Aid for the countries of Asia and Latin America

EEC - LAA

New guidelines for the 1990s

The Commission has adopted the new guidelines for cooperation with the countries of Latin America and Asia. On the initiative of Mr Matutes, the Commission is proposing to the Council and Parliament the implementation of a balanced package of cooperation instruments structured along two major lines: development aid for the poorest population groups, and economic cooperation with regions which have high growth potential. Particular attention is given to environmental considerations.

The new guidelines are accompanied, for the first time, by a five - year financial perspective amounting to ECU 2 900 m for the period 19911 995.

The Commission proposal is a response to the political need to increase the levels of financing and adapt the instruments used for cooperation - which had never been reviewed since it began in 1976, despite the profound changes which have taken place in Latin America, Asia and the Community itself.

The strengthening of Community cooperation with the Latin American and Asian (LAA) developing countries, as proposed by the Commission, takes account of the tremendous needs of the 40 developing countries concerned, with their population of 2 300 million and their extremely diverse economic, social and cultural situations.

The Commission also wishes to ensure that LAA cooperation remains consistent with the Community’s policies of cooperation with the developing countries in the Mediterranean, the ACP countries and the countries of Central and Eastern Europe.

There are currently two distinct approaches to cooperation between the Community and the LAA developing countries: development aid (financial and technical cooperation, humanitarian and food aid) and economic cooperation (promoting exports and European investments, training, cooperation in the fields of industry, energy, science and technology).

Development aid

The Commission considers that that, in view of the serious problems facing most of the LAA developing countries (population growth, mass poverty, financial and environmental problems, etc.), Community support should be maintained and strengthened through development aid.

The amount of aid involved should be consistent with the Community’s economic strength and its worldwide responsibilities, since the common feature of all these difficulties is that they seriously hinder development in the countries concerned and are a major threat to world economic equilibria. In the Commission’s view, aid should continue to be targeted on the poorest strata of society and the poorest countries but the operating principles should be modernised (e.g. by introducing structural schemes) and more account taken of certain specific problems such as the role of women in development, population growth, environmental and urban problems, etc.

Accordingly, in order to take account of the diversity of situations and new methods of granting aid, the Commission proposes six major areas of action: (i) support for the rural sector in the broad sense, (ii) the environment, (iii) the human dimension of development, (iv) the structural dimension of development, (v) regional cooperation and (vi) aid relating to natural disasters.

Economic cooperation

At the same time the Commission considers that well - structured and effective economic cooperation between the Community and the LAA developing countries should be promoted.

A considerable number of LAA developing countries or regions have a high growth potential, and this calls for closer forms of cooperation.

Economic cooperation should encourage direct contact between operators, who are the driving force behind economic expansion, and it is thus very much in line with the favourable trends emerging in a number of Asian and Latin American countries: the tendency for the private sector to play an increased role, the introduction of market rules and disciplines, the orientation of economies towards international trade, infrastructure modernisation and extension, the attempt to make better use of human resources in education and research and to encourage people to invest their savings in the manufacturing industries.

The Commission intends to take action on three levels:

(i) to strengthen the scientific and technological potential of the LAA developing countries and facilitate high - level economic and technical dialogue with these countries by speeding up the exchange of information and promoting technology transfers;

(ii) to ensure that the economic environment of the LAA developing countries improves and becomes more favourable to investment and development through appropriate institutional and regulatory support measures;

(iii) to improve the competitiveness of firms by providing better training (technical, in particular), facilitating technological exchange, improving market access and promoting Community investment in these countries.

The environment: an ever - present concern

In the Commission’s view, it is essential to develop cooperation on the environment with the developing countries of Latin America and Asia, since the environment is a matter of global concern, some major environmental problems (e.g. protection of the tropical rain forests) relate specifically to the LAA developing countries and there is a clear need for these countries to receive from the Community increased financial and technical support in dealing with environmental problems.

A multiannual perspective and increased financing

In the Commission’s view, considerably greater financial resources should be allocated to LAA aid schemes so as to provide the necessary “ critical mass “ of aid and to ensure that it is acceptable by comparison with schemes operating in Central and Eastern Europe and the ACP States. The Commission also considers that, for the first time, multiannual perspectives should be established, enabling a medium - term programme of activities to be drawn up in line with the wishes of the Council and Parliament.

In view of the financial discipline imposed by the present inter - institutional Agreement (which expires in 1992) and of the fact that there is, as yet, no agreement relating to the period after 1992, the Commission has decided, for the time being, to limit its proposal to ECU 2900 million for the five - year period 19911995. This amount takes no account of any additional drive for growth which the Community might make nor of any re - consideration by the Commission of its proposals.

EASTERN EUROPE

Support of economic reform in Eastern and Central Europe: analyses and strategies

In July 1989 the Commission was invited to coordinate the aid efforts of 24 Western countries to Poland and Hungary. The number of recipient countries in Eastern and Central Europe has since been expanded. The Commission decided in the early autumn to bring together a group of high level economic experts from the Member States, Poland and Hungary in order to establish the analytical background for economic reform and aid from the 24 countries, the Community, the EIB and the European Bank for Reconstruction and Development (EBRD).

The results of this work are now being presented by Vice - President Christophersen in a special issue of European Economy (no. 43), which is devoted to “ Economic Transformation in Hungary and Poland”.

The papers in this volume emphasise the diversity in the situations of these two countries. But they also show that the critical factors that will determine the successes of the transition from communism to market economies are common to both. First, the private sector is crucial. The public sector can help to ease the transition, but only the private sector can ensure that it is accomplished.

The second insight, which is peculiar to the work of the Commission’s group of experts, is the importance of “ robust sequencing “. This means, for example, that privatisation should not be implemented until the tutelage system has been dismantled. This system of bargaining between ministries and enterprises over taxes and subsidies lies at the heart of the lack of competition in the bureaucratic economic system. While it persists, the emergence of a market environment will be hampered.

Sequencing is also important in the context of credibility. If people believe that the change in economic regime will not succeed, their behaviour will bring this about. Hence it is necessary to convince them that the process will be pursued systematically and thoroughly. Yet progress cannot be too slow, since this too would jeopardise the regime change.

Similarly, macroeconomic stabilisation needs to come before structural reform. To embark on liberalisation in conditions of high inflation would be risky, since high inflation impedes rational economic decisions, promotes hoarding and distorts income distribution.

None of this is to say that the same sequencing of measures will be appropriate to all economies. It should be determined on the basis of a detailed assessment of each country’s economic situation, though price stability is always likely to be a priority.

Analysis of policy measures

Central and East European countries have suffered severely from central planning and state trade within the CMEA. The absence of competitive markets in these economies, and their exclusion from the beneficial impact of the international division of labour have contributed to low levels of productivity, outdated technology, slow rates of technological progress and inefficiency in management and organisation. Centralised control of production decisions and administered price systems have compounded these problems.

The economic measures which are summarised below would contribute to a predictable economic environment in which price incentives can work.

Openness and improved access to the world market will be an important stimulus to economic reform. It will require greater convertibility, especially in current transactions, and stronger external monetary reserves. An appropriate exchange rate policy will have to be devised, possibly by pegging currencies to the ecu as a basket currency.

Several countries in transition from socialism suffer from severe internal and external disequilibria. A firm macroeconomic stabilisation plan capable of curbing inflation during the period of structural change will be advisable so as to underpin reforms and signal the change of economic regime.

Sound government financial policies will be required, including reform of the national budget by improving budgetary controls and by eliminating financing through money creation. Reform of the fiscal system, together with more efficient administration and greater openness in taxes and subsidies, will be an important element. A substantial reduction in subsidies is also called for.

To curb inflation, firm monetary policy will be necessary. This will require a strong, independent central bank. For goods and services, efficient markets will imply that centralised price determination and production planning, as well as state interference in the decision - making of firms, must be abandoned.

This should go hand in hand with the creation of a legal framework that includes private property, company, competition and contract law.

Labour markets need fundamental institutional and legal reform in order to end administered full employment and structural rigidity.

Particularly in the transitional period, the necessary training and investment support to private or reformed socialised sectors needs careful monitoring in order to remain conducive to liberalisation.

Improved infrastructure, a cleaner environment and more efficient energy utilisation will improve growth prospects and facilitate reform.

Western assistance and coordination

For the external financing needs of these countries private financing on capital markets must be the general rule. The financing of balance of payments gaps, the provision of structural adjustment or of stabilisation loans would be the exception. In the first phase, however, official assistance may play a role in external financing for many countries, not least to boost confidence. As the transition advances sufficiently to attract a substantial flow of private investment which will be the test of the success of reform - official assistance can be scaled back. Some forms of public funding (technical cooperation and lending, notably by the EBRD) will play a continuing role.