International Economic Integration: Selected International Organizations and the European Union 9783486599381, 9783486584745

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International Economic Integration Selected International Organizations and the European Union

by

Prof. Dr.Wolfgang Eibner

OldenbourgVerlag MünchenWien

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On the Author and his Collaborating Research Associate The author, Wolfgang EIBNER, born 1960 in Giessen, married, two daughters, after his military service (1979/80 with the German Air Force in the Netherlands and in Rheine, Westphalia) he studied economics (including business administration and political sciences) at Cologne University (Diploma in Economics). From 1982 to the end of his studies 1986, he was a part-time amanuensis at the ‘Staatswissenschaftliche Seminar’ (Department of Economics) chaired by Prof. Dr. Rolf Rettig. From 1986 to 1989, he held a scholarship at Passau University under BayNwFg, a doctorate scholarship of the state of Bavaria for the promotion of artistic and scientific talent at Bavarian universities. Besides this he was a tutor and part-time scientific employee at the chair for Money and Foreign Trade under Prof. Dr. Wolfgang Harbrecht. Until 1991, he was full-time scientific assistant to the same chair. The author graduated in 1990 as Dr. rer. pol. (Ph.D. in Economics) with a dissertation directed by Prof. Dr. Wolfgang Harbrecht on the subject ‘Limits to the International Debt of Developing Countries – Restrictions on Protectionism, World Trade Regionalization, Declining Net Financing Volumes and Imminent Growth Problems: The Economic Foundation of Debt Relief’. From 1991 to 1993, Wolfgang Eibner worked as a controller with Air Liquide GmbH, Düsseldorf, the German subsidiary of the French world market leader for production and distribution of technical gases. Since October 1st 1993, he has been professor for economics and economic policy at Jena University of Applied Sciences where he for many years had made a substantial contribution to build up the newly founded university as well as the discipline Industrial Engineering (Business Administration & Engineering) as the successor to the founding dean (1994 – 1999). Between 1993 and 2003 he helped to prepare correspondence courses within the Associated Universities of Applied Sciences [FachhochschulFernstudienverbund der Länder, FFV] of the German Federal States Berlin, Brandenburg, Mecklenburg - West Pomerania, Saxony, Saxony-Anhalt, Thuringia, originally seated in Chemnitz and then in Berlin, and had the responsibility for the contents of the courses in economics. Since 2003 he still is an author for its successor, the service agency of the Association of Distance Learning, seated at the University of Applied Sciences Brandenburg. v

On the Author and his Collaborator From 1997 to 1999 he also constituted the first correspondence courses in economics for the majors Business Administration and Industrial Engineering at the privately-run Distance Learning University of Applied Sciences Hamburg [FernFachhochschule Hamburg gGmbH]. Working and teaching at these institutions he published more than 70 textbooks to different topics of economics like micro- and macroeconomics, economic policy, fiscal policy, international trade, environmental policy, sustainable development, international economic integration as well as how to use economic simulation programs in economic education. In subsidiary appointments, he is trainer in various business simulation programs in companies and universities, and is teaching in bachelor- and master courses in business administration at the privately-run University of Applied Sciences for Economics and Management (FOM) in Hamburg, at the privately-run University 21 in Buxtehude, at the AKAD [private distance learning university for studying besides the job] in Pinneberg, and at the Hanseatic VWA [Academy for Economics and Administration].

Dipl.-Wirt.-Ing. Michael ANDING, born in 1980 in Jena, studied business administration & engineering (industrial engineering) at the University of Applied Sciences in Jena after his general qualification for university entrance and his alternative civilian service. During his studies he had the possibility to experience the effects of international connected economic activities due to an internship at Siemens Company in the US-Mexican border region of El Paso (Texas) and Ciudad Juárez (Chihuahua). His diploma thesis Michael Anding wrote in 2004 under Prof. Dr. Wolfgang Eibner in collaboration with the Thuringian Ministry of Economic Affairs, Technology and Employment to the topic: ‘Company related capabilities in the Thuringian handicrafts for the improvement of using market opportunities – in consideration of the Basel II demands’. From March 2005 until December 2006 he was a portfolio manager at E.ON Thüringer Energie AG, in Erfurt, a regional provider of the large European power and gas supplier E.ON. By now, Mr. Anding works as a portfolio manager at the E.ON Sales & Trading GmbH, the prestigious trading house of the E.ON Energie AG in Munich. vi

Table of Contents On the Author and his Collaborating Research Associate.................................... v

Table of Contents........................................................................................ vii Table of Figures ......................................................................................... xiii List of Abbreviations ............................................................................... xviii 0 Introduction and Acknowledgements.................................................... 1 0.1

General View on the Following Contents of Teaching ............................ 1

0.2

Acknowledgements................................................................................... 5

Part A: Selected Organizations Active in the Area of International Trade Policy.................................................................................. 9 1 The World Trade Organization (WTO)................................................ 9 1.1

Introduction to WTO ................................................................................ 9 1.1.1 Founding and Goals............................................................................ 9 1.1.2 The Institutional Structure of the WTO............................................ 11

1.2

The General Agreement on Tariffs and Trade (GATT).......................... 13 1.2.1 History and Goals of the GATT within the WTO ............................ 13 1.2.2 The Basic Foreign Trade Policy Principles of the GATT................. 16 1.2.3 Further GATT Principles.................................................................. 20

1.3

General Agreement on Trade in Services (GATS) ................................. 23

1.4

Agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS) ....................................................................................... 24

1.5

The Trade Policy Review Mechanism (TPRM) and the Monitoring of Regional Trade and Integration Agreements...................................... 25

1.6

The Dispute Settlement Body of the WTO (DSB) ................................. 26

1.7

The Trade Related Investment Measures (TRIMS) ................................ 30

1.8

The Practical Relevance of the WTO and an Outlook on Its Possible Future Activities ..................................................................................... 31

1.9

Review Questions ................................................................................... 34

2 The United Nations Conference on Trade and Development (UNCTAD) ............................................................................................. 35 2.1

Economic Policy Goals of the UNCTAD............................................... 35

vii

Table of Contents 2.2

The Main Economic Policy Activities of UNCTAD .............................. 36 2.2.1 Foreign Trade Policy ........................................................................ 37 2.2.2 Development Financing.................................................................... 37 2.2.3 Commodity Price Stabilization ......................................................... 38

2.3

Review Questions ................................................................................... 40

Part B: Selected Organizations Active in the Area of Monetary Policy and International Development Lending ................................. 41 3 The International Monetary Fund (IMF) ........................................... 41 3.1

Objectives, Tasks and Organizational Structure of the IMF................... 42

3.2

The Bretton Woods System .................................................................... 47

3.3

Recent Tasks of the IMF in the Context of Balance of Payment Stabilization and Liquidity Management................................................ 49

3.4

Debt Relief: The New Task of the IMF .................................................. 51

3.5

Problems in Regard to Conditional Lending by the IMF........................ 53

3.6

Review Questions ................................................................................... 57

4 The World Bank Group........................................................................ 58 4.1

Organizational Structure of the World Bank Group ............................... 58

4.2

Tasks of the World Bank Group............................................................. 59 4.2.1 The International Bank for Reconstruction and Development (IBRD) .............................................................................................. 59 4.2.2 The International Development Association (IDA).......................... 61 4.2.3 Activities of the World Bank Group to Assist Investment: IFC, MIGA, GRIP and ICSID .................................................................. 63 4.2.4 Main Publications of the World Bank Group and the Significance of the World Bank for Export-oriented Companies.......................... 65

4.3

A Critical Examination of the World Bank Group ................................. 66 4.3.1 Critical Evaluation of the World Banks’ Development Aid Projects ............................................................................................. 67 4.3.2 Main Points of Criticism of World Bank’s Development Policy and herefrom Resulting Need for Action.......................................... 70

4.4

The Necessity for a Stronger Active Poverty Reduction: Banker for the Poor................................................................................. 73 4.4.1 Insufficient Integration of a Strong Growing Population into the Economic Cycle................................................................................ 73

viii

Table of Contents 4.4.2 Support to Take Matters into One’s Own Hand: The Example of the GRAMEEN BANK & the GRAMEEN FOUNDATION; an EXCURSUS to Microloans ......................................................... 75 4.4.3 Microloans as a New Tool also of the World Bank Group .............. 86 4.5

Perspectives of the World Banks’ Possibilities to Redesign its Future Development Policy................................................................................ 89

4.6

Review Questions ................................................................................... 97

5 International Development Banks with Regional Field of Operation ............................................................................................... 98 5.1

Overview: Goals of Regional Development Banks ................................ 98

5.2

The European Bank of Reconstruction and Development (EBRD) ....... 99 5.2.1 Establishment and Function of the EBRD...................................... 100 5.2.2 Institutional Structure of the Bank.................................................. 103 5.2.3 On the General Significance of the EBRD for the Development of Eastern European Countries and the CIS ................................... 104 5.2.4 Overview of the EBRD’s Financings ............................................. 106

5.3

Asian Development Bank (ADB) ......................................................... 110 5.3.1 Institutional Structure and Function of the ADB............................ 110 5.3.2 Overview on the Development Financing of the Asian Development Bank and its Special Funds ...................................... 115 5.3.3 Microloans of ADB ........................................................................ 126

5.4

Inter-American Development Bank (IADB) ........................................ 128 5.4.1 Institutional Structure and Function of the IADB .......................... 128 5.4.2 The Inter-American Investment Corporation (IIC)......................... 130 5.4.3 The Multilateral Investment Fund (MIF)........................................ 130 5.4.4 Overview of the Development Financing of the Inter-American Development Bank and its Subsidiary Organizations .................... 131

5.5

African Development Bank (AfDB)..................................................... 137 5.5.1 Institutional Structure and Function of the AfDB .......................... 137 5.5.2 Overview of the Development Financing of the African Development Bank Group .............................................................. 139 5.5.3 The Lending of the African Development Bank (AfDB) ............... 142 5.5.4 The Lending of the African Development Fund (AfDF)................ 144 5.5.5 The Nigeria Trust Fund (NTF) ....................................................... 147

5.6

Criticism on a Politically and Ethically Not Sufficiently Reflected Development Financing........................................................................ 149

5.7

Review Questions ................................................................................. 155

ix

Table of Contents Part C: Selected Groups and Organizations Active in the Area of Economic Cooperation and Integration................................. 157 6 Groups of International Cooperation................................................ 157 6.1

Group of the 7 and 8 Greatest Industrial Nations in the World: G-7 and G-8 .......................................................................................... 157 6.1.1 The Way from the G-5 over the G-4 to the G-7 and G-8 ............... 158 6.1.2 Economic Cooperation of the G-7/ G-8.......................................... 159 6.1.3 Monetary Cooperation of the G-7/ G-8 .......................................... 160 6.1.4 Development Cooperation of the G-7/ G-8 .................................... 161

6.2

Bodies Representing the Interests of Industrialized Countries to Strengthen International Financial Markets and International Trade ... 162 6.2.1 The Group of the Greatest Industrial Creditor States: G-10 ........... 162 6.2.2 The Group of the Economically Most Powerful Industrialized Countries: G-20 .............................................................................. 163

6.3

Bodies Representing the Interests of the Developing Countries: The G-77 and the G-24 ......................................................................... 164 6.3.1 The Group of the Developing Countries: G-77 .............................. 164 6.3.2 The Group of 24: G-24 ................................................................... 165

6.4

Bodies Representing the Lobby of the Creditors: Paris Club, London Club and Institute of International Finance ............................. 165 6.4.1 Paris Club ....................................................................................... 165 6.4.2 London Club and the IIF ................................................................ 168

6.5

Review Questions ................................................................................. 170

7 The Organization for Economic Co-operation and Development (OECD)................................................................................................. 171 7.1

Foundation of the OECD as the Successor of the OEEC ..................... 171

7.2

Membership, Goals and Tasks.............................................................. 172

7.3

Organs and Most Important Activities of the OECD............................ 176 7.3.1 The Economic Policy Committee ................................................... 176 7.3.2 The Committee on Capital Movements and Invisible Transactions and the Committee on Financial Markets ....................................... 177 7.3.3 The Development Assistance Committee ....................................... 179 7.3.4 Excursus: World Economic Performance – in GDP – an Overview.................................................................................... 181

7.4

The Practical Importance of the OECD for Business Activities........... 185

7.5

Review Questions ................................................................................. 187

x

Table of Contents 8 Economic and Political Integration of Europe through the European Union (EU) ......................................................................... 188 8.1

Integrating Steps on the Way to the European Union: From the ECSC to the Nice Treaty ....................................................... 190 8.1.1 Phases of Economical and Political Integration in Western Europe............................................................................................. 190 8.1.2 Overall Social Objectives, Tasks and Perspectives of the European Union based on the Treaties of Maastricht, Amsterdam, and Nice ..................................................................... 196

8.2

Summary of Important European Integration Steps ............................. 199

8.3

Organizational Structure of the European Union.................................. 202 8.3.1 The Council of Ministers ................................................................ 205 8.3.2 The European Council .................................................................... 208 8.3.3 The Commission............................................................................. 209 8.3.4 The European Parliament ............................................................... 211 8.3.5 Most Important Committees ........................................................... 213 8.3.6 The European Court of Justice ....................................................... 214 8.3.7 The EU-Convent: The Failed Constitution..................................... 214

8.4

The Legislative Procedure of the European Union............................... 223

8.5

The Budget of the European Union ...................................................... 225 8.5.1 The Revenues of the European Union ............................................ 225 8.5.2 The Distribution of the Individual EU-Member-Countries’ Contributions .................................................................................. 227 8.5.3 Expenditure of the European Union ............................................... 232

8.6

Organization of the European Agricultural Policy ............................... 235 8.6.1 Treaty Basis and Objectives of the European Agricultural Policy . 235 8.6.2 Instruments of the Common Agricultural Policy (CAP) ................ 236 8.6.3 Farm Structure Policy ..................................................................... 238 8.6.4 Costs and Financing of European Agricultural Market Organization and Support for Rural Development since 2007....... 239 8.6.5 The Necessity for a Fundamental Reorganization of the European Agricultural Policy ......................................................... 243

8.7

The Single Market Idea......................................................................... 251

8.8

Regional- and Structural Policy............................................................ 254 8.8.1 Regional and Structural Policy for the Adjustment of Different Development Levels in the European Union.................................. 254 8.8.2 The Regional and Structural Funds by the European Union .......... 257

xi

Table of Contents 8.8.3 Scope and Objective of the European Structural- and Regional Policy until 2006 ............................................................. 258 8.8.4 Scope and Objective of the European Structural- and Regional Policy since 2007 ............................................................ 262 8.8.5 Structural Promotion of the Accession States................................. 266 8.9

Research- and Technology Policy ........................................................ 269 8.9.1 Approaches and Targets of a European Research and Technology Policy.......................................................................... 269 8.9.2 The Realization of Current Research- and Technological Policy... 271

8.10

The European Union on the Way to a Social Union............................. 275

8.11 The European Economic and Monetary Union (EEMU)...................... 279 8.11.1 Legal Basis and Organizational- and Institutional Structure of the EEMU................................................................................... 281 8.11.2 Objectives and Organization of the European Central Bank .......... 285 8.11.3 Convergence Criteria and the Economic Stability Pact .................. 289 8.11.4 Observations on Potential Effects of the European Economic and Monetary Union on the further Development of Germany and the European Union ................................................................. 295 8.12

Review Questions ................................................................................. 300

Answer Key for the Review Questions.................................................... 303 Glossary .................................................................................................... 324 Bibliography.............................................................................................. 340 Internet Bibliography:................................................................................ 352

xii

Table of Figures Figure 1.1:

Institutional structure of the WTO ......................................... 11

Figure 1.2:

Treaty structure of the WTO .................................................. 12

Figure 1.3:

Tariff reductions in the negotiation rounds of the GATT/ WTO....................................................................................... 15

Figure 3.1:

Member states of the IMF including contributions in special drawing rights (SDR) in absolute and relative terms.............. 45

Figure 4.1:

Loan commitments of the IBRD by geographical regions, June 30th 2006......................................................................... 60

Figure 4.2:

Loan commitments of the IBRD by sectors of economic activity 2004 ........................................................................... 61

Figure 4.3:

Loan commitments of the IDA by regions for the period 2006 – 2008............................................................................ 62

Figure 4.4:

Failures of World Bank projects by type and target group..... 68

Figure 4.5:

Nobel laureate Muhammad Yunus ......................................... 75

Figure 4.6:

Growth of Grameen Bank’s volume of disbursed microloans per year ................................................................ 77

Figure 4.7:

Balance Sheet of Grameen Bank as of end 2003.................... 81

Figure 4.8:

Key Numbers of Grameen Bank’s support helping the poor to take matters into their own hand in Bangladesh................. 82

Figure 4.9:

Liabilities and net assets of Grameen Foundation................. 83

Figure 4.10:

Revenues and expenses of Grameen Foundation .................. 83

Figure 4.11:

Worldwide activities of Grameen Foundation........................ 84

Figure 4.12:

Allocation of the Grameen Foundation’s expenses ................ 85

Figure 4.13:

Microloan clients worldwide in million ................................. 86

Figure 4.14:

Total active environmental projects of the IBRD and the IDA 1986 – 1997 in number and mill. of US-$................ 90

Figure 4.15:

Lending for environmental projects by IBRD and IDA 1996 – 2004............................................................................ 91

Figure 4.16:

Distribution of World Bank Group – GEF commitments 1991 – 2006 in millions of US-$ ............................................ 93

Figure 4.17:

Mobilizing public and private funds for the environment: The World Bank Group – GEF Program 1991 – 2006........... 94

xiii

Table of Figures Figure 5.1:

Member countries of the EBRD 2007 (dark countries)........ 100

Figure 5.2:

Private sector’s share of total EBRD lending....................... 102

Figure 5.3:

Shareholders of the EBRD countries and country-groups.... 104

Figure 5.4:

EBRD investment commitments and disbursements of the years 2001 to 2005 in billion US-$ ...................................... 106

Figure 5.5:

EBRD’s total commitments by sector – real and financial sector, 2005 .......................................................................... 107

Figure 5.6:

EBRD lending by region ..................................................... 108

Figure 5.7:

ADB lending by countries, 2004 and 2005 in mill. US-$ .... 116

Figure 5.8:

ADB lending by sectors 2005 .............................................. 117

Figure 5.9:

Total co-financings along recipient countries 2001 – 2005 in % of the total volume of US-$ 49.5 billion ...................... 118

Figure 5.10:

ADF-VIII lending by focus, 2001 – 2004 in %.................... 120

Figure 5.11:

ADF-VIII lending to developing member countries (DMC) 2001 – 2004.......................................................................... 120

Figure 5.12:

ADF-IX lending to developing member countries (DMCs) 2005 – 2008 in mill. US-$ .................................................... 121

Figure 5.13:

Sector-specific distribution of technical assistance, 2005, in mill. US-$ ......................................................................... 123

Figure 5.14:

Approved technical assistance per country, 2005, in mill. US-$ ......................................................................... 123

Figure 5.15:

Japan Special Fund approvals by sector, 2005 in mill. US-$124

Figure 5.16:

Distribution of microloans to ADB member countries......... 126

Figure 5.17:

Distribution of the member states’ voting power of IADB .. 129

Figure 5.18:

IADB lending and guarantees compared to resulting total project investment in 2006 and cumulated for the years 1961 – 2006, in mill. US-$ ................................................... 132

Figure 5.19:

Lending and guarantees by sector, 2006 and cumulated 1961 – 2006; absolute figures in mill. US-$ and relative figures in % .......................................................................... 133

xiv

Table of Figures Figure 5.20:

Donor-countries’ development-funds in cooperation with the IADB ...................................................................... 135

Figure 5.21:

Overview on total lending and grants of all parts of the AfDB-Group: AfDB, AfDF and NTF for various periods ... 139

Figure 5.22:

AfDB beneficiary countries as of 2007 ................................ 142

Figure 5.23:

Sector-specific distribution of AfDB lending between 1967 and 2005 in % of US-$ 21.6 billion............................. 142

Figure 5.24:

Regional distribution of AfDB lending between 1967 and 2005 in % of US-$ 21.6 billion...................................... 143

Figure 5.25:

Authorized/ supported projects and programs by the AfDB in 2005 ....................................................................... 144

Figure 5.26:

AfDF beneficiary countries as of 2007 ................................ 145

Figure 5.27:

Sectoral distribution of AfDF lending between 1974 and 2005 in % of US-$ 13.8 billion ............................................ 146

Figure 5.28:

Regional distribution of AfDF lending between 1974 and 2005 in % of US-$ 13.8 billion ............................................ 146

Figure 5.29:

Cumulative NTF approvals by sectors, 1976 – 2005 in % of US-$ 350 million.............................................................. 148

Figure 5.30:

Cumulative NTF approvals by regions, 1976 – 2005 in % of US-$ 350 million.............................................................. 148

Figure 5.31:

Himba in the frontier-region of Angola – Namibia .............. 154

Figure 7.1:

Member Countries of the OECD, 2006; GDP in US-$ ........ 173

Figure 7.2:

Official Development Assistance (ODA) of the DAC countries in the average of the years 1993 to 1995 and in the year 2005 .................................................................... 180

Figure 7.3:

Overview on population 2001/ 2006, GDP 2005 – calculated in purchasing power parity (PPP) and official exchange rates 2005 – as well as of per capita income (GDP) 2000/ 2005 calculated in PPP (2000/ 2005) and official exchange rates (ExR) 2005. .......................................................................... 185

Figure 8.1:

Ratification of the ‘Treaties of Rome’ for the foundation of the EEC and EAEC in Rome on March 25th 1957 ........... 192

Figure 8.2:

Main facts about the 27 member states of the European Union.................................................................................... 195

Figure 8.3:

Chronology of important European integration steps........... 201

xv

Table of Figures Figure 8.4:

Matrix of the member states’ presence in the most important institutions/ bodies of the European Union in the year 2007 – accordant to the treaty of Nice and the treaty of accession of June 21st 2005 ................................................. 203

Figure 8.5:

Decision making in the EU, as of 2007 ................................ 204

Figure 8.6:

Composition of the European Union’s Convent................... 215

Figure 8.7:

Legislative procedures of the EU according to the Articles 251 and 252 ECT .................................................... 224

Figure 8.8:

Percentage of the various contributions to the total EUrevenue in the year 1996 in comparison with 2007.............. 226

Figure 8.9:

Total own resources of each EU member state committed to the EU-budget 1995 and 2005 in absolute and relative figures................................................................................... 227

Figure 8.10:

EU member countries’ contributions to the EU-Budget in 2005.................................................................................. 228

Figure 8.11:

Overview of the progression of Germany’s gross contributions to the EU-budget ............................................ 229

Figure 8.12:

Net transfer position of the EU-member states in the year 2000 in billion Euro...................................................... 230

Figure 8.13:

Operative balance of individual EU member countries’ netcommitments ........................................................................ 231

Figure 8.14:

Expenditure of the European Union 2001 – 2006 ................ 233

Figure 8.15:

The expenditure of the EU in 2004 ...................................... 234

Figure 8.16:

The EU budget draft 2007 to 2013....................................... 234

Figure 8.17:

Allocation of the financial means of the European Agricultural Fund for Rural Development amounting to 8.112 bn. Euro as distributed to the German Federal States 2007 – 2013 ............................................................... 242

Figure 8.18:

Regional differences in the GDP per capita of the EU states in the year 1997 .......................................................... 256

Figure 8.19:

Structural subsidies payed by the EU 1988 – 2006 .............. 258

Figure 8.20:

Allocation of the structural subsidies by aims and uses ....... 259

xvi

Table of Figures Figure 8.21:

Regional distribution of the capital from the EU structural funds by destinations 1 and 2 including the Spanish (Canary Islands), the French (Guadaloupe, Martinique, Réunion, Guyana) and the Portuguese (Azores, Madeira) overseas territories................................................................ 260

Figure 8.22:

Distribution of the EU structural funds’ subsidies to the single beneficiary states in the time period 2000 – 2006 in absolute- (mill. €) and per capita figures (€) .................... 262

Figure 8.23:

Distribution of the new structural subsidies in EU member states for the years 2007 – 2013 ............................. 264

Figure 8.24:

Pre-accession assistance for the 10 Eastern European entry states by the EU in the time period 2000 – 2006 in mill. Euro.......................................................................... 267

Figure 8.25:

The ERA as a catalysator in the coordination of European Research and Technological Policy including the 6th Framework Program FP6 ..................................................... 271

Figure 8.26:

Appropriation of funds within the scope of the Sixth Framework Program by the EU in 2001............................... 273

Figure 8.27:

Appropriation of planned funds within the scope of the Seventh Framework Program by the EU in 2005................. 274

Figure 8.28:

Legal minimum wages of EU countries in Euro/ hour, as of the year 2007................................................................ 277

Figure 8.29:

The European Central Bank in Frankfurt/ Main................... 283

Figure 8.30:

Organizational structure of the European System of Central Banks (as of 2007) ................................................... 286

Figure 8.31:

Achieved convergence of the Euro-countries in 2003 and 2004 ............................................................................... 291

Figure 8.32:

Level of the convergence criteria regarding national debt of the 10 EU accession countries of 2004 for the year 2006...................................................................................... 292

Figure 8.33:

Change in real unitized labor costs 1995 – 2005.................. 298

xvii

List of Abbreviations AfDB:

African Development Bank

AfDF:

African Development Fund

ADB:

Asian Development Bank

ADBI:

Asian Development Bank Institute

ADF:

Asian Development Fund

APTA:

Asian Pacific Trade Agreement

ARIC:

Until 2004: Asia Recovery Information Center (of the Ö ADB); since 2004: Asia Regional Information Center (of the Ö ADB)

ASEAN:

Association of South-East Asian Nations

ATF:

Asian Tsunami Fund (of the Ö ADB)

AusAID:

Australian Agency for International Development

BeNeLux:

Short for Belgium/ Netherlands/ Luxembourg

BIS:

Bank for International Settlements

CAF:

Corporatión Andina de Fomento, Andean Development Bank

CAP:

Common Agricultural Policy (of the Ö EU)

CARICOM: Caribbean Community and Common Market CCFF:

Compensatory and Contingency Financing Facility (of the Ö IMF)

CDB:

Carribean Development Bank

CESI:

Committee on Environmental and Social Impact (of the Ö ADB)

CFM: xviii

Committee on Financial Markets (of the Ö OECD)

List of Abbreviations CFSP:

Common Foreign and Security Policy (of the Ö EU)

CGAP:

Consultative Group to Assist the Poorest (of the Ö World Bank Group)

CI:

Community Initiatives under the Structural Funds (of the Ö EU)

CIME:

Committee on International Investment and Multinational Enterprises (of the Ö OECD)

CIS:

Commonwealth of Independent States (of the former Soviet Union)

CMIT:

Committee on Capital Movements and Invisible Transactions (of the Ö OECD)

COREPER: Permanent Representatives Committee of the Council (of the Ö EU); Comité des Représentants Permanents COST:

Program for the coordination on fundamental research exertions per state of the EU research and technology policy: Coopération Scientifique et Technique

DAC:

Development Assistance Committee (of the Ö OECD)

DSB:

Dispute Settlement Body (of the Ö WTO)

EAEC:

European Atomic Energy Community (Ö Euratom)

EAFRD:

European Agricultural Fund for Rural Development (in the framework of Ö CAP)

EAGF:

European Agricultural Guarantee Fund (of Ö CAP)

EAGGF:

European Agricultural Guidance and Guarantee Fund (of Ö CAP)

EBRD:

European Bank for Reconstruction and Development

EC:

European Community, European Communities

xix

List of Abbreviations ECB:

European Central Bank

ECHR:

European Convention of Human Rights

ECJ:

European Court of Justice

ECOFIN:

Economic and Financial Affairs Council (of the Ö EU)

ECSC:

European Coal and Steel Community

ECT:

Treaty Establishing the European Community

ECU:

European Currency Unit

EDC:

European Defense Community

EDRC:

Economic and Development Review Committee (of the Ö OECD)

EEA:

European Economic Area (between Ö EU and Ö EFTA)

EEAP:

Earthquake Emergency Assistance Project (of the Ö ADB)

EEC:

European Economic Community

EECT:

Treaty establishing the European Economic Community

EEMU:

European Economic and Monetary Union

EFF:

European Fisheries Fund (of the Ö EU)

EFTA:

European Free Trade Association

EIA:

Environmental Impact Assessment (of the Ö ADB)

EIB:

European Investment Bank

EIF:

European Investment Fund

EMA:

European Monetary Agreement

EMI:

European Monetary Institute

EMS:

European Monetary System

xx

List of Abbreviations EP:

European Parliament

EPC:

Economic Policy Committee (of the Ö OECD)

EPC:

European Political Cooperation (of the Ö EU)

EPU:

European Payments Union

ERA:

European Research Area (of the Ö EU)

ERDF:

European Regional Development Fund (of the Ö EU)

ERM:

Exchange Rate Mechanism (of Ö EEMU)

ESAF:

Enhanced Structural Adjustment Facility (of the Ö IMF)

ESC:

Economic and Social Committee (of the Ö EU)

ESCB:

European System of Central Banks

ESF:

European Social Fund (of the Ö EU)

ESIR:

Environmental and Social Impact Report (of the Ö ADB)

ESPRIT:

European Strategic Programme for Research and Development in Information Technology

EU:

European Union

EURAB:

European Research Advice Board (of the Ö EU)

Euratom:

European Atomic Energy Community (Ö EAEC)

Europol:

European Police Office

EUT:

Treaty establishing the European Union

FAO:

Food and Agriculture Organization (of the Ö UN)

FAST:

Forecasting and Assessment in the Field of Science and Technology (of the Ö European Union)

FIAS:

Foreign Investment Advisory Services (of the Ö World Bank Group) xxi

List of Abbreviations FIFG:

Financial Instrument for Fisheries Guidance (of the Ö European Union)

FINCA:

Foundation for International Community Assistance

FONDEP: Foundation for Local Development and Partnership (of the Ö World Bank Group) FP:

Framework Program for funding research in Europe (of the Ö EU)

FSD:

Financial Sector Development Department (of the Ö World Bank Group)

FSO:

Fund for Special Operations (of the Ö IADB)

FTAA:

Free Trade Area of the Americas

G-4 ... G-8: Group of the 4 to 8 strongest economically developed nations G-10:

Group of the 11 most financially strong developed nations (10 plus Switzerland)

G-20:

Group of the 20 most important economies of the world

G-24:

Special board for monetary policy of the emerging and developing countries inside the Ö G-77

G-77:

Group of the developing countries

GATS:

General Agreement on Trade in Services (multilateral agreement within the Ö WTO)

GATT:

General Agreement on Tariffs and Trade, founded 1948 (now multilateral agreement within the Ö WTO)

GDP:

Gross Domestic Product

GEF:

Global Environment Facility

GNI:

Gross National Income (= former Ö GNP)

GNP:

Gross National Product (= now Ö GNI)

GRIP:

Guaranteed Recovery of Investment Principal (of the Ö IFC)

xxii

List of Abbreviations HIPC:

Heavily Indebted Poor Countries

IADB:

Inter-American Development Bank

IBRD:

International Bank for Reconstruction and Development (part of the Ö WBG)

ICSID:

International Centre for the Settlement of Investment Disputes (part of the Ö WBG)

IDA:

International Development Association (part of the Ö WBG)

IEA:

International Energy Agency

IFAD:

International Fund for Agricultural Development (of the Ö UN)

IFC:

International Finance Corporation (part of the Ö WBG)

IIF:

Institute of International Finance

IMF:

International Monetary Fund

IPA:

Instrument for Pre-Accession Assistance for future accession states (of the Ö EU)

ISPA:

Instrument for Structural Policy for Pre-Accession (of the Ö EU)

ITO:

International Trade Organization

JASPERS: Joint Assistance in Supporting Projects in European Regions (of the Ö EU) JEREMIE: Joint European Resources for Micro to Medium Enterprises (of the Ö EU) JESSICA: Joint European Support for Sustainable Investment in City Areas (of the Ö EU) JET:

Joint European Trust, research plant for nuclear fusion and energy generation (of the Ö EU)

JFPR:

Japan Fund for Poverty Reduction (of the Ö ADB) xxiii

List of Abbreviations JRC:

Joint Research Centers in the framework of the research and technology policy (of the Ö EU)

JSF:

Japan Special Fund (of the Ö ADB)

LDCs:

Less Developed Countries

MAI:

Multilateral Agreement on Investments (of the Ö OECD)

MDRI:

Multilateral Debt Relief Initiative (of the Ö IMF)

MERCOSUR: Mercado Común del Sur or Mercado Comum do Sul, free trade area in South America MFA:

Multifiber Arrangement

MFI:

Microfinance Institution

MIGA:

Multilateral Investment Guarantee Agency (of the World Bank Group)

NAFTA:

North American Free Trade Agreement

NGOs:

Non-Governmental Organizations

NIS:

Newly Independent States (of the former Soviet Union)

NTF:

Nigerian Trust Fund (of the Ö AfDB)

OAU:

Organization of African Unity

OCR:

Ordinary Capital Resources

ODA:

Official Development Assistance

OECD:

Organization for Economic Co-operation and Development

OEEC:

Organization for European Economic Co-operation

PEF:

Pakistan Earthquake Fund (of the Ö ADB)

PHARE:

Poland and Hungary: Aid for Restructuring of the Economies, structural adjustment facility (of the Ö EU)

PIC:

Public Information Center (of the Ö ADB)

xxiv

List of Abbreviations PRGF:

Poverty Reduction and Growth Facility (of the Ö IMF)

PRSP:

Poverty Reduction Strategy Paper (of the Ö IMF)

SAF:

Structural Adjustment Facility (of the Ö IMF)

SAPARD: Special Accession Programme for Agriculture and Rural Development (of the Ö EU) SBP:

Sustainable Banking with the Poor Initiative (of the Ö WBG)

SDR:

Special Drawing Right (of the Ö IMF; June, 15th 2007: SDR 1 = US-$ 1,01 or Euro 0,75)

SEA:

Single European Act (of the Ö EC)

SEAF:

Special Emergency Assistance Fund for drought and Famine in Africa (of the Ö AfDB)

SEDF:

Soros Economic Development Fund

SME:

Small and Medium-Sized Enterprises (an institution of the Ö OECD)

SMED:

Small and Medium Enterprise Department, an institution of the Ö World Bank Group

SRF:

Special Relief Fund (of the Ö AfDB)

STF:

System Transformation Facility (of the Ö IMF)

TASF:

Technical Assistance Special Fund (of the Ö ADB)

TPRM:

Trade Policy Review Mechanism (of the Ö WTO)

TRIMS:

Trade Related Investment Measures (of the Ö GATT)

TRIPS:

Agreement on Trade-Related Aspects of Intellectual Property Rights (multilateral agreement of the Ö WTO)

UA:

Unit of Account (of the Ö AfDB); whose value is defined as 0,8897 grams of fine gold (2005: = 1.17 Euro or 1.47 US-$)

UN(O):

United Nations (Organization)

UNAIDS:

Joint United Nations Programme on HIV/ AIDS xxv

List of Abbreviations UNCTAD: United Nations Conference on Trade and Development UNDP

United Nations Development Program

UNEP

United Nations Environment Program

UNIDO:

United Nations Industrial Development Organization

WBG:

World Bank Group

WBI:

World Bank Institute (of the Ö WBG)

WIPO:

World Intellectual Property Organization (multilateral agreement of the Ö UN)

WTO:

World Trade Organization

xxvi

0

Introduction and Acknowledgements

This textbook also is available in a German version: The companion volume in German, entitled „Internationale wirtschaftliche Integration: Ausgewählte Internationale Organisationen und die Europäische Union” presents the identical contents. In both textbooks the pages in content and form are constructed totally identical. Following academic internationalization, in German universities the number of courses in the English language is increasing. Also courses in universities of English-speaking countries may present courses in German language, at least in the language department. Using the textbooks simultaneously will help students to learn the necessary vocabulary covering the contents of ‘International Organizations’ and ‘International Economics’ in the respective language to reasonably follow a class in English or German.

0.1

General View on the Following Contents of Teaching

The present textbook in bilingual publishing together with the German version is designed to give interested readers a comprehensive overview of central aspects of organizations und institutions in the broad sphere of international economic cooperation and integration at an advanced scientific level in a form also for the non-specialist reader. Its purpose is to stimulate, next to students of Economics and also students of Business Administration and Engineering at Universities and Universities of Applied Sciences, also readers interested in other areas of specialization dealing with international organizations of economic coordination and integration and above all the European Union, giving them an excellent opportunity to acquire the respective English/ German jargon in parallel to advancing their knowledge of International Organizations.

1

Introduction and Acknowledgements Due to the parallel bilingual presentation of the contents, this textbook together with its German pendant is also highly suited for students of linguistics, respectively German studies, wishing to deal more intensively with the broad contents of international economic integration. Principal aim of the following contents is offering the reader the option to get informed respectively keep up with the current development of the fundamental causal connection of international networks in our increasingly globalized environment that even effects the daily life of everyone. The goal of this textbook is to give an overview of the most important international organizations, bodies of international collaboration, and treaties which facilitate the cooperation among nations as well as the activities of companies to act global. The following contents is divided into three parts and treats organizations and bodies active in the international areas of Trade Policy (Part A), Monetary Policy and Development Lending (Part B), as well as Economic Cooperation and Integration (Part C). Of the large number of international organizations, institutions and bodies, it is especially the World Trade Organization (WTO) and also the United Nations Conference on Trade and Development (UNCTAD), which are important for the foreign trade policy discussion of Part A. While the WTO in the tradition of the General Agreement on Tariffs and Trade (GATT) aims more at a general trade liberalization and codification of international trade flows, the main goal of UNCTAD is more the creation of a new, ‘fair’ world trade order. Part B presents – in the area of international monetary policy and development lending – the two Bretton Woods Institutions: The International Monetary Fund (IMF), and the World Bank Group, which are of significant relevance for the stability of the worldwide monetary- und financial system (IMF) as well as for international development lending (World Bank Group). Within a critical discussion about the World Bank’s activities regarding development policy the special significance of microloans for an active fight against poverty will be depicted. In this context, the work of the Grameen Bank by example will be presented due to an excursus. 2

Introduction and Acknowledgements Another focus of this part shall introduce the Regional Development Banks of Eastern Europe, Asia, Latin America and Africa and discuss their relevance for regional economic development. A general critical discussion on recent political and ethical not sufficiently reflected development financing will close this Part B. Part C takes up bodies and organizations of economic cooperation and integration. After a presentation of the most important bodies of informal international collaboration (like the G-8, which the reader certainly already knows), the OECD and – with the main focus for Part C – the main goals and contents of the European Union’s integration policy will be discussed. The European Union as a special form of economic, political and increasingly also social integration includes a crucial set of agreements for current European economic life and for further economic and political development every decision maker – in principle every citizen – should be acquainted with. Accordingly, it is necessary to know the main political elements as well as the institutions of the European Union with their decision-making processes and future perspectives. All organizations and bodies presented conspicuously shape international economic relations and are inextricably bound up with the concepts of trade and monetary liberalization. These are the concepts that should interest all exporting but also purely domestic companies if they want to withstand foreign competition. It is essential to understand the rules of international economic policy and trade. These rules within an accelerating globalization have been and are being substantially fashioned by the institutions and organizations presented below. Especially for the readers, who use this book to prepare for university-tests, an autonomous working with and answering of the review questions is highly recommended; the experience shows, that students often underestimate ‘easy’ parts without algebraically contents. For your own benefit please consult the answer key only after you have worked out the answers to the review questions. 3

Introduction and Acknowledgements To summarize, Parts A to C of both the bilingual textbooks in English and German supply the following teachings: Table of Contents: Part A: International Trade Policy Internationale Handelspolitik 1.

The World Trade Organization (WTO) Die Welthandelsorganisation (WTO)

2.

The United Nations Conference on Trade and Development (UNCTAD) Die Konferenz der Vereinten Nationen für Handel und Entwicklung (UNCTAD)

Part B: International Monetary Policy and International Development Lending Internationale Währungspolitik und Entwicklungsfinanzierung 3.

The International Monetary Fund (IMF) Der Internationale Währungsfonds (IWF)

4.

The World Bank Group Die Weltbankgruppe

5.

Regional Development Banks Regionale Entwicklungsbanken

Part C: International Economic Cooperation and Integration Internationale wirtschaftspolitische Zusammenarbeit und Integration

4

6.

Bodies of International Collaboration Gremien internationaler Zusammenarbeit

7.

The Organization for Economic Co-operation and Development (OECD) Die Organisation für wirtschaftliche Zusammenarbeit und Entwicklung (OECD)

8.

Economic and Political Integration of Europe through the European Union (EU) Die wirtschaftliche und politische Integration Europas durch die Europäische Union (EU)

Introduction and Acknowledgements

0.2

Acknowledgements

The idea to the current textbook was born already at the beginning of my teachings at the Jena University of Applied Sciences in 1993. Students frequently asked for a written summary of the didactic contents on International Organizations including the European Union supplied at the lectures. In addition, an intensive professional foreign language course had been an integral part of the studies in Business Administration and Engineering. My special appreciation goes to my American colleague and friend of many years, Professor Dennis P. de Loof, Ph.D., who encouraged me to compile my course materials bilingually in German and English as published textbooks and who translated some 50 % of the parallel published Germanlanguage textbook into English with unflagging commitment. Apart from the current book of International Economic Integration, these are the following bilingual English – German textbooks of Oldenbourg Publishing: •

Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Munich 2006,

•

Understanding Economic Policy, Munich 2008 and constructed identically Anwendungsorientierte Wirtschaftspolitik, Munich 2008,

•

and in English: Understanding Microeconomics, Munich 2008.

In this context, I must also thank Oldenbourg Publishing in Munich, who supported this idea as early as 1999. My cordial thanks go to Dr. Schechler, Rainer Berger, and Mrs Meike Schaich who accompanied the creation of this bilingual economic book as part of the bilingual publication series of Oldenbourg Publishing. This book could not have been completed without the collaboration of my highly committed research associate, and now portfolio manager in international energy-trading, Dipl.-Wirt.-Ing. Michael Anding, who supported me in translating a great portion of the parallel German-language textbook into English and gave most helpful comments. The contents of the present textbook also were influenced by a great number of profound discussions with my students at Jena University of Applied Sciences; especially naming the worthy contributions of Benjamin Graf,

5

Introduction and Acknowledgements Tina Gröbner, Janine Hoffmann, the very expert of Latin American life Carsten Jehle, Koray Cura, Christian Parth, Michael Taubert and Annelie Timmler. For many helpful and interesting discussions on the contents during a study trip to IMF, World Bank, Asian Development Bank in Washington, to the UN in New York, and within their presentations at Clemson University, South Carolina, in autumn 2001, my thanks go to afterwards graduated Dipl.-Ing. [Diploma in Engineering] Jörg Burggraf, Markus Daniel, Karsten Lang, Jens Lösche, and Andreas Edel; I have to thank them also for their help in translating Chapters 5 and 6. I am also grateful for numerous discussions on the contents to my students of another study trip to IMF, World Bank, Inter-American Development Bank in Washington, and to the UN, New York, in October 2002: in particular the today’s Dipl.-Wirt.-Ing. [Diploma in Business Administration & Engineering] Ferencz Arendt, Jana Beier, Mathias Jähler, Enrico Piechotka, Steffen Remdt, Torsten Salomon, Heidrun Schmidt und Swen Schumann. I would like to thank the participants of my development policy experiencing study trip to Namibia and to the Polytechnic of Namibia in April 2007 for lively discussions particularly regarding the problems of an active development policy including the granting of microloans and donations: the ladies Ivoire Eibner and Dipl.-Wirt.-Ing. Nicole Krämer, as well as the Cand.-Wirt.-Ingenieurs Matthias Böhnert, Stephan Braune, Robert Meyer, and Dipl.-Ing., Cand.-Wirt.-Ing. Andreas Edel. Last but not least I express my thanks to my daughters Ivoire Joy Eibner and Chantal Eibner for their great help in finishing the final lectorate. It goes without saying that I bare the responsibility for any remaining errors. The reader is cordially invited to get in touch with me by e-mail at any time to submit comments, corrections, supplements or to suggest improvements to the following contents: [email protected] . Jena and Hilden, June 2007, Wolfgang Eibner

6

Introduction and Acknowledgements When I started the job as a research assistant in the year 2003 for the present textbook as well as for the also bilingual textbook „Understanding Economic Policy – Anwendungsorientierte Wirtschaftspolitik“, it was not in sight, that this task will accompany myself for four years even after my diploma. But the pleasure and the interest on the subject as well as the exceeding productive cooperation with Prof. Dr. Eibner were consistently enough incentive to help completing the textbooks. I want to thank sincerely Prof. Dr. Wolfgang Eibner, who gave me the chance to enlarge and deepen my academic abilities and skills. Furthermore, I would like to thank cordially Dr. Eldon L. Knuth, professor emeritus of the University of California, Los Angeles, for his various suggestions without which my translation work could not have succeeded. Jena and Munich, June 2007, Michael Anding

7

8

Part A:

1

Selected Organizations Active in the Area of International Trade Policy

The World Trade Organization (WTO)

After an introduction in the history and goals of the World Trade Organization (Section 1.1), the actions and precise agreements will be shown, with which the WTO attempts to: •

liberalize further the global trade in goods (GATT, Section 1.2),

•

promote the world wide trade in services (GATS, Section 1.3),

•

protect intellectual property in global markets (TRIPS, Section 1.4),

•

monitor the behavior of member states with reference to foreign trade policy (TPRM, Section 1.5),

•

and, if necessary, to arbitrate disputes (DSB, Section 1.6).

•

The side-agreement of GATT, the Trade Related Investment Measures (TRIMS), will be expounded in Section 0.1.

•

Section 1.8 will close this chapter by sketching out possible future foreign trade policy problems within the WTO.

1.1

Introduction to WTO

1.1.1 Founding and Goals One of the goals of the United Nations after World War II – besides the founding of the two Bretton Woods organizations, the IMF (cf. Chapter 3) and the World Bank (cf. Chapter 4) – was to establish a special foreign trade policy organization of the UN: The International Trade Organization (ITO). 1948 in Havana, the principles and rules for the work of the ITO were drawn up within the framework of a ‘world trade charter’. This so-called ‘Havana Charter’ was never ratified, however, due to its rejection by the United States which did not believe that the liberalization had gone far enough. In order not to have to completely abandon the goal of a set of rules to liberalize world trade, the participants at the Havana conference agreed to a provisional use of this charter as the so-called ‘General Agreement on Tariffs and Trade’ (GATT). 9

Part A

1 WTO

This just provisional set of rules then determined the liberalization of world trade – for 47 years – until after many circles of negotiations within the GATT, the breakthrough for the founding of a World Trade Organization (WTO), which came into being on 1 January 1995, occurred in 1994 during the so-called Uruguay negotiation round. With the establishment of the WTO by the GATT member countries the idea of the ITO became a reality 47 years after its miscarriage. The new WTO agreements provide a permanent forum for the solution of foreign trade policy disputes and moreover include •

the old GATT of 1948 with all its separate commitments (schedules) and decisions from 1948 to the end of the Uruguay round in 1994,

as well as two further multilateral agreements on •

Trade in Services (GATS), and

•

Trade-Related Aspects of Intellectual Property Rights (TRIPS).

In addition there are plurilateral agreements on •

civil aircraft,

•

information technology, and

•

rules for public procurement in an international context.

Former plurilateral agreements on beef exports and dairy products meanwhile are expired. A side-agreement of GATT since 1995 is the treaty on Trade Related Investment Measures (TRIMS), which will be expounded in coming Section 0.1. The tasks of the World Trade Organization are the:

10

•

carrying out and further development of WTO agreements,

•

provision of a permanent forum for future multilateral trade negotiations,

•

arbitration of disputes between individual WTO members,

•

surveillance of the foreign trade policy of WTO member states,

•

cooperation with other international organizations, especially the IMF and the World Bank.

1.1 Introduction to WTO

1.1.2 The Institutional Structure of the WTO The following two figures give an overview of the institutional structure (Figure 1.1) and primary activities (Figure 1.2) of the WTO, which counts (in the middle of 2007) 150 member countries, Russia supposed to be the next member: Institutional Structure of the World Trade Organization (WTO) W T O – Agreement *

Ministerial Conference Committees: - Budget, Finance and Administration - Trade and Development - Trade and Environment - Regional Trade Agreements - Balance of Payments Restrictions

General Council Director General

Secretariat

Arbitral Panel of the Dispute Settlement Body – DSB – Monitoring of the Trade Policy – TPRM –

* In the WTO-agreement the treaties about the trade in goods (GATT), the trade in services (GATS) and trade related aspects of intellectual property (TRIPS) can be found as Attachment 1; in addition as Attachment 2 the agreement on the settlement of disputes (DSB) and in Attachment 3 the mechanism for monitoring the trade policy (TPRM) are included.

Figure 1.1:

Institutional structure of the WTO (cf. DEUTSCHE BUNDESBANK, 1997b, p. 141)

The supreme body of the WTO is the Ministerial Conference consisting of representatives of all member states. It meets at least every two years. The carrying out of agreements is monitored by the General Council, which likewise contains representatives from all the member states. As a rule, decisions in the WTO are arrived by consensus. In this regard, every member state has a vote. In contrast to other international organizations, there is no weighting of votes in the WTO according to shares of world trade, size of financial contributions or other criteria as this had also been the case with the GATT. 11

Part A

1 WTO

All the former members of the GATT as well as the European Union became founding-members of the WTO. Any country can join the WTO, if twothirds of the WTO members agree. In addition, the conditions of admission have to be negotiated in each case with the General Council. Treaty Structure of the World Trade Organization (WTO) Multilateral Agreements

GATT

-

GATS

TRIPS

Council for Trade with Goods

Council for Trade in Services

Agreements about:

Agreements about:

dumping import licences health procedures investments checkups before shipments agriculture precaution subsidies technical trade barriers textiles and clothes rules of origin

- financial services - air transportation (partitions) - transportation of natural persons - opening of the markets for telecommunications

Council for Trade Related Aspects of Intellectual Property Rights Conventions of: Bern: - art, literature Paris: - protection of commercial property (copyright, invention, producer, trademarks and geographical descriptions, business secrets) Washington: - integrated circuits - regulation about imitations of all types

- customs value

Plurilateral Agreements Trade in Civil Aircraft Committee

Government Procurement Committee

Information Technology

TRIMS – as a side agreement to GATT

Figure 1.2:

12

Treaty structure of the WTO (cf. DEUTSCHE BUNDESBANK 1997b, p. 141; [www WTO 11/2006])

1.2 GATT When it comes to voting, the European Union member states are represented by the EU Commission, which has votes equal to the number of EU members it represents. How the commission votes has already been decided in socalled EU coordinations. Here the EU member states inform the EU Commission of their joint standpoint and instruct the Commission to take this position in negotiations. Within the framework of the GATT, membership dues depended on the respective share of the global merchandise trade of the individual signatory states. With the founding of the WTO, the basis for the assessment of dues – compared with the predecessor organization GATT – was significantly extended and embraces not only the share of global merchandise trade but also the share of worldwide trade in services. This additional financial charge is more than tolerable, in the interest of improvements in international competitiveness, because of the advantages which the WTO offers especially to an exporting nation like Germany. For example, Germany with about 9 % of global trade volume contributed around Swiss Francs 14.9 million, respectively Euro 9.6 million, in 2005. The substantive law of the WTO is laid down in the multilateral and plurilateral agreements as listed in Figure 1.2 and mentioned in Section 1.1.1.

1.2

The General Agreement on Tariffs and Trade (GATT)

1.2.1 History and Goals of the GATT within the WTO The General Agreement on Tariffs and Trade (GATT) has formed the basis of the international trade order from after World War II for about 60 years. The GATT as a component of the WTO is a treaty under international law among 150 countries (as of beginning 2007), which together carry out far above 90 % of world trade. Moreover, many other states make de facto use of the GATT, although they are not (yet) members. (Cf. for the following explanations HARBRECHT, 1997.) The impetus for a reorganization of world trade after World War II arose from the experience that disturbances in the orderly course of the world economy could lead to economic and political steps of despair, e.g., 13

Part A

1 WTO

•

the temptation to implement a ‘beggar-my-neighbor-policy’ by means of a competitive currency devaluation of countries,

•

the obstruction of the open global trading system by introduction of tariffs, quotas, and the return to bilateral barter transactions, or even

•

trade wars,

and that therefore an international economic system can help to secure the political order and the peaceful cohabitation of nations. The General Agreement on Tariffs and Trade is, as a component of the WTO, the only multilateral treaty thus far in which rules for world trade in goods are laid down in terms of rights and duties. The treaty is supposed to guarantee the economically necessary security and reliability of international trade relations. It is also supposed to provide a step-by-step liberalization of world trade, in order to promote the goals named in the treaty preamble, i.e., •

the ‘rise in living standards’,

•

‘realization of full employment’,

•

a ‘high and continually rising level of real income and effective demand’,

•

the ‘full development of the world’s resources’ as well as

•

an ‘increase in production and the exchange of goods’.

Until its integration into the WTO, the GATT was not an international organization in the narrow sense of the words. Nevertheless, it was always much more than just an international treaty and was and is still functioning as

14

•

a multilateral agreement, which lays down internationally binding rules for orderly world trade and thereby decisively influences the trade policy of the signatories;

•

a forum, in which nations can discuss and solve their trade problems as well as negotiate improvements in the conditions of world trade, either by opening national markets within the framework of the existing order or through improvement and extension of the treaty itself;

1.2 GATT •

an international court of arbitration, which attempts to arbitrate disputes among member states or settle them by means of its own judgments (the so-called ‘panel system’) within the framework of the formal Dispute Settlement Body (cf. coming Section 1.6).

In the course of its 60 year history, the GATT – as one of the pillars of the international world trade order created after World War II – has on the whole proved its worth. It has decisively contributed to the fact that world trade has reached an extent which is unique in history and which was not previously considered as possible (see for more detail the bilingual textbook of EIBNER, 2006c: Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Chapter 1). The successes of the GATT were obtained by regularly occurring treaty renegotiations, the last very important of which with great improvement – the Uruguay Round – led to the replacement of the GATT by the WTO. Following Figure 1.3 gives an overview of the various negotiation forums and the tariff reductions achieved: involved countries

Period of time

Average customs duty cuts in %

Value of trade covered through tariff cuts in billion US-$

Geneva

23

1947

19

10.0

Annecy (France)

13

1949

2

-

Torquay (England)

38

1950 – 51

3

-

Geneva

26

1955 – 56

2

2.5

26

1960 – 61

7

4.9

62

1964 – 67

35

40.0

102

1973 – 79

34

148.0

123

1986 – 94

40

736.9

149

2001 – 06

failed (2006)

failed (2006)

Customs duty negotiation round

Geneva (Dillon–round) Geneva (Kennedy–round) Geneva (Tokyo–round) Geneva (Uruguay–round) Doha (Qatar) et al. (Doha–round) Figure 1.3:

Suspended on July 27, 2006

Tariff reductions in the negotiation rounds of the GATT/ WTO (data from MÜLLER, 1983, p. 57; GATT, 1994, p. 11; [www WTO 09/2006]).

15

Part A

1 WTO

Besides the ‘Uruguay-round’, the most important GATT negotiations were the Kennedy- and the Tokyo round. These two latter negotiation rounds succeeded in reducing the weighted average tariff on finished products exported into the nine most important industrial countries to 4.7 %. When the GATT was founded, this tariff rate was still around 40 %. For consumers this meant a tariff-related price reduction of about 25 %. (If the original price amounts 100, it will rise to 140 with a tariff of 40 %. Reducing the tariff rate to 4.7 %, the price will drop to 104.7.) The abolition or reduction of so-called non-tariff trade barriers was first negotiated in the Tokyo Round. These are trade barriers that arise not by the imposition of tariffs but rather on the basis of other government regulations, as e.g., different technical norms, different rules concerning health and consumer protection, environmental and noise protection, different safety rules, etc. (For tariff- as well as non-tariff trade barriers e.g. compare in detail the also bilingual textbook of EIBNER, 2006c: Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part B.) In order to curb such non-tariff trade barriers, several codes of behavior and a number of individual arrangements were agreed within the framework of the Tokyo Round. In the Uruguay Round, the average tariff on industrial products was lowered from 6.3 % to henceforth 3.9 %.

1.2.2 The Basic Foreign Trade Policy Principles of the GATT Although the General Agreement on Tariffs and Trade with its total of 38 articles is a rather comprehensive treaty, it is centered on a small number of principles and goals. The following three principles can be mentioned as the main content, being •

the principle of non-discrimination in international trade (Art. III GATT),

•

the principle of reciprocity in the dismantling of trade barriers,

•

the principle of liberalization, i.e., the dismantling of tariffs and other trade barriers (especially Art. XI GATT).

All three principles are mentioned in the preamble of the GATT. 16

1.2 GATT

1.2.2.1

The Principle of Non-Discrimination or the so-called MostFavored-Nation Principle

This first and most important principle of the GATT commits the member states (i.e. the treaty signatories) to non-discriminatory trade practices. This is achieved primarily by granting all other member states a „General Most-Favored Nation Treatment” (Article I GATT). This important mostfavored-nation clause obliges the signatory states to grant all advantages, concessions, prerogatives and exemptions – which are accorded to the merchandise of one signatory state – promptly and unconditionally to the same kind of merchandise exported from other signatory states, or put in a nutshell: All benefits, which are granted to a GATT country in the international trade, have to be awarded immediately and unconditionally to every other GATT trade partner. This means that no merchandise may be treated more unfavorably in terms of tariff because of its origin in a particular country than the same merchandise exported from some other WTO member country. According to the GATT, exceptions to this rule are only allowed for •

regional associations such as customs unions and free trade areas (Art. XXIV) as well as

•

unilateral preferences for developing countries (Art. XXXVIII).

Granting of unilateral preferences means that developing countries often obtain entry to certain markets of the developed world although the countries of the latter do not receive corresponding greater ease of entry in return. The intention is to promote economic development of economically weaker countries by supporting their foreign trade unilaterally. The previously mentioned authorization to form regional associations is supposed to facilitate merchandise trade among these countries, but on the other hand not to limit trade with the rest of the world. Seen in this way, functioning regional associations such as the former European Economic Community (today a part of the European Union), the North American Free Trade Area (the NAFTA countries are the USA, Canada and Mexico), or in South-East Asia the ASEAN (even if it is – 2007 – only very basically a free trade area, but is planning a strengthening of the Asian Pacific Trade Agreement (APTA) by accession of China, India, Japan, Korea and Australia, to 17

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become a big competitive challenge in international trade for Europe and the USA). These regional free trade associations are not inevitably positioned against international trade and competition; on the contrary, they can promote this trade and competition. (Members of ASEAN in 2007 are: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar (in former times named Birma), Philippines, Singapore, Thailand and Vietnam.) Such regional trade agreements, however, always lead de facto to a more or less significant commercial exclusion for third parties. This already shows an analysis of world trade structures dependent on regional trade agreements from 1978 to 1986, which verifies a clear increase of trade volume in areas with regional trade agreements to the detriment of third parties: cf. EIBNER, 1991a, Section 1.3, pp. 100. In the last years, this regionalization of trade became even stronger.

1.2.2.2

The Principle of Reciprocity

The principle of reciprocity is not explicitly mentioned anywhere in the GATT regulations, not even defined. However, it is indirectly mentioned at many points. It is supposed to make trade policy concessions achievable politically, for one expects from a ‘balanced’ reduction of trade barriers that trade volume will increase but that the structure of the flow of goods will mainly remain unchanged. Of course, the principle of reciprocity causes major practical problems regarding the question of which concessions are seen as equivalent. Thus one can understand a customs exemption for the same absolute trade volume between two signatory states as an equivalent concession. But if the trading partners are of different sizes as, e.g., the European Union in comparison to Taiwan or Fiji, this is a clear handicap for the smaller partner – since a relatively larger concession is expected from the smaller country compared to the large country. If, however, one understands equivalent to mean the same relative concessions, e.g., a percentage of one’s own total trading volume, then large countries feel disadvantaged compared with smaller countries and lose interest in trade concessions. In this latter regard, companies in larger countries profit much less from the same trade concessions than potential exporters in smaller states, who stand to gain a large market for their exports. To take an example, exporters in the EU would only have small satisfaction in unfettered access to the markets of the Fiji Islands. 18

1.2 GATT It is easy to understand that under such conditions especially the European Union, as far and away the largest trader in the world, is a very difficult negotiating party in liberalization negotiations or – looked at in a positive way – is a vigorous champion of the interests of European producers and suppliers in national and international markets. Heeding the principle of reciprocity can therefore easily lead to a situation in which the obligation of unconditional most-favored-nation treatment is weakened de facto to conditional most-favored-nation treatment with additional contributions required from the smaller partner.

1.2.2.3

The Principle of Liberalization of Foreign Trade or Open Markets

The principle of liberalization says that no GATT signatory may introduce new tariffs, prohibitions or restrictions on quantity or even keep the old prohibitions and restrictions in trade with other member countries. These restrictions on quantity acquired their great importance during the Great Depression, when almost all nations of the world had hopes of economic advantages from the mercantile principle of promoting exports but preventing imports as far as possible (see also EIBNER, 2008a: Understanding Economic Policy – Anwendungsorientierte Wirtschaftspolitik, Part A). The result of this violation of the classical free trade principle was a reduction in world trade of up to 70 % in the years 1929 to 1933. These quantitative trade restrictions are also popular in times of war and other crises. In the meantime, quantitative trade restrictions – with the exception of those on agricultural products, textiles and steel – have largely been dismantled, since the GATT principle of liberalization forbids all non-tariff trade barriers and especially quantitative import and export restrictions (Art. XI) as well as the misuse of internal taxation and regulation to achieve trade restrictions (Art. III and VIII). Moreover the principle of liberalization especially forbids the signatory nations to make foreign goods less desirable than domestic wares through the imposition of taxes or other domestic charges or by other measures such as laws, ordinances or other regulations. This is to the advantage of companies in exporting countries like Germany. If such companies run up against unfair (i.e., forbidden by the GATT) market entry barriers in their attempts to offer their products in foreign markets, then market entry can be forced by means of the GATT. 19

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Nevertheless the GATT does not have a ‘free trade commandment’ and is also clearly not the ‘free trade organization’ which many consider it to be. Rather the GATT supports open, fair and undistorted competition, protective measures for domestic industries are not forbidden by the GATT; in the next section they will be explained.

1.2.3 Further GATT Principles Besides the above-mentioned basic principles, which are usually listed in the professional literature, the GATT itself adds the following principles: •

Transparent control of foreign trade:

Trade protection is basically supposed to be the result of tariffs and not of other trade limiting measures. In this way the scope of protective measures is supposed to be clearly recognizable and transparent. •

Legal underpinnings of international trade:

The GATT offers a stable legal foundation for trade. The ‘bound’ tariffs for each country are collected in tariff schedules, which are an integral component of the GATT and which therefore each country or company can rely on in regard to the treatment of its merchandise. Tariff increases on some merchandise are in principle possible, but have to be combined with the granting of something in return and are therefore the subject matter of political negotiations. In addition, there is the explicit right of consultation and complaint to the GATT in cases of breach of treaty. If treaty-based rights are withheld from one country or its companies by another country or if the rights of the first country are diminished, then this country can demand bilateral consultations with the alleged treaty-breaching country in order to settle the dispute. If this does not succeed, a panel within the Dispute Settlement Body of the WTO will be entrusted with the investigation of the incident. This panel will draw a report and make recommendations, that are automatically adopted as soon as one party agrees to them: if the recommendations of the panel are not accepted by the inferior party, the injured country is entitled to carry out retaliatory measures (Art. XII and XIII). •

20

Limited legalization of protective measures and exceptions:

1.2 GATT Protective measures are only allowed in exceptional cases and in emergencies. Exceptional cases, in which domestic protective measures are allowed according to the rules of the GATT, exist when •

another country engages in unfair trade practices as, e.g., dumping or subsidies (Art. VI),

•

balance of payments problems occur (according to the general blanket clause, Art. XII),

•

temporary protection of several industries by specific safeguard clauses is given – above all due to labor market policy causes (Art. XIX),

•

the importation of goods is prevented because of violations of public morals (Art. XXa), to protect human, animal or plant life as well as health (Art. XXb), or for the protection of national treasures of artistic, historic or archaeological value (Art. XXf),

•

national security is threatened (Art. XXI),

•

when an exemption from obligations is granted by the GATT (Art. XXV),

•

given certain pre-conditions, a renegotiation of trade concessions is to be achieved (Art. XXVII),

•

given certain pre-conditions, a country’s own economic development is to be assisted (Art. XXVIII).

Moreover, most of the GATT rules were or are also after the failure of the ‘Doha-round’ in 2006 not valid for agricultural products and therefore the protection of the national agricultural sector is fundamentally consistent with the GATT and the WTO respectively (Art. XI). A crucial result of the Uruguay negotiating round of the GATT, founding the WTO, was the understanding between the EU and the USA, on the basis of the Blair House Agreement, to achieve a reduction in agricultural subsidies and easier market entry for third parties, above all to the EU agricultural market from 1994 on. Furthermore a reduction of the ‘disadvantageous’ trade effects of animal and plant protection measures was agreed in 1994 already. But this had to be viewed not unrestricted positive under the aspects of health protection, because national import prohibitions are hardly possible e.g. due to the usage of international accepted, but national prohibited substances in the livestockor plant breeding on import products. 21

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Likewise there were and are also within the rules of the WTO exceptions for textiles and clothing. From 1961 onward, the textile industry was more and more excluded from the GATT and incorporated into other agreements. In 1961, a so-called ‘short-term, cotton textile agreement’ was concluded for the first time among 19 nations under the aegis of the GATT in order to protect textile producers in industrial countries from textile imports from low-wage countries. In keeping with several further agreements, selective import restrictions were extended to all textile fibers after the conclusion of the so-called multi-fiber agreement (MFA), to protect the textile industry in the Western industrialized countries from imports of textile exporting countries by a predefinition of quotas and import limits. At last, 41 nations were participating in the agreement, whereby the European Union counted as one ‘state’. Most of the protective measures taken within the framework of the MFA are bilateral agreements which violate the fundamentals of the GATT in many respects. However, even these in part drastic import restrictions – especially on the part of the former EC on Turkish cotton or South-East Asian textiles – could not stop the collapse of the European textile industry; so within the framework of the Uruguay Round of the GATT in 1994 the abolition of all MFA quotas over 4 grades of a liberalization of quotas until January 1st 2005 was resolved and implemented. But, the disadvantage of this abolition is, that an entire integration of the textile sector into the WTO regulations is not succeeded yet due to the failure of the Doha Round in 2006: For this reason, bilateral allocations of quotas can now be – and will be – arranged again in the textile sector. Hence, the worldwide textile trade is not really liberalized. Until now (2007) the textile sector still is a matter of ongoing debates – because it is relatively labor-intensive. An example in this case are the still legal quantity limits, for instance on the import of Chinese textiles into the EU. Those were first recognized by the public in late 2005: In 2001 Chinese imports of jackets into the EU were for instance restricted to a maximum of 18 million units by the MFA. In 2005 China exported 199 million jackets unimpeded into the EU (cf. MAHMOUD, 2005, p. 4). In the same period the EU initially prohibited the import of 75 million Chinese t-shirts, as the delivery quota for the year 2005 was already exceeded. The agreement between the EU and China charged the 2005 quota excess to the quotas for 2006 and 2007. 22

1.3 GATS This deferment of the problem is only marginally noted. China arguably will be successful in boosting the consignment quotas by massive violations of these negotiated quotas; last but not least because of the rising political power of China. In emergencies, the GATT allows the temporary protection of individual industries as laid down in specific safeguard clauses (Art. XIX). If a country can substantiate that the import of certain merchandise would seriously damage the domestic economy (e.g., would endanger the continued existence of certain labor intensive industries), the GATT can sanction trade restrictions: Thus, e.g., Germany after its reunification has received a foreign trade policy waiver – which is supposed to protect certain weak industries from foreign competition – for the protection of the economy in the region of East Germany. The imposition of protective measures is also permissible in cases of ‘balance of payments difficulties’, according to the general clause of Art. XII, which is commonly seen as the most important protective clause, since it is almost always possible to substantiate ‘balance of payments problems’. The usual condition for the use of protective clauses or exceptions is that the protection may not exceed the necessary degree and that, as soon as conditions allow, it will be relaxed. It is apparent and understandable that through the use of these many exceptions, even with adherence to the GATT or WTO rules, a wide berth for the (re-)introduction of protectionist measures remains and conflicts arise again and again between individual signatories regarding the interpretation of the WTO regulations in concrete cases.

1.3

General Agreement on Trade in Services (GATS)

Services were not a component of the GATT. It was therefore indispensable for the development of free world trade that trade in services – in many nations traditionally subjected to considerable barriers – was incorporated into trade liberalization through the WTO. There are now significantly better export opportunities for suppliers of trade in services here too. Naturally at the same time – in part for the first time – they also have to confront massive foreign competition. 23

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The GATS consists of three elements: •

the framework agreement, which in principle subjects all tradable services to the global liberalization obligations drawn up by the GATT,

•

lists with the liberalization obligations undertaken by each individual signatory, as well as

•

various sector specific regulations (above all in the fields of financial services, audiovisual areas and transportation) that are not yet subject to the liberalization of the framework agreement.

Since the liberalization obligations do not automatically arise from the framework agreement, but only through inclusion in country-specific negotiated lists, every member state is obligated to participate in the negotiating rounds of the GATS at least once every five years. At this time the member countries have to submit lists with specific obligations regarding market entry and treatment of their residents. In this regard, each country can choose for itself the sectors for which it wants to undertake liberalization obligations. After approval by the WTO member states of such a list, it becomes an integral component of the GATS.

1.4

Agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS)

There are big problems with the protection of intellectual property, which like trade in services was not a subject of the GATT. Here it is a question of the clarification of patent protection, trademark rights, etc., in international trade and of the development of new regulations and measures for the international protection of intellectual property rights. Moreover, a multinational framework agreement on sanctions for trade in counterfeit products was realized. Here the big problem of counterfeiting especially in South-East Asia, which in part endangers the existence of many American and European companies, was taken up for the first time. Framed by the World Intellectual Property Organization – WIPO – based in Geneva, TRIPS completes the yet existing special agreement concerning protection of intellectual property from plagiarism and brand piracy in a more obliging form (for more detail cf. VOLZ, 2000, pp. 112). 24

1.4 TRIPS

1.5 TPRM

Through the incorporation of TRIPS into the set of WTO agreements, its standards became binding for all member states of the WTO. Nevertheless some developing countries and transforming economies of Eastern Europe were granted longer compliance deadlines (maximum 11 years). The incorporation of TRIPS into the WTO leads to the expectation that through the potential sanction mechanisms of the WTO – if necessary, by decision of the arbitral body (panel) of the DSB, cf. coming Section 1.6 – in the long run there will be a much more vigorous regard for the rules protecting intellectual property.

The Trade Policy Review Mechanism (TPRM) and the Monitoring of Regional Trade and Integration Agreements

1.5

As early as 1988, the GATT – using the goal of liberalization as a premise – agreed to a regular review of the trade policy of individual member states. The WTO has taken over these regular reviews into its set of rules as the TPRM, in order to recognize short-comings or the potential for international trade conflicts as early as possible. Through the publication of the results of the reviews, the WTO can put substantial pressure on the member states concerned to remedy trade policy short-comings or flawed behavior. The following regular review intervals are provided: •

the four largest trading entities (EU, USA, Japan and Canada) are reviewed every two years,

•

the 15 next largest countries every 4 years,

•

all other states (with the exception of the least developed countries of the Third World, which are granted longer intervals) are reviewed every six years.

In addition, the WTO keeps the important regional trade and integration agreements under observation in regard to which exceptions to the general WTO liberalization codex have been granted, as seen in Section 1.2.2.1. This is supposed to stop regional trade and integration agreements (e.g., the EU, EFTA, NAFTA, CARICOM, MERCOSUR, or the Asian APTA; in the future may be also the all-American FTAA) from parceling up the world economy at the same time as the WTO is striving to create a global liberalized economic area. 25

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Therefore, all such treaties or preferential agreements mentioned in Section 1.2.2.1 are monitored according to Articles XXIV and XXXVI et sqq. GATT. This is also the case for integration agreements in the service sector, which are monitored according to Art. V GATS.

1.6

The Dispute Settlement Body of the WTO (DSB)

With the ‘Dispute Settlement Body’ (DSB) the WTO provides a framework for the resolution of disputes arising among its member states with regard to any of the WTO-agreements (cf. VOLZ, 2000, pp. 116 – 117). If such a dispute arises, the parties first must try to find an amicable solution. If they fail, the DSB formally can be called upon and then will upon request of either party build an arbitral body consisting of three arbitrators that is called a ‘panel’. This panel after hearing the different arguments concludes the procedure by issuing its ‘report’ and as part of this report offers its ‘recommendations’. Very controversial discussed and a real lack of democracy is the fact, that the panel’s hearings are held without access for the public, including the press. Another interesting point is, that the panel in its recommendations is in no way bound by the motions or requests made by the parties. That is, it may recommend remedies that neither party has formally requested in its pleadings. The panel’s reports are automatically adopted unless all members unanimously reject them. So it is up to the winning side, if necessary on its own, to force through the adoption by the WTO-DSB of such a panel report. If the other party is not willing to accept the panel report’s recommendations, there is the possibility of appealing against such a panel report. Such an appeal is then decided upon by the second instance of the dispute resolution process, the ‘Standing Appellate Body’. The final report then issued by this second instance in any case acts as the final instance. The two GATT related examples given below shall demonstrate the procedure of dispute settlement monitoring in a concrete case as well as problems resulting from the application respectively interpretation of WTO regulations (closely to VOLZ, 2000, pp. 100). 26

1.6 DSB • The Dolphin-Tuna case USA versus Mexico:

In order to protect maritime mammals, in particular dolphins, the USA passed a law prohibiting US-fishermen catching tuna on the high sea by using especially dense and therefore very effective nets. Instead USfishers must use wide nets, that e. g. young dolphins can escape. It is clear, that this renders fishing less effective and so makes tuna fishing more expensive. To protect US-fishermen from foreign competition, which still uses those dense ‘killer-nets’ and because of this can compete by selling cheaper tuna, the USA simultaneously prohibited the import of foreign tuna, if caught not also with wider nets. Mexico, one of the largest suppliers of tuna on the US market, in 1993 brought action against the United States before the GATT (at that time the WTO wasn’t founded, yet) because of the restriction of trade inherent in this prohibition. The question to decide by the at that time GATT panel was: Does this US import prohibition violate Articles III or XI GATT (see the explanations at beginning Section 1.2.2) and, if so, does one of the exceptions listed in Article XX GATT (as discussed in Section 1.2.3) apply here and thus is the import prohibition justified and legal? The given import prohibition of tuna is a case of Art. XI GATT: it is an import restriction pertaining the manner of production (fishing with dense nets) and therefore is an illegal restriction. The question now was, whether this presumption of illegality might be rebutted by Article XX GATT: Art. XX GATT would legalize the importrestriction, if it aims at a legitimate policy goal explicitly listed there, and second, is proportionate, i.e. suitable and necessary to achieve that goal and not excessive in its consequences, and finally, it must not constitute a hidden or unduly trade discrimination. The first of these conditions seems easily fulfilled, as the pertinent US import prohibition clearly aims at the survival of a certain valuable mammal species (the dolphins), it most clearly pursues a legitimate policy goal. Also the trade restriction is suitable and necessary to achieve that goal, and most definitely not excessive. 27

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Concluding it is not a hidden trade barrier or discrimination as long as this trade prohibition is binding for every fisher and every country worldwide without exemption: no import as long as dense fishing nets are used for catching tuna. However, the panel made a diametrical different decision in this case: Contrary to the author’s results of the just discussed points of consideration, the panel found that the pursuance of a legitimate policy goal was indeed lacking. For the reader now the question might arise why the GATT doesn’t respect the protection of animals as a legitimate policy goal. Indeed this is one main criticism concerning its work, the WTO has since then been exposed to. However the panel’s reasons for its decision were less stemmed from a lack of respect for the protection of animals or environment but were based on the fear of a misuse of international law by making a different decision. For the members of the panel seemed obvious that a proper object of unilateral US-legislation only can be those objects, or in this case animals, that fall under the jurisdiction of the US. But this would be the case in this special dispute only for animals situated on US-territory or within its coastal area. “This condition was not satisfied in the present case, as the dolphins in question lived on the high seas that are under no country’s unilateral authority. Thus, in effect, the panel read an additional condition into Art. XX GATT that – although it is nowhere explicitly to be found in the text of that article – must also be fulfilled for Art. XX GATT to be acceptable: not only must one of the legitimate policy goals listed in that article be the object of the policy in question, but this object must further fall within the proper jurisdiction of the relevant country. In the opinion of the panel, this additional requirement was warranted not only by the principles of international law, but also by the needs of free trade: too obvious and inviting are the opportunities for unilateral misuse that would otherwise be open to all countries”: VOLZ, 2000, p. 101. As a result this dispute was decided in favor of the legal argumentation of Mexico. However, this panel report never became legally effective for the USA, as in 1993 the today’s dispute settlement monitoring of the WTO 28

1.6 DSB was not in effect, where the adoption of such a panel report only requires the consent of one of the dispute parties. According to today’s WTO regulations, however, this panel report’s recommendations would be binding for both parties. • The Sea Turtle-Shrimps Case:

A case basically identical was the Sea Turtle-Shrimps case from 1998: The main difference to the Dolphin-Tuna case was that now sea turtles were to be protected of being caught in the nets used by US-fishermen to catch shrimp. Again this regulation was reinforced by an import ban on shrimp harvested by foreign fishermen using too dense nets. (Cf. VOLZ, 2000, p. 102.) The panel and the Standing Appellate Body again came to the conclusion, that this import restriction might be legal under Art. XX GATT, explicitly under considering of the ‘protection and preservation of the environment’, newly added to the text of the WTO-preamble of 1994. Again, however, both made clear, that such an import ban – besides the requirement that it must treat equally and fairly all shrimps harvested with dense nets whatever their country of origin – has to be based on a multilateral treaty or that at least good-faith efforts had been made to reach an agreement before unilateral action was taken. In the concrete case the panel found, that both conditions were not given. These two WTO panel decisions made clear, that a definition of international minimum standards with regard to the environment as well as to working conditions are ultimately needed and will have to be mandatory for all competitors. The great problem now indeed is, that these standards will not be achievable in the near future: Third world countries are competitive mainly because of ignoring even basic social and environmental standards. That is why these countries will not agree to the necessary multinational agreements that are urgently needed to save our environment and social standards of living. The WTO therefore is not in a direct way threatening our sustainable development for the future, but in an indirect way: As long as the WTO will accept the exceptions listed in Article XX GATT only in the framework of multinational agreements, these regulations more or less will not be able to care for a better, healthier or more social world. 29

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The Trade Related Investment Measures (TRIMS)

1.7

The 1995 implemented Trade Related Investment Measures (TRIMS), a treaty secondary to GATT, should be regarded as one of the most problematic conventions from the prospect of developing- respectively emerging countries: The problem is that in many cases development strategies of developing countries cannot be conducted autonomously anymore because of TRIMS. Due to TRIMS foreign investors reap the benefit of almost unrestricted liberty in countries of their investment plans and operate self-governed in their host countries regardless of domestic development strategies respectively local labor markets. With the implementation of the TRIMS in 1995 the following national regulations for the controlling of foreign direct investments were interdicted for every WTO member country: •

it is not allowed to enforce the foreign investor to buy primary products for his production in the host country any longer,

•

the host country also must not limit the import of primary products for the production of goods,

•

it is not allowed to pledge the investor to export his products, which he made in the host country, an unlimited distribution has to be guaranteed on the national market, no matter how many national jobs get lost,

•

the access of foreign companies to possibly rare foreign currency must not be constrained any longer,

•

it is not allowed to force investors to train domestic labor in knowhow and new technologies,

•

it is not allowed to pledge foreign companies to employ a specific number of domestic labor force (also in higher positions); a regulation, which especially China extremely exploits since its membership in the WTO, because within the context of a foreign investment own employees are partially brought along to a significant extent.

With such dramatic restrictions of national sovereignty of the host countries that receive direct investments, a self-determined national development strategy is hardly possible: Hereby, a so-called ‘Local-content’ policy, an economic policy which orientates on national interests is de facto not possible any longer in many developing countries. 30

1.7 TRIMS

1.8 Outlook on WTO’s Possible Future Activities

An example for concrete effects of the TRIMS agreement are for instance, that foreign investors do not have to prefer or at least regard local suppliers: In countries like Korea, Taiwan, Brazil, Mexico and Thailand such ‘Local content’ directives were helpful to build up ancillary industries for the automobile and electronic industry. Since the abrogation of these regulations owing to the TRIMS agreement, the suppliers came under high pressure. Hence, the rate of imports in the Brazil automobile industry escalated for example and many local jobs were destroyed. National suppliers were bought up by transnational companies, whereupon the quota of research and development drastically declined in Brazil. This example shows, that the country before was able to attain industrial advances in its development due to these requirements – as they are now prohibited in the TRIMS agreement – which would not have been realized without these regulations – which indeed represent hindrances of the free international trade. (From: [www ATTAC 05/2007].)

1.8

The Practical Relevance of the WTO and an Outlook on Its Possible Future Activities

The practical relevance for companies of the basic principles established by the WTO – especially the basic principles of the preamble – is that these companies can get problems in their export business solved by means of petition or lobbying their governments according to the WTO rules – if necessary within the framework of the panels. Thus, for example, market entry into another country can be forced via the WTO; import quotas can be successfully challenged; and many other problems can be solved, which would otherwise present insuperable trade or export barriers for individual companies, primarily small or middle-sized firms. Principally for the heavily export-oriented German companies, the positive influence of the WTO in regard to the opening up of new markets or the safeguarding of those already in existence cannot be valued highly enough. The successful conclusion of the seven-year negotiations within the framework of the Uruguay Round and the founding of the WTO, independent 31

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under international law, were therefore decisive for the extension of a liberal world trade order, from which especially the merchandise-exporting industry benefits and will benefit further on. Especially also for export-orientated companies following regularly released publications of the WTO can be recommended, which include prevailing reports and data about developments and problems of world trade: • WTO: Activities, • WTO: Annual Report, • WTO: FOCUS Newsletters. In the future, a topic which will become increasingly important is the connection between trade and competition policy. Questions of an impairment of international commerce due to differences in national competition law will become more and more relevant. In this respect, the widely diverging national social norms have to be judged as an eminently critical issue in the global arena. Here the question is exceedingly whether the large international differences in •

wages,

•

industrial safety regulations,

•

terms and conditions of employment,

•

environmental protection regulations and

•

social security systems

can be reconciled with free trade. Thus, first and foremost, the developed industrial nations fear being exposed to global social- and environmental dumping, whereas the developing countries see a new protectionism coming from the industrialized states which are fearful and even reproachful in this regard. (Readers with deeper interest in this subject are recommended to the just as critical as worth reading analysis of the WTO’s fields of work: S. GEORGE, 2002.) The WTO Secretariat takes a view which balances the interests of both of these groups of nations, namely, that low social standards should be eliminated above all through direct foreign investment and under no circumstances combated with trade restrictions. 32

1.8 Outlook on WTO’s Possible Future Activities •

As welcome as this recommendation is for the developing countries, it can find little acceptance among the industrial nations: at least as long as there is high unemployment in almost all industrial countries, this high unemployment does not exactly make the strengthening of the competitive position of developing- or newly industrializing countries a compelling task in a national view.

Accordingly, the trade policy conflicts of the future will be played out in this area.

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Review Questions

1.1

Give an overview of the activities of the WTO including the multiand plurilateral agreements.

1.2

Which objectives does the GATT have within the WTO?

1.3

Which negotiating rounds of the GATT can be seen as the most important and why?

1.4

What are the basic trade policy principles of the GATT preamble?

1.5

What further basic GATT principles are you acquainted with?

1.6

Explain the main contents of the GATS.

1.7

Give a broad view of the main contents of the TRIPS.

1.8

Which monitoring functions does the WTO have?

1.9

Which framework does the WTO provide to solve disputes arising with regard to the WTO-agreements?

1.10 What is the main problem of the WTO’s requirement that it will accept the exceptions listed in Article XX GATT only in the framework of multinational agreements that agree to minimum standards in the fields of environmental protection, health, and labor conditions, or that at least good-faith efforts had to be made to reach such an agreement? 1.11 What is the goal of TRIMS? 1.12 Name the main activity of TRIMS, that is attacked harshly by organizations as ATTAC? 1.13 What new fields of activity will increasingly define the work of the WTO in the future?

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2.1 Economic Policy Goals of the UNCTAD

The United Nations Conference on Trade and Development (UNCTAD)

In the following pages (based on EIBNER, 1999, pp. 27) the reader will •

obtain an overview on the goals of the second UN organization – besides the WTO – which is involved in foreign trade policy (Section 2.1) and

•

become acquainted with the main tasks of UNCTAD against the background of changing global economic fundamentals (Section 2.2).

For readers interested in the fields of activity of UNCTAD additionally to the following explanations and its homepage www.unctad.org following main publications of the UNCTAD are recommended: •

UNCTAD: Trade and Development Report, giving information of topics in the sphere of foreign trade and economic development;

•

UNCTAD: UNCTAD Commodity Yearbook, which shows changes and trends in the trade of commodities as well as of commodity prices;

•

UNCTAD: World Investment Report, portraying the development of worldwide foreign direct investments.

Economic Policy Goals of the UNCTAD

2.1

UNCTAD with a membership of 192 nations and a budget of about US-$ 95 mill. (as of 2007) was founded in 1964 as a body of the UN General Assembly with headquarter in Geneva. This founding happened at the urgent request of the developing countries, which saw existing international organizations – especially the International Monetary Fund (IMF), the World Bank (IBRD) and above all the GATT – as paying insufficient regard to their economic desires. The UN General Assembly gave the newly founded UNCTAD the following goals back in 1964: •

promotion of international trade to benefit the developing countries, including elaborating possibilities to reach these benefits by working out targets, principles, guidelines, and resulting proposals; 35

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•

submission of concrete proposals for multilateral agreements;

•

coordination of the activities of other UN institutions in the area of international trade and economic development;

•

availability as a center for the harmonization of trade and development policy of nations and regional economic associations.

Until the end of the Cold War, UNCTAD – together with state-trading countries of Eastern Europe – viewed its role as a kind of champion for more justice in international trade for the benefit of the Third World. The goal was especially to construct counter positions to those of the GATT, and to weaken the preeminence of the IMF, the World Bank, the USA and Western Europe. The global economy was supposed to be organized more strongly on the basis of planned-economy and poverty-related criteria. The goal was to create a ‘new economic world order’, which was supposed to be more redistributive. Since these efforts had little success even during the Cold War, UNCTAD had to accept the consequences of its decreasing significance – at the latest after the collapse of the state-trading countries’ economic system in 1989/1990. In keeping with trendsetting decisions of 1992 and 1996, UNCTAD now views its main task as that of integrating the developing countries and those transforming their economic system into the increasingly liberal and global world economy. Members of UNCTAD are in principle all states which in some way or other belong to the United Nations, de facto therefore the countries represented in the UN General Assembly. UNCTAD takes decisions in the form of morally binding obligations; UNCTAD’s resolutions, therefore, are not actionable.

The Main Economic Policy Activities of UNCTAD

2.2

The following points can be mentioned as central economic policy activities of UNCTAD:

36

•

foreign trade policy,

•

development financing,

•

commodity price stabilization.

2.2 Main Economic Policy Activities of UNCTAD

2.2.1 Foreign Trade Policy The so-called most-favored-nation clause in international trade has already been presented in Section 1.2.2.1 in remarks on the GATT. This clause, however, is not of interest to the developing countries in every case, since these demand trade preferences for development policy reasons in the markets of the industrial countries. The industrial countries, in turn, often refuse to give such trade preferences, when on the basis of the most-favorednation clause the preferences then have to be granted to all other countries too. Accordingly, directly after its founding, UNCTAD demanded for developing countries unilateral preferences that have nothing to do with most-favored-nation treatment. The exceptions to the general most-favored-nation treatment in favor of unilateral preferences for developing countries, already explained in Section 1.2.2.1, were anchored in 1979 in a GATT protocol declaration as an enabling clause – under pressure from and at the suggestion of UNCTAD. Permitted are unilateral preferences both between developing countries themselves and also between industrial and developing countries.

2.2.2 Development Financing UNCTAD regularly demands definite international standards in aid for development. Thus as early as 1964, UNCTAD succeeded in wringing a promise of annual aid for development of at least 1 % of their net national income from the industrial countries. In 1970, the developing countries succeeded in persuading the industrial nations that the latter should provide as a general principle 0.7 % of Gross National Income (GNI) in official development assistance (ODA) by 1975 at the latest. This would have meant a clear increase in aid for development. Based on this obligation, a resolution was accepted in 1983 requiring that public development assistance of 0.15 % of GNI must be reserved for the socalled LDC’s (Least Developed Countries). 37

Part A

2 UNCTAD

A look at the actual amount of development assistance payment transferred is a sobering experience, however, from UNCTAD’s perspective, since almost no donor countries have carried out the demanded or even the promised monetary transfers. The currently agreed goal of allocating 0.7 % of each nation’s Gross National Income for public development assistance has been achieved, or indeed surpassed to date, however, only by the three countries of Scandinavia, Luxembourg and the Netherlands, as Section 7.3.3 will show in detail. The goal of UNCTAD was always to bring a substantial influence to bear on the conditions and extent of international development assistance. De facto, however, relevant international development assistance is controlled by the OECD (see Part C, Section 7.3.3) or its Development Assistance Committee (DAC).

2.2.3 Commodity Price Stabilization Regarding the structure of their exports, developing countries as a rule are heavily influenced by commodities. Thus it is of the greatest importance for almost all countries of the Third World that there are not any overly large price fluctuations in the area of commodity exports. Powerful changes of prices in this area can lead to such large fluctuations in the foreign currency receipts of these countries that durable development strategies are considerably endangered. A further problem is the fact that the terms of trade have been constantly getting worse for the developing countries for decades: •

The prices of necessary, imported industrial and capital investment goods rise much faster than developing countries’ export prices, which have been falling for years in real and sometimes even in nominal (!) terms.

Accordingly, UNCTAD makes two basic demands on the industrial nations: 1.

stabilization of basic commodity prices ‘at a high level’,

2.

indexation of the price movements of commodities with the price movements of important imported goods from the industrialized world.

In 1976, UNCTAD proposed an ‘Integrated Commodity Program’. A network of international commodity agreements was supposed to be created for a total of 18 products and financed by a joint fund of developing and industrial nations in the amount of US-$ 10 to US-$ 13 billion. 38

2.2 Main Economic Policy Activities of UNCTAD The basic idea behind these models was and is to buy, as it was, unlimited quantities of these commodities when prices are low or sinking. Thus the money in the fund would be used to support the prices of the raw materials; and this in turn would build buffer stocks (de facto giant warehouses) of the commodities concerned. Originally, such commodity agreements and buffer stocks were planned for all critical agricultural and mining exports of developing countries: bananas, cotton (including yarns), bauxite, iron ore, meat, hard fibers (including hard fiber products), jute (including jute products), coffee, cocoa, natural rubber, manganese, vegetable oils (including olive oil and oilseeds), phosphate, tea, tropical woods, tin and sugar. Accordingly, in 1980, a common fund with headquarters in Amsterdam was formed for the purpose of commodity price stabilization. The fund came into effect in 1989 with 104 member states and is endowed with compulsory contributions of US-$ 470 million (about US-$ 25 million account for Germany) and voluntary contributions of US-$ 280 million (about US-$ 25 million from Germany). The industrial countries have 90 % of the equity in the common fund but for political reasons barely 53 % of the votes. The common fund covers the commodity agreements for coffee, cocoa, olive oil, tin, sugar, jute (including jute products) and tropical woods. Tropical wood being included into this fund however shows how less developing assistance often is coordinated with environmental policy. To this most important field the interested reader is referred to EIBNER, 1991a, especially sections 5.2.3 and 5.3. The experience of the last few years has shown, however, that serious, market-conditioned, commodity price fluctuations can only briefly be allayed by the common fund. Commodity agreements fail in the case of structural market price fluctuations.

39

Part A

2.3

2 UNCTAD

Review Questions

2.1

What were – at least until 1990 – the main goals of UNCTAD?

2.2

Give a description of the current goals of UNCTAD’s policies.

2.3

Name the main economic policy activities of UNCTAD.

2.4

What can be said about the idea of regulating commodity prices by using a stabilizing fund and building buffer stocks?

40

Part B: Selected Organizations Active in the Area of Monetary Policy and International Development Lending 3

The International Monetary Fund (IMF)

The remarks in the following section will convey •

what kind of organization the IMF, encountered continually in the daily press, is, in which historical context it was developed, which tasks it had to fulfill at first (Section 3.1),

and show •

what significance the so-called Bretton Woods system of the IMF had for the global monetary order, world trade and therefore also for exporting companies (Section 3.2);

•

which newer tasks are confronting the IMF, which changed from an organization for the protection of the world monetary system (in the beginning of the 70s) to an institution for the protection of the international financial markets by the granting of foreign currency and financial aid to countries with serious problems in the balance of payments (Section 3.3);

•

in how far the IMF is involved in debt relief programs in aid of the poorest countries of the world, and what kind of problems may result from debt cancellation in general (Section 3.4).

•

Section 3.5, that closes the presentation of the IMF, describes the special problems of the so-called ‘conditional lending’ policy of the IMF and what role the IMF currently has in integrating the countries-intransformation as well as the developing countries into the global economic system. (By countries-in-transformation all countries are subsumed, especially Eastern European ones, which were attempting to change their economic system from a centrally planned economy to a market economy.)

For readers more interested in the work of the IMF additionally to the following explanations and its homepage www.imf.org the amplifying publications below are highly recommended: A distinguished description about the IMF tasks offer the multi-volume publications about IMF history of 41

Part B

3 IMF

• J. K. HORSEFIELD (Ed.), 1969/1986: The International Monetary Fund, 1945 – 1965: Twenty Years of International Monetary Cooperation, in 3 volumes, • M. G. de VRIES (Ed.), 1976: The International Monetary Fund, 1966 – 1971: The System under Stress, in 2 volumes, and • M. G. de VRIES (Ed.), 1985: The International Monetary Fund, 1972 – 1978: Cooperation on Trial, in 3 volumes, • N. K. HUMPHREYS, 1999: Historical Dictionary of the International Monetary Fund. The following books deal with possible future changes in the role of the IMF as part of the actual discussions of how to reform the IMF: • E. M. TRUMAN (Ed.), 2006a: Reforming the IMF for the 21st Century, and • E. M. TRUMAN, 2006b: Strategy for IMF Reform. • A. PALONI/ M. ZANARDI, 2006: The IMF, World Bank and Policy Reform. The book of • W. EIBNER, 1991a: Grenzen internationaler Verschuldung der Dritten Welt, in Section 3.4.2.2, pp. 299 deals in a critical way with IMF and World Bank’s developing countries lending policy. Further critical but well academically investigated publications concerning IMF and World Bank’s lending policy are: • S. GEORGE, 1983: How the Other Half Dies: The Real Reasons for World Hunger, and • S. GEORGE/ F. SABELLI, 1994: Faith and Credit: The World Bank’s Secular Empire, 1994, and especially the most analytical but critical publication by the former World Bank’s Vice President (1997 – 2001) Joseph E. Stiglitz: • J. E. STIGLITZ, 2002: Globalization and Its Discontents.

3.1

Objectives, Tasks and Organizational Structure of the IMF

On 22 July 1944, in the small town of Bretton Woods, New Hampshire (USA), 44 nations including the Soviet Union concluded an agreement to found a so-called International Monetary Fund and an International Bank for Reconstruction and Development, the so-called World Bank (cf. Section 4). 42

3.1 Objectives, Tasks and Structure of the IMF This double agreement was signed on 27 December 1945 by 39 countries; the Soviet Union as well as the future Warsaw Pact states did not sign and on the basis of this decision disengaged themselves from the trade relations of the Western world. At present (2007), there are 183 countries members of the IMF as well as in the sister organization – the World Bank. Figure 3.1 lists all IMF membership quotas (as agreed to in end of 2006) in special drawing rights (SDR); fundamental economic data to a range of countries can be found in Figure 7.3 in Section 7.3.4. A revision of the quota-system especially for India, Turkey and Mexico is planned for autumn 2008. IMF – Member Countries

Quota in mill. SDR

in %

IMF – Member Countries

161.9

0.07

Cameroon

Albania

48.7

0.02

Canada

Algeria

1,254.7

0.58

Cape Verde

Angola

286.3

0.13

Central African Rep.

Afghanistan

Antigua & Barbuda Argentina Armenia

Quota in mill. SDR 185.7

2.94

9.6

0.004

55.7

0.03 0.03

13.5

0.01

Chad

56.0

2,117.1

0.98

Chile

856.1

0.40

92.0

0.04

China

8,090.1

3.74

3,236.4

1.49

Colombia

774.0

Austria

1,872.3

0.86

Comoros

8.9

Azerbaijan

160.9

0.07

Congo (former Zaire)

Bahamas

130.3

0.06

Congo (Rep.)

Bahrain

135.0

0.06

Bangladesh

533.3 67.5 386.4 4,605.2

Belarus Belgium

0.09

6,369.2

Australia

Barbados

in %

0.36 0.004

533.0

0.25

84.6

0.04

Costa Rica

164.1

0.08

0.25

Côte d’Ivoire

325.2

0.15

0.03

Croatia

365.1

0.17

0.18

Cyprus

139.6

0.06

2.13

Czech Republic

819.3

0.38

1,642.8

0.76

Belize

18.8

0.01

Denmark

Benin

61.9

0.03

Djibouti

15.9

0.01

Bhutan

6.3

0.003

Dominica

8.2

0.004

Bolivia

171.5

0.08

Dominican Rep.

218.9

0.10

Bosnia & Herzegovina

169.1

0.08

Ecuador

302.3

0.14

63.0

0.03

Egypt

943.7

0.44

3,036.1

1.40

El Salvador

171.3

0.08

Brunei Darussalam

215.2

0.10

Equatorial Guinea

32.6

0.02

Bulgaria

640.2

0.30

Eritrea

15.9

0.01

Botswana Brazil

Burkina Faso

60.2

0.03

Estonia

65.2

0.03

Burundi

77.0

0.04

Ethiopia

133.7

0.06

Cambodia

87.5

0.04

Fiji

70.3

0.03

43

Part B IMF – Member Countries

3 IMF Quota in mill. SDR

in %

IMF – Member Countries

Quota in mill. SDR

in %

Finland

1,263.8

0.58

Libya

1,123.7

0.52

France

10,738.5

4.96

Lithuania

144.2

0.07

Gabon

154.3

0.07

Luxembourg

279.1

0.13

Gambia

31.1

0.01

Macedonia

68.9

0.03

Georgia

150.3

0.07

Madagascar

122.2

0.06

Germany

13,008.2

6.01

Malawi

69.4

0.03

Ghana

369.0

0.17

Malaysia

1,486.6

0.69

Greece

823.0

0.38

Maldives

8.2

0.004 0.04

Grenada

11.7

0.01

Mali

93.3

Guatemala

210.2

0.10

Malta

102.0

Guinea

107.1

0.05

Marshall Islands

14.2

0.01

Mauritania

Guinea-Bissau Guyana

90.0

0.04

Mauritius

Haiti

81.9

0.04

Mexico

Honduras

0.05

3.5

0.002

64.4

0.03

101.6

0.05

2,585.8

1.19

129.5

0.06

Micronesia

1,038.4

0.48

Moldova

123.2

0.06

117.6

0.05

Mongolia

51.1

0.02

India

4,158.2

1.92

Morocco

588.2

0.27

Indonesia

2,079.3

0.96

Mozambique

113.6

0.05

Iran

1,497.2

0.69

Myanmar

258.4

0.12

Iraq

136.5

0.06

Hungary Iceland

5.1

0.002

1,188.4

0.55

Namibia

Ireland

838.4

0.39

Nepal

Israel

928.2

0.43

Netherlands

7,055.5

3.26

New Zealand

894.6

0.41

273.5

0.13

Nicaragua

130.0

0.06

13,312.8

6.15

Niger

65.8

0.03

Italy Jamaica Japan

71.3

0.03

5,162.4

2.38

Jordan

170.5

0.08

Nigeria

1,753.2

0.81

Kazakhstan

365.7

0.17

Norway

1,671.7

0.77

Kenya

271.4

0.13

Oman

194.0

0.09

0.003

Pakistan

1,033.7

0.48

Kiribati

5.6

Korea (Republic)

2,927.3

1.35

Palau

Kuwait

3.1

0.001

1,381.1

0.64

Panama

206.6

Kyrgyz Republic

88.8

0.04

Papua New Guinea

131.6

0.10 0.06

Laos

52.9

0.02

Paraguay

99.9

0.05 0.29

Latvia

126.8

0.06

Peru

638.4

Lebanon

203.0

0.09

Philippines

879.9

0.41

Lesotho

34.9

0.02

Poland

1,369.0

0.63

Liberia

71.3

0.03

Portugal

867.4

0.40

44

3.1 Objectives, Tasks and Structure of the IMF IMF – Member Countries

Quota in mill. SDR

in %

IMF – Member Countries

Quota in mill. SDR

in %

263.8

0.12

Sweden

2,395.5

1.11

Romania

1,030.2

0.48

Switzerland

3,458.5

1.60

Russian Federation

Qatar

5,945.4

2.75

Syria

Rwanda

80.1

0.04

Tajikistan

Samoa

11.6

0.01

San Marino

17.0

0.01

7.4

0.003

Timor-Leste

Sao Tomé & Principe

Saudi Arabia

293.6

0.14

87.0

0.04

Tanzania

198.9

0.09

Thailand

1,081.9 8.2

0.50 0.004

6,985.5

3.27

Togo

73.4

0.03

Senegal

161.8

0.07

Tonga

6.9

0.003

Serbia & Montenegro

467.7

0.22

Trinidad & Tobago

Seychelles

8.8

335.6

0.16

0.004

Tunisia

286.5

0.13

Sierra Leone

103.7

0.05

Turkey

964.0

0.45

Singapore

862.5

0.40

Turkmenistan

75.2

0.03

Slovak Republic

357.5

0.17

Uganda

180.5

0.08

Slovenia

231.7

0.11

Ukraine

1,372.0

0.63

Solomon Islands

10.4

0.005

United Arab Emirate

611.7

0.28

Somalia

44.2

0.02

United Kingdom

10,738.5

4.96

South Africa

1,868.5

0.86

United States

37,149.3

17.16

Spain

3,048.9

1.41

Uruguay

306.5

0.14

413.4

0.19

Uzbekistan

275.6

0.13

Sri Lanka St. Kitts & Nevis St. Lucia St.Vincent & Grenadines

Sudan

8.9

0.004

Vanuatu

15.3

0.01

Venezuela *

8.3

0.004

Vietnam

17.0

0.01

2,659.1

1.23

329.1

0.15

169.70

0.08

Yemen, Republic of

243.5

0.11

Suriname

92.1

0.04

Zambia

489.1

0.23

Swaziland

50.7

0.02

Zimbabwe

353.4

0.16

Total: Figure 3.1:

184 Countries *

216,493.0 mill. SDR

= 100 %

Member states of the IMF including contributions in special drawing rights (SDR) in absolute and relative terms (Quotas determined in September 2006; cf. [www IMF 10/2006]); *: Venezuela left the IMF on Mai 1st 2007 [www Auslandsjahr 05/2007], p. 1

Art. I of the IMF Articles of Agreement defines the following targets: •

coordination of monetary policy among member states resulting in stability of currency markets and

•

development of a liberal international payments system (convertibility of all national currencies), 45

Part B

3 IMF

in order to realize the following crucial goals: •

expansion and balanced growth of international trade volume,

•

an internationally high level of employment,

•

high real income in all member states with

•

continual growth of productive resources and

•

maximum utilization of output capacities.

Moreover it is still the mission of the IMF to grant member states financial aid in case of balance of payments problems (i.e., large capital outflows primarily because of a negative current account balance). Art. VIII, 5, assigns the IMF the mission of preparing and publishing statistical reviews especially of balance of payments information, currency reserves, foreign trade, exchange rates, interest rates, prices of important internationally-traded commodities as well as further important economic statistics. All statistical publications of the IMF such as ‘International Financial Statistics’, ‘Balance of Payments Statistics’ or ‘Direction of Trade Statistics’ are as first rate as the narrative and scholarly publications such as ‘IMF Survey’ – an overview of the current activity of the fund (also in digital version free from the Fund’s homepage [www IMF Survey]) – or ‘Occasional Papers’ and ‘World Economic and Financial Surveys’ as well as ‘World Economic Outlook’, which comment on a broad spectrum of scholarly and financial questions. The ‘IMF Staff Papers’ are directed to university audiences. The periodical ‘Finance and Development’ on the other hand gives relevant information on the task areas of the IMF and the World Bank Group to the interested practitioner. Organizationally, the IMF is headed by a Board of Governors on which each member country has a governor and an alternate, who are as a rule national finance ministers or central bank presidents. From originally 44 governors, the number rose to 183 (as end of Mai 2007), which corresponds to the present number of member states; of these governors – as can be seen in Figure 3.1 – there are about 130 representatives of the Third World. The Board of Governors has transferred its executive duties to a 22 member Executive Board. Of these 22 executive directors, 16 are elected and 6 are appointed by the countries with the highest quota subscriptions – money and gold deposited with the IMF (cf. Figure 3.1): at present the latter are USA, Japan, Germany, France and Great Britain. Saudi-Arabia places because 46

3.2 The Bretton Woods System of its high deposits in the IMF since many years also a permanent executive director. The powers of the Executive Board are in the main: •

acceptance and alteration of members’ quota contributions,

•

issuance of so-called ‘special drawing rights’, a type of artificial money from the IMF, which the International Monetary Fund creates by decree and which it can issue to member states in case of need as a substitute for standard currencies such as the dollar or Euro, etc.,

•

granting of so-called borrowing facilities, as a further lending possibility, to countries with inadequate amounts of foreign currency.

The managing director is elected by the executive directors for a period of 5 years. By tradition, the managing director of the IMF is always a European, or at least a non-American. This serves as a counterbalance to the USdominated World Bank, whose president is traditionally a US national. The current (2007) Federal President of Germany, Horst Köhler, is the only German representative, who managed the IMF as the director so far (May 01, 2000 – March 04, 2004).

3.2

The Bretton Woods System

At the above-mentioned Bretton Woods conference, an international currency system was also agreed: the so-called Bretton Woods system. The original goal of this system was to minimize foreign trade risks by keeping exchange rates as constant as possible. It was agreed to allow the exchange rates of the countries of the Western world to fluctuate by a maximum of +/– 1 % against the dollar, which was in turn tied to gold. This, of course, meant a maximum fluctuation margin of +/– 2 % for non-dollar currencies against each other. In order to make this constant par value credible, the USA obligated itself to buy or sell gold for dollars at this firm rate of exchange. The Bretton Woods system was therefore a gold standard system (compare for more details EIBNER, 2008a: Understanding Economic Policy – Anwendungsorientierte Wirtschaftspolitik, Part C, as well as EIBNER, 2006c: Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Chapter 14); strictly speaking, it was a golddollar system. 47

Part B

3 IMF

In order to make an international currency system out of a national (USA) definition of the value of money, it is necessary to connect all other currencies of the world or of member countries of the IMF to the US dollar with a fixed rate of exchange. Accordingly, in conformity with Art. IV of the IMF agreement, each country was obligated to arrange with the IMF a so-called initial parity of its currency in gold or US dollars. All member states of the IMF except the USA were obligated to stabilize this fixed exchange rate of their currency against the US dollar in a maximum fluctuation margin of +/– 1 % of parity – through interventions of their central banks in foreign currency markets. Changes in parity were possible only after consultation with the IMF and a presentation of so-called ‘fundamental balance of payments imbalances’. In order not to allow such fundamental balance of payments imbalances to arise in the first place, the IMF had various possibilities of lending to member states. Without going into too much detail at this point, there were (and still are) two basic ways to receive IMF loans: • Currency loans without conditions are granted at any time in case of need to member states up to the amount of their convertible currency or gold contributions to the IMF (cf. Figure 3.1). If this financing aid is not sufficient, • further, so-called conditional, borrowing from the IMF is possible – however only under the macroeconomic conditions laid down by the IMF, which the debtor country must comply with under all circumstances in order to remain creditworthy. This lending under certain conditions belongs to the notion of ‘conditionality’, with which we will be more closely concerned in Section 3.5. From the beginning, the Bretton Woods system did not work as its founding fathers wanted it to do: It was an illusion to believe that a world-wide system of fixed exchange rates could be maintained in the long term. The economic development in the individual member countries was too heterogeneous or different respectively. In the period between 1951 and 1960, the gold reserves of the USA declined steadily and stood in 1960 at US-$ 18.7 billion, which was against the dollar balance of US-$ 21.2 billion held by foreigners. Therefore a guaranteed possibility of exchange of US dollars for gold was de facto no longer possible. 48

3.3 Recent Tasks of the IMF In the wake of the strongly expanding money supply in the USA at that time (not least because of the Vietnam War), the free market gold price rose temporarily to US-$ 41 per fine ounce. Accordingly, President Nixon had to terminate gold-US dollar convertibility, in order to prevent the drainage of the national gold reserves. The system finally collapsed de facto in March 1973 and countries started using flexible rates of exchange, which dominate the foreign currency markets – at least in the industrialized countries – up to now.

Recent Tasks of the IMF in the Context of Balance of Payment Stabilization and Liquidity Management

3.3

After the abolition of the more or less fixed exchange rates in 1973 and a related abolition of balance of payments stabilization to insure fixed exchange rates, the IMF received three new tasks: •

surveillance of the exchange rate policy of member countries with the goal of keeping exchange rate fluctuations in narrow bounds, but especially of promoting the free exchange of currencies at all times, which also includes the supervision of the economic policy of member states and especially of developing countries,

•

granting of short and middle term loans in case of balance of payments- or liquidity problems by means of diverse borrowing facilities and

•

offering of technical assistance to member countries.

The IMF carries out economic surveillance in the form of consultations with the individual member states. The goal of these efforts is – by promoting multilateral cooperation and consultations – to reach a stronger international harmonization of national economic policies, especially to attain •

a convergence of rates of inflation at a low level,

•

fiscal policy consolidation and

•

coordination of those structural policy measures which are supposed to lead to a global rise in employment.

The possibilities of short term financial or liquidity assistance to member states were considerably extended from 1974 on, and especially within the scope of the financial market crisis in Asia 1997/98 assistance was granted at a level above US-$ 100 billion. 49

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3 IMF

While previously a country basically had only been able to borrow to the level of its subscription quota, from 1974 on the IMF granted its member states special loans in the form of a • so-called Extended Fund Facility which made borrowing possible to 140 % of the quota. This extended possibility for borrowing was not yet sufficient to satisfy higher liquidity requirements in the wake of the first oil crisis. Therefore between 1974 and 1976, a special temporary oil facility was provided. Also worth to mention is • the Compensatory and Contingency Financing Facility (CCFF), created in 1988, which gives developing countries the possibility of compensating unexpected liquidity losses caused by a fall in oil prices or a rise in grain import prices. This takes the form of a loan of up to 200 % of a country’s subscription quota. In addition, • the Structural Adjustment Facility (SAF), which is limited to the poorest developing countries – therefore primarily to the countries of Africa, the Caribbean and the Pacific – has to be mentioned. What is special about the SAF and the increase and prolongation of its financial resources in 1987 and 1993 – within the framework of • the Enhanced Structural Adjustment Facility (ESAF) – is that the economic policy conditions are quite rigid and the World Bank as development financier has a hand in the shaping of the contract. The other side of this is that the rate of interest is only 0.5 %. Another liquidity instrument of the IMF is • the Systemic Transformation Facility (STF), introduced in 1993, which was especially created to help the transforming countries of Eastern Europe in their transition to a market economy. The main beneficiary of this facility is Russia, which received about US-$ 2 billion the first time in 1993/1994. Since then, however, Russia’s solvency had been increasingly dependent on liquidity injections from the IMF. Since financial assistance from the IMF is a very important pre-condition for the urgently needed loans from the Western world, the once proud super-power was at least in the 1990s – for financial policy reasons – dependent on transfusions from the US and the European Union as the principal creditors both of the IMF and of direct financial assistance to Russia. With the rise in crude oil and natural gas prices, however, the financial situation of Russia was mitigated again because of the high inflow of foreign exchange from the resource exports. 50

3.4 Debt Relief New instruments are the • Poverty Reduction and Growth Facility (PRGF) and • the Fund of Debt Relief for the heavily indebted poor countries (HIPC), that will be explained in Section 3.4. The increasing importance of an active policy for the struggle against poverty becomes apparent, because since 1999 the IMF demands the supported countries for a ‘Poverty Reduction Strategy Paper (PRSP)’, which must include concrete plans on the struggle against poverty. The third area of IMF activities, technical assistance, encompasses extensive advising of member states by experts in questions of fiscal policy, monetary policy in the widest sense and economic statistics. For example, many countries are not in the position to ascertain the simplest economic data or the economic transactions underlying them. Without serviceable economic statistics, however, all economic policy is condemned from the start to failure.

3.4

Debt Relief: The New Task of the IMF

In the year 1996, at the initiative of the G-7 countries and the G-77 (cf. Section 6.1.3), the so-called HIPC-Initiative for the reduction of foreign debts of poor less-developed countries was started by the IMF and the World Bank. The goal of this strategy is via debt relief to help heavily indebted lessdeveloped countries to achieve economic growth to enable them to allay their poverty. In 1999, debts totaling US-$ 6 billion were cancelled for seven lessdeveloped countries. In comparison with the indebtedness of more than US-$ 2.5 trillion by the developing countries in the year 2005, this is not nearly enough to provide the aspired growth impulse. Accordingly, the number of potential recipients of the HIPC-program was expanded to 36 countries in 1999. Also the program for debt relief was accelerated in order to proceed faster against poverty and to make sure that national capital can again be used in programs of the struggle against poverty rather than in debt servicing by interest payments. Especially programs in the area of health and education are in mind. 51

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Of the 36 countries which fulfilled the requirements of the debt-relief program, 23 over-indebted low-income countries – 19 in the Sahel – obtained first debt cancellations by mid 2001. The main program of the HIPC aims at the poor countries of Africa. Accordingly, the African Development Bank (AfDB) is intensely integrated into the HIPC program (cf. also Section 5.5.1). A Multilateral Debt Relief Initiative (MDRI) was adopted by the IMF in late 2005. This initiative puts into action a debt relief proposal for the most indebted nations of the Third World, initially advanced by the G-8 in June 2005, which called for the cancellation of 100 percent of the claims of the three multilateral institutions IMF, IDA (cf. Section 4.2.2), and the African Development Fund (AfDF, cf. Section 5.5.4), on those countries that have reached, or will eventually reach, the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative). In January 2006, the IMF turned this commitment into action when it delivered MDRI debt relief – amounting to US-$ 3.4 billion to an initial group of 19 countries (Benin, Bolivia, Burkina Faso, Cambodia, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Tajikistan, Uganda and Zambia). Other countries are eligible and the IMF is helping them make rapid progress to qualify for the debt relief. Total debt relief by the IMF under the MDRI is expected to be over US-$ 5 billion (cf. [www IMF 09/2006]). Generally in the area of debt relief, an intensive participation in the economic rebuilding of the HIPC countries is important. This will be realized by financial and technical help from the IMF, the World Bank and the Regional Development Banks (in addition to the African Development Bank also the Asian (ADB), the Caribbean (CDB) and the Inter-American Development Banks (IADB) are included; cf. for the Regional Development Banks below Section 5), whereby this help should take place under stringent conditions which minimize unilateral arbitrage effects by the favored countries. Basically it seems to be very problematic to provide heavily indebted countries one-sided debt cancellations without an expectation for trade-offs. Regarding the debt-relief programs, it is very deplorable that proposals discussed in the late 80s (for instance, a debt-for-nature swap program) were not adopted: 52

3.5 Problems in Regard to Conditional Lending by the IMF Here, developing countries, which wanted debt reductions would have been required to provide in return services such as resource strengthening and environmental protection. (Cf. the statement on the concept of the debt-fornature-swap in the study of debt relief for developing countries in exchange for environmental projects by EIBNER, 1991b.) In the end, one has to ask basically if such programs for debt cancellation make sense beyond the sedation of the conscience of the wealthy industrialized countries towards the people who live in the poor Third World: The ultimate question is, whether these programs are really able to meet the high expectations in a debt relief induced economic upswing in the Third World. In favor of debt relief, it can be argued, that with retention of the indebtedness a permanent economic recovery is nearly impossible. Too large a fraction of the national economic resources will flow to the creditors via interest payments and won’t be available for national investments. Against the relief it can be argued, that a socialization of questionable economic policy occurs WITHOUT a reward by the creditor countries to the donor countries of the First World and hence to their tax-payers and bank customers. This criticism weights all the more, because one must fear, that the favored states won’t practice a more rational economic policy in the future and the disposable national economic resources will be used for military projects or private enrichments by the prevailing elites (compare for this problem the criticisms in coming Section 5.6). But in the framework of the HIPC programs, this will be the case in the author’s view, because of insufficient obligation mechanisms.

3.5

Problems in Regard to Conditional Lending by the IMF

Many countries, which as late as the second oil crisis of 1978 had preferred to finance their investments or budget deficits by means of commercial loans (i.e., with loans from the international banking sector without economic policy conditions), turned with increasing urgency to the IMF with their loan applications in the wake of ever smaller national foreign exchange reserves. 53

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This became increasingly necessary especially since the international commercial banking sector – faced with the deteriorating financial standing of most developing (= debtor) countries – was only prepared to make most urgently needed loans when the loan-seeking country had worked out a plan for the reorganization of its economy with the IMF, i.e., when it had agreed on a loan package with the IMF in combination with (compulsory) economic policy reorganization both domestic and external. This had also been the situation in Eastern Europe since it opened up to a free-market economy in 1989/1990. The Eastern European countries after 1990 were also seeking out the IMF as a co-financier or lender of larger amounts of foreign currency for investment projects, since private lenders and foreign investors invest more readily, when they know that the IMF – as a critical lender helping to steer economic policy – is likewise committed in the form of its conditional lending activities. Common conditions are, e.g., upward or downward revaluation of the national currency; belt-tightening measures for public budgets, especially cuts in subsidies; tax increases; public sector job pruning; reduction of the public sector share of the gross national product. Conditional IMF loans are problematic for its debtors primarily for two reasons:

54

•

they mean a renunciation of sovereignty by the debtor in the sense of limited possibilities for national monetary-, exchange rate- and financial policy,

•

IMF loans are as a rule short term financial assistance (length of time up to 4 years, seldom up to 10 years). This means they have to be restructured after a relatively short period of time. If the economic situation of the creditor has not improved by this time, however, new loans from the IMF are mainly obtainable only with harder conditions. A country naturally has the right to leave this system at any time. However, the high international indebtedness in foreign currency of the Third World means that the borrowing requirements rise annually and those considerable new net loans have to be taken out from the commercial banking sector only in order to meet the interest payments due. These new loans are as a rule only obtainable from the banks by highly indebted countries after presentation of conditional loan approval from the IMF.

3.5 Problems in Regard to Conditional Lending by the IMF Thereupon the situation of the debtor nation becomes more and more difficult: it needs money continually – alone to finance the loan burdens of the past (interest, amortization) – and receives new loans as a rule only at the price of increasing loss of sovereignty in the area of economic policy. This was a heatedly discussed problem in the highly indebted Third World during the years 1978 to about 1990, in the former Russian CIS countries in the 90s, during the financial market crisis of South-Eastern Asia 1997/98, and once more during the national bankruptcy of Argentina 2002. As the founding of the ‘Bank of the South’ (Banco del Sur) in June 2007 on the initiative of Venezuela, followed by Argentina, Brazil, Bolivia, Ecuador and Paraguay (the situation as of June 2007) shows, the IMF – and also the World Bank Group – will have to orientate their financing policies to the needs of the receiving countries. If this does not happen, both Bretton Woods institutions will lose the important oversight role they have had up to now over international financial markets (IMF) and aid for development (World Bank Group, cf. here especially Section 4.3). Of course, this connection between conditionality and loss of sovereignty is not unavoidable: The conditions are actually supposed to result in a country's economic recovery. The reason why IMF conditionality often does not succeed in economic progress for the debtor, is – besides other reasons – a result of the fact, that the IMF as well as the World Bank (which will be discussed later) presuppose economic and social structures in the Third World as they are found in the First (Europe) and Second World (America). This is only seldom the case; it means that most of the conditions or economic policy programs of the IMF implemented to date have proved to be failures in final effect. A failure not least because often in many countries of the Third World, but also today in Eastern Europe, only those conditions are implemented by the responsible persons, which do not endanger their political power. Therefore a study by the IMF asks the fundamental question whether conditionality does more harm than good: cf. the critical analysis in REICHMANN/ STILLSON, 1978; and this portrayal is still very up-to-date. The attempts at macroeconomic control on the part of the IMF in Russia and the Ukraine between 1990 and 2000 were in part characterized by dramatic failure: 55

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Regarding these countries, in 1998, the IMF diverged de facto from the premise only to grant new loans if the conditions on previous loans were successfully carried out. This, however, was not currently the case in Russia and the Ukraine. To this extent, the IMF prevented the total financial collapse of these two countries with de facto pure cash injections. In more developed countries, such as, for example, Portugal or Greece, IMF conditions result mainly in economic successes, but not, for example, in Eastern Europe: The reason why becomes clear considering the effects of the primarily monetarist programs in Russia, which attempt to force the success of the system transformation to a market economy – in the opinion of the authors as well as of also the former World Bank’s Vice President Joseph E. STIGLITZ, cf. STIGLITZ, 2002, Chapter 5 – too much by means of a supply-oriented deregulation of the markets and too little by means of an increase in macroeconomic demand (in the sense of an invigoration of the purchasing power of wide sections of the population). If the economic upswing in Western Germany after World War II had been embedded in a purely monetarist policy, it certainly could not have taken the form of Ludwig Erhard’s also demand-induced economic miracle.

56

3.6 Review Questions

3.6

Review Questions

3.1

With which mission was the IMF entrusted at its founding?

3.2

What countries determine de facto the policies of the IMF?

3.3

What was the Bretton Woods system and what economic goals did it pursue?

3.4

Which new mission has the IMF had since the end of the Bretton Woods system?

3.5

Name and explain the Funds different financing facilities in a short overview.

3.6

Which tasks does the IMF fulfill regarding the debt relief?

3.7

Evaluate objections concerning a debt relief program for overindebted developing countries under economic aspects.

3.8

What kind of problems can be discussed by reconsidering debt relief under non-economic questions?

3.9

What is meant by a conditional granting of credits by the IMF?

3.10 What are the main problems concerning the IMF’s conditional lending policy?

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4 The World Bank Group

The World Bank Group

The following chapter deals with

4.1

•

the organizational structure of the World Bank Group in Section 4.1,

•

and the tasks and economic importance of each of its financing institutions in Section 4.2.

•

Section 4.3 discusses the main points of criticism concerning its work.

•

The from this review resulting requirement for a more poverty oriented concentration of aid programs, e.g. in terms of microcredits, will be absorbed in Section 4.4 and its feasibility is presented as an excursus on the example of the GRAMEEN Bank.

•

Perspectives of future constitutive power of the World Bank Group are discussed in Section 4.5.

Organizational Structure of the World Bank Group

The World Bank was founded in Bretton Woods in 1945 as the International Bank for Reconstruction and Development (IBRD) at the same time as the IMF as the latter’s sister institution. Only member states of the IMF can also be members of the World Bank. The World Bank Group comprises the financing institutions: •

International Bank for Reconstruction and Development (IBRD), the World Bank proper, presented in Section 4.2.1,

•

International Development Association (IDA) in Section 4.2.2,

•

International Finance Corporation (IFC), shown in Section 4.2.3 together with activities to promote investments, as the Multilateral Investment Guarantee Agency (MIGA), the Guaranteed Recovery of Investment Principal (GRIP), or the International Center for Settlement of Investment Disputes (ICSID).

•

An overview of important publications of the World Bank is given in Section 4.2.4.

The IBRD and the IDA are designated as the World Bank in the narrower sense. The highest body here is also a Board of Governors, which as a rule is represented by the Executive Directors, analogous to the situation at the IMF. 58

4.2 Tasks of the World Bank Group

4.2

Tasks of the World Bank Group

4.2.1 The International Bank for Reconstruction and Development (IBRD) Until 1950, the main task of the IBRD was the financing of reconstruction in Europe with low-interest loans. Therefore the World Bank in contrast to the IMF does not give any loan commitments relating to economic activity or solvency but exclusively loan commitments relating to future development and growth. Since 1950, loan financing of development in the Third World by means of (co-) financing of concrete individual projects has occurred – projects from whose realization a surge in the economic development of the countries concerned was hoped for. At present the World Bank is especially active in development financing in the Third World and since 1990 also in Eastern Europe. The activities of the IBRD in the latter area are concentrated primarily on Russia, Ukraine and Poland, while development financing in the other countries of the former Warsaw Pact is handled mainly by the European Bank for Reconstruction and Development (cf. below Section 5.2). The present investment goals which the World Bank is pursuing in its lending policy can be divided into primary and secondary project priorities: •

Primary Projects: Energy supply, agriculture and rural development, transportation, promotion of industry.

•

Secondary Projects: Urban development, small business, population, health, nutrition, technical assistance.

The World Bank sees itself as a capital gathering agency, in order to enable investments in the Third World at lower cost than the countries concerned could do this, if they themselves were to raise capital in the international financial markets. The World Bank re-finances its low-interest loans to developing countries to a small extent by means of its equity capital (quota payments of its members) but primarily by means of its own borrowing in the international capital markets, since the World Bank obtains loans at interest rates far 59

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below the rates which other debtors would have to pay. This is the case because the bonds of the World Bank are guaranteed by its members, i.e., the rich industrial countries, so that virtually no risk of default exists. The term of IBRD loans for Third World and Eastern European projects amounts in general from 15 to 20 years with a grace period (no interest or principal repayments) of 3 to 5 years. Looking e.g. at the financial year 2006, the granting of loans by the IBRD amounted for instance to US-$ 14 billion for 87 projects in 33 countries. All in all, until 2006 the IBRD conceded credits in the amount of US-$ 420 billion, which were allocated to more than 5,000 single loans (cf. [www IBRD 03/2007]). The main beneficiaries are Latin America (Mexico, Brazil, Argentina, Colombia), India and China as well as the developing countries of South-East Asia (Indonesia, the Philippines and South Korea), but also Turkey. A new main focus of the World Bank is the urgently needed fight against AIDS – especially in Africa (for dramatic social as well as economical consequences in Africa see TIETZE, 2006). Hence, until the end of 2004 more than US-$ 3 billion were used for this purpose; 2002 UNAIDS, the aid program for the combat of HIV/ AIDS, was founded with the help of massive investments by the World Bank. Figure 4.1 gives an overview of the loan commitments of IBRD by geographical regions up to June 30th 2006 and Figure 4.2 shows the loan commitments of IBRD up to Dec. 31st 2004 on sectors of economic activity: Loan commitments of IBRD by geographical regions, 07/2005 – 06/2006 bn. US-$ 5.7

Latin America and the Caribbean

% 41

East Asia and Pacific

2.3

16

Europe and Central Asia

3.5

25

South Asia

1.2

9

Middle East and North Africa

1,3

9

0.04

0

14.1

100

Africa Total Figure 4.1:

60

Loan commitments of the IBRD by geographical regions, June 30th 2006 (Data from WORLD BANK, 2006a, own compilation)

4.2 Tasks of the World Bank Group Loan commitments of the IBRD by sectors of economic activity, 2004 bn. US-$

%

Law, Justice & Public Administration

2.6

24

Transportation

2.5

23

Health & Other Social Services

1.8

16

Finance

1.2

11

Agriculture, Fishing & Forestry

0.7

6

Industry & Trade

0.7

6

Water, Sanitation & Flood Protection

0.7

6

Education

0.5

5

Energy & Mining

0.3

3

11.0

100

Total Figure 4.2:

Loan commitments of the IBRD by sectors of economic activity 2004 (cf. [www WORLD BANK 01/2006], Table 5.7)

4.2.2 The International Development Association (IDA) The International Development Association (IDA) was founded in 1960 in order to support the poorest developing countries. In the meantime, it has 165 members (as of 2007). Three criteria are used to determine which countries are eligible to borrow IDA resources: •

Relative poverty, defined as GNP per capita below an established threshold of US-$ 1,025 (as of July 1st, 2006, cf. [www IDA 10/2006]),

•

inadequate creditworthiness to borrow on market terms,

•

good policy performance, defined as positive economic and social policies that promote growth and poverty reduction.

IDA loans are as a rule interest-free. The term of such ‘gifts for a certain time’ is as a rule 50 years; the repayment begins after 10 years.

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Basically, the same types of projects are supported as the IBRD funds. The IBRD finances primarily the newly industrializing countries such as Brazil, Mexico, Turkey, Thailand, etc., from which a repayment of the loans is expected. The IDA by comparison benefits projects primarily in the poorest countries of the world (Ethiopia, Bangladesh, etc.), from which in the medium term no economic upswing and therefore no foreign exchange holdings for payments can be expected. From its founding in 1960 until 2006, the IDA has conceded US-$ 170 billion for about 4,000 projects in 113 countries. But more than 60 % of all assigned funds account for only 10 countries, of which India received the lion’s share with more than US-$ 32 billion. Behind India queue Bangladesh with 12 billion, China with about 10 billion, Pakistan with about 9 billion, Vietnam with more than 6 bn., Ethiopia, Ghana, Tanzania and Uganda with each about 5 bn, followed by a couple of states with US-$ 3 billion: Congo, Kenya, Madagascar, Mozambique, Nigeria, Sri Lanka, and Zambia (cf. [www IDA 03/2007]). Figure 4.3 analogous to the IBRD description gives an overview of the loans of IDA, which are planned and still ongoing for the financial period from 2006 to 2008: Loan commitments of the IDA by regions for the period 2006 - 2008 South Asia Africa East Asia and Pacific Europe and Middle Asia Latin America and the Caribbean Iraq Middle East and North Africa Total Figure 4.3:

bn. US-$ 6.81 8.97 2.24 0.94 0.51 0.34 0.20

% 34.1 44.8 11.2 4.7 2.5 1.7 1.0

20.01

100

Loan commitments of the IDA by regions for the period 2006 – 2008 (cf. [www IDA 01/2006], Table 4, p. 11)

The IDA sees the struggle against the low immunity disease AIDS as a new focal point, too: Since 1986 the IDA expended US-$ 690 million to 46 countries for the fight against AIDS. In the year 2000 once again US-$ 500 million were approved to AIDS projects. Since 1995 the IDA also is involved in the support of the poor by the allocation of so-called Microloans; cf. coming Section 4.4.3. 62

4.2 Tasks of the World Bank Group Currently the IDA is also heavily included in the policy of debt relief for LDCs (cf. Section 3.4), which was initiated by the G-8 as well as the IMF and the World Bank: Because of its profile, the IDA is preferred involved in the financing of development in the poorest countries of the world and thus, all outstanding debts are potentially subject of the actual debt relief programs.

4.2.3 Activities of the World Bank Group to Assist Investment: IFC, MIGA, GRIP and ICSID The International Finance Corporation (IFC), founded in 1956 as the first sister organization of the IBRD, is supposed to assist private investment activity in the Third World. It acts therefore only as co-financier of private (i.e. non-state) companies’ investments. The mission of IFC is to promote sustainable private sector investment in emerging markets, helping to reduce poverty and improve people’s lives. The IFC • finances private sector investments in transition and developing countries, • mobilizes capital in the international financial markets, • helps clients improve social and environmental sustainability, and • provides technical assistance and advice to governments and businesses. From its founding in 1956 through the end of 2004, the IFC has committed more than US-$ 44 billion of its own funds and arranged US-$ 23 billion in syndications for 3,143 companies in 140 developing countries. IFC’s worldwide committed portfolio as of end 2004 was US-$ 17.9 billion for its own account and US-$ 5.5 billion held for participants in loan syndications. (Cf. [www IFC 01/2007].) The conditions for financing are in each case adjusted to the risks involved with the investment and to the normal conditions in the capital markets. Thus they are much harsher (i.e. money is more expensive) than for loans from the sister institutions IBRD and IDA. The reverse side of this situation, however, is that the IFC is permitted to have a stake in private companies and to support companies by means of guarantees, if necessary; the IBRD and IDA do not have such possibilities. Since 1995 also the IFC is included in the financing of so-called Microloans; coming Sections 4.4.2 and 4.4.3 will focus on this topic in detail. 63

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The specific goal of the IFC is the promotion of direct investments. This is attempted, among other things, ‘by eliminating insurance deficiencies beyond the ordinarily existing one of insuring against non-commercial risks (expropriation, war losses, lack of convertibility of dividends and capital transfers) at a national level via the 1988 founded World Bank’s Multilateral Investment Guarantee Agency (MIGA) [with currently (2007) 168 member countries] and by the Guaranteed Recovery of Investment Principal (GRIP) of the IFC, which even covers commercial risks.’: EIBNER, 1991a, p. 315. MIGA’s operational strategy plays to its foremost strength in the marketplace: attracting investors and private insurers into difficult operating environments. The agency’s strategy focuses on the following specific areas (see [www MIGA 02/2007]): •

Infrastructure development is an important priority for MIGA, given the estimated need for US-$ 230 billion a year solely for new investment to deal with the rapidly growing urban centers and underserved rural populations in developing countries.

•

Frontier markets – i.e. high-risk markets and/or low-income countries – are a next challenge for the agency. These markets typically have the most need and stand to benefit the most from foreign investment, but are not well served by the private market.

•

Investment into conflict-affected countries is another operational priority for the agency. Private investment is critical for reconstruction and growth. With many investors wary of potential risks, political risk insurance becomes essential to moving investments forward.

•

South-South investments (investments between developing countries) are contributing a greater proportion of FDI flows. But the private insurance market in these countries is not always sufficiently developed and national export credit agencies often lack the ability and capacity to offer political risk insurance, so this is one target more for MIGA to be engaged to help.

These additional instruments are certainly not very important in their quantitative effect, although they could be attractive for companies, for example, with joint ventures in countries changing from a planned to a market economy and in developing countries. A final means for the promotion of international direct investments is the International Centre for the Settlement of Investment Disputes (ICSID), founded in 1966 with currently (end of 2006) 143 member states. 64

4.2 Tasks of the World Bank Group

4.2.4 Main Publications of the World Bank Group and the Significance of the World Bank for Export-oriented Companies As important and highly informative publications of the World Bank Group – besides the information on its homepage www.worldbank.org – the following titles have to be mentioned in the first place: •

The WORLD BANK: World Development Report, which is also published in German as the ‘Weltentwicklungsbericht’ by the World Bank and which consecrates to annually alternating main areas of development politics; cf. e.g.: − WORLD BANK, 2004, on the necessity for a stronger involvement of poor people in the planning process and realization of World Bank projects, − WORLD BANK, 2005, on possibilities to improve the investment conditions in the Third World to reduce poverty and underdevelopment, or − WORLD BANK, 2006e, with the subject of searching for possibilities and ways to abolish discriminations which stabilize indigence, like e.g. disparities in the treatment of gender. Other issues are differences in life chances by reason of nationality, race and social origin on the one hand and the unequal balances of ownership and power in developing and industrial countries on the other hand. This undoubtedly leads to a vicious circle of poorness and unfair distributed opportunities and hence must be broken through. The report documents these ‘disparity traps’ with appropriate comparison data regarding economics in general, education, health care, law, demography, distribution and infrastructure as well as capital, labor and product markets. It also discusses the consequences of social, economical and political concepts that promote fairness for a sustainable, efficient development.

Furthermore the yearly published statistical reports have to be pointed out: •

The WORLD BANK, 2006b: Global Development Finance, which gives an overview of the debt situation of emerging and developing countries (as successor of the former ‘Debt-Tables’ by the World Bank), as well as, above all

•

The WORLD BANK: World Development Indicators, which give an excellent (separated und linked) overview of the global state of development in such different areas like population, markets, 65

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welfare, state, environment and economy with the help of more than 800 various key figures for 150 countries. By means of the also available CDROMs of the World Development Indicators it is furthermore possible to create and access time series for more than 200 countries over more than 40 years (cf. e.g. WORLD BANK, 2006d). As general information sources on current monetary and economic policy problems the following can be mentioned: •

The WORLD BANK: Annual Report, and

•

MIGA: Annual Report, which specifically reports on risks of investment projects.

A very good possibility extracting data of relevant economic figures for all World Bank member countries besides the World Development Reports presents • ‘Data Query’ in the worldwide web: [www WORLD BANK Data Query]. The World Bank Group counts as one of the most solvent debtors in the world. Based on the also above-named very good provision of information regarding the economical and social infrastructure of these countries, the investment projects, tendered and financed by the World Bank, present an almost certain chance to export. Especially within the framework of World Bank supported projects, now also extended to Eastern Europe, informed companies have excellent chances to complete large projects without risk even in countries with payment difficulties. If these large projects were carried out alone under private management, they would be very risky commitments, reasonable for a few large companies. Relevant for providing risk cover for investment projects are MIGA and GRIP, mentioned in Section 4.2.3.

4.3

A Critical Examination of the World Bank Group

The World Bank Group plays a decisive role in the coordination of aid for development, i.e., there are scarcely any development projects in which the World Bank is not somehow involved. Without exception the economic publications of the World Bank are on top of the relevant problems in every respect (cf., e.g., the annually appearing World Development Report). 66

4.3 A Critical Examination of the World Bank Group The practical transformation of the in theory as useful and reasonable considered suggestions often has to be marked as calamitous (cf. Section 4.3.1). An effective fight against poverty in developing countries is brought about only insufficiently respectively not at all (cf. Sections 4.3.2 and 4.4).

4.3.1 Critical Evaluation of the World Banks’ Development Aid Projects The World Bank itself, however, assumes in official publications that about 40 % of all projects must be seen as failures, i.e., the investments do not lead to the hoped or rather planned economic welfare effects or company profits. Often the state of the project was better before the assistance from the World Bank. For massive criticisms of the World Bank, of the IMF, respectively development assistance in general, cf. again S. GEORGE, 1983; GEORGE/ SABELLI, 1994; B. ERLER, 1988 (the latter was employed for many years in the German Ministry for Economic Cooperation); and for the World Bank’s era of president Wolfensohn: W. BELLO/ S. GUTTAL, 2006. At the latest from the 1960s on, when its focus switched to the financing of the mainly big infrastructure projects in the developing countries, the World Bank fell into increasing criticism: for example for the support of powerdam projects in Latin America and Africa – and today in China. They seem to be problematic, both from the economical and from the social view, and forced millions of people to resettle, or destroyed huge woodlands. A report about the work of the institution solicited by the US-congress in the year 2000 (the so-called Meltzer Report) shows impressively that the World Bank with all its projects is everything but successful to date. More than 50 percent of all projects aided by the bank were flops; especially Africa was impacted with a failure-quote of 73 %, as Figure 4.4 shows. The Meltzer report names the lack of information by the staff about local conditions as a main reason for the abortive World Bank projects and the problematical political recommendations. Also in the World Bank the decisions are made by the wealthy industrial nations, with under-representation of developing countries. 67

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Failed development projects of the World Bank in % of all projects 90 73

80 70

59

57

60

61 48

47

50

39

40 30 20 10 0 Total

Figure 4.4:

Structural Adjustment Projects

Investment Projects

Africa

South Asia Latin America

East Asia

Failures of World Bank projects by type and target group (from MELTZER–COMMISSION 2000, Tab. 3-8)

The extent to which the World Bank depends on old concepts and is reluctant to adapt them to reality becomes clear consistently: The former World Bank president, James Wolfensohn, himself instructed a commission in 2002 to investigate if the World Bank’s focus on the financing of oil and coal projects contributes to the combat of poverty. The result of the study was definite: This policy is not only more than questionable for the world climate, but also does not help the local populace. Thus, until the year 2008 the bank should retreat step-by-step from the engagement with fossil fuels and encourage a 20 % annual increase in the use of renewable energies (cf. [www Extractive Industries Review (EIR) 10/2006], p. 7; complete Extractive Industries Review reports can be found at [www Extractive Industries Review Reports 10/2006]). The reaction of the bank management was equally clear. It swept the principal requirements of the commission from the table immediately after receiving the report. The explanation for this behavior might be, that the management had not even read the advice carefully: It refuses to depart from fossil fuels and to embrace renewable energies, arguing that in this case the costs for environment protection would be shifted to the populace of poor countries. 68

4.3 A Critical Examination of the World Bank Group This argument can be seen as sheer mockery, since the Extractive Industries Review (EIR) once again had explicitly shown, about what NGOs had been complaining for years: that the poorer population stratum benefits scarcely from the extraction of oil and coal; instead, as a rule, large corporations as well as local oligarchy skim the profits, not rarely from abroad. For the native populace often only a destroyed habitat remains: Cf. CARUSO et al., 2003. Dramatic examples – out of almost unlimited worldwide tragedies – for this are e.g.: −

the oil production in Nigeria, which merely leaves a dramatically destructed environment for the native population instead of well paid jobs or a transfer of profits by the companies (cf. HUMAN RIGHTS WATCH, 1993), the oil production in Ecuador with dramatic consequences for the rainforest and the indigenous population (cf. SCHMIDT, 2003; GOODLAND, 2005; [www Eine Welt Netz NRW 08/2006]; cf. also [www GlobalAware Canada 08/2006]),

−

the coal output in Venezuela (cf. [www Uni Kassel – Venezuela 08/2006]; [www Mines and Communities 08/2006]), where an enlarged strip mining in the federal state of Zulia threatens to foil the guideline of a ‘sustained development’ by the government of President Chávez, or exemplary as well the effects of mining and timber industry in Western Papua (Indonesia), where the local population does not only not participate in the profits, but is evicted or even killed if it resists (cf. [www Gesellschaft für bedrohte Völker 08/2006]; the same is also valid for more developed countries like Brazil (cf. HOUSE, 1988, p. A 10; SCHWELIEN, 1989; [www Die Welt.de 08/2006]).

−

To the problem of the exploitation of resources in developing countries, the so-called ‘resource wars’, the following sources are generally pointed out: RENNER, 2002; BANNON/ COLLIER (editor), 2003, or also GLOBAL WITNESS/ FAFO INSTITUTE for APPLIED SOCIAL SCIENCE, 2002.

On the other hand, the encouragement of renewable energies has a positive effect in two ways. It protects the climate and it offers the people of poorer countries a real chance to develop: by saving foreign currency consequently of reduced oil- and coal imports and through the possibility of a decentralized extension of alternative energy technologies that reduces poverty by creating jobs.

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At this one should admittedly pay attention, that projects for the production of renewable raw materials do not destroy resources on site, for example by a wide slashing and burning policy of primary forests for the cultivation of oil plants or soy e.g. for the creation of biodiesel (cf. on this e.g. the wide offer of information in the periodically published ‘Regenwaldreport’ (rainforest report) by the organization ‘Rettet den Regenwald e. V.’: [www Rettet den Regenwald e. V. 08/2006]).

4.3.2 Main Points of Criticism of World Bank’s Development Policy and herefrom Resulting Need for Action The main points of criticism of World Bank’s development policy are that World Bank projects mainly attempt to ‘cure the symptoms’ but do not attack the causes of socio-political and economic problems. Projects advance in a fashion which is too technologically oriented: the attempt is made, in part with an immense amount of capital, to realize stages of development which are not achievable at the socio-cultural or political-economic levels. This is done on the one hand because no consideration is shown for the mentality of the population, whereby this lack of consideration is mainly associated with the projects stipulated by the donor countries themselves (nomads will scarcely want to work in a steel mill; the project will never cover its own costs; the balance of payments of the country – in this case Algeria – will be further weakened). On the other hand, the elites of the respective country prefer projects whose proceeds go to a small caste of the already well-to-do. Thus these proceeds do not contribute to the development especially of the rural sector and therefore do not increase the purchasing power of the poor. (For hard-hitting criticism at the ruling ‘elite’ in too many countries of the Third World compare: Hans Magnus ENZENSBERGER, 1988, pp. 183.) It is unnecessary to emphasize that agrarian land reforms are also unavoidable in order to be able to implement any small farm production structure at all. But many newly industrializing- and developing countries – e.g. Brazil –

70

4.3 A Critical Examination of the World Bank Group are not interested in any agrarian land reforms whatsoever in order to supply jobs to the continuously growing population. Developing- and newly industrializing countries in most cases urge the World Bank to (co-) finance big projects, which make large industrial complexes possible, whose owners – ‘as chance would have it’ – of course will again be just that elite which suggests projects to the World Bank. Even the environmental impact assessment, which the World Bank compellingly introduced in 1988/89, has come up against bitter resistance not from the ‘capitalistic First World’, but from the developing countries. Such an assessment as a rule must be forced on the developing countries, which often brand this as ‘neo-colonialism’. There are a lot of dramatic examples about economical futile and ecological disastrous ‘development projects’. At first, the Yacyreta embankment dam on the border to Paraguay and Argentina has to be named. This dam, with a retaining wall of 65 kilometers length and 76 meters height and costs of US-$ 894 million in 1992 transformed a river full of fishes into a putrefactive lake. Also, the dam generates electricity to prices that are three times higher as the ones in Argentina. At second, particularly the Balbina storage lake in Brazil has to be named. 2,500 square kilometers rain forest with the worth of exotic woods of US-$ 200 million was flooded; the Indian population of the Waimirí and Atroarí had to be forced to resettle partly by violence; huge quantities of carbon dioxide were released by rotten plants in the water and instead of a planned power generation of 250 MW per year, only 94 MW at a maximum are possible. One of the main pundits of the World Bank policy, Susan S. GEORGE, writes e.g.: „In our century, in our society, the concept of development has acquired religious and doctrinal status.”: GEORGE/ SABELLI, 1994, p. 6; the institution World Bank is said to be like a religion: One can only believe in it or refuse it. Its economical dogma suits only for a small fraction of transnational elite interests. The new concentration by the World Bank on the fight against poverty shows, that it is searching for a mission, but it has no idea for the practical transformation that goes beyond the formation of economies after a neoclassical pattern and the cognition of all men and women as a ‘Homo Economicus’ (cf. GEORGE/ SABELLI, 1994, p. 6). 71

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The World Bank is said to be an institution, „… which craves ‘intellectual leadership’, but cannot necessarily recognize it even in-house; which seems condemned to reproducing a worn-out, bankrupt development paradigm, and thus to do much harm, occasionally responding to criticism but unable to pre-empt it through genuine change.”: GEORGE/ SABELLI, 1994, p. 8. The World Banks’ conditions within the structural reform programs have a norm defining effect for all of those countries, which apply for credits or want to be a member of the Bretton-Woods organization. The consequences are negative in the majority of cases (Russia, Mexico, Latin America), because the condition can only be fulfilled, if norms and forms, which standardized the work and life, are breached. Furthermore, complete scopes of economy and society are excluded to non-formality. The expanding of non-formality enables an elastically adaptation on standards for the economy and the society of one ‘location’, set by global competitors. But world-wide, the motives are not implicitly geared to increasing social responsibility; in fact they incline towards free, cost minimizing market forces primary of the supply side. The USA developed the system of ‘certification’ (according to §§ 489, 490 of the „Foreign Assistance Act“), with which countries are divided into ‘good’ and ‘bad’ ones. The certificate is only given to countries who want to trade with the USA or expect credits or economic assistance, if those norms are fulfilled, which the USA decreed sovereign and which must be obeyed. The USA require cooperation especially on the combat of drug distribution if the certification should be issued. This standard was intensified after 9/11-2001, because now the join regarding the fight against terrorism is also requested. Since the USA is the biggest financial backer and shareholder of the World Bank – as well as certainly of the IMF –, unforeseen control feasibilities of the USA result, which reach deeply into the structure of decision-making, if the question of fundamental strategies on the programs for the ‘struggle against poverty’ is on the agenda. It would be a positive aspect, if this wide influence would not be exerted under the purpose for the maximization of global American economic and political interest, but rather in terms of a worldwide fight against poverty. 72

4.4 The Necessity for a Stronger Active Poverty Reduction

The Necessity for a Stronger Active Poverty Reduction: Banker for the Poor

4.4

The cycle of •

producing and earning, as well as

•

consuming

cannot be started up for a wide cross-section of the populace of the Third World and of many countries of Eastern Europe, especially the CIS countries.

4.4.1 Insufficient Integration of a Strong Growing Population into the Economic Cycle One of the main reasons for the long-lasting backwardness of a large part of the developing countries is, that the ultra-large majority of the population is not actively involved in the business cycle as a productive supplier and enquirer of economic outputs. Prime reasons for this fact in many developing countries are the persisting strong dependency of a bigger part of the rural population on great land owners and the also dramatic dependency of a bigger part of the commercial actors of the rural and urban population on monopolistic organized creditors and investors. Those donors not only allocate for the indigent majority the for their business required liquidity with horrendous excessive interests, but also lend the needed materials of all kinds such as sewing machines, fabrics or fishing boats with such exorbitant prices, which allow the poor almost no income. This basic problem gets even worse due to the very high population growth in nearly all developing countries. Even if it is possible to induce a certain dynamic of growth resulting from various reforms in developing countries, then as a rule only to an extent which is below the growth in population, so that the individual person despite productivity increases in the economy as a whole becomes ever poorer. Hence, among economic reforms particularly an active monitoring of fertility, which must be able to decelerate the population growth clearly, is of fundamental relevance for a permanent development perspective. 73

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Accordingly, for example the population policy of the Vatican has to be criticized in this regard for being inimical to economic growth. Whereas, within the scope of questions regarding developing- and social policy the additional problem occurs, that because of the condemnation of an active control of fertility, as for instance to forbid the use of condoms even though there is a dramatic spread of HIV/ AIDS especially in developing countries, the prevalence of this epidemic plague is rather be pushed – an attitude, which had caused a world-wide sensation especially at the International Conference on Population and Development of the United Nations in Cairo at the end of 1994. In many countries, especially in Africa, the number of the economic main actors at the age between 20 and 40 strongly decreases by virtue of the high level of infestation with AIDS (cf. hereunto e. g. the national infection rates with AIDS, as they are presented in the ‘Worldwide HIV & AIDS Statistics Commentary’ [www Aids Statistics 02/2007]). So the despite the large number of dead persons in consequence of AIDS still too high growth of population gets even worse by reason of the nearly unchecked increase of unattended AIDS orphans and also unattended old people. Anyway, a rethink by the curia started under the German pope Benedikt XVI., who discussed in 2006 for the first time about the permission of condoms in order to help to control the strong expansion of AIDS. The reader now will certainly ask why the World Bank does not draw conclusions from these reflections and those discussed in Section 4.3.2 – which should not be unknown to the bank – in regard to its business practices, especially since it employs a group of top-flight economists and also development-theoreticians and policy-makers. Indeed, the World Bank has been striving to pursue a poverty-oriented development policy, especially since 1973 after the so-called ‘Nairobi Speech’ of the then World Bank President McNamara. In concrete terms, such a development policy could be carried out, for example, in programs for small farmers. In such programs, small farmers who, for example, already possess land, would be supported in such a way that they would produce surpluses – by means of productivity gains – which would be saleable locally. As a result of the surpluses, a kind of division of labor could occur, which could enable others – e.g. the landless people – to work as traders or craftsmen. Moreover, this could be supported by small loans within the framework of comprehensive assistance for the self-employed as is partially the case especially in Asia, based on the ideas of Grameen Bank. 74

4 Excursus The GRAMEEN BANK

4.4.2 Support to Take Matters into One’s Own Hand: The Example of the GRAMEEN BANK & the GRAMEEN FOUNDATION; an EXCURSUS to Microloans A very successful example of a poverty-oriented development financing is the work of the GRAMEEN BANK in Dhaka, Bangladesh. The bank was founded by Professor Muhammad YUNUS, who received the Nobel peace prize of 2006 for this support to people living below the poverty line. His bank grants so-called entrepreneurial self-help microloans to the destitute and thereby helps them to set up and keep up new businesses (cf. YUNUS/ JOLIS, 2003; SCHÖNERT, 1998, p. 73). The bank finances itself primarily with public funds and aid for development. Only with such targeted, ‘first push’ financing for the destitute selfreliance can be reached in the Third World and the much too limited economic purchasing power of wide sections of the population might increase.

Figure 4.5:

Nobel laureate Muhammad Yunus (from [www Grameen Bank 12/06])

The idea to establish a new kind of a “Bank for the Poor” was set by Muhammad Yunus, that time Head of the Rural Economics Program at Chittagong University, in the very south of Bangladesh. After a dearth in Bangladesh in 1974 Yunus walked through a starving village near by, Jobra, and came up with a list of 42 people who were basically stuck in poverty over a matter of pennies: Just the ability to buy sewing needles, material or an old loom would have led them out of poverty. Yunus is quoted with this sentence: “When I added up the total amount they needed, I got the biggest shock of my life: It added up to 27 dollars! I felt ashamed of myself for being part of a society which could not provide even 27 dollars to 42 hardworking, skilled human beings.” ([www D. Murphy 11/2004].) So he lent US-$ 27 to 42 families to get them of the hook. Because poor people are not collateral, conventional banks do not lend to such people. Therefore Yunus lent money from the bank for himself to give it then to the rural people. 75

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In 1976 he finally launched his own bank: The Grameen Bank. The basic work of this Grameen Bank is to help out the rural people in the villages of Bangladesh with microloans without requiring collaterals. One credit is about US-$ 30 to 50. Because of a higher moral of repayment and to increase the role of women in the society, credits were mainly given to women. To receive a credit one woman has to incorporate with four other women to a group of five, to make repayment more likely. Each member of the group can get a credit. But first of all only two of them get financial support. If they can pay back on time the other three can apply for a credit too. In case of an extraordinary intervention (for example the husband disappears with the money) that causes insolvency, the borrower can ask for a new credit. The first credit then will be transferred into a longterm credit that is free of interest and the borrower can decide when he pays back that credit. In general the rate of interest for a common credit is 20 %. For credits used for education the interest rate is 5% and to build a house a borrower would pay 8 % annually. The repayment scheme is based on weekly installments. The loan does either come from non-profit organizations or institutions owned by the borrowers of the Grameen Bank that have some extra money to give away. If none of these works, the Grameen Bank tries to borrow money from a profit organization with an interest rate as low as possible. There are no legal regulations between the bank and its borrowers. If a client can not repay his credit in time, he is able to reschedule his payments. No matter what the total interest is on a loan, it may never exceed the amount of the loan. The system of the bank is based on mutual trust, creativity, participation and accountability. Owner of the bank are the borrowers. They possess 90 % and the government owns the other 10 %. There is an annual election of a group of leaders that are members of the bank; those people decide about who awards a credit. In contrast to the conventional banks the branches of the Grameen Bank are in poorer areas close to the village they support. The employees go from door to door to distribute the credits among the poor people. In this process there is a selection with certain criteria that specify whether somebody can get a credit or not. If there is a catastrophe like a flood disaster, branches at the hit areas close down and the employees go into the villages to help the people, for example giving financial support to buy food. All the money is acquitted by the income of the bank. 76

4 Excursus The GRAMEEN BANK The Grameen Bank lends money with no advices, nor hints. In this way rural people shall try to be creative. In the years after 1976 the members of the Grameen Bank increased enormously. Women are respected more and more by their husbands and the society. More people participate in Bangladesh’s politics; members of the Grameen Bank started to run for election. The birth rate decreases and more children attend school. This results in a lower illiterate rate falling from 90% to 70%.

Track Record of the Steady Growth of Disbursed Microloans per year

600 in mill. US-$

500 400 300 200 100 0 2002

Figure 4.6:

2003

2004

2005

Growth of Grameen Bank’s volume of disbursed microloans per year (data from [www Grameen Bank 01/07])

There are 16 general principles of the Grameen Bank that are supposed to be internalized by all members of the Grameen Bank family in order to help the rural people in Bangladesh. These 16 principles of Grameen Bank are the following (as of [www Grameen Bank 11/2006]): 1. “We shall follow and advance the four principles of Grameen Bank – Discipline, Unity, Courage and Hard work – in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.

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5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditure. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines. 10. We shall drink water from tubewells. If it is not available, we shall boil water or use alum. 11. We shall not take any dowry at our sons' weddings, neither shall we give any dowry at our daughters wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not inflict any injustice on anyone, neither shall we allow anyone to do so. 13. We shall collectively undertake bigger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her. 15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline. 16. We shall take part in all social activities collectively.” In 1989 the Grameen Bank started additional new loan programs, as for the building of lavatories, septic systems and water supply. The Grameen Bank furthermore established a group of non-profit oriented companies, which are in action with plenty of activities for the poor. These companies meanwhile became known as the ‘Grameen Bank family’ (cf. [www Grameen Family 02/2007]). The most relevant of these enterprises will be introduced below. •

Grameen Fund

The Grameen Fund was incorporated in January 1994 as a non-profitoriented institution and started operations on February 1, 1994. Its emphasis is on providing finance to ventures that are risky, technology-oriented and otherwise deprived of financing from existing formal lending institutions.

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4 Excursus The GRAMEEN BANK •

Grameen Communications/ IT

Grameen Communications is a technology firm that participates in the foundation of firms and validates to give away computers and provides internet service. This company as a member of the Grameen family also is a nonprofit organization. Using the internet the residents of the villages shall see what is happening in the world and try to participate in international businesses. It has been providing complete system solution through developing software products and services, internet services, hardware- & networking services and IT education services since its inception in 1997. The idea is to earn more foreign exchange, helping to increase the economic development of the whole country. •

Grameen Shakti/ Energy

Grameen Shakti is a non-profit-oriented rural power company whose purpose is to supply renewable energy to villages in Bangladesh which are still not connected to the power supply system. Grameen Shakti expects not only to supply renewable energy services, but also to create employment in rural Bangladesh and therefore improve better income-generation opportunities. •

Grameen Shikkha/ Education

Established in 1997 the main objectives of Grameen Shikkha are to promote mass education in rural areas, provide financial support in the form of loans and grants for the purpose of better education, use information technologies for alleviation of illiteracy and development of education, promote new technologies and innovate ideas as well as in general to support new methods for the development of education etc. Grameen Shikkha has been conducting Life Oriented Education Projects, Pre-school/Child Development Programs, Early Childhood Development Program and Arsenic Mitigation Programs in various districts of Bangladesh. •

Grameen Telecom and GrameenPhone

Yunus merged with the Norwegian telephone company Telenor in 1996 that gave him mobile phones which he distributes among the villages. This serves the purpose of giving the poor the opportunity to make an emergency call, make an order, and shorten mailing route and time. Grameen Telecom is planning, until 2010, to provide GSM 900/1100 cellular mobile phone service to 100 million rural inhabitants in 68,000 villages by (1) financing 60,000 members of Grameen Bank to provide village pay phone service and (2) providing direct phones to potential subscribers. As of January 2007 there are 283,000 village phones already in operation. 79

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Grameen Telecom holds 38 % share of the also non-profit GrameenPhone Ltd., which commenced operation in March 1997; the company that was awarded a nationwide license for GSM 900 cellular mobile phone services. It is a joint venture enterprise with Telenor (62 %), the largest telecommunications service provider in Norway with mobile phone operations in 12 other countries. GrameenPhone is now the leading telecommunications service provider in the country with more than 10 million subscribers as of November 2006. At present, there are about 15 million telephone users in the country, of which a little more than one million are fixed-phone users and the rest mobile phone subscribers. •

Grameen Knitwear Limited

This company is a 100 % export oriented composite knitwear factory, located in the Export Processing Zone in Savar in the vicinity of Dhaka, the capital of Bangladesh. It has knitting and garments production facilities including dyeing, and offers a range of good paid jobs. The countries where the goods are currently exported to are mostly Europe, thus bringing pressingly needed foreign exchange into the country. •

Grameen Cybernet Ltd

Grameen Cybernet Ltd. has been Bangladesh’s leader in Internet service provision since it commenced operation in July 1996. The whole project of Grameen Bank’s microloans meanwhile is sponsored by the central bank of the country and gets support of the nationalized commercial banks. In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation. In contrast to the situation with conventional banks, 98 % of the clients of the Grameen Bank repay their money on time. It started with 42 families in 1974 and as of January 2007, Grameen Bank has 6.95 million borrowers, 97 percent of whom are women. With 2,343 branches, it provides services in 75,359 villages, covering more than 90 percent of the total villages in Bangladesh; 2,120 of the 2,343 branches already work with computerized accounting. The Grameen Bank shows a consistent increase of its clients that are spread out over whole Bangladesh. As of January 2007 the Grameen Bank shows a cumulative amount disbursed since inception of US-$ 6.009 billion, whereof a cumulative amount of 5.344 billion was repaid; this is equal to 98.48 % of the outstanding loan. [Data from [www Grameen Bank 02/2007b].) 80

4 Excursus The GRAMEEN BANK Total revenue generated by Grameen Bank in 2005 was US-$ 112.40 million. Total expenditure was US-$ 97.19 million. Interest payment on deposits of US-$ 34.74 million was the largest component of expenditure (36 %). Expenditure on salary, allowances, pension benefits amounted to US-$ 25.37 million, which was the second largest component of the total expenditure (26 %). Grameen Bank made a profit of US-$ 15.21 million in 2005. Entire profit is transferred to a rehabilitation fund created to cope with disaster situations. This is done in fulfillment of a condition imposed by the government for exempting Grameen Bank from paying corporate income tax (cf. [www Grameen Bank 02/2007a]). Also the balance sheet in Figure 4.7 shows that a poverty-oriented financing makes sense in an economical view: Balance Sheet 2003 PROPERTY AND ASSETS

2003

in US-$ 58.45

Average Bangladesh-Taka/ US-Dollar Rate of the Year Cash in hand

103,668

Balance with other banks

9,915,216

Investment-at cost

91,280,150

Loans and advances

287,830,780

Fixed assets-at cost less accumulated depreciation

15,584,661

Other assets

59,670,599 Total

CAPITAL AND LIABILITIES

464,385,074 2003

in US-$

Share Capital: Authorized

8,554,320

Paid up

4,979,109

General and other reserves

135,893,551

Revolving Funds

-

Deposits and other funds

251,766,477

Borrowings from banks and foreign institutions Other liabilities

329,258

Profit and Loss Account

Total

Figure 4.7:

72,075,195

464,385,074

Balance Sheet of Grameen Bank as of end 2003 (from [www Grameen Bank 07/2006])

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The contribution of Grameen Bank to the GDP of Bangladesh amounts to more than 1 % (cf. [www Grameen Bank 05/2005]). The income of Grameen Bank clients is estimated to be about 50 % higher than the target group in non-supported control villages, and 25 % higher than target group non-member in the villages that are supported by the Grameen Bank. The landless have benefited most, followed by marginal landowners. This has resulted in a reduction of 20 % in the number of Grameen Bank members that live below the poverty line. There has also been a shift from agriculture to petty trading with a high rate of self employed people. Such a shift in occupational patterns has an indirect positive effect on the employment and wages of other agricultural waged laborers. What started as an innovative local initiative, has thus grown to the point where it has made an impact on poverty alleviation at the national level, as also Figure 4.8 might show: Key Numbers of helping the Poor 2005 (cumulative) Cumulative Disbursement

US-$ 6.009 billion

Number of Members of Grameen Bank

6.949 million

Number of disbursed Microloans Number of Houses built Number of Village Phones

Figure 4.8:

1.036 million

627 thousand 283 thousand

Key Numbers of Grameen Bank’s support helping the poor to take matters into their own hand in Bangladesh (data from [www Grameen Bank 02/2007b])

Inspired by the work of Grameen Bank in Bangladesh, a “Grameen Foundation” was created to help share the Grameen philosophy and accelerate the positive impact of microfinance on the world’s poorest people. Although they are independent organizations, Grameen Foundation and Grameen Bank maintain a close relationship. 82

4 Excursus The GRAMEEN BANK Grameen Foundation replicates the success of Grameen Bank internationally by supporting microfinance institutions worldwide that embody its vision and values. Professor Yunus is also a founding and current member of Grameen Foundation’s board of directors. (From [www Grameen Foundation 01/2007a].) Founded in 1997, the global network of Grameen Foundation’s microfinance partners reaches 2.7 million families in 22 countries (cf. [www Grameen Foundation 01/2007b]). The following Figures give an overview on the financial position and the statement of activities of the Grameen Foundation as of end 2005: Statement of financial position year ended December 31, 2005

Statement of activities for the period January 1 through December 31, 2005

Assets in $

Revenues in $

Cash & Equivalent

7,354,270

Contributions

Investments

1,044,995

Restricted

7,324,240

Unrestricted

1,537,648

Other Current Assets Program Related Investments Loans Receivable Guarantee Collateral Net Fixed Assets Total

238,739

Total Contributions 4,471,115 764,500 22,709 13,895,968

Liabilities & Net Assets in $ Liabilities Accounts Payable Other Current Liabilities

255,000

Total liabilities

689,854

Net Assets Unrestricted Temporarily Restricted

434,854

6,208,941 6,997,173

Total Net Assets

13,206,114

Total Liabilities and Net Assets

13,895,968

8,861,888

Loan Reflows Investment Income Pro Bono Legal Total Revenues

854,020 282,960 446,762 10,445,630

Expenses in $ Program Service Partner Support Technology Center Public Education Total Program Services Support Services Management & Administration Fundraising & Marketing Total Support Services Total Expenses Changes in Net Assets

3,755,253 1,212,332 191,089 5,158,674

1,948,799 476,146 2,424,945 7,583,619 2,862,011

Figure 4.10: Revenues and expenses Liabilities and net assets of Grameen Foundation (cf. [www Grameen Foundation 11/06], p. 32; GRAMEEN FOUNDATION, 2006, p. 32) Figure 4.9:

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The Grameen Foundation focuses on four key areas: •

Providing microfinance program support in the form of funding, technical assistance, training and new technology.

•

Harnessing the power of technology by an own technology Center, that is the leader in information and communications technology initiatives which are dedicated exclusively to advancing microfinance by driving industry-changing innovations. These increase the efficiency of microfinance institutions’ operations, create new micro-business opportunities for the poor, and provide telecommunication access for the world’s rural poor.

•

Connecting microfinance institutions with capital markets to bring new financial resources to microloan lenders worldwide: With more than 400 million poor people cut off from financial services, there is a huge, unmet need for microfinance. To reach them, MFIs need capital beyond the traditional philanthropic support to rapidly expand their operations.

•

Expanding microfinance industry knowledge: Knowledge sharing is of greatest impact on global poverty. New ideas and innovative thinking will drive the expansion and effectiveness of microfinance.

The Foundation works to reach the world’s poorest people across four continents and by now (2007) took action in the below stated countries:

Figure 4.11:

84

Worldwide activities of Grameen Foundation (from [www Grameen Foundation 02/2007b])

4 Excursus The GRAMEEN BANK Figures 4.12 a) to 4.12 c) give a concluding overview on the Grameen Foundation’s Fund raising, sources, and its money allocation (cf. [www Grameen Foundation 02/2007a]; [www Grameen Foundation 11/06], p. 31; Grameen Foundation, 2006, p. 31).

Where the Grameen Foundation’s Money comes from pro bono legal 4% contributions 85%

investment earnings 3% loan reflows 8%

Figure 4.12a: Fund raising of the Grameen Foundation

Sources of Grameen Foundation’s Contributions multilaterals like the U.N. 1% government 9% corporations & corporate foundations 28%

non profits 3% foundations 18%

individuals 41%

Figure 4.12b: Sources of contributions to the Grameen Foundation

Where the Grameen Foundation’s Money goes for management & administration 19% loans & guarantees issued 25%

fundraising & marketing 5% program services 51%

Figure 4.12c: Allocation of the Grameen Foundation’s expenses

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4.4.3 Microloans as a New Tool also of the World Bank Group At present nearly 120 million poor people can ask for microloans at microloan institutions in more than 60 countries and thus can start their own businesses having a plain occupation.

Track Record of the Customers of Microloans per year

120 in mill.

100 80

113.3 80.9

60 40 20

67.6 54.9 30.7

0 2000 Figure 4.13:

92.3

30,7

2001

2002

2003

2004

2005

Microloan clients worldwide in million (data from RETTBERG, 2007, p. 34)

In 1995 the World Bank founded the ‘Consultative Group to Assist the Poor’ (CGAP), having the target to mobilize financial resources for the purpose of lending microloans. A first highlight of this successful campaign was the ‘Microloan Summit’ in 1997; until the end of 1999 US-$ 200 million could be summoned up. 1999 the World Bank initiated the ‘World Bank Group’s Microfinance Institutional Action Plan’: The goal of this plan for action is to build a robust microfinance industry and to strengthen existing microfinance institutions to build their portfolios and extend outreach to the poor. The World Bank has several instruments at its disposal to support microfinance: •

86

Cooperation with the Small and Medium Enterprise Department (SMED) for diffusion of good practice and lessons of experience with small and medium scale enterprises;

4.4 The Necessity for a Stronger Active Poverty Reduction •

•

•

•

training services, as offered by the World Bank Institute (WBI) and the World Bank’s country departments, providing technical and managerial knowledge; the leading microfinance research effort has been the SBP-Initative of the World Bank Group (Sustainable Banking with the Poor); in 1999 the ‘Microfinance Handbook’ was published, and numerous case studies and complementary analytical materials concerning the broad field of micro-financing are made available for people interested in the subject; especially the African Region is supported by the ‘Financial Sector Development Department’ (FSD) of the World Bank Group: the initiative is helping to establish microfinance networks; the ‘African Action Research on Sustainable Microfinance Institution’ by now formed microfinance practitioner networks in the countries Cameroon, Ethiopia, Ghana, Kenya, Mozambique, and Zambia; and the World Bank Group’s ‘Foreign Investment Advisory Service’ (FIAS) is developing business linkages.

Access to financial resources can be given by • grants, given by the Consultative Group to Assist the Poorest (CGAP), meanwhile supporting microloan financing in a lot of countries in Africa, Asia and Latin America with US-$ 34 million, • market-priced IBRD loans, • concessional priced IDA credits, and • IFC equity investments, with a worldwide microfinance portfolio of over US-$ 200 million, whereby the IFC directly co-finances a wide range of privately acting microfinance institutions in their lending to the poor. For example the IFC cooperates with the ‘Aga Khan Microfinance Agency’, now operating in 10 countries, focused on central and south Asia, Egypt, Syria and parts of Africa; the development network making 25,000 micro loans, totaling US-$ 35 million. The most important cooperation of the IFC since the year 2005 is with ACCION International, having pioneered parallel to the Grameen Bank in the fields of microloans and disbursed US-$ 9.4 billion in microloans for 4 million clients (cumulated 1996 – 2006), 65 % of whom are women; 97 % of these loans were repaid. ACCION provides loans in 23 countries in Latin America, the Caribbean and sub-Saharan Africa, and in the U.S.A. (cf. [www ACCION 02/2007]), 87

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4 The World Bank Group thus being the World’s second largest microfinance institution just behind Grameen Bank, ranked by the number of borrowers. Another important partner of IFC is FINCA, that currently serves over 120,000 clients in 17 countries on 5 continents. Its largest operations have been in Latin America, but it is rapidly setting up new programs in the former Soviet Union’s newly independent states (CIS). Since the year 2006 IFC has signed a partnership agreement in Morocco with the ‘Foundation for Local Development and Partnership’ (FONDEP), offering cheap microloans to about 45,000 active beneficiaries. The IFC is increasingly cooperating in the same way with pure regional partners in the context of a global network of microloan institutions.

In Cooperation with the IFC besides the ‘Soros Economic Development Fund’ (SEDF) especially the charitable foundation ‘Opportunity International’ gets strongly involved in the stimulation for the build-up of microfinance institutions by using its donations for the setup of those organizations. Also the ecumenical development companionship ‘Oicocredit’ has an important function, it assigns 50 % of all credits to microfinance institutions. So far, in addition to the World Bank Group only the Asean Development Bank (ADB) participates to a relevant extent on the part of multilateral organizations. Particularly since the awarding of the Nobel Peace Prize to Muhammad Yunus and his Grameen Bank in 2006 for the implementation of the microloan idea, also traditional banks like for instance ABN Amro, AXA, Bank of America or the Erste Bank Österreich increasingly start an engagement in the field of microloan financing. To raise the overall budget, microloans enter the financial and capital markets as well. Meanwhile, there are even first certificates which are issued on the basis of microloans and a number of investment funds and bonds for the financing of microloans. Examples are the Luxembourgian ‘responsAbility global Microfinance Fund’ of a predominantly Swiss group of banks and the Luxembourgian ‘Vision Microfinance’, which is distributed by the corporation ‘Invest in Visions’ and mainly includes fixed-interest investments in the form of loans to micro-finance institutes. The ProCredit Holding AG, on which the government owned German KfW bank group participates, refinances the ProCredit Group, where on the other hand also private investors can be part of by purchasing debentures. 88

4.5 Perspectives of the World Bank’s Future The official governmental demand of developing countries at the World Bank for such projects to help the poor is nevertheless almost nil. Moreover, such mini-projects are not very sensible for the export trade of the donor countries. Mainly development concepts are offered which require the building of capital intensive – i.e., modern – infrastructures (transportation and energy) as well as of industrial complexes. This is precisely what the developing countries ask for. So, in relation to the total granting of credits the still very modest engagement in the area of microloan financing by the World Bank Group is not only a lapse by the World Bank: It is at least also a direct consequence of a lack of demand by the poor countries’ governments for such a financial aid offered by the World Bank. Furthermore one has to keep in mind that the development aid of investment projects is the primary objective of the World Bank: It is a learning process that such aid however is not only adequate by financing capital intensive large-scale projects initiated from the supply side but can also be reasonable by financing smallest projects, which then might immediately generate purchasing power effects on the demand side. This learning process affects not only the World Bank but also a large part of the development theory and the developing countries themselves as well. In this respect it is a very positive sign, that the World Bank Group pushed the start of the financing of microloans with the help of the subsidies by the IDA and the IFC especially under president Wolfensohn.

4.5

Perspectives of the World Banks’ Possibilities to Redesign its Future Development Policy

During the 10 years from 1995 to 2005, a certain ideological opening under the World Bank’s president Wolfensohn came into action: The World Bank now appeared more open and transparent, with good information on the homepage and is much more than in the past emphasizing the eminent importance of a strong policy to reduce poverty and to promote a policy for ecological sustainable development which both is a prerequisite for the strengthening of economic development in Third World countries (e.g. cf. WORLD BANK, 2001). 89

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Nevertheless, an even strengthened consideration of political, social and cultural dimensions of the development is necessary (cf. e.g. coming Section 5.6). Analysis capacities of the development countries, especially in the area of economic policy and social-economic implications, have to be even more keenly promoted, if the World Bank wants to approach its self-set target: To eliminate poverty in this world (see the World Bank’s publication by Sandra GRANZOW, 2000: Our Dream – A World free of Poverty). To this idea also the publication of the WORLD BANK’s Vice President of the years 1997 – 2001 is obliged to. Joseph E. STIGLITZ demands for a regulated process of globalization and for an alternative and a development policy of the World Bank that is oriented more to the poor (J. E. STIGLITZ, 2002: Globalization and its discontents): managing alternatives, that STIGLITZ was not able to implement in the World Bank. Since 1989 the World Bank has begun to take environmental issues more seriously as a result of the growing public criticism of the World Bank Group’s policies and operations. In this respect, the steady increase of active environmental projects by the World Bank Group (IBRD and IDA) was a welcome sign of hope starting 1989 as Figures 4.14 and 4.15 illustrate – even if the expenditure for IBRD and IDA environmental projects amount together to only 1 % of the total expenditure.

Millions of US-Dollars

12,000

153

Number of T otal Active Environmental Projects of the IBR D/ IDA

10,000 8,000

119

160

137

93

6,000 70

4,000 2,000

1

16

10

4

33

45

Figure 4.14:

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

Total active environmental projects of the IBRD and the IDA 1986 – 1997 in number and mill. of US-$ (cf. [www Machno hbi-Stuttgart 01/2000])

A long-lasting realization of the ‘sustainable development’ principle in the routine business has not been imposed so far: 90

4.5 Perspectives of the World Bank’s Future For the majority of the World Bank’s decision makers – especially in the developing countries! – nature still is basically a reservoir of raw materials to be used up in creating growth, to which there are no physical limits and where nature also serves indefinitely as a universal dustbin for the byproducts of growth – anything from CO2 to toxic wastes (cf. GEORGE/ SABELLI, 1994, p. 163). Figure 4.15 admittedly shows the declining investment trend of environmental projects of the World Bank in the years from 1998 to 2004; at the end of 2004 the ongoing granting of loans for the environment amounted to US-$ 1.3 billion despite of this reduction, with the assertive statement of that-time president Wolfensohn to strengthen this main pillar. Environmental lending of the World Bank Environmental lending in % of total Bank's

in million US-$

3000 2500

12%

2000 1500

8%

1000

4%

500 0

0% 1996

Figure 4.15:

16%

1997

1998

1999

2000

2001

2002

2003

2004

Lending for environmental projects by IBRD and IDA 1996 – 2004 (data from [www WORLD BANK 02/2006])

At the end of Wolfensohn’s presidency in 2004 the World Bank expressed the vision to grant renewable energies a more important function in their energy strategy for the future. Its target is to offer energy services on favorable terms to utilize the high-technology of the North for the South. The goal is to promote research and development of technologies in the North, the setup of markets for alternative energies and finally the reduction of costs by mass production and adjustment of the technology on the needs of the South. But this scenario requires many additional years of development, which are not available any longer especially in times of the looming climate change. 91

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An accelerated cost cutting both in the area of alternative energy production and for the financing to encourage renewable energies are indispensable to realize this intention faster. An aspect for the cost reduction to install and promote regenerative power generation and the regenerative use of energy are microloans, explained in the Sections 4.4.2 and 4.4.3, which the World Bank wants to integrate in its future development aid policy (cf. [www Monika HÜLSKENSTOBBE, 06/2004]). At present, there are approximately 10,000 microloan businesses worldwide. But only five companies are successful and economically sound; they grant 78 percent of all credits. The World Bank is particularly interested in models with very low interest rates. The Grameen Bank in Bangladesh generally grants credits with 20 % interest. USHA, a non-governmental organization in India, grants credits with only 4 % interest. This low interest rate is possible due to low costs, which can be realized especially by state-of-the-art data-handling and office communication. (The Grameen Bank also tries to reduce its costs significantly with the help of the Grameen Foundation by miscellaneous modernization programs.) Such suggestions the World Bank is going to seize to make financial services affordable, also in favor of promoting regenerative energies. The microloan products are very adaptable and therefore flexible applicable in the field of development policy. In Latin America currently only single credits and no cluster credits like in South Asia are possible for instance. In South Asia, on the other hand, the example of the Grameen Bank would be trend-setting for reform approaches. Another strategy for the reduction of costs is the allocation of special ‘soft money’-credits, which are assigned as a subsidy on projects fraught with risk. An example is a project in Tajikistan, where the expansion of a hydroelectric power plant was realized with the help of a mixed financing by the Aga Khan Foundation, benefits of the Swiss government and capital of the already in Section 4.4.3 as a spearhead in the allocation of World Bank microloans mentioned International Development Association IDA. The power of this plant is now offered by 2.2 US-Cent compared to 4.5 US-Cent in former times. An additional agreement guaranteed that smallest-scale consumers, which are very poor households with an extremely low power requirement, get a special rate of 0.25 US-Cent. 92

4.5 Perspectives of the World Bank’s Future Such intricate projects could be the future for the promotion of renewable energies in poor countries (cf. [www Monika HÜLSKEN-STOBBE, 06/2004]). Beside the development of financial instruments a technology transfer into the countries of the South must happen. Non-governmental organizations emphasize, that the regenerative production of energy has to be adjusted to the South, namely cultural, social and environmentally compatible. Among others, this is also a task of the in 1991 born Global Environmental Facility (GEF) The Global Environmental Facility consists of an assembly of all participating countries, a Council, a Secretariat, a Scientific and Technical Advisory Panel, and the three ‘Implementing Agencies’ UNDP (United Nations Development Program), UNEP (United Nations Environment Program) plus the World Bank and is financed through commitments by 174 countries. Four Regional Development Banks (ADB, AfDB, EBRD, and IDB), FAO, UNIDO, and IFAD contribute to the management and execution of GEF projects as executing agencies. Between 1991 and 2006 the GEF has approved about US-$ 7.4 billion for 1,300 projects in more than 140 countries; of this World Bank has committed more than US-$ 3 billion for about 450 projects in 100 developing countries and countries with economies in transition (cf. WORLD BANK, 2006c, p. 1). Additional costs of development programs are financed, that accrue due to the consideration of sustainable ecological oriented development in terms of the above named GEF promotion catalogue. Figure 4.16 shows the GEF commitments of the World Bank 1991 – 2006 by focal area and by regional or global program: By Regional or Global Program

By Focal Area Multiple Focal Areas Ozone $152 Depletion $132 Climate Change $1,152

Figure 4.16:

Biodiversity $1,112

Land Degradation International $54 Waters $475 Persistant Organic Pollutants $64

Europe & Central Asia South Asia Middle East & $152 North Afrika $563 Global $210 $27 Sub-Saharan IFC Africa $231 East Asia Latin America $560 & Pacific & the Caribbean $664 $734

Distribution of World Bank Group – GEF commitments 1991 – 2006 in millions of US-$ (from WORLD BANK, 2006c, p. 3)

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The objectives of GEF are in the fields of climate change incl. programs to reduce carbon dioxide emissions, protection of the ozone layer, biological diversity, water protection, programs against desertification and persistant organic pollutants. Besides the original GEF-Capital of US-$ 3.1 billion committed by the World Bank, another US-$ 5.2 billion were added by the IBRD and its sister agency IDA of their own resources. Thus, the World Bank Group participates in the financing of environmental programs to an outstanding dimension. Together with the cofinancing of other public and private sources amounting to further US-$ 15 billion there are – as Figure 4.17 shows – US-$ 23.3 billion offered to the above mentioned objectives of GEF – inter alia for actions fighting the climate change, which will be an economically disaster primarily for the poor countries of the Third World. These sources until end of 2006 supported already over 1,800 projects that produce global environmental benefits in 140 developing countries and countries with economies in transition (cf. [www WORLD BANK 02/2007]).

Other cofinancing 15 billion US-$ IBRD & IDA 5.2 billion US-$ GEF 3.1 billion US-$

Figure 4.17:

Mobilizing public and private funds for the environment: The World Bank Group – GEF Program 1991 – 2006 (from WORLD BANK, 2006c, p. 3)

So, it is not only a matter of quantity regarding development aid, but also an integral question of a definite improvement of the quality of life for the people who especially live in the countryside. 94

4.5 Perspectives of the World Bank’s Future But exactly in this field of action an important weak point of current World Bank projects can be identified: All local partners must be involved in the project’s planning and realization. At the moment, this can’t be realized by an organization like the World Bank, which is specialized in huge investments. Such sensitive tasks must necessarily be executed by aid and development agencies, which are on site and know the ropes. The challenges of the prospective development aid require a great flexibility and a massive internal rethinking inside the World Bank particularly against the background of possible dramatically aggravating environmental problems, whereas mainly the developing countries act like a skid, not the industrial countries: Cf. on this the example of the Narmada Valley reservoir in India, a highly disputed project inside the World Bank, which in 1992 was supported by the receiving countries against the will of the donating countries despite of failed energy forecasts, massive ecological problems and dramatic health problems (malaria) for the abutters resulting from the project (GEORGE/ SABELLI, 1994, pp. 175) und by that gave the devastating signal, that: „… no matter how egregious the situation, no matter how flawed the project, no matter how many policies are violated and no matter how clear the remedies prescribed, the Bank will go forward on its own terms.“, as even the then US-Executive Director of the World Bank put on record (Patrick COADY, 1993, p. 14, quoted in: GEORGE/ SABELLI, 1994, p. 177). When the project was finally stopped due to a strong public pressure, US-$ 950 million, including US-$ 440 million reimbursement to India for the projects’ severance, were senselessly spent (GEORGE/ SABELLI, 1994, p. 176 and p. 179*) – the reader may ponder, how many microloans could have been financed for a business start-up of poor people in the Third World (e.g. 20 million credits of each US-$ 50). The successor to the office of World Bank president, Paul Wolfowitz – who was brought to this office by US president George W. Bush – was considered by critics of the World Bank from the very beginning as an example of spectacular miscasting (Wolfowitz was the deputy US defense secretary under Bush and is considered to be an ultra-conservative representative of free market forces), who was thought to be trying to reverse this policy of an opening and liberalization of the World Bank including the focus on an ecologically sustainable policy on subsidies, started by Wolfensohn (cf. e.g. de THIER, 2005). 95

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On July 1st 2007, Robert ZOELLICK followed prematurely as World Bank president, since Wolfowitz had had to resign after being confronted with accusations of showing favoritism in office (ZIENER, 2007, p. 2) and thereby of seriously damaging the reputation of the World Bank. How far the new World Bank president Zoellick will orientate the work of the World Bank again in the direction of an active policy of fighting poverty which pays more attention to environmental matters remains to be seen. Once again this president also bears the handicap of being thrust into office by the Bush Administration without much consultation with the donor countries. Furthermore he is regarded as a good administrator but is not identified as a developmental aid politician. Jagdish BHAGWATI, the highly renowned economist and long-standing expert for developmental policy, made the statement on ZOELLICK, that ‘If he is a developmental policy expert, then I’m a ballet dancer’ (HANDELSBLATT, 2007, p. 8). Concluding there is the question: Who is the guilty party when present development policy is – rightly – considered to be detrimental rather than beneficial? The World Bank? Or perhaps finally the donors or more precisely: the rulers of the poor? The poor are becoming ever poorer – without the World Bank in every case and with the World Bank probably also – as long as on the one hand the still dominating World Bank culture of a capital-intensive projection of growth doesn’t change, and on the other hand the feudal structures as well as corruption in the Third World cannot be broken up. The extensive allocation of microloans to highly motivated poor people must be seen as an important instrument for the fight against poverty and must be encouraged. This instrument of self-help has to be connected with a strong deregulation of governmental interventions and with the organization of democratic political and especially also liberal social structures, where the idea of sustainable and environmentally compatible management must be strengthened on behalf of forthcoming generations. The mistake of the World Bank is indeed to have recognized this but to consider such a goal to be unachievable neither internal institutional nor external political. Is it achievable? The reader may answer this question by oneself. 96

4.6 Review Questions

4.6

Review Questions

4.1

Which financing institutions does the World Bank Group comprise?

4.2

What is the main difference of World Bank loans compared to those of the IMF?

4.3

What are the tasks of the World Bank (IBRD)?

4.4

Why can the World Bank Group make loans available to many countries on better terms than other lenders?

4.5

What does the IDA distinguish from the IBRD?

4.6

What are the tasks of the IFC?

4.7

What are MIGA and GRIP for?

4.8

Name the most important publications and sources of information of the World Bank Group.

4.9

How must the economical success of the World Bank projects be evaluated?

4.10 What points of criticism can be mentioned to be the main problems of World Bank’s development policy? 4.11 What are the main problems of development, which are responsible for the fact, that World Bank projects often do not improve the situation of the poor? 4.12 What are the main targets of the GRAMEEN Bank and how are they converted to success? 4.13 In how far are microloans a part of World Bank’s development financing? 4.14 In how far is ecology a matter within the fields of operation of the World Bank Group? 4.15 What is the GEF and how is it involved in the activities of the World Bank Group? 4.16 What kind of measures should be taken in the future by the World Bank to fight poverty more effectively?

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5

5 Regional Development Banks

International Development Banks with Regional Field of Operation

The following expositions provide an overview of •

the different Regional Development Banks, as main actors of regional development financing, their

•

targets, responsibilities, structure, and their

•

current policy of lending

within the international development financing. After a general introduction into the goals of Regional Development Banks (Section 5.1) the following banks will be introduced: •

the European Bank of Reconstruction and Development: EBRD (Section 5.2),

•

the Asian Development Bank: ADB (Section 5.3),

•

the Inter-American Development Bank: IADB (Section 5.4), and

•

the African Development Bank: AfDB (Section 5.5).

•

A general critical discussion on the recent political and ethical not sufficiently reflected development financing will close this Part B (Section 5.6).

5.1

Overview: Goals of Regional Development Banks

Regional development banks being existent for Europe, Asia, Latin-America and Africa are ‘self-helping institutions’ with the aim to promote the economic development of the respective regions. Analogously to the function of the World Bank, the regional development banks try to foster economic growth by means of direct financial aids and advisory activity in order to improve financing possibilities and thus to contribute to the economic integration of the countries in the respective operational area. Financing patterns and organizational structure of each development bank correspond to a large extent to those of the World Bank. 98

5.1 Goals of Regional Development Banks

5.2 EBRD

The Board of Governors being the highest organ of each development bank consists of representatives of each member country. A Board of Directors being the executive organ is responsible for general business. The current business is conducted by the president of the respective development bank under the direction of the Board of Directors. The financial structure as well is similar with all banks. Basically, one can differentiate between ‘Ordinary Resources’ and ‘Special Funds’. •

Ordinary Resources are available via credits being raised by the regional development bank on the capital market amounting to a sum which is equal to the own capital resources. Credits being raised from Ordinary Resources are granted according to strict economic success or yield criteria.

•

Special Funds are funds from which particularly ‘soft’ credits, i.e. credits being favorable in terms of interest and terms, are granted primarily to economically weak countries and sectors. As far as special funds are concerned, there can be the danger that a value adjustment will be necessary because of credit failures resulting from risks that are difficult to evaluate.

Therefore the two credit lines are strictly separated from each other in terms of administration and balance in order not to lose the confidence of the international credit markets being the financiers of the regional development banks. For German companies the work of regional development banks is of essential importance because a great part of the provided capital is for the benefit of the German export business. Of an outstanding relevance for the German export business are the credits granted by the EBRD, but also by the IADB, whose credits by more than 4 % finance German exports.

5.2

The European Bank of Reconstruction and Development (EBRD)

The European Bank of Reconstruction and Development (EBRD) was established in 1991 as an answer to the opening of Eastern Europe towards market economy and the very high need of capital for the system transition of those countries in the public and private sector resulting from it. 99

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5.2.1 Establishment and Function of the EBRD The EBRD seeks to help the Central- and Eastern European countries and the CIS countries to meet the very high investment demands by providing favorable infrastructure and investment capital. Because of social and political reasons it seemed important to foster the process of the economic system transition from ponderous, centralized planned-economy structures towards free-enterprise, decentralized decision making and output oriented units. Therefore, at the EU summit at the end of 1989 in Paris, the French president Mitterand proposed the establishment of a European Development Bank for Eastern Europe. In April 1991 the European Bank of Reconstruction and Development, having its seat in London, was finally founded by 39 countries. In early 2007 61 countries, plus the European Union and the European Investment Bank are members of the EBRD: Beside all European and non-European OECD countries including the EU and the EIB as investors all Central- and Eastern European countries are members. Besides Russia, Belarus, Ukraine, Albania, Croatia, Macedonia, Montenegro and Serbia these are also the Eurasian CIS countries Armenia, Azerbaijan, Georgia, Kazakhstan, Kirghizia, Moldova, Tajikistan, Turkmenistan and Uzbekistan, as well as Egypt, Morocco and Mongolia.

Figure 5.1:

Member countries of the EBRD 2007 (dark countries)

With regard to the need of operation by the Western world described above, which means the support of the political and economic transition process in the countries of the former Eastern block and their integration into a competitive trade business, it is the concrete goal of the EBRD: 100

5.2 EBRD •

to support the establishment of the private sector by granting favorable credits,

•

to help mobilize private capital for the countries,

both also by investing into equity capital, i.e. pure capital assets. It is also a function to •

intensively support the establishment of a more powerful private bank sector,

•

to support infrastructural- and ecological measures and

•

to provide technical assistance concerning the preparation, financing and realization of projects in question.

This is reflected particularly within the scope of •

the function to guarantee environmental and reactor safety by supporting projects in the power producing industry,

especially including • extensive nuclear power plant modernization – especially in Chernobyl, as well as • the administration of the Nuclear Safety Account Chernobyl and of the Chernobyl Shelter Fund, which is, for the Ukraine, in no way possible to finance by its own. Precondition for a project to be supported by the EBRD is the fact that it also helps to establish democratic principles, pluralism and that it guarantees the human rights. In addition, the projects have to contribute to the improvement of the environmental situation, which means that the supported projects have to be realized in accordance with certain ecological standards. An essential function of the bank is also to mobilize private investment capital in the target countries. The bank supports project plans of private and public investors not only in a direct way by granting credits for cofinancing but primarily also by providing guarantees (securities and security issues). Altogether, the EBRD, in the very eminent time of reconstruction work of the 90s, was able to mobilize another Euro 2.5 billion coming from other sources per each Euro of own sources: By the end of 1999 out of about Euro 10 billion own investment another Euro 24 billion were generated (cf. EBRD, 2000, p. 10). 101

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The economic purpose of the EBRD lies in the fact, that it is regarded to be a reliable, i.e. safe debtor on the capital markets and therefore can raise credits on the capital market to much more favorable conditions than many private investors in Eastern Europe, especially middle-sized companies. These credits raised by the EBRD can then be passed on to private or public investors, also as low-interest credits. The EBRD’s financial power has two sources: •

Its own capital funds (paid-up ordinary share capital of about Euro 7 billion and not paid-up ordinary share capital of about Euro 13 billion as liability capital), as well as

•

the possibility for a favorable re-financing on the international capital markets.

A further particularity of the EBRD is, that the bank represents a combination of both, a commercial bank and a development bank: in accordance with its statutes, at least 60 % of the projects supported by the bank have to be private projects, whereas public projects shall not exceed 40 % (in 1995 the support of the private sector amounted to 62.5 %, in 2000 to 70 % and in 2005 it was 76 %).

Private Sector’s share of Total EBRD Lending 100% 80% 60%

Public sector

40%

Private sector

20% 0% 1995

Figure 5.2:

102

2000

2005

Private sector’s share of total EBRD lending

5.2 EBRD In accordance with its statutes, the EBRD in carrying out its functions, works in close co-operation with other international organizations, such as the International Monetary Fund (IMF), the World Bank, its subsidiary the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the European Investment Bank and the OECD. With other regional banks, too, a cooperation is principally welcome: But in this case, only a co-operation with the Asian Development Bank (cf. Section 5.3) makes sense, because many countries are member of the EBRD and also of the ADB; an example of this cooperation is a great railway project being cofinanced in Uzbekistan in 1999 by EBRD and ADB.

5.2.2 Institutional Structure of the Bank The Board of Governors is the highest managing organ, in which each member country is represented. The Board of Governors has the power to take decisions with two thirds of the votes of its members. The Board of Directors is responsible for the conduction of the general operations, in particular for the establishment of policies. It is composed of 23 members, representing each one big or some small countries. The European Union consequently determines the business policy of the EBRD. In close cooperation with the Board of Governors, the Board of Directors takes decisions concerning loans, guarantees, investment into equity capital, borrowings by the bank and technical assistance. The president of the EBRD is elected for four years by vote of majority of the total number of governors and the majority of the total voting power of the members. The president may be re-elected. He is the legal representative of the bank and conducts, under the direction of the Board of Directors, the current business of the bank. With 10 % the USA holds the biggest single share. France, Germany, Great Britain, Italy, and Japan with each of them holding more than 8 % of the share capital are the next important shareholders. The Bank’s statute determines that with every new country that is admitted to membership it must be ensured that the member countries of the European Union together with the EU as institution and the European Investment Bank always hold the absolute majority of the capital shares: As of May 2007 the EU member countries (56 %) together with EU as institution (3 %) and the EIB (3 %) subscribe to shares of 62 % of the initial capital stock, whereof the donor-EU-countries owe 50.55 %. 103

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This illustrates that the EBRD, in contrast to the IMF or the World Bank, is a European institution. The receiving countries of the bank (29 as of Mai 2007) in Central- and Eastern Europe – being the potential debtors – altogether hold less than 15 % of the shares; thereof the share of the non-EU receiving countries is less than 10 %. Therefore they actually have no real influence on the bank’s business policy which is primarily conducted by the European Union.

Shareholders of the EBRD

Other countries Receiving non-EU-countries USA EU-countries EU as institution EIB

Figure 5.3:

Shareholders of the EBRD countries and country-groups

5.2.3 On the General Significance of the EBRD for the Development of Eastern European Countries and the CIS By the end of 1999 projects covering a sum of altogether Euro 10.8 billion have been signed, of which about Euro 7 billion have been disbursed (EBRD 2000, p. 10). The practical meaning of the EBRD for the economic development of the Eastern European countries, especially in times of economic awakening didn’t come up and isn’t coming up nearly to the expectations it had placed. Especially compared to the long existing European Investment Bank (EIB) which has the aim to grant long-term loans for European investment projects, the EBRD has significantly fell short of the expectation as an investment support for the transition countries. 104

5.2 EBRD The EIB is granting loans at a total amount of Euro 40 billion a year. From 1994 to 1996 a sum of about Euro 3 billion, with an upward trend, had been provided by EIB for the countries of Central- and Eastern Europe, being the target countries of the EBRD; in the year 2000 it was a sum of over 3 bn. Euro, in the years 2001 – 2006 again Euro 28.3 billion have been disbursed (cf. [www EIB 05/2007a, b]. This is a capacity that the EBRD is not able to provide. E.g. the two large-scale projects concerning the airport in Tallinn and the Estonian railway projects have been realized via co-financing with the EIB. Also the direct private sector investments into the target countries of the EBRD have extremely increased from US-$ 4 to 17 billion, so that the relative meaning of the EBRD isn’t as significant for the development of Middle- and Eastern Europe as it has been expected in 1991 when the bank was established. This is a result also of the construction deficit of the bank, that on the one hand works with the political purpose to support the Eastern European countries on their way to a market-oriented economy, but on the other hand, in accordance with the bank’s statute, has to grant credits with the care usual for business banks, so that especially high risk company-founding or jointventure projects rarely can be supported. Another point of criticism concerning the EBRD is that it works very profitoriented and thus offers its financial aids only just below the usual market conditions of private business banks. Other business banks or international financial institutions are often able to offer financings for attractive private projects to the same conditions. On the one hand, this raises the question, whether the respective investments would have been also realized without the EBRD, on the other hand, whether the EBRD, by granting subsidized credits, not even hinders a further development of a private banking system. But one has to emphasize, that this point of criticism applies only to the already more developed countries: for countries of the economic periphery, such as the Eurasian CIS-countries, but also Bulgaria and Romania which still don’t have a suitable financial infrastructure and a modern bank system yet, the EBRD is indispensable. To the Eastern European accession states to the EU it seems that the importance of the EBRD is more and more declining. A revision of the support conception and a more intensive co-operation with the EIB would therefore be helpful. 105

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One last point of criticism is the minor importance of the EBRD’s capital that is directed to the small- and medium-sized companies (SMC). No essential changes could be made in 1993 when the EBRD co-financed 50 % of a Euro 300 million fund for the support of small- and medium-sized companies. Something that is more helpful than the direct investment aids for the SMC are the networks offered by the EBRD and the contact addresses for the investment management and financing in the Central- and Eastern European countries which interested companies can call up at any time via internet under www.ebrd.org., as e.g. the contact and financing guideline of the EBRD for the SMC in central and Eastern Europe. The so-called micro and small loans provided by the EBRD can be judged positively in the range of supporting SMCs: With micro loans between US-$ 100 and US-$ 20,000, investment credits are available also for small-sized companies over a period of 9 to 12 months, which then, in a case of a successful transaction, can be increased to small loans amounting to a sum of US-$125,000.

5.2.4 Overview of the EBRD’s Financings

Commitments and Disbursements of EBRD 2001 – 2005

bn. €

5 4,5 4

3,7

3,9

3,7

2,5

4,3

3,4

3,5 3

4,1

2,4

2,4

EBRD Commitments 2,2

Disbursements

2,1

2 1,5 1 0,5 0 2001

Figure 5.4:

106

2002

2003

2004

2005

EBRD investment commitments and disbursements of the years 2001 to 2005 in billion US-$ (cf. EBRD, 2006, p. 2)

5.2 EBRD In the year 2005 the EBRD financed 151 projects by commitments of 4.3 bn. Euro. The disbursements of EBRD loans however fell from Euro 3.4 bn. in 2004 down to Euro 2.2 bn. in 2005 (as shown in Figure 5.4). Until now, the EBRD with its financial aids has focused primarily on the sector of real as well as financial infrastructure. Apart from the real-economic financial aids for infrastructure provided in the fields of energy (power and electricity supply including the increase of efficiency), transport and traffic, as well as of local- and environmental infrastructure, a clear priority is set on the establishment of a financial infrastructure by intensively supporting the establishment of a more efficient bank system. So 32 % of the total EBRD lending is for financial investments. Figure 5.5 in the left circular chart gives an overview of the sector-specific distribution of EBRD’s total investments and shows in the right diagram the distribution of the financial investments, whereof 55 % of this investment is for bank debt. Commitments of EBRD by Sector 2005 Property and tourism 4 % Agribusiness 11 %

Telecoms, informatics and media 3 %

Bank debt 18 %

Production 9 %

Equity funds 7% Financial institutions 32 %

Power and energy 12 %

Non-bank financial institutions 5 %

Natural resources 5% Energy efficiency 0,2 %

Figure 5.5:

Transport 16 %

Municipal infrastructure 7 %

Bankequity 2%

Micro- and small business 1 %

EBRD’s total commitments by sector – real and financial sector, 2005 (Data from EBRD, 2006, p. 3, own calculations)

Euro 199 million of the in 2005 total Euro 796.7 mill. in the right diagram shown bank debt in was targeted for small- and medium enterprises.

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A special program elaborated more recently in connection with this is the ‘New trade facilitation programme for banks in Central- and Eastern Europe and the CIS’, with which the EBRD seeks to facilitate trade integration primarily by: •

giving guarantees which are issued by the bank in order to support trade instruments,

•

facilitating direct financings of regional banks which facilitate export by offering advance payments and

•

facilitating direct financings of selected private large-scale enterprises by offering export financings and/or working capital loans (cf. [www EBRD 01/2001]).

In following this program, the EBRD extends its covering for letters of credits and standby letters of credit, advance payments guarantees, other types of payment guarantees, bills of exchange and promissory notes from issuing banks up to 100 % of the nominal value of the underlying trade finance instruments. Figure 5.6 concluding gives an overview on the distribution of EBRD financial resources by region.

EBRD Lending by Region 5%

15%

25%

25% 28%

Southeast Europe

30% 26%

Russia 14%

Western CIS and Caucasus Central-Europe and the Baltic States Central Asia

16%

108

2004 22% 23%

8% 8% 10%

Figure 5.6:

35%

20%

30%

EBRD lending by region (from EBRD, 2006, p. 2)

2005

5.2 EBRD Following its new strategy of shifting its financial support furtheron to the South and the East, about 58 % of the EBRD lending volume in 2005 was invested in development projects of the transformation countries of Southeast Europe, the Caucasus, Central Asia and the Western CIS of the former Soviet Union. As expected, the greatest share of the EBRD’s financing capital goes to Russia. But when evaluating the capital flowing into the Central-, East-, and South-east European countries, one has to consider, that – as mentioned in Section 5.2.3 – also the European Investment Bank (EIB supports primarily the potential Central- and Eastern European candidates being admitted to membership in the European Union with investment aids of about Euro 3 billion per year: From 1993 to the end of 2006, this amounts to more than Euro 50 billion, a sum that exceeds the total financing volume of the EBRD by far. This proves that the EBRD plays an important, but not a central role for the economic transition process. The EBRD is therefore a more important factor for those Eastern European countries that don’t have the perspective of joining the EU in the foreseeable or long-term future, because these countries don’t get the benefit of the high financial aids granted by the EIB, which explains the high effort the EBRD is doing in Russia, which is intensively supported also by the World Bank and the IMF in terms of liquidity (IMF) and investments (IBRD). However, the EBRD supports to a lower extent – together with the EIB – also the regional policy of the European Union within the scope of the EU financial-aid program JASPERS (see also Section 8.8.4). But in this case the question arises, whether it would be more sensible to focus the means and the competence of the EBRD solely on the furtherance of the non-EU Eastern European states and the Central Asian CIS countries.

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5.3

5 Regional Development Banks

Asian Development Bank (ADB)

The Asian Development Bank (ADB) was established in December 1965 by 31 countries with the aim to support the economic development in Asia by means of favorable financial aids. Germany is one of the foundation members of the ADB. The bank is seated in Manila (Philippines); end of 2006, the ADB had more than 2,000 employees coming from 53 countries.

5.3.1 Institutional Structure and Function of the ADB At the beginning of 2007, members of ADB are 67 countries including 44 developing countries. With 48 regional countries these are all Asian countries east of Turkey except North Korea: Japan and all Southeast Asian countries, the Islamic successor countries of the Soviet Union (being members of the ADB and the EBRD), Afghanistan, China, India, Japan, Korea, Pakistan, Taiwan, the insular states of the Pacific Ocean as well as Australia and New Zealand. The 19 non-regional members are 16 Western European countries: Austria, the 3 BeNeLux countries, France, Germany, Great Britain, Ireland, Italy, all 4 countries of Scandinavia, Portugal, Spain, Switzerland; USA, Canada and Turkey complete to 19 (cf. [www ADB 05/2007]). The votes are distributed among the 48 regional member countries with nearly 64.85 %; Japan as the most important regional investor with some 15.6% of the authorized capital has about 12.8 % of the votes; China, India, Australia, Indonesia and South Korea have 6.46 – 5.04 % of the authorized capital thus, they have 5.46 – 4.33 % of the votes. The 19 non-regional member countries of the ADB have a vote of slightly over 35.15 %, the lion’s share goes to the USA with 12.8 % and to Canada and Germany with about 4.49 and 3.76 %. According to its foundation charter, the ADB is authorized to establish several funds, so that it can directly meet certain development demands. The first and thus oldest fund directed by the ADB is •

110

the Asian Development Fund (ADF) being a fiduciary development fund which shall support primarily the poorest member countries of the ADB. This fund is the biggest fund of the ADB and is regularly

5.3 ADB equipped with new capital of the member countries. At present – 2007 – the IXth ADF finance program for the years 2005 – 2008 is realized; ADF VIII has covered the years 2001-2004 (cf. for more detail coming Section 5.3.2.2). The Asian Development Bank is directing some other funds aimed at a sector-specific and regional support, being presented in more detail in Section 5.3.2. There is •

a Technical Assistance Special Fund, having the task to help finance administrative and technical assistance projects for the benefit of the developing countries within the ADB,

•

the Japan Special Fund established in 1988 to support the structural adjustment of regional developing countries, primarily projects are financed that provide technical and administrative assistance and advice,

•

the Japan Fund for Poverty Reduction aimed at financing programs of the ADB’s new priority of an active poverty reduction,

•

the Asian Tsunami Fund having the task to help regions affected by the Tsunami at the Indian Ocean in 2004,

•

the Pakistan Earthquake Fund targeted to support regions of NorthPakistan and the neighboring regions, that are affected by the earthquake on October 8th 2004.

•

Furthermore since 1997 there is ADB Institute (ADBI) having been established by the ADB and the Japanese government to provide the necessary political and theoretical knowledge and information concerning development. Central goals of the Asian Development Bank are: -

elaboration of development strategies concerning the long-termoriented development of the region and definition of social and economic conditions being necessary for this,

-

establishment of management capacities and providing advice to institutions of developing countries being member of the ADB,

-

establishing a modern digital telecommunication which is regarded as the essential key for poverty reduction via modernization and education of the society, and finally 111

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5 Regional Development Banks a coordinated reform of the national capital markets in order to catch up with the international financial markets.

Since 2003 the focus on achieving these objectives of the ADBI has been locating on supporting research, the mediation of abilities to develop poor countries, and in the knowledge management. Especially knowledge management has been becoming one of the principle tasks of the ADBI, since they confessed to an organization of ‘Knowledge Management Framework’ in 2004, whose primary aim is the creation and use of knowledge. In 2004, the ADBI set out in writing these aims through its official statute to improve the support of the ADB and their member countries. •

As a consequence and as the answer to the South-East Asian currency crisis of 1997/1998 another institution – the ‘Asia Recovery Information Centre’ (ARIC) – was established on March 5th 1999 at the ADB meeting in Sydney on the proposal of Australia. The special function of this institution is to collect and to work off information concerning the analysis and the combat of the currency crisis. The ADB has financed this information agency to a great extent within a technical assistance project of the ADB which was established for this purpose and with the considerable financial support of the ‘Australian Agency for International Development’ (AusAID). Founding members of the ARIC have been the five countries that were hit most by the South-East Asian currency crisis of 1997/98: Indonesia, Korea, Malaysia, Philippines and Thailand. However, the currency crisis was almost negotiated in 2001 and in the meantime, the ARIC established itself as an important institution for gaining information of economic trends for Asia, and as an early warning system for threats in the financial sector as well as an adviser of structural reforms and political issues. Because of the high demand of information in the public and private sector, the ARIC broadened its proposal and was renamed to ‘Asia Regional Information Centre’ (also ARIC) by May 5th 2004. The information provided can also be accessed via their very comprehensive website (cf. [www ARIC]).

112

5.3 ADB Current members (2007) of ARIC besides the above mentioned five foundation members are 11 more countries: Bangladesh, Brunei, Cambodia, China, Laos, Myanmar, India, Pakistan, Singapore, Sri Lanka, Vietnam (cf. [www ARIC 05/2007]. The ADB sees its primary function in the support of the economic development of is member countries by consideration of social aspects. Apart from the development financing, a central task of the bank is a wide-ranged information supply and information processing. The ADB offers a range of statistical publications, such as surveys on the current account balances of the receiving countries, environmental analysis’s, etc.. Because of their development, in most Asian member countries, the traditional, purely industry-oriented development support recedes more and more into the background. That’s why the ADB has defined the following new aims: •

active labor market policy meaning an employment expansion by means of qualification support,

•

decentralization of social security in order to reduce the country’s expenses,

•

support of the private sector in order to generate jobs, to reduce the public sector share and to reduce poverty,

•

urban poverty reduction,

•

establishment of new so-called pro-active social networks, which, based on public and private responsibility, shall actively prevent poverty and misery or the formation of slums: In 1999, an Agenda for ‘new social policy and poverty reduction’ has been passed.

•

The support of a ‘sustainable economic growth’ as the necessity to persistently use the economic resources; the main focus of the ADB’s support policy is put on the reduction of air-, water- and soil pollution as well as the commitment for the Kyoto protocol as far as the reduction of carbon dioxide emissions is concerned.

The so-called framework of long-term strategies that was determined by the ADB in 2001 especially supports these aims. The targets mentioned above shall lead to a region without poverty until 2015. 113

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Since it is almost impossible to plan such aims within a timeframe of 14 years, also intermediate strategies as milestones have been determined. Currently on stage there is the medium-term strategy for the years 2006 to 2008. The focus of this strategy lies in the core fields •

transportation,

•

energy,

•

urban- and rural infrastructure,

•

as well as education and finances.

The special importance of the ADB’s environmental responsibility becomes evident by the fact that, for projects supported by the ADB, an ‘Environmental Impact Assessment’ (EIA) is required by their ‘Committee on Environmental and Social Impact’ (CESI) from the project-financing institutions in order to evaluate the ecological and social consequences of the respective programs. Taking this as a basis, the ADB draws up an ‘Environmental and Social Impact Report’ (ESIR). These studies are published in the internet by the ‘Public Information Center’ (PIC) and via publications from 26 national offices currently existing (2007), which means that the ADB conducts an open and transparent credit policy. A main focus in the work of the ADB are the poverty reduction programs already mentioned above. The technical assistance of the ADB also consists in drawing up several statistical surveys in order to improve the recording and the assimilation of statistical data, such as information about •

increase in population,

•

age structure,

•

urbanization,

•

employment rates according to gender and branches,

•

health and nutrition indicators,

•

income distribution and distribution of wealth.

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5.3 ADB

5.3.2 Overview on the Development Financing of the Asian Development Bank and its Special Funds At present, the ADB classifies its target countries into four groups of payment receiving countries, whereas the classification of each single country depends on its stage of development. Group A comprises the poorest countries which exclusively receive highly subsidized supports from the ADF. By end of 2006, the following countries belonged to this group: Afghanistan, Bhutan, Laos, Cambodia, Kyrgyzstan, Kiribati, Maldives, Mongolia, Myanmar, Nepal, Samoa, Solomon Islands, Tajikistan, Timor-Leste, Tuvalu and Vanuatu. Group B1 is mainly supported by ADF-capital and to a small extend by the regular OCR-capital of the ADB. End of 2006 this group consists of the following countries: Armenia, Azerbaijan, Bangladesh, Cook-Islands, Marshall-Islands, Micronesia, Pakistan, Sri Lanka, Tonga and Vietnam. Group B2 mainly receives OCR-capital and, for certain projects, also money coming from funds. By end of 2006 China, India, Indonesia, Nauru, Palau, Papua New Guinea and Uzbekistan belong to this group. All other countries of the ADB belong to group C, which exclusively receive OCR-capital and payments from special funds and only in rare cases of precisely defined, exceptional projects receive highly subsidized ADFcapital, in 2006 the Fiji Islands, Kazakhstan, Malaysia, Philippines, Thailand and Turkmenistan belong to this group. Georgia as the newest member state (admittance 2007) probably will be Group B2.

5.3.2.1

Development Financing by the Asian Development Bank

The Asian Development Bank itself grants credits coming from its ordinary capital resources, e.g. the OCR-capital aimed at supporting the economy of its member countries. By December 31st 2005, the accumulated credits receivable amounted to about to US-$ 24.45 billion with maximum own resources of US-$ 50.2 billion, which is covered by authorized capital (cf. [www ADB 10/2006e]). By December 31st 2005, the total lending of ADB without its funds amounts to US-$ 65 billion (cf. [www ADB 10/2006c]). 115

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Figure 5.7 shows ADB country lending in the years 2004 and 2005.

2004 Other DMCs 325 Regional 18

Nepal 110 Sri Lanka 195

China 1,260

Afghanistan 205 Indonesia 225 Bangladesh 250 Vietnam 296

Philippines 446

India 1,254 Pakistan 709

2005 Uzbekistan 70

Other DMCs 245 Regional 2

Afghanistan 135 Vietnam 180

India 1,500

Philippines 253 Indonesia 440

Sri Lanka 475

China 1,146

Bangladesh 578

Pakistan 776

Figure 5.7:

116

ADB lending by countries, 2004 and 2005 in mill. US-$ (Data from [www ADB 10/2006a])

5.3 ADB Figure 5.8 gives an overview of the distribution of ABD lending by sectors in comparison of 2004 and 2005.

Health, Nutrition, Social Protection 5%

ADB Approvals by Sector 2004 in % Multisector Loans 12%

Transport and Communication 38%

Finance 6% Law, Economic Management, Public Policy 11% Education 5% Water Supply, Energy 14% Sanitation, Agriculture and Industry and WastemanageNatural Resources Trade 3% ment 0,6% 4%

ADB Approvals by Sector 2005 in % Health, Nutrition, Social Protection 1%

Multisector Loans 15%

Transport and Communication 30%

Finance 5% Education 1% Law, Economic Management, Public Policy 13%

Figure 5.8:

Water Supply, Sanitation, Wastemanagement 11%

Agriculture and Natural Resources 5% Energy 19% Industry and Trade 0,4%

ADB lending by sectors 2005 (data from [www ADB 10/2006a], p. 26)

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As one can denote from Figure 5.8, there is a considerable increase of deployed capital in sectors of water supply and sanitation from 2004 to 2005. The reason for that is the campaign ‘Water for all’ of the ADB. Further realized projects of the financial aids are primary the set up of new social infrastructure and the building of infrastructure in terms of traffic and IT. Other projects of importance are the increase of efficiency in agriculture as well as the creation of industrial productivity respectively employment possibilities. Another important activity realized by the ADB is cofinancing with private investors. The co-financings made it possible to finance 692 projects, amounting US-$ 49.5 billion between 1970 and 2005. Total Cofinancing by Supported Countries 2001 - 2005 Other 6%

Sri Lanka Pakistan 3% 3%

Philippines 4% Bangladesh 5% India 6% Laos 6%

China 38%

Vietnam 8% Indonesia 21%

Figure 5.9:

Total co-financings along recipient countries 2001 – 2005 in % of the total volume of US-$ 49.5 billion (data from [www ADB 10/2006d])

Since its foundation, the ADB realized altogether over 1.500 projects in 34 member countries with credits amounting to more than US-$ 65 billion. The ADB’s most important borrowers in a cumulated view (by end of 2005, cf. ASIAN DEVELOPMENT BANK, 2006, p. 130) are: • 118

Indonesia (US-$ 20.7 billion)

5.3 ADB •

China (approximately US-$ 16.4 billion),

•

Pakistan (US-$ 15.4 billion), and

•

India (nearly US-$ 14.9 billion).

The increasing efforts of the USA to stabilize the region and especially Afghanistan and Pakistan as a consequence of the terror acts of 09/11 in 2001 and the war against the Taliban in Afghanistan, result in an obvious supposition that the ADB and its capital – provided primarily by the USA and Japan – is of gaining importance in the future: A permanent fight against terrorism in South-east Asia is possible and useful only with the help of an enormous financial transfer aimed at poverty reducing and at establishing efficient social networks and enduring employment facilities also in the industrial sector. Therefore the ADB will further consolidate its already leading position among the regional development banks, as it did in the last years.

5.3.2.2

Asian Development Fund (ADF)

The Asian Development Fund (ADF) as a fiduciary development fund has the special function to support member countries of the ADB which have a comparatively small income per capita and/or that are highly indebted. The ADF therefore offers extremely favorable financings that usually run over a period of 24 years with 8 redemption-free years, the so-called free years. The development credits have an interest rate of 1 % during the free years and 1.5 % during redemption period, so that credits granted by the ADF bear a rather symbolic interest. Considering this, the ADB – different for example to the EBRD – is a real development bank having a development aid character. At the end of 2005 the total financing potential of this development fund so far amounted to approximately US-$ 24.4 billion. Up to now nine financial programs of ADF had been installed, the IXth program runs from 2005 to 2008. Figure 5.10 shows the distribution of ADF-VIII lending 2001 – 2004 by focus in % of its total disbursements of US-$ 5.6 bn., Figure 5.11 gives an overview on the distribution by country.

119

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5 Regional Development Banks ADF-VIII - Lending by Focus 2001 - 2004

Environmental Private Sector Good Governance Protection Development 5% 3% 1% Human Development 13% Regional Development 1%

Economic Growth 27%

Multitheme Projects 46%

Figure 5.10:

Gender and Social Development 4%

ADF-VIII lending by focus, 2001 – 2004 in % (cf. [www ADF 10/2006], p. 11)

Figure 3. ADF VIII Lending by DMCs, ADF-VIII Lending by DMCs, 20012001-2004 – 2004 1,200 1,000

$ Million

800 600 400 200

Pa ki Vi sta e n Ba t N ng am la Sr des iL h Af gh ank an a In ista do n ne si N a C ep am a b l La odi o a Ky T PD rg ajik R yz is R tan ep M ubli on c Pa go pu a Re lia N gi ew on G al u M ine al a di v B es Az hut er an ba M ija ar n sh al FS lI M sl an Sa ds m o To a ng C Ki a oo rib k a Is ti la nd Tu s va lu

0

Figure 5.11:

120

ADF-VIII lending to developing member countries (DMC) 2001 – 2004 (from [www ADF 10/2006], p. 38)

5.3 ADB By end of 2005, within the scope of the IXth Additional Financial Equipment of the Asian Development Fund, further new capital amounting to a sum US-$ 7 billion could be provided by the then 30 donating countries of the ADF (primarily the USA, Japan, Canada, France and Germany) for the years 2005 – 2008. 27 countries are supported by the ADF by end of 2006. Figure 5.12 gives an overview of the distribution of these ADF-IX lending to the supported countries. ADF-IX Lending by DMCs 2005 - 2008 Tuvalu Cook Islands Solomon Vanuatu Tonga Kiribati Micronesia Marshall Islands Maldives Samoa Timor-Leste Bhutan Papua New Azerbaijan Kyrgyzia Tadjikistan Mongolia Lao Cambodia Indonesia Nepal Sri Lanka Afghanistan Pakistan Bangladesh Vietnam

4 6 8 11 15 18 19 21 25 29 30 39 60 92 126 140 143 167 358 400 457 576 800 963 963 978

0

Figure 5.12:

300

600

900

ADF-IX lending to developing member countries (DMCs) 2005 – 2008 in mill. US-$ (Data from ASIAN DEVELOPMENT BANK, 2004, p. 33; or [www ADF 05/2007], p. 33)

The term ‘Multitheme’ within the above Figures comprises more than just one sector of financing (e.g. Good Governance and Economic Growth). By supporting particular, coherent sectors it is the aim to fight more than one reason of poverty at the same time. Projects belonging to the sector ‘economic growth’ support the typical investments aimed at creating production capacities or rationalization respectively efficiency increase in general. ‘Social projects’ (Human Development) comprise investments concerning poverty reduction, education, birth control and women’s issues in general. 121

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The sector ‘environment’ (environmental protection) comprises projects concerning the support of sustainable development, e.g. projects aimed at supporting the responsible use of natural resources and the environment. Figure 5.10 clearly shows that the ADF uses the ADB’s strategy which consists in not conducting a purely growth-oriented policy of capacityand efficiency increase but in realizing projects that combine both economic and social development considering ecological aspects. By now, with 27 %, less than one third of the ADB’s total financial support is used for traditional projects in purely output-oriented development financing. Also the implementation of the multitheme projects, which were only a small part of the ADF-VII and ADF-VIII programs, is playing a more and more important role in terms of fighting against poverty at its origin. This is a realization of a ‘Poverty Reduction Strategy’, the World Bank for example still is light years far away from (cf. Section 4.4). Therefore, the financial support of the ADB can be considered as a development financing, that meets the modern demands of a future-compliant development aid.

5.3.2.3

The Technical Assistance Special Fund (TASF)

By December 31st 2005 this fund with which the ADB provides technical assistance for the member countries had nearly US-$ 1.257 billion at its disposal, out of which approximately US-$ 1.042 bn. have already been granted. By June 30th 2006 overall 88 projects have been supported amounting US-$ 92.4 million, whereof US-$ 35.6 million derived from the TASF (cf. ADB, 2006, p. 23]. The Technical Assistance Special Fund is supplied by the ADF-IX program as well as by voluntary payments of the member countries. Japan, the USA, Canada, France, Australia and Germany exclusively made these voluntary payments. In 2005, the TASF was providing US-$ 198.7 million for overall 299 projects in technical assistance. The TASF share of the total financings in terms of technical support is amounting to US-$ 78 million, that is some 39.2 %. Figure 5.13 gives an overview of the sector-specific distribution of technical assistance and Figure 5.14 shows the distribution of technical aid among the supported countries in 2005. 122

5.3 ADB TASF - Sectoral Distribution of Technical Assistance 2005 Multisector Loans 36.1%

Health, Nutrition, and Social Protection 6% Finance 13.2%

Transport and Communication Industry and 21.1% Trade 3.1%

Education 11.8% Water Supply, Sanitation, Wastemanagement 5.5% Figure 5.13:

Energy 15.1%

Law, Economic Management, and Public Policy 36.3%

Agriculture and Natural Resources 50.7%

Sector-specific distribution of technical assistance, 2005, in mill. US-$ (data from [www ADB 10/2006f])

TASF - Approved Technical Assistance by Supported Countries 2005 in mill. US-$ Afghanistan 8.5

Other Countries 34.2

Pakistan 15.2 India 6.3

Tajikistan 4.0 Bangladesh 7.5 Indonesia 10.3

Figure 5.14:

China 18.3

Vietnam 12.3

Philippines 4.6 Cambodia 7.6

Approved technical assistance per country, 2005, in mill. US-$ (data from [www ADB 10/2006g])

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5.3.2.4

Japan Special Fund (JSF)

This special fund for the financing of technical assistance was initiated 1988 and financed by Japan as a special fund of the ADB aimed at adjusting the structure of regional developing countries. In 1988, with a special contract, Japan provided approximately US-$ 609 million for participations, e.g. the (co-) financing of technical assistance projects, primarily in the private sector. At the end of 2005, the fund had US-$ 904.2 million at its disposal, whereof US-$ 126.4 million were not bound to projects, yet (cf. ADB, 2006, p. 23).

JSP - Approvals by Sector 2005 in mill. US-$

Health, Nutrition, and Social Industry and Protection 0.7 Law, Economic Trade 1.0 Management, and Public Policy 3.0

Transport and Communications 6.8

Education 2.0 Water Supply, Sanitation, Wastemanagement 2.4 Energy 2.8 Multisector Loans 0.5

Figure 5.15:

124

Finance 5.9 Agriculture and Natural Resources 3.3

Japan Special Fund approvals by sector, 2005 in mill. US-$

5.3 ADB

5.3.2.5

Japan Fund for poverty reduction (JFPR)

The primary aim of this special fund established by Japan in 2000 is to finance measures for an active regional poverty reduction. For instance, it finances projects having the aim to support public employment of poorer population groups as well as to give assistance in financial crisis. In 2005, 19 projects amounting to US-$ 28.41 million and until the end of September 2006, 13 more projects of a total volume of US-$ 45.37 mill. were supported by this fund. At the end of 2005, the fund was equipped with about US-$ 360 mill. out of which, however, US-$ 149 million were not bound, yet.

5.3.2.6

Asian Tsunami Fund (ATF)

The only aim of this fund established in February 2005 is to support, as fast as possible, the victims of the Tsunami that occurred on December 26th 2004. Thus, financing should support the medium-term rehabilitation of the affected regions. The recipients of this fund were Indonesia, India, the Maldives, Sri Lanka and Thailand. The initial payments of US-$ 312 million by the ADB were increased to US-$ 600 million, shortly afterwards. Further capital was paid in by Australia (US-$ 3.7 million) and Luxembourg (US-$ 1 mill.). Originally, the fund had a time limit of 18 months for proposals that was shortened to 12 months. The fund was closed for further pay offs in December 2005.

5.3.2.7

Pakistan Earthquake Fund (PEF)

The Pakistan Earthquake Fund was established because of the devastating damages caused by the earthquake in the northern parts of Pakistan as well as the closeby countries Afghanistan and India on October 8th 2005. Out of this reason, the ADB along with some of its members decided to establish a reconstruction fund. It shall ensure through investment projects and technical support a faster rehabilitation of the affected regions. 125

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This fund supports also the Earthquake Emergency Assistance Project (EEAP) along with the ADB. The initial financial strength was US-$ 80 million and was increased by another US-$ 83 million until end of September 2006.

5.3.3 Microloans of ADB The idea of the allocation of microloans that is known by the Grameen Bank among others (cf. Section 4.4.2) has been convincing in terms of development aid and the affiliated fight against poverty. Based on this example, in the middle of 2000 the ADB passed a strategy for micro financing which makes it possible for some 180 million households in this region to get a better access to financial services. Figure 5.16 shows the distribution of financial allocations for microloan use among countries.

Distribution of ADB - Microloans by Countries in %, June 2006 Nepal 4.8% Indonesia 5.3%

Lao 0.2% Pakistan 27.1%

Sri Lanka 10.5 Mongolia 1.3% Bangladesh 8.5%

Tajikistan 1.2%

Uzbekistan 3% Vietnam 7.1% Kyrgyz Republic 1.7%

Figure 5.16:

Philippines 27.2%

Distribution of microloans to ADB member countries

At the end of June 2006 the total ADB expenditure on microloans amounted to US-$ 670.21 million. 126

5.3 ADB The scope of these financial services are not only the allocation of microloans (normally, a maximum of US-$ 200 is granted) but also insurance services, bank transfers as well as leasing services. The allocation of microloans are carried out by so-called Microfinance Institutions (MFI’s) as for example besides the GRAMEEN Bank as described in Section 4.4.3 also ACCION International, FINCA, the FONDEP, or the Aga Khan Microfinance Agency. These creditors offer their loans granted to set up a business to their potential debtors directly and collect the holdback- and interest payments due isochronously. Basically the function of the ADB hereby is to build up a framework in terms of microloans, an infrastructure for financial services and viable MIFs.

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Inter-American Development Bank (IADB)

The Inter-American Development Bank (IADB, also known as IDB) seated in Washington, DC, is the oldest and biggest multilateral Regional Development Bank. It is responsible for the regional development financing in Latin America. Additionally also responsible for the Carribean area is the Caribbean Development Bank (CDB), which in the following however will not be discussed explicitly (2005 approvals are nearly US-$ 1.4 billion, cf. [www CDB 05/2007], p. 63). Another Regional Development Bank especially for the support of the Anden region is the Andean-Development Corporation (CAF), but in this context being only mentioned.

5.4.1 Institutional Structure and Function of the IADB The Inter-American Development Bank was established in December 1959 by 19 countries of Latin America and the USA with the aim to foster the economic development in Latin America and the Caribbean region by means of favorable financial aids. The Caribbean Development Bank (CDB) pursues the same aims of economic development in the Caribbean region. Germany has been member of both regional development banks: since 1976 it is member of the IADB and since 1985 of the CDB. Early 2007 47 countries belonged to the IADB: •

26 Latin American countries (all but Cuba),

•

USA, Canada

•

16 European countries (Austria, Belgium, Croatia, Denmark, Germany, Great Britain, Finland, France, Italy, the Netherlands, Norway, Portugal, Slovenia, Spain, Sweden, and Switzerland),

•

Japan, Korea

•

and Israel.

IADB’s own capital amounts to more than US-$ 10 bn., consisting of: •

4.3 % paid in capital by the member states,

•

95.7 % callable capital, guaranteed for by the governments of the member countries.

128

5.4 IADB In order to permanently maintain the regional character of the IADB, each member’s voting rights were determined independently from the capital: • Regional (supported) countries of Latin America: at least 50 %,

their voting power being distributed to the biggest shareholders − Brazil and Argentina each 10.75 %, − Mexico 6.91 % and − Venezuela 5.76 %; • USA: minimum of 30 %; • Canada: 4 %.

The last 16 % of the remaining votes are for the other donating industrialized countries; Japan signs for about 5 % and Germany for nearly 1.9 % of the voting power (cf. INTER-AMERICAN DEVELOPMENT BANK, 2007).

Voting Power within the IADB USA > 30 %

Canada 4% Borrowing countries > 50 %

Figure 5.17:

Japan 5%

Europe and Israel 11 %

Distribution of the member states’ voting power of IADB

Besides the main budget with the official OCR-capital, the IADB additionally operates with a ‘Fund for Special Operations’ (FSO), that – mostly in the area of social projects – primarily supports the poor member countries; the terms of such low-interest FSO-loans is up to 40 years; the repayment begins after 10 years. To this fund member states have submitted about US-$ 10 bn. meanwhile. In 2006 total lending was of about US-$ 215 mill., distributed to 8 countries, the main figures were US-$ 70 mill. to Nicaragua, US-$ 50 mill for Haiti, more than US-$ 30 mill. for each Guyana as well as Bolivia, and US-$ 22 Mio. to Honduras (cf. [www IADB 03/2007b]). 129

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In the past another special fund existed, the ‘Venezuelan Trust Fund’, which was funded by capital from the oil-exporting Venezuela. However, this fund had already lost its importance by 2001 due to Venezuela’s severe financial problems at that time. Regaining financial power, however, Venezuela in 2007 founded an alternative Development Bank, the ‘Bank of the South’, as already mentioned in Section 3.5, to counteract – as president CHAVEZ says – US-dominated IMF, World Bank Group and IADB. Furthermore two other independent institutions are bound to the IADB: •

the ‘Inter-American Investment Corporation’ (IIC) and

•

the ‘Multilateral Investment Fund’ (MIF).

5.4.2 The Inter-American Investment Corporation (IIC) The Inter-American Investment Corporation is a legally independent but with the IADB affiliated organization which supports the aims of company foundation and modernization of small- and medium-sized companies in Latin America and the Caribbean by means of • credits, • investments and credit lines together with private finance institutes for credit renewals, • investments into private capital funds and • guarantees for the establishment of capital market funds. The IIC supports the participation of other (private) investors by means of co-financings, joint ventures and other instruments of development support. Besides, it offers technical, financial and management aids. By middle of 2007 there are 43 countries member of IIC (cf. [www IIC 05/2007]). In 2006 the IIC supported 46 projects in 13 countries and in addition one regional project. The total lending amounted to US-$ 511 mill. (cf. INTERAMERICAN INVESTMENT CORPORATION, 2007, p. 13).

5.4.3 The Multilateral Investment Fund (MIF) The Multilateral Investment Fund was established in 1993 by the IADB and also is governed by it. Early 2007 the MIF consists of 33 member countries (cf. [www MIF 05/2007a]). 130

5.4 IADB It is the primary source for the support of the development of the private sector in Latin America and the Caribbean and has financial means of recently (end of 2006) US-$ 1.2 bn., paid in by 26 countries. Recently (April 2007) 1,140 projects were supported of which there were 103 projects for 26 counties in the year 2006 (cf. [www MIF 05/2007b]). The following projects are typical for the targets of lending by the MIF: •

pilot projects for institutional, juridical and administrative reforms,

•

reforms to establish a unhindered free market,

•

improving conditions for private investments,

•

training programs for employees, and

•

foundation of small companies.

5.4.4 Overview of the Development Financing of the Inter-American Development Bank and its Subsidiary Organizations Since its founding in the year 1959 until end of 2006 the IADB has approved US-$ 145 bn. in funding for projects. This induced a total investment of US$ 336 billion within the supported projects. The bank’s operations cover the entire spectrum of economic and social development, with an emphasis on programs that also benefit low-income populations, as the IADB emphasizes. In addition, it has to be underlined, that credits granted by the IADB as well as credits granted by the EBRD or other regional development banks do not represent full financings. Therefore, development lending granted by development banks always have a highly multiplying effect as far as the total investment power of a certain region is concerned; this also because a big part of the financial aids represent co-financings or direct export financings. In 2006 IADB approvals were US-$ 6.4 billion and therefore by far ranked first among all Regional Development Banks (ADB: US-$ 6 bn.; EBRD: US-$ 4.3 bn.; AfDB: US-$ 3.4 bn.). Figure 5.18 provides an overview on cumulated IADB lending since it started its lending 1961 for the period until end of 2006 and also for the year 2006. Additional to the IADB lending, the total costs of the projects are presented. This shows, that the lending of the IADB lead in average to a project realiza131

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tion being 2.3 times higher than the applied amount of loans: Compared to a total IADB lending of US-$ 145 billion from 1961 to 2006 – as shown in Figure 5.18 – a total project volume of US-$ 336 bn. results. Loans and Guarantees Approved Total Amount 2006

Country Argentina Bahamas Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominican Rep. Ecuador El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Suriname Trinidad and Tobago Uruguay Venezuela Regional Total Figure 5.18:

132

Total Amount 1961 – 2006

Total Costs of Projects 2006

1961 – 2006

1,625.7 8.8 0.7 25.0 153.0 515.7 213.3 620.0 70.0 181.0 326.9 102.5 239.0 116.7 100.4 125.9 5.0 387.0 132.5 304.7 257.2 565.0 -

22,657.4 380.4 420.3 112.3 3,735.8 28,675.4 5,426.8 12,809.8 2,488.5 3,028.0 4,573.7 3,287.3 2,918.2 1,085.2 1,280.9 2,877.8 1,774.8 19,486.9 2,478.2 2,434.5 2,160.3 7,737.8 104.7

2,178.2 0.8 11.5 25.0 162.7 1,824.0 667.2 775.0 83.4 183.5 514.0 102.5 239.5 122.2 101.2 129.4 5.0 1,510.0 146.0 318.1 780.3 358.2 -

47,261.1 785.9 597.4 170.2 6,172.7 86,085.9 13,129.0 24,923.5 4,136.2 4,125.2 8,930.6 5,075.7 4,666.3 1,272.3 1,768.5 4,892.5 2,380.3 51,200.1 4,002.0 3,008.7 14,161.3 5,538.1 126.1

28.0

1,070.5

35.0

1,642.2

190.9 26.0 60.0

4,197.9 4,848.4 2,968.2

217.5 51.0 150.0

5,578.0 16,430.9 17,730.2

6,380.9

145,020.0

10,691.2

335,790.9

IADB lending and guarantees compared to resulting total project investment in 2006 and cumulated for the years 1961 – 2006, in mill. US-$ (cf. [www IADB 05/2007a]

5.4 IADB The allocated loans mainly finance the following sectors • social development, • competitiveness, and • reforms and modernization of the state. Distribution of Loans and Guarantees by Sector of Activity in millions of US-$ Sector Competitiveness

Energy Transportation and Communication Agriculture and Fisheries Industry, Mining and Tourism Multisector Credit and Preinvestment Science and Technology Trade Financing Productive Infrastructure Capital Markets Social Development Social Investment Water and Sanitation Urban Development Education Health Environment Microenterprise Reform and Modernization of the State Reform and Public Sector Support Financial Sector Reform Fiscal Reform Decentralization Policies Modernization and Administration of Justice Planning and State Reform Parliamentary Modernization Civil Society Trade Policy Support E-Government

Total Figure 5.19:

2006

%

3,190.1

50.0

1961-2006 71,846.3

% 49.5

1,044.4 717.3 62.1 5.0 0.0 331.5 252.9 333.3 443.6

16.4 11.2 1.0 0.1 0.0 5.2 4.0 5.2 7.0

20,077.3 15,777.0 13,612.2 12,750.3 3,638.6 1,936.1 2,345.1 1,175.9 533.9

13.8 10.9 9.4 8.8 2.5 1.3 1.6 0.8 0.4

1,727.1

27.1

48,593.9

33.5

994.5 370.0 74.4 60.5 140.0 84.8 2.9

15.6 5.8 1.2 0.9 2.2 1.3 0.0

19,867.6 9,473.4 7,446.1 5,579.9 2,981.5 2,753.0 492.3

13.7 6.5 5.1 3.8 2.1 1.9 0.3

1,463.7

22.9

24,579.8

17.0

24.3 801.0 177.0 353.0

0.4 12.6 2.8 5.5

11,383.5 7,406.3 4,040.7 1,072.5

7.8 5.1 2.8 0.7

54.0

0.8

368.9

0.3

26.4 0.0 0.0 0.0 28.0

0.4 0.0 0.0 0.0 0.4

143.3 71.9 22.0 27.4 43.3

0.1 0.1 0.0 0.0 0.0

6,380.9

100.0

145,020.0

100.0

Lending and guarantees by sector, 2006 and cumulated 1961 – 2006; absolute figures in mill. US-$ and relative figures in % (data from INTERAMERICAN DEVELOPMENT BANK, 2007; or [www IADB 05/2007b])

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The lending of the official OCR-resources of the IADB occur to market based loan conditions with a duration of normally 15 – 20 years; for loans in the public sector guarantees by the government are furthermore required. Loan requests and resultant developing projects are verified and evaluated by the IADB in detail, at first on their compatibility to the overall strategy of the bank and at second regarding the project realization.

Project schedule and submission rules of the IADB are strictly regulated as follows: •

together with development-experts the overall strategies within project aid are developed and priority projects are extracted, such analyses (so called ‘programming missions’) take place every two years,

•

all project information about the planned projects are published monthly (available in the internet and by the representation-offices of the IADB),

•

severe procurement rules demand a public submission of all projects in the public sector (for project volumes of more than US-$ 5 mill.),

•

the respective project leaders bear the overall responsibility for the realization of the project,

•

deliveries by companies are prohibited, which are commercially or legally combined with the company that had lead the preparation of the project,

•

deliveries and services for projects financed by the IADB are only allowed to come from member states of the IADB,

•

goods and services from the country of the project leader are privileged (15 % bonus in the period of the project evaluation).

Another main pillar of the development financing by the IADB are a large number of ‘Trust Funds’. Those are funds, which are financed by certain countries or organizations. The financial backers determine, which purpose the particular fund pursues. In 2006 the IADB had 47 Trust Funds at its disposal, which are listed in Figure 5.20 in combination with the investors: 134

5.4 IADB Country

Fund’s name

AUSTRIA BELGIUM CANADA

DENMARK FINLAND FRANCE

ISRAEL ITALY

JAPAN

NETHERLANDS NORWAY

PORTUGAL KOREA SPAIN SWEDEN

SWITZERLAND GREAT BRITAIN

USA

Figure 5.20:

Austrian Technical Cooperation Trust Fund Austria Hurricane Mitch Disaster Assistance and Reconstruction Trust Fund Belgian Trust Fund for Consultants Social Inclusion Trust Fund IDB-Canada Trade Fund Social Capital, Ethics and Development Fund CANTAP-3, Canadian Technical Assistance Program Danish Trust Fund for Consulting Services Finnish Technical Assistance Program French Technical Cooperation Trust Fund for Consulting Services and Training Activities - Caribbean Contribution French Technical Cooperation Trust Fund for Consulting Services and Training Activities Human Resources Contribution French Technical Cooperation Trust Fund for Consulting Services and Training Activities - Indigenous Contribution French Technical Cooperation Trust Fund for Consulting Services and Training activities - Regular Fund Israeli Consultant Trust Fund Italian Trust for Microenterprise Development Italian Consulting Firms and Specialized Institutions Trust Fund Italian Individual Consultant Trust Fund Italian Trust Fund for MIF Project Preparation Italian Trust Fund for Cultural Heritage and Sustainable Development Italian Trust Fund for Information and Communication Technology Japan Special Fund Poverty Reduction Program Japanese Trust Fund for Consultancy Services Japan Special Fund IDB-Netherlands Water Partnership Program The Netherlands-IDB Partnership Program in Environment Social Inclusion Trust Fund Norwegian Development Fund for Latin America Norwegian Consulting Services Trust Fund (NCS) Gender Mainstreaming Trust Fund Social Capital, Ethics and Development Fund Norwegian Fund for Microenterprise Development Portuguese Technical Cooperation Fund Knowledge Partnership Korea Fund for Technology and Innovation Korea Poverty Reduction Fund Spanish Fund for Consultants, ICEX Spanish Framework-General Cooperation Fund Sida/IDB Partnership Swedish Trust Fund for Consulting Services Swedish Trust Fund for the Financing of Small Projects Swiss Technical Cooperation Trust Fund for Consulting Services and Training Activities Social Inclusion Trust Fund DFID-IDB Enlace Social Inclusion Trust Fund Markets and Governance for Poverty Reduction Trust Fund Trade and Poverty Trust Fund USTDA Evergreen Fund

Donor-countries’ development-funds in cooperation with the IADB (from [www IADB 04/2007])

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A point of criticism to be taken seriously with regard to the granting of credits is – contrary to self-describing statements – the fact, that IADB primarily enhances major projects and their subsidies policy is not well directed towards the integration of poor people into the economic cycle. In the middle of the 90s there was a structural reform of the loan allocation politics of the IADB. Following fundamentals were implemented into the up to that time very conservative development policy, focused on a promotion of big-projects: •

a minimum of 40 % of the loan volume and 50 % of the projects should be applied to reduce poverty (primarily through resources of the FSO),

•

at least 5 % of the total credits should be lent to private investors without a state guarantee (projects of the ICC),

•

the lending should increasingly be a conditional lending bonded to the implementation of –

fiscal discipline (budgetary discipline),

–

monetary discipline (stability of the overall price level), and

–

accelerated privatization and de-monopolization in all institutions of the receiving countries.

Despite of this positively evaluated orientation of the IADB (taking into account the in Section 3.5 mentioned criticism concerning conditional lending) still mainly ‘large-scale projects’ are privileged by development loans until now. A concrete project promotion in favor of the poor is – different from the ADB for instance (cf. Section 5.3.3) – not noticeable: The IADB offers the granting of credits to support ‘micro-, small and medium-scale businesses’ indeed. An example for this purpose is a credit tranche in Brazil in April 2007, but the term ‘micro business’ is defined by the IADB as a business, which has up to 19 employees and which features a sales volume of US-$ 400,000. Apparently such a strategy cannot achieve sustainable poverty reduction for large parts of the Latin-American population as the reality in Latin-America indicates clearly – unlike the situation in Asia where development financing as shown in Section 5.3 is more oriented on the needs of the poor.

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5.5 AfDB

5.5

African Development Bank (AfDB)

The African Development Bank (AfDB, in own publications also short ‘ADB’ or ‘BAD’: Banque Africaine de Développement) was established in 1964 by 30 independent African countries and took up its work in 1966.

5.5.1 Institutional Structure and Function of the AfDB The AfDB has its seat in Abidjian, the capital of Côte d’Ivoire (Ivory Coast); since February 2003 it is seated in Tunis, Tunisia, because of the civil war in Côte d’Ivoire. Germany has been member of the AfDB since 1983. By 2007, the AfDB’s ordinary share capital amounts to UA 21.87 billion (Unit of Account of the AfDB) which is equivalent to about US-$ 33 billion. With 53 African and 24 non-regional members, in 2007, a total number of 77 member countries belong to the AfDB. Non-regional members (which have been admitted only since 1983 for being member of the AfDB) are the 14 Western European countries Austria, Belgium, Denmark, France, Finland, Germany, Great Britain, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland, as well as the USA, Canada, Argentina, Brazil, China, India, Japan, Korea, Kuwait, Saudi Arabia and the United Arab Emirates (cf. AfDB, 2006, p. 258, or [www AfDB 05/2007]). The Board of Governors is the supreme authority, where all members are represented, it determines general guidelines in terms of granting credits and can assign its authority to the board of directors that acts as an executive committee. Basically, the Board of Directors is responsible for the implementation of the general business activities, each six regional and non-regional directors are member of the Board. As of 2007 Germany provides a director of the non-regional voting group, and by this represents Germany, the Netherlands, Portugal, and the United Kingdom (cf. AfDB, 2006, p. 256). The ongoing businesses are operated on instructions received by the Board of Directors by Donald Kaberuka, the President of the AfDB, former Minister of Finance and Planning in Rwanda. The voting power is distributed by 60,1 % among the regional member countries and by 39.9 % on the non-regional member countries, categorizing at the same time the AfDB member states into receiving- and donorcountries. 137

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The biggest regional shareholders are Nigeria (9 %), Egypt (5.1 %), South Africa (4 %) as well as Algeria, Libya, Ivory Coast and Morocco (between 3.8 and 3.3 %); the most important non-regional-member shareholders are the USA with about 6.5 %, Japan with 5.4 %, Germany with 4.1 % and Canada, France with each 3.7 % (as of end 2005: cf. AfDB, 2006, table A1.1). Compared to other development banks, an external credit raising was very difficult for AfDB until 1983, because until then, no financially strong external countries were admitted for membership. That’s why, until now, it is the particularity of the AfDB, that credit raisings are secured by so-called senior debt and subordinated debt instruments. In case of liquidity problems of the AfDB, subordinated debt instruments are used only, when the senior debt credit raisings have been repaid. Therefore, the AfDB received refinancing credits on the capital markets to much more unfavorable conditions than other development banks, whereas this refinancing disadvantage has become smaller by now. Besides its ordinary resources the AfDB as well has special funds at its disposal: •

The most important fund of the AfDB is the African Development Fund (AfDF) which was established in 1972 and has been operating since 1974. It is responsible for lending long term development assistance to the poorest African countries, cf. coming Section 5.5.4.

•

An important source of support is the Nigeria Trust Fund (NTF) equipped by Nigeria, cf. coming Section 5.5.5.

•

The Special Relief Fund (SRF) is a fund with about US-$ 8 million which shall support the poorest countries of the AfDB concerning warinduced burdens and in case of natural disasters.

•

The Special Emergency Assistance Fund for Drought and Famine in Africa (SEAF) was established in Addis Ababa, Ethiopia, at the 20th meeting of the Organization of African Unity (OAU), 1984.

•

Another fund is the Mamoun Beheiry Fund, which was founded on October 31st 1970 by the previous president of the bank, the Sudanese Mamoun Beheiry.

138

5.5 AfDB •

The Arab Oil Fund was equipped by Algeria in 1974 with a sum of about US-$ 20 mill., targeted to financially support the energy supply of poorer AfDB countries. This fund is no longer relevant, because US-$ 19 million were paid back to the Algerian government already in 1975.

Beside the raising of development credits, the participation in the debt relief programs for the so-called ‘Heavily Indebted Poor Countries’ (HIPC) initiated by the G-7 in 1998, becomes more and more important for the AfDB – see the expositions concerning the organization of the debt relief conducted by the IMF with the ‘Supplementary Financing Mechanism’ founded in 1998 (cf. Section 3.4) and the initiative of the G-7 (cf. Section 6.1.3). The AfDB offers a sum of altogether US-$ 370 million; the capital of the Debt Relief Trust Fund is increased to US-$ 1.77 billion by other sources (Western industrial countries). The AfDB together with the financial support of the AfDF within the HIPCinitiative has implemented US-$ 15.62 million in the year 1998, another US$ 36.96 mill. in 1999, and US-$ 200 million in 2000 for 17 operations in 11 indebted countries; these debt relief operations will go on dynamically.

5.5.2 Overview of the Development Financing of the African Development Bank Group Between 1967 and 2005 the AfDB-Group in total has invested UA 24.3 billion, resp. US-$ 35.7 bn. for the support of about 3,000 development projects. Following Figure 5.21 gives an overview of the total grants and lending of the AfDB, the AfDF, and the NTF. In the year 2005 US-$ 3.370 billion were approved for the support of 102 development projects including HIPC-debt-relief, which led to a disbursement of US-$ 1.9 billion (UA 1.3 bn., as shown in Figure 5.21).

Figure 5.21:

Overview on total lending and grants of all parts of the AfDB-Group: AfDB, AfDF and NTF for various periods (from AFRICAN DEVELOPMENT BANK, 2006, pp. 135 – 136 or [www AfDB 05/2007a])

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5 Regional Development Banks Loan and Grant Disbursements of the AfDB-Group in millions of UA (1 UA = US-$ 1.47)

140

5.5 AfDB Loan and Grant Disbursements of the AfDB-Group in millions of UA (1 UA = US-$ 1.47)

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5.5.3 The Lending of the African Development Bank (AfDB) The AfDB only supports those economically sounder African member countries listed in Figure 5.22: AfDB Beneficiary Countries •

Algeria

•

Morocco

•

Botswana

•

Namibia

•

Egypt

•

Seychelles

•

Equatorial Guinea

•

South Africa

•

Gabon

•

Swaziland

•

Mauritius

•

Tunisia

AfDB and AfDF Beneficiary Countries •

•

Nigeria

Figure 5.22:

Zimbabwe

AfDB beneficiary countries as of 2007

At the end of 2005, total AfDB lending and grants amount to about US-$ 14.7 bn. US, resp. US-$ 21.6 bn., having supported 150 projects – as can be seen in Figure 5.21. Figure 5.23 gives an overview of the sector-specific distributions of the AfDB lending between 1976 until 2005; Figure 5.24 shows its regional distribution. AfDB Cumulative Lending by Sector 1967 - 2005 in % Social 5.2 %

Transport 15.5 %

Finance 21.2%

Other 3.8 %

Agriculture 12.2 % Multisector Loans 14.1 %

Industry 8.2 % Water Supply, Sanitation 7.2 %

Figure 5.23:

142

Energy 12.7%

Sector-specific distribution of AfDB lending between 1967 and 2005 in % of US-$ 21.6 billion (cf. AFRICAN DEVELOPMENT BANK, 2006, p. 95)

5.5 AfDB Regional Distribution of Cumulative AfDB Lending 1967 - 2005 in %

Eastern Africa 5%

Central Africa 10 %

Western Africa 18 %

Southern Africa 12 %

Northern Africa 53 %

Figure 5.24:

Regional distribution of AfDB lending between 1967 and 2005 in % of US-$ 21.6 billion (cf. AFRICAN DEVELOPMENT BANK, 2006, p. 95)

Figure 5.25 provides an ample information on current AfDB projects: Country

Project Finance/ Banking

Egypt

Second NBE credit line for the purpose of funding/financing the SME support project

Nigeria

Bank of Zenith PLC credit line

Nigeria

Credit line for the Guarantee Trust Bank PLC

Multinational

Equity investment in EMP Africa Fund II LLC Agriculture/ Environment/ Industry/

Gabon

Fishery and aquaculture support projects

Morocco

clean air improvements by improving the efficiency of production in the oil-industry

Tunisia

CPG assets growth in terms of environmental protection and decomposition/ degradation of phosphate

Tunisia

Competitiveness- and support program III

Egypt

El Kureimat – combined circuit power plant project

Morocco

Ain Beni Mathar – thermo power plant

Across-the-sectors

Energy

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Senegal

Kounoune- thermal energy project

Angola

Humanitarian emergency support against the Marburg Haemorrhagic pyrexia/ fever epidemic

Burkina Faso

Humanitarian emergency support against eradication of Poliomyelitis

Burundi

Humanitarian emergency support for victims of drought in the provinces of Kirundi and Muyinga

Chad

Humanitarian emergency support against eradication of Poliomyelitis

Djibouti

Humanitarian emergency support for the victims of drought

Egypt

Emergency support to control the grasshopper-invasion in 2004

Malawi

Humanitarian emergency support for drought-affected regions

Mauritania

Food support for victims of natural emergencies (flooding, drought, grasshoppers)

Health

Mozambique

Humanitarian emergency support for drought-affected regions in 2005

Niger

Humanitarian emergency support against eradication of Poliomyelitis

Niger

Humanitarian emergency support for drought-affected victims and grasshopperinvasion

Nigeria

Humanitarian emergency support against eradication of Poliomyelitis

Seychelles

Emergency support for recovering the damages occurred by the Tsunami in 2004

Somalia

Humanitarian emergency support for victims of the Tsunami in Asia in 2004 and the disaster happened in the North-eastern part of Somalia

Swaziland

Food support for drought-affected people in 2005

Tunisia

Second apprenticeship support program, stage II

Zambia

Humanitarian emergency support for drought-affected townships in 2005

Zimbabwe

Humanitarian emergency support for drought-affected townships in 2005

Kenya

Growth-orientated women-, entrepreneur- and development projects

Social HIPC – Debt relief: Madagascar, Rwanda, Zambia

Figure 5.25:

Authorized/ supported projects and programs by the AfDB in 2005 (cf. AFRICAN DEVELOPMENT BANK, 2006, p. 96)

5.5.4 The Lending of the African Development Fund (AfDF) With this fund’s capital of US-$ 14 billion (end of 2006) the AfDF tries to support development projects of poorer countries to very favorable conditions: The term of an AfDF credit can be up to 50 years including 10 free years. The handling charge is 0.5 %, the interest rate amounts to symbolic 0.75 %. The fund is hold by the AfDB and 24 non-regional member states, which are identical with the non-regional member countries of the AfDB; main shareholders are Japan (14.5 %), USA (13.3 %), Canada and Germany (nearly 10 % each). 144

5.5 AfDB The AfDF only supports the already mentioned member countries •

Nigeria and

Zimbabwe,

that are also supported by the AfDB, plus the following poorer member states as listed in Figure 5.26.

AfDF Beneficiary Countries •

Angola

•

Kenya

•

Benin

•

Lesotho

•

Burkina Faso

•

Liberia

•

Burundi

•

Madagascar

•

Cameroon

•

Malawi

•

Cape Verde

•

Mali

•

Central African Rep.

•

Mauritania

•

Chad

•

Mozambique

•

Comoros

•

Niger

•

Democr. Rep. of Congo

•

Rwanda

•

Republic of the Congo

•

São Tomé and Príncipe

•

Côte d’Ivoire

•

Senegal

•

Djibouti

•

Sierra Leone

•

Eritrea

•

Somalia

•

Ethiopia

•

Sudan

•

Gambia

•

Tanzania

•

Ghana

•

Togo

•

Guinea

•

Uganda

•

Guinea-Bissau

•

Zambia

Figure 5.26:

AfDF beneficiary countries as of 2007

Between 1974 and 2005 the AfDF has – as is shown in Figure 5.21 – granted UA 9.4 billion, resp. US-$ 13.8 bn. in order to support 1,986 projects. Figure 5.27 gives an overview of the sector-specific distributions of the AfDB lending between 1976 until 2005; Figure 5.28 shows its regional distribution. 145

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AfDF Cumulative Lending by Sector 1974 - 2005 in % Transport 17.5 %

Social 20.9 %

Other 1 % Finance 2.3%

Agriculture 26.5 %

Multisector Loans 17.1 % Water Supply, Sanitation 8,5 %

Figure 5.27:

Power Supply 4.9 %

Industry 1.3 %

Sectoral distribution of AfDF lending between 1974 and 2005 in % of US$ 13.8 billion (cf. AFRICAN DEVELOPMENT BANK, 2006, p. 108)

Regional Distribution of Cumulative AfDF Lending 1974 - 2005 in %

Central Africa 14,6 %

Eastern Africa 28 %

Figure 5.28:

146

Multiregional 4,8 %

Western Africa 32,5 %

Southern Africa 15 %

Northern Africa 5%

Regional distribution of AfDF lending between 1974 and 2005 in % of US-$ 13.8 billion (cf. AFRICAN DEVELOPMENT BANK, 2006, p. 108)

5.5 AfDB

5.5.5 The Nigeria Trust Fund (NTF) The Nigeria Trust Fund was established in 1976. It is granting very favorable development credits with interest rates of 4 % over a period of 25 years including 5 free years. This has the aim to support development endeavors of member countries, especially those with low-income rates. At the end of 2006 the NTF has a capital volume of about US-$ 515 million. Article XIII of the NTF agreement which was signed between the ADB and Nigeria states that the NTF has been taken effect for a duration of 30 years. There is also the possibility of extension with a mutual agreement of the AfDB and the government of Nigeria. According to article XIII, 1 of the NTF agreement, the NTF had abandoned it activities if it would not have been extended by a mutual agreement beyond the April 26th 2006 (exit date). In this regard the AfDB held two conferences with the authorities of Nigeria in Abuja and Tunis in 2005 to discuss the extension of the agreement for another 30 years. Basically, the government of Nigeria agreed with the extension of the NTF agreement. But the government demanded a complete evaluation of the NTF. The terms of the evaluation have been prepared in 2005 and independent consultants have made the evaluation in spring 2006. The evaluation determines the success of projects conducted by the NTF, existing management methods and governmental structures for NTF projects. It also comes up with recommendations for the future strategic direction and the NTF beyond April 25th 2006. This evaluation acts as a key for the successful conclusion of the negotiations to extend the duration of the NTF. In 2005, there were neither credits nor other support granted by the NTF. Only three projects amounting to US-$ 3.6 million have been approved under the patronage of the HIPC initiative. The NTF had authorized 71 projects amounting US-$ 350.3 million along 30 regional member countries during 1976 and 2005, wherefrom US-$ 16.2 mill. accounted to cross-national projects. As Figure 5.21 indicates, of these approvals only UA 197.4 million, resp. US-$ 290 mill. were disbursed. Figure 5.29 gives an overview of the distribution of the financial support by sectors; Figure 5.30 shows the given financial support by regions. 147

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Cumulative NTF Approvals by Sector, 1976 - 2005 Finance and Bank ManageWater Supply, ment 6% Sanitation 6%

Education, Social Protection 18 % Industry 5%

Transport 33 % Energy 4%

Figure 5.29:

Communication 9 %

Agriculture and Natural Resources 19 %

Cumulative NTF approvals by sectors, 1976 – 2005 in % of US-$ 350 million (cf. AFRICAN DEVELOPMENT BANK, 2006, p. 127)

Cumulative NTF Approvals by Region, 1976 - 2005

Western Africa 39 %

Multiregional 5%

Central Africa 11 % Southern Africa 18 %

Northern Africa 3 % Eastern Africa 25 %

Figure 5.30:

148

Cumulative NTF approvals by regions, 1976 – 2005 in % of US-$ 350 million (cf. AFRICAN DEVELOPMENT BANK, 2006, p. 127)

5.6 Critical Reflection on Development Financing

Criticism on a Politically and Ethically Not Sufficiently Reflected Development Financing

5.6

Regional Development Banks – different to IMF or World Bank – are banks of the respective region: this offers the possibility for those banks to take an action for a better control of the expenditure on given development loans as well as it gives them the opportunity to better control the political and ethical behavior of countries getting subsidies from abroad. As concluding remarks to Part B and especially in the context of the discussion of the development aid given by Regional Development Banks it shall be noted – not only concerning the support policy of the IMF, the World Bank and the Regional Development Banks as discussed in Sections 3, 4 and 5 up to this point, but in general – that it might be necessary to exclude those countries from financial aid provided by the development financing of the Western industrialized countries as well as the Regional Development Banks that don’t intend to accept the Western civilization values, especially in the range of human- und civil rights. There are a lot of countries that are financially supported by international lending and grants and at the same time treat main values of civilization with contempt: This e.g. especially applies to •

the Taliban regime before the US-intervention in Afghanistan,

•

the today’s military regimes of Myanmar (cf. the various information to be found under [www MYANMAR]), and North Korea,

•

the terror-regime of Robert Mugabe in Zimbabwe (cf. LESSING, 2003; or [www LE MONDE 08/2003]; [www AMNESTY INTERNATIONAL 09/2006]; HUMAN RIGHTS WATCH, 2006, 2007), which not only tolerates but even organizes officially accepted programs to rape and kill people from the opposition (cf. BÖSEL, 2002, p. 92; [www BBC 02/2004]),

•

the genocide organizing government of Sudan in the province of Darfur as well as also in the Chad (cf. GESELLSCHAFT für BEDROHTE VÖLKER, 2007, and the various information to be found under [www DARFUR]; see also [www AMNESTY INTERNATIONAL 04/2007]), 149

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5 Regional Development Banks or – to a lower degree – to Indonesia which also has an at least questionable way of dealing with ethnic minorities or global natural resources (cf. [www GESELLSCHAFT für BEDROHTE VÖLKER 08/2006]).

Analogue criticism is significant for many countries on the ‘lost continent’ Africa: •

A glaring example is the so-called ‘Democratic Republic’ of Congo.

This example is indicative for ‘internationally subsidized predacious dictatorships of violence’ ([www BUNDESTAG 09/2004], p. 1) which mercyless depredate the territory and exploit the population as short-term peons. This on a lower level is characteristic for a lot of African states: By 2003, the US non-governmental organization ‘Freedom House’ had categorized eleven African countries as ‘free’, 20 as ‘partly free’ and 16 as ‘unfree’. Insofar development aid must be bound elementary to the building of democratic structures, as: „… a barrier against large-scale killing, torture, and other abuses by the state.“: SACHS, 2005b, p. 315; admittedly a demand, which in view of US democracy under the presidency of George W. Bush reflected at Guantanamo and in the torture at secret prisons does not compellingly convince many developing countries; this is in the final analysis a catastrophe of vast extent for the further civilized and democratic development of the world. The mightily ruler Mobutu Sese Seko despoiled Congo – one of the most prosperous countries in Africa – during 33 years. In solely 1992 he aparted 95 % of the governmental income for his own purpose. This elite networks policy of private appropriation on account of the population basically did not change since the introduction of the interim government and the presidential election of Joseph Kabila: The Congo is currently playground for African despots of nearly all neighboring countries as well as for militia in collaboration with international concerns. Detached from functioning constitutional structures, cutting of lumber (cf. GREENPEACE, 2007, especially pp. 9), mining of ore, coltran and diamonds to their benefit is enforced, while remaining public structures collapse, millions of people die from exploitation, enslavement, starva150

5.6 Critical Reflection on Development Financing tion and displacement respectively get violated, raped or killed by marauding militias including children soldiers recruted by force and coerced to take drugs (see in more detail: ÖKUMENISCHES NETZWERK Zentralafrika, 2004, or [www BUNDESTAG 09/2004]).

Other countries, like India and Pakistan, expect the global community to support their economic development while at the same time plundering their own economic resources for military objects of prestige – in case of India and Pakistan even for the production of nuclear bombs while concurrently a good part of the population is sinking into misery or actually is starving to death. If development assistance of any kind can not be delivered tangible and directly to individuals affected by starvation and poverty, it should exclusively be provided to those recipient countries that guarantee minimum human and civil rights and assertion that aid payments will be used according to mandatory regulations. According to the UN, every day more than 20,000 people die in consequence of poverty – yesterday, today, tomorrow. These are in total about 8 million people per year. The highly renowned US-economist Jeffrey D. SACHS in his book „The End of Poverty: How We Can Make it Happen in Our Time“ (SACHS, 2005b) shows as insistently as comprehensible, that there are ways to largely eradicate the misery of the world within 20 years by all means. This book is explicitly recommended for every reader interested in development policy: SACHS is hard on the USA, because they were succumbed to the erroneous belief, security could be ensured primary by force of arms in an unstable world order: „The $450 billion that the United States will spend this year on the military will never buy peace if it continues to spend around one thirtieth of that, just $15 billion, to address the plight of the world’s poorest of the poor, whose societies are destabilized by extreme poverty and thereby become havens of unrest, violence, and even global terrorism.”: SACHS, 2005b, p. 1. His advice, that the USA brings up the rear under the industrialized countries regarding governmental development aid is correct indeed, as Figure 7.2 in Section 7.3.3 will show: 151

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But only the adherence of an old UNCTAD-requirement, to achieve 0.7 % of the GNI as development aid (cf. the remarks in Section 2.2.2) won’t solve the problem. If one adds the diverse development payments of the direct public aids, the private contributions, the development aid by the World Bank Group and Regional Development Banks, one easily gets – without the several military aids of ‘development policy’ – a sum of more than 50 billion US-Dollar per year. This is doubtlessly an amount, which, if it would be really used efficiently for the struggle against poverty, should ease the misery of the poor more clearly as it can be seen in reality. In addition it may be noted that the annual military spending world wide (in 2005) was US-$ 1.2 trillion or € 900 billion (here we are using the Euro/ Dollar exchange rate for 2007). This is equivalent to US-$ 184 or € 136 per capita for the entire population of the world (cf. GAMILLSCHEG, 2007, p. 1). The latter amounts surpass the gross domestic product per capita of many people in poor countries – such as Ethiopia or Congo – over an entire year (cf. in this regard Figure 7.3 in Section 7.3.4.). So, we have come full circle of the development problem: Even if the already industrialized world would commit itself to less military programs but rather to a more active development policy as a matter of fact, every additional use of money would result in bottomless vats of senseless major projects, thriftlessness, corruption or even of personal property of rape dictators, as long as one thing can’t be succeeded: To grant means not to anonymous countries or their predacious oligarchies, but to invest in projects directly (e.g. also in strongly required programs for the prevention of the municipal emergence of slums, cf. on this the apocalyptic work of Mike DAVIS, 2006). This would straightly and immediately prove advantageous to those, who need the means most urgently: The poor people in this world. But this is considered as an intrusion in national sovereignty by a bigger part of the receiving countries – and these are not only the currently most dramatic outlaws of the civilized world (2007): Myanmar, North Korea, Sudan, Zimbabwe, but a large part of the developing countries of the Third World particularly in Africa and Latin America. A problematic focus concerning the global political situation (that shall not be subject of discussion at this point) is the fact that there are repeatedly socalled ‘package deals’: 152

5.6 Critical Reflection on Development Financing Pakistan having supported the USA’s war against Afghanistan since 2001, for example, receives enormous bi- and multilateral financial aids which might again flow into the nuclear armament – and definitely not in helping the poor. This means that the Western state community creates new conflict potentials being probably of a vital significance, that are resulting from the present actions to gain short-term advantages in the struggle against terrorism in Afghanistan. It seems logical that countries, which set themselves outside of the basic values of the human and civil rights of Western civilizations (especially the values of social responsibility and freedom of Europe), should also have to manage their development without the financial power of these states. This becomes true especially if Western financial aid finally leads to the effect that because of foreign financial transfers a diversion of domestic economic power into the fields of national terror (as mentioned above especially in the developing aid receiving countries Sudan and Zimbabwe) or military armament up to finally becoming a nuclear power nation becomes possible (cf. Pakistan, India, North Korea, Iran). This is a fundamental criticism referring to a global development policy which follows a pseudo-ethical direction and finally – at a closer look – doesn’t help the population to prosper but helps the elite of these countries to strengthen or even to extend their corruption, tyranny or at least supports a policy which is not oriented towards the welfare of the populace. It is commonly neglected – apart from the fundamental ethical requirements – that each financial transfer from industrialized countries into the Third World results from the hard work of common taxpayers in industrialized countries and that it shall not lead to the endangerment of domestic political or even civil objectives or achievements. Therefore a stronger democratic control of the various international organizations providing development financing, such as the IMF, the World Bank or the Regional Development Banks, is absolutely necessary. These organizations, according to the political scientist Susan Strange (1996) conduct to an increasing degree the development of (global) economy by means of a growing multilateralization of original national tasks and the centralization of this power under the control of a few “econocrats” (cf. STRANGE 1996/2000, pp. 161; EIBNER, 2006b, pp. 508 – 509). 153

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Anytime this can be achieved, a large step is taken in enabling a secure existence with self-determination and participation in increasing prosperity for the poor of Africa – e.g. for Himba tribe women in the border area between Angola and Namibia, see photos – and of other regions of the world: A life no longer characterized by lack of education, corruption (cf. iwd, 2007, pp. 4), hunger and permanent threats to existence.

Figure 5.31:

154

Himba in the frontier-region of Angola – Namibia (author’s photos)

5.7 Review Questions

5.7

Review Questions

5.1

What goals does the Regional Development Banks have?

5.2

What is the difference between the ordinary resources and the special funds of Regional Development Banks?

5.3

What arguments led to the founding of the EBRD alongside other already existing international financial institutions?

5.4

When was the EBRD founded and what countries are its members?

5.5

What kind of projects does the EBRD finance?

5.6

Who determines the business policy of the EBRD?

5.7

What is a main point of criticism concerning the EBRD business policy?

5.8

What is the practical relevance of the EBRD for the economic development of Eastern European countries?

5.9

Name the four most important Regional Development Banks in descending order of their financial strength.

5.10 What countries are member of the Asian Development Bank? 5.11 What Special Funds are established within the Asian Development Bank? 5.12 What countries are member of the Inter-American Development Bank? 5.13 Name the independent institutions that are bound to the InterAmerican Development Bank. 5.14 What is the IIC? 5.15 What is the MIF, what its goal? 5.16 What countries belong to the African Development Bank? 155

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5.17 With which Special Funds can the African Development Bank operate with what kind of goals? 5.18 In general, what is the central problem of efficiency for developmental aid policy?

156

Part C:

6

Selected Groups and Organizations Active in the Area of Economic Cooperation and Integration

Groups of International Cooperation

Not only within international organizations, but also within a large number of informal or non-contract-bound panels, international cooperation concerning economic and monetary questions takes place. Taking into consideration the global political development since 9/11 of 2001, the informal international cooperation is gaining more and more importance also in the range of the definition and agreement of useful and aimoriented international economic aid and -coordination. The following Sections (in parts based on EIBNER, 2002, pp. 9) will show economically oriented boards of cooperation •

of the industrial states (cf. Sections 6.1 and 6.2), as well as of

•

the developing countries (Section 6.3), and

•

financially orientated negotiation- and decision-making platforms, dealing primarily with debt-problems between creditors and debtors (Section 6.4).

It will be shown,

6.1

•

what kind of problems these groups deal with,

•

which decisions each single panel makes, and

•

of which relevance these decisions finally are for the development of the global economy.

Group of the 7 and 8 Greatest Industrial Nations in the World: G-7 and G-8

In principle, an informal cooperation is useful because, 1. it may help countries with a similar development and comparable economic interests and perhaps also common problems to come to an agreement among each other, before certain topics or problems are treated in formal inter-state panels, 157

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2. it seems to be useful to discuss common interests or problems with those state groups first, that are hit directly by a problem or that can contribute to problem solutions. The best known informal cooperation takes place within the so-called G-7 or G-8. This group of the seven or eight most important industrial nations of the world, primarily known by the yearly world economic summit, usually meets once a year in order to discuss current questions concerning world economy and to decide about common measures for a global stimulation of business activity or for the development of the exchange rates of the three big currencies (US-$, Euro and Yen).

6.1.1 The Way from the G-5 over the G-4 to the G-7 and G-8 The G-8 being currently relevant for world economy originates from the socalled Group of Five, the G-5. This G-5 met in 1967 for the first time when the ministers of finance of the USA, Germany, France, Great Britain, and Italy met in the British town Chequers to discuss interest-rate-related problems. After the collapse of the monetary system of Bretton Woods in 1973 (for more detail compare EIBNER, 2006c, Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Section 14.2), this way to cooperate was re-established by the USA, Great Britain, France and Germany as the G-4 in order to discuss the further future development of the global monetary system and the currency markets. In 1973, the group of the G-4 was extended to the G-5 by integrating Japan as the 5th country and the presidents of the central banks of the participating countries. In 1975, this group again changed to the G-6, when the French president Valéry Giscard d’Estaing and the German chancellor Helmut Schmidt invited to the first so-called world economic summit of the heads of the states and governments in Rambouillet and additionally integrated Italy as the 6th greatest industrial nation. The group became the G-7 in 1976, when Canada joined. Since 1978, the Commission president representing the European community or European Union has been invited in order to demonstrate the intensified European integration. 158

6.1 G-7 and G-8 During the past years the G-7 has – in the beginning starting more or less as a kind of good-will invitation to the Russian Prime Minister of the time, Boris JELZIN, before it became an official integration – changed into G-8 by integrating Russia. Yet, Russia still is only part of the yearly world economic summits and not completely integrated in the panel of the ministers of finance and presidents of the central banks of the G-7. This is problematic because the Russian president is invited only because of primarily political considerations – and not because of the economic usefulness – which means that the decision-making and the discussion power of the world economic summit is more and more reduced to a public event without greater economic relevance. Concrete agreements keep being made within the former G-7 (the ministers of finance and the presidents of the central banks). Currently (since 2005) the economic role of Russia for the G-7 in addition to its political relevance strongly increases because of the worldwide shortage of oil and gas and therefore of the rise in these commodity prices, which lead to a growing energy dependence of the Western states from Russia.

6.1.2 Economic Cooperation of the G-7/ G-8 The steps taken so far by the G-5 or G-7 concerning a coordination of the economic policy in the industrial states have not been successful at all. The agreement according to the ‘locomotive theory’, which was made in 1978 at the economic summit in Bonn, was not successful. The plan was, to animate those countries to an intensified national expenditure as well as to a raising import demand in order to stimulate global business activity, which have low inflation rates but a surplus in the balance of payments. The result of trying to implement Germany and Japan as ‘locomotives’ of global business activity was an increasing inflation all over the world without having reached durable economic growth (this is also an empirical evidence for the monetarist interpretation of the Phillips curve: Cf. EIBNER, 2008a: Understanding Economic Policy – Anwendungsorientierte Wirtschaftspolitik, Part C). After the failure of the demand-oriented world economic policy conducted according to a Keynesian pattern, there were more and more attempts at the beginning of the 80s to set growth-oriented impulses by means 159

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of a world-wide coordinated supply policy: The main focus was now to reduce inflation and the deregulation of the economy. Since that time, international cooperation has meant primarily that the partner countries reinforce each other in the attempt to keep following the way of national budget consolidation and deregulation of the economy. Another important point of G-8 discussions is the climate change mitigation, however (as of the Heiligendamm G-8 summit in Germany, 2007), without any agreement up to now (cf. iwd, 2007, p. 2).

6.1.3 Monetary Cooperation of the G-7/ G-8 In the field of monetary cooperation, the year 1985 represents the beginning of efficient and successful international coordination and cooperation (cf. Deutsche Bundesbank, 1997b, pp. 199). In 1985, under president Ronald Reagan, the US-Dollar amounted to a historic high, compared with all currencies of the Western world. This resulted in a dramatic collapse of the American trade balance leading to the consequence that in the USA, especially in the Congress, a stronger protectionism was claimed. In order to encounter this danger for the global economic development coming from the monetary field, the heads of states and governments of the G-5 met 1985 in the New York Plaza Hotel and signed the so-called Plaza Accord. The agreement intended, with a devaluation of the US-Dollar, to move the highly overvalued US-Dollar closer to its purchasing power parity (PPP, see the explanation of PPP in Section 7.3.4) as a trade-adequate evaluation, by means of economic measures combined with coordinated interventions on the currency markets. The Plaza Accord was one of the most successful international monetary interventions so far. One central measure of the Plaza Accord was the USA’s commitment to reduce the interest-increasing deficit of the US-budget caused by the government under President Reagan. Without the realization of this claim of Europe and Japan, the operations on the currency markets would have been without success. As a result of the Plaza Accord, the US-Dollar fell continuously and in 1987 following the other direction, impended to miss the purchasing power parity by far. In February 1987, a summit of the G-6 in Paris (Italy didn’t participate) agreed in the so-called Louvre Accord to take economic corrections and to cooperate closely on the currency markets in order to re-value the US-Dollar again – with success. 160

6.1 G-7 and G-8 Another important operation of the G-7 was the report about preconditions of international monetary stability (cf. Deutsche Bundesbank, 1996, pp. 9) and the existing possibilities and bounds of currency market operations. This report was used in 1996 by the heads of state and government as a basis of their agreement to fight an undesirable development of the exchange rates by means of direct economic operations and coordinated currency market interventions in the future.

6.1.4 Development Cooperation of the G-7/ G-8 Since 1991, in order to support the world economy, the G-7 has been advocating an extensive debt relief for the poorest countries being indebted most (LDCs). In this context see also Section 3.4 for the G-8 induced debtrelief of IMF, IDA and AfDB. A principle renunciation of creditors’ claims covering a sum of over US-$ 34 billion were planned 2001, so that the burden of debts and thus the burden of interest of the poorest countries to be paid in foreign exchange will be reduced by two thirds. Besides, the G-7, within the scope of this debt relief initiative, committed themselves to renounce a repayment of all statefinanced development credits having been granted so far, so that the G-7 agreed to a 100 % debt relief for certain LDCs. In return for that, the G-7 accepted the consent of the developing countries concerning another great trade negotiation round within the WTO – the following Doha round –, which should have dealt especially with the problems of a further opening of the markets and with the principles of social and ecological standards being valid all over the world (cf. G-7, 2001, p. 13) as already explained in Section 1.8 as a central future field of WTO-politics. With knowledge of 2006 it must be stated that within the Doha-round an implementation of stronger consideration of social- and ecological standards in developing- and in newly industrializing countries, which the G-7 asked for, did not take place. The Doha negotiation round failed from July 2006. In June 2007 the G-8 summit meeting in Heiligendamm/ Germany as one main point of discussion had on its agenda the economic development of Africa to be accelerated by giving support to the idea of microloans for the poor. The G-8 even invited Muhammad YUNUS, the founder of GRAMEEN BANK (cf. Section 4.4.2) to introduce his ideas of helping the poor to overcome impoverishment by starting own small businesses financed by microloans. 161

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6.2

6 Groups of International Cooperation

Bodies Representing the Interests of Industrialized Countries to Strengthen International Financial Markets and International Trade

6.2.1 The Group of the Greatest Industrial Creditor States: G-10 The group of the G-10 originated in the ‘General Credit Agreement’ signed in 1962 by the IMF and the countries of the present G-7 as well as the Netherlands, Belgium and Sweden. Switzerland made a comparable IMF agreement in 1964 and since then it has been an ‘associated member’ of the G-10 (the term G11 has never established).

According to the number of credits it has granted, the G-10 understands itself as a group of the 11 greatest economies in the world. It meets twice a year (shortly before the meeting of the IMF’s interim committee), with the ministers of finance or the presidents of the central banks as representatives. In addition, representatives of the IMF, of the BIS and the OECD participate. The employees of these organization do all the necessary secretariat’s work which would be hard to manage for the informal boards. These meetings are prepared by the so-called vice-meetings (usually the under-secretaries of state), which are mostly identical with the OECD board of the working group 3 of the OECD’s Economic Committee (which will be explained in coming Section 7.3.1). The G-10 primarily deals with problems of the global financial system. The expositions made by the G-10 concerning the global currency reserves are more detailed and more telling than comparable data of the IMF. The G10 was the leading negotiation platform for the so-called ‘Smithonian Agreement’ which could succeed in stabilizing the global financial system after Richard Nixon had suspended the gold convertibility of the US-Dollar and also could forward the duration of life of the Bretton-Woods System again until 1973 (cf. EIBNER, 2008a, Understanding Economic Policy – Anwendungsorientierte Wirtschaftspolitik, Part C). In 1985, the G-10 drew up a report which was directed against the return to stable exchange rates which had been considered by US president Ronald Reagan. In 1989, the G-10 published a study to which the international financial markets paid much attention and which was about the role of the IMF and the World Bank concerning the debt strategy of the creditor states towards the indebted countries. 162

6.2 G-10 and G-20 In 1995, a study was published with which a reduction of the high budget deficits all over the world was claimed as a central possibility to permanently reduce the real interest level. At present, the G-10 is dealing with the heavily increasing international capital movements, which expand more and more also on speculation in raw commodity markets and not insignificantly contribute to the topical (2005/2007) lasting rise of commodity prices especially on the crude oil markets.

6.2.2 The Group of the Economically Most Powerful Industrialized Countries: G-20 The G-20 was founded in 1999 by the G-7 as the newest panel of international cooperation and lobby as a reaction to the East-Asian financial crises of 1997/98. It consists of the ministers of finance and the central banks’ presidents of the countries Argentina, Australia, Brazil, Canada, China, France, Germany, Great Britain, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the USA, and the EU as an institution and representative of those EU countries which do not have their own seat in the G-20. Thus, the G-20 represents the 19, or with inclusion of the European Union 20, most important economies of the world, which display •

87 % of the world economic performance,

•

80 % of world trade volume,

•

65 % of world population,

•

but also 65 % of the worlds’ poor people.

Furthermore, also the World Bank and the IMF are represented in the G-20. The panel normally holds their meetings once a year and has these primary goals: 1. stabilization of the world fiscal system and 2. liberalization of the world trade. Other, secondary, goals are: •

inflation reduction, 163

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•

low, growth-conducive commodity prices,

•

consistent financial market standards with the secondary aims

•

−

publication of financial data,

−

supervision of banking,

−

liberalization of national financial markets,

and also poverty reduction.

Currently (as of 2005/07) the G-20 basically deals with the safeguarding of crude-oil supply and requested already in October 2005 during the annual meeting in Xianghe near Peking more investments for an expansion of oil production and refineries, because ‘ongoing high and volatile oil prices increase the inflationary forces, slow the growth and destabilize the world economy’. The G-20 wants to ‘proceed resolutely against these imbalances and take action in the context of finance, monetary and exchange-rate policy, to solve these imbalances and to overcome these risks.’ (Cf. the final statement of the G-20, 2005a, pp. 7.) The second focal point in the work of the G-20 at the end of 2005 was the (unsuccessful) attempt to lead the so-called ‘DOHA-round’ of the WTO in Hong Kong in December 2005 to another deregulation success. The goal was a ‘cancellation of all forms of export subsidies for all agricultural products’ and a ‘significant improvement for the access to the markets of the G-20 countries’. (Cf. the final statement of the G-20, 2005b, p. 19.) This attempt, however, totally failed in July 2006 and the Doha-round ended unsuccessfully.

6.3

Bodies Representing the Interests of the Developing Countries: The G-77 and the G-24

6.3.1 The Group of the Developing Countries: G-77 The central informal board of the developing countries is the G-77, which originates in the so-called ‘Committee of the 75’ and was founded in 1964 by ministers in order to prepare for the foundation of UNCTAD. After having finished the first UNCTAD-round, 77 developing countries stated their point of view concerning the trade-related results of this circle. 164

6.3 G-77 and G-24

6.4 Bodies Representing the Lobby of the Creditors

In 1967, with the ‘Declaration of Algier’, the G-77 agreed upon a permanent cooperation as far as global economic questions are concerned in order to find common positions for the negotiation carried on with the industrial states within the UNCTAD. With 131 countries at present, the G-77 comprises almost all developing countries of the world (the name G-77 for the informal group would not have changed). The economic- and political influence of the G-77 is very small, not least because of its extreme heterogeneity. This lack of importance is strengthened by the fact, that, after the Cold War, neither the USA nor Russia or Europe is motivated to make some relevant economic concessions to the Third World because of political reasons.

6.3.2 The Group of 24: G-24 The Group of the 24 was founded in 1972 by the G-77 as a special monetary board of the emerging and developing countries. The G-24 consists of respectively eight alternating African, Asian and Latin American member countries. Representatives of the IMF and the World Bank participate in the discussions. Other international organizations are allowed to take part as observers. The G-24 was meant to be the Third World’s counterpart to the G-10. Just like the G-10, the G-24 draws up programmatic propositions concerning the international monetary policy, e.g., in 1979, the “Operational Programme for the Reform of the International Monetary System”, in 1985 a statement on the “Functioning and Improvement of the International Monetary System”, and in 1990 the report on the “Role of the IMF and the World Bank in Connection with the Debt Strategy” as antithesis on the report of the G-10 in 1989 mentioned in Section 6.2.1 which treated the same topic.

6.4

Bodies Representing the Lobby of the Creditors: Paris Club, London Club and Institute of International Finance

6.4.1 Paris Club The Paris Club is the platform for debt conversion of public credits since 1956. Its particularity lies in the fact, that an indebted country has the opportunity to negotiate with all creditors at the same time if it comes to overindebtedness or debt conversion problems. 165

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The institution of the Paris Club dates back to the year 1956, when France, at the request of the Argentinean government, organized a multilateral creditors’ meeting in Paris in order to discuss and regulate with all creditor states the payment problems of Argentina simultaneously. Since 1956, traditionally the French government has chaired the Paris Club. The advantage of that kind of official debt negotiations soon became evident: The advantage for the debtor lies in the possibility to be able to negotiate his debt problems with all creditors at the same time. The advantage for the creditors lies in the fact that they can be sure, that all approaches to solve the debt problem maintain the principle of an equal treatment. The Paris Club therefore is a very efficient board for the overcome of a debt crisis for all parties involved. In principle, the membership in the Paris Club is open for every creditor country. The only criterion for collaboration is the concern with payment problems of an indebted country. The readiness of the creditors to make concessions to the debtor is increased primarily by the fact, that debt conversion programs are accepted or paid by the Paris Club only if the IMF accompanies the debt conversion negotiations in a positive way and if the debtor(s) has/ have agreed upon a conditional adjustment program with the IMF. Therefore, the IMF participates in the negotiations not only as an observer, but essentially influences the conversion volume and conversion terms because of its knowledge about the financial and economic situation of the indebted country. It suggests itself, that this important role of the IMF simultaneous bears the great danger of taking a worldwide influence on the economic- and fiscal policy of debtors as well as creditors: Compare to such topics e.g. Susan STRANGE’s critics on multilateral organizations lead by ‘Econocrates’ like those of the IMF (STRANGE, 1996/2000, pp. 161, cf. also EIBNER, 2006b, pp. 508, or once again Susan GEORGE, 1983). From 1986 to 1988 there was the first big debt crisis in Mexico. In the course of the debt converting process additionally also of credits of other Latin American countries a sum of US-$ 157 billion in total had to be moved, of which Euro 16 billion were coordinated by the Paris Club. 166

6.4 Bodies Representing the Lobby of the Creditors One of the most important operations of the Paris Club so far was the cooperation with the IMF and the World Bank within the scope of the so-called BRADY-plan which was aimed at diffusing the debt crisis in Latin America. The over-indebtedness getting critical in 1989 especially in Brazil, Mexico, and Argentina, led to a commitment of the Bretton-Woods organizations amounting to a sum of US-$ 25 billion for debt re-purchase and interest payment safeguarding. Also the promise of the Paris Club was made to extend on a long-term basis the foreign debts of the governmental creditors concerned within the scope of the BRADY-plan and to reduce to a large extent the transfer burden resulting from interest payments on the basis of up to a 90 % interest capitalization for 10 years (cf. for more detail EIBNER, 1991a, pp. 420). Between 1989 and 1995 a number of altogether 13 debtor countries together with their creditors made agreements concerning a total debt sum of US-$ 191 billion. They agreed upon debt reductions and primarily upon the conversion of book credits into long-term loans, which are secured by credits provided by the IMF. In 1998/99 an explosive event was the debt conversion negotiation of the Paris Club in addition to the supportive operation of the IMF within the scope of the dramatic bank collapses in Malaysia, Thailand, Indonesia, South Korea and other South-east Asian countries and the currency crisis in Southeast Asia 1997/98 resulting from it. In the year 2001, the Russian payment moratoriums were the most important problems, which were negotiated with the Russian government by the Paris Club in close cooperation with the IMF. In 2001 only repayments of US-$ 1.25 billion and intercept payments of US-$ 2.6 billion were overdue. By the year 2003, Russian debt would have been increased up to more than US-$ 17 billion. Russia would not have been able to pay this sum, because this amount would have been more than one third of the whole national budget at that time. The total debt, that Russia owed the Paris Club in 2001 amounted to more than US-$ 50 billion, of which about US-$ 17 billion Russia owed Germany. Meanwhile (2007) the Russian financial situation however has improved dramatically. Together with the payment moratorium from 2001, the fact that commodity prices of crude oil and gas increased strongly is responsible for this positive development. 167

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Currently, the Paris Club is involved – together with IMF, World Bank, AfDB and OECD – in the big debt relief for least developed countries, especially African countries.

6.4.2 London Club and the IIF Since 1976 – when the foreign debt of the former Zaire had to be converted – an informal panel of selected international creditor banks exists in London as the counterpart to the Paris Club, which also deals with the problem of debt crises. Unlike the Paris Club, this panel doesn’t manage the debt conversions for public creditors, but only deals with credits between public debtors and private creditors. Another contrast to the debt-conversion policy of the Paris Club exists in the fact that interest debts are in principle not converted (which according to many national balance account directives would lead to a compulsory revaluation of the total debt sum, which is in no case in the interest of the creditor banks). Since 1982, when the big Latin American debt crisis had to be handled, the London Club together with public creditors of the Paris Club and BrettonWoods Institutes, the IMF and the World Bank, have been decisive authorities for handling debt crises or crises of the global financial system by means of a claim renunciation. An essential – primarily balance-motivated – strategy of the London Club to solve the problem of over-indebtedness is the granting of relatively generous debt reliefs in order to get regular interest payments for the remaining debt sum again as a return, so that necessary value adjustments in the form of write-offs for debt claims are reduced to a minimum. In the year 2000, the London Club agreed to a generous debt relief for Russia amounting to billions (a measure for which the Paris Club had no great understanding) and shortly after that made every effort to have Russia meet its financial liabilities (which finally succeeded only because of the preceding debt relief by the London Club).

168

6.4 Bodies Representing the Lobby of the Creditors The Institute of International Finance (IIF), with seat in Washington and founded in 1983 by international banks, is in close contact with the London Club of the commercial banks. It is the aim of the IIF to improve the information about the indebted countries and the communication between the creditors. Common positions of the banks are elaborated and represented to the debtor countries as well as to the international organizations (especially to the Bretton-Wood-Institutes).

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6.5

Review Questions

6.1

Why is it wise, to create informal boards of international cooperation?

6.2

What is meant by the G-7 and G-8?

6.3

Which previous economical and monetary activities of the G-7 have to be particularly emphasized?

6.4

What is the relevance of the G-10?

6.5

What are the main goals of the G-20?

6.6

Which aims follows the G-77?

6.7

Who are the G-24 and which ambitions do they have?

6.8

What is the Paris Club and which tasks does it have?

6.9

Explain briefly the function of the London Club and the IIF.

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7.1 Foundation of the OECD

The Organization for Economic Cooperation and Development (OECD)

This overview of the OECD is divided into the following subject areas:

7.1

•

Historic and economical background (Section 7.1),

•

goals, tasks and members of the OECD as one of the most wellknown European economic organizations (Section 7.2),

•

most important activities of the OECD (Section 7.3), including an overview of the economic strength of selected countries (Section 7.3.4), and

•

special relevance of the OECD also for business activities (Section 7.4).

Foundation of the OECD as the Successor of the OEEC

The OECD was founded on December 14th 1960 as a successor to the Organization for European Economic Co-operation (OEEC), set up by 20 Western European countries and the USA (cf. HARBRECHT, 1993a, 1993b).

Based in Paris, the OEEC was already founded in 1948, its primary objective was to support and organize as efficient as possible the American economic and financial aid especially within the scope of the Marshall Plan by the improvement of the general economic conditions in the Western European countries. The founder members of the OEEC were France, Great Britain, the Federal Republic of Germany (starting from October 31st 1949, as the legal successor of the three West allied zones of occupation, which were initial members) and Austria, the BeNeLux states, Denmark, Greece, Iceland, Ireland, Italy, Norway, Portugal, Sweden, Switzerland, and Turkey. Spain joined in 1959 and the USA and Canada as the ‘donor countries’ of the economic rebuilding were associated members since 1960. The special status of a complete collaboration without a membership had (because of political reasons) Yugoslavia and Finland since 1959.

Main achievements of the OEEC – which were continued from 1961 on in the OECD – were: 171

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•

in 1950 the foundation of the ‘European Payments Union’ (EPU), that existed until 1958. So, a multilateral clearing-system for monetary transactions between the OEEC countries was established,

•

in 1955 the conclusion of the ‘European Monetary Agreement’ (EMA), to set up and secure the 1958 established convertibility of the affiliated European currencies.

The project of the OEEC to create a huge European free trade zone was not succeeded. A parallel development of two different economic integration concepts followed instead: The European Economic Community (EEC) under the leadership of France and Germany as well as the European Free Trade Association (EFTA) under the special guidance of Great Britain (cf. Section 8.1.1). After the formation of the European Economic Community and the split of the OEEC states into two groups of different economic integration requests (the EEC in a form of a customs union with an extensive political integration intention, and the EFTA in a form of a merely free trade union without any integration goals), the OEEC was obsolete regarding a primary forum of economic integration in Europe. In 1961 the OEEC was replaced by the foundation of OECD on December 14th 1960, considered as a global cooperation panel, which changed to a panel not only for European, but also for industrialized states over the years.

Membership, Goals and Tasks

7.2

By middle of 2007, 30 countries belong to the OECD – as Figure 7.1 shows. These countries pursue the following goals within the framework of the OECD:

172

•

a continually rising standard of living in the member countries with the maintenance of financial stability by means of an optimum economic development and employment,

•

promotion of economic growth in the member states and developing countries,

•

an expansion of world trade as well as

•

reducing restrictions on competition e.g. in the form of cartels.

7.2 Membership, Goals and Tasks Organization for Economic Co-operation and Development: OECD Country (year of entry 1) ) (EU-Member-Countries bold) Luxembourg Norway USA

Population Gross Domestic GDP per 2006 Product 2005 Capita 2005 in million PPP in bn. US-$ 2) PPP in US-$ 2) 0.5 5 298

31 194 12,360

Ireland

4

165

41,000

Iceland

0.3

11

35,600

6

188

34,600

Canada

33

1,114

34,000

Austria

8

268

32,700

Denmark

Switzerland

55,600 42,300 41,800

8

242

32,300

Australia (1971)

20

640

31,900

Japan (1964) Belgium Finland (1969)

127 10 5

4,018 325 162

31,500 31,400 30,900

Netherlands

16

500

30,500

Germany

82

2,504

30,400

United Kingdom France Sweden Italy Spain

61 61 9 58 40

1,83 1,816 268 1,698 1,029

30,300 29,900 29,800 29,200 25,500

New Zealand (1973)

4

102

25,200

Greece Korea (South) (1996)

11 49

237 965

22,200 20,400

Czech Republic (1995) Portugal

10 11

199 204

19,500 19,300

Hungary (1996)

10

163

16,300

Slovakia (2001)

5

87

16,100

Poland (1996)

39

514

13,300

Mexico (1994) Turkey

108 70

1,067 572

10,000 8,200

1) Unless noted (in paranthesis), the countries' OECD membership startet in 1961 when the OECD was founded. 2) Calculation based on Purchasing Power Parity (PPP).

Figure 7.1:

Member Countries of the OECD, 2006 (Data from [www OECD 09/2006 GDP] and [www OECD 09/2006 – population]); GDP in US-$

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In order to achieve these goals, the OECD discharges above all the following responsibilities through a coordination of national economic policies (cf. the regularly updated and detailed reports of the OECD in the worldwide web: www.oecd.org):

174

•

collaboration on questions of the coordination of general economic and monetary policy, also regarding economically important nonmembers;

•

presentation of significant statistical information for diverse areas of economics for the description of the actual state, the economic development in the comparison of time, but also for the prognosis;

•

publication of reports on the general competitive situation (industrial competitiveness policies), including proposals for a severe prosecution of cartel irregularities in the member states, as recommended by the OECD e.g. in mid 2002: For the containment of anticompetitive cartel attitudes, the OECD required amongst others sensible imprisonments for the involved management, because the deterrent effect of the hitherto common fines is barely relevant in comparison to the potential attainable benefit via market constrictions.

•

Formulation of strategies against corruption and organized whitecollar crime;

•

development of international future scenarios of possible following trends;

•

assessments of particular problematic sectors for the OECD member countries, especially the ship-building and steel- and coal industries;

•

‘SMEs: Small and Medium-sized Enterprises’, an institution originated by the OECD based on an ‘Alliance for Jobs’ for small and medium-sized companies in a more global dimension;

•

solution of political and technical problems in the energy-, transportation- and agricultural areas;

•

international coordination and solution of labor market problems, especially those of education and social policy, mainly with the increasing obsolescence of the European society;

•

engagements on trends and alternatives in the transportation area;

•

a liberalization of international service- and capital transactions, and

7.2 Membership, Goals and Tasks •

regulations for national and international capital markets;

•

discussion of trade policy questions in coordination with the WTO;

•

coordination of development aid as well as economic aid for economically weaker OECD countries and also from developing countries (special attention in this causality can be called to the Club du Sahel).

More recent and of increasing importance are also: •

activities in the environmental sector, especially under the rubric ‘sustainable development’.

There, the programs of economic development base on the lasting protection of resources. In the framework of a sustainable development a sustainable management is required: both within in the scope of an environmentally oriented economy as an attempt by society to influence business decisions ecologically and especially within the scope of on-site environmental management in the concrete use of such management in the plants and companies. Thus, Sustainable Development stands for an economic development that corresponds to present needs, but without a restriction of the possibilities for future generations to meet their wants. The main point on this concept is the demand, to gain the wealth of the living and economic acting generations not at the expense of future generations. The special meaning is to keep the world in a condition that enables future generations a life, which stays qualitative at least at the present level (cf. The WORLD COMMISSION on ENVIRONMENT and DEVELOPMENT, 1990, the so-called ‘Brundtland Report’). Other new fields of OECD’s action are: •

Analyses and reports on research and technology policy, especially in the areas of innovation, scientific systems, biotechnology and basic science/ mega science,

•

telecommunications and information services as well as

•

electronic commerce, especially against the background of the increasing international relevance of the worldwide web.

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Organs and Most Important Activities of the OECD

7.3

The OECD is primarily a multilateral forum for discussion, which closely collaborates with all the other organizations presented in this book and primarily aims to support information exchange and economic cooperation. Thus the relevance of the OECD lies less in binding resolutions for the solution of special problems but much more in the discussion of current and structural problems of the world economy and of global economic integration. Because of their special importance, the following committees and working groups will be sketched briefly: •

Economic Policy Committee (EPC),

•

Committee on Capital Movements and Invisible Transactions (CMIT),

•

Committee on International Investment and Multinational Enterprises (CIME),

•

Committee on Financial Markets (CFM),

•

Development Assistance Committee (DAC).

•

Another point regarding the crucial work of the OECD is the close cooperation with the International Energy Agency (IEA). The OECD has been working closely with the IEA since 1974 with the goal of assisting in the diversification of sources of energy and of oil supply sources. Moreover, as a precaution against supply crises, stockpiling responsibilities and – in crises – demand restrictions as well as oil allocation mechanisms can be organized and coordinated.

7.3.1 The Economic Policy Committee The Economic Policy Committee (EPC) is composed of senior officials from economics ministries and central banks. It analyzes the economic situation in the OECD countries semiannually and discusses the national and international effects of national economic policy measures with the intention of harmonizing these. The results of the EPC are published in the semiannually appearing ‘Economic Outlook’ of the OECD. 176

7.3 Organs and Most Important Activities of the OECD Individual aspects of economic policy are discussed in two working groups, namely, questions of structural policy in the so-called Working Party No. 1 and questions of monetary policy in Working Party No. 3. The latter working group views itself as the Monetary Committee of the OECD, in which – in contrast to all other OECD bodies – only the representatives of the 11 largest creditor countries are allowed to participate: the so-called G-10, that traditionally name itself the ‘Great 10’, although this group including Switzerland meanwhile counts 11 members: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, United Kingdom, and USA, (cf. also Section 6.2.1) as well as representatives of leading international and European institutions (IMF, BIS, EU Commission and ECB). Matters for the deliberations of the Monetary Committee of the OECD are above all questions of balance of payments equilibria for OECD countries and problems in the foreign currency markets. A further important aspect of the work of the Economic Policy Committee consists of the analyses of the economic situation and -policy of individual member countries, which are prepared in the Economic and Development Review Committee (EDRC). In this regard, the larger OECD countries are examined every one and a half years – smaller economies less often. The resulting country surveys are produced on the basis of intensive conversations not only with the important government agencies and the central banks but also with national economic research organizations. Countries which want to join the OECD have to undergo a comparative investigation (which has the character of an entrance examination) by Working Party No. 3 and the EDRC. Entry to the OECD is allowed only to those countries, which have reached an OECD-consistent maturity level of economic development (cf. DEUTSCHE BUNDESBANK, 1997b, pp. 173).

7.3.2 The Committee on Capital Movements and Invisible Transactions and the Committee on Financial Markets The Committee on Capital Movements and Invisible Transactions (CMIT) monitors the commitments made by member countries to dismantle the restrictions on the international service sector and capital transactions.

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The commitments of the OECD countries are laid down in two liberalization codices – which go back to a codex of the OEEC from 1951 – concluded by the OECD Council: In 1951, the OEEC had already decided on liberalizations of trade and invisible transactions, which were codified in 1959. With the transition to the OECD, these codices were taken over in 1961, however without reference to a liberalization of foreign trade, since aspects of foreign trade in the meantime are looked after by the GATT (since 1995 by the WTO – cf. Chapter 1) and an overlap with the World Trade Organization was and is supposed to be avoided. The central content of the liberalization codices is that transactions between OECD countries are supposed to be just as unhampered as those within the individual OECD states. Escape clauses, however, are a component of the codices. On the basis of these clauses, temporary restrictions on already liberalized transactions are allowed, so far as the domestic and external economic situations require it. A relatively new field of attention for the Committee on Capital Movements and Invisible Transactions is the dismantling of barriers to direct investments. Here the CMIT works closely together with the OECD Committee on International Investment and Multinational Enterprises (CIME). The goal is to put the investment projects of OECD investors on the same level as those of the respective domestic investors and at the same time to create investmentprotection and dispute-arbitration rules. The Multilateral Agreement on Investments (MAI) is of special importance here. The Committee on Financial Markets (CFM), which observes and analyzes the structure and above all the development of national and international money and financial markets, is likewise an important body within the OECD. The committee reports in detail on its field of activity including current developments in the deregulation process in the international financial sector and existing obstacles in regard to portfolio transactions in its tri-annually appearing publication ‘Financial Market Trends’.

178

7.3 Organs and Most Important Activities of the OECD

7.3.3 The Development Assistance Committee A further important field of activity of the OECD is the collaboration in the area of development policy: in the Development Assistance Committee (DAC) all the donor countries of the OECD and the EU Commission are represented as equally entitled members. Observers from the IMF, the World Bank and the United Nations Industrial Development Organization (UNIDO) give assistance. The contents of the deliberations concern above all questions of financial conditions for assistance, foreign indebtedness, and possibilities for a coupling of aid for development with aspects of environmental protection within the framework of the promotion of a sustainable development, i.e., an enduring possibility of use of all resources necessary for future generations. Moreover, the concrete arrangements regarding lending conditions for official development assistance (ODA) are coordinated for member states by the DAC and examined on basis of the demands and target figures of UNCTAD. The results of this examination are published by the OECD secretariat. UNCTAD regularly demands – as is already known from Section 2.2.2 – specific international standards in aid for development. An inspection of the financial aid for development actually transferred shows however – from the viewpoint of UNCTAD in very sober fashion – that almost none of the donor states – with the exception of the countries Denmark, Luxembourg, the Netherlands, Norway, and Sweden already named in Chapter 2 – have achieved the currently valid quota of 0.7 % of Gross National Income for official development assistance. Figure 7.2 gives a summary of the official development assistance of the OECD countries which participate in the DAC. Given these figures, it is obvious that the development policy demands of UNCTAD could not be executed into action. The goal of UNCTAD, to prevail upon the industrial countries to contribute aid for development of at least 0.7 % of the respective GNI, did not even reach 50 % on average during the years: the OECD average was around 0.40 % in 2005. At first glance, this is a joyful rise, because this number has been declining for 15 years and fell down to 0.25 % in 2003. Admittedly, this is basically also a consequence of increased development assistances particularly by the USA (from 0.15 % in 2003 up to 0.22 % in 2005) and Great Britain (from 0.34 % in 2003 up to 0.48 % in 2005), which are paid among others as military aid for the struggle against terrorism or which are used for Afghanistan and Iraq – and hence are without any benefit for the large number of poor countries. 179

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Official Development Assistance (ODA) DAC-Country 1993 – 1995

US-$ (billions)

in % of GNI

UNCTAD-performance targets of 0.7 % ODA/ GNI (over-) fulfilled Denmark Norway Sweden Netherlands

1.5 1.9 1.1 2.8

1.00 0.98 0.94 0.79

Below UNCTAD performance targets, but DAC average or better: France Canada Luxembourg Belgium Switzerland Australia Finland Germany Austria Great Britain Portugal

8.3 2.2 0.1 0.8 1.0 1.0 0.3 7.1 0.7 3.1 0.3

Σ Figure 7.2:

180

US-$ (billions)

in % of GNI

UNCTAD-performance targets of 0.7 % ODA/ GNI (over-) fulfilled Norway Sweden Luxembourg Netherlands Denmark

2.8 3.3 0.3 5.1 2.1

0.93 0.92 0.87 0.82 0.81

Below UNCTAD performance targets, but DAC average or better:

0.60 0.42 0.38 0.36 0.35 0.35 0.35 0.34 0.32 0.30 0.30

Belgium Austria Great Britain France Finland Switzerland Ireland

13.0 1.3 0.1 2.4 0.1 9.1

0.28 0.26 0.24 0.24 0.24 0.13

Germany Canada Italy Spain Japan New Zealand Australia Greece USA Portugal

58.2

0.29

Below the DAC average: Japan Spain Ireland Italy New Zealand USA

DAC-Country 2005

2.0 1.6 10.8 10.1 0.9 1.8 0.7

0.53 0.52 0.48 0.47 0.47 0.44 0.41

Below the DAC average:

Σ

9.9 3.7 5.1 3.1 13.1 0.3 1.7 0.5 27.5 0.4

0.35 0.34 0.29 0.29 0.28 0.27 0.25 0.24 0.22 0.21

106.8

0.40

Official Development Assistance (ODA) of the DAC countries in the average of the years 1993 to 1995 and in the year 2005 (Data from DEUTSCHE BUNDESBANK, 1997b, p. 179 and [www BMZ 10/2006])

7 Excursus: World Economic Performance This poor performance of the official development assistance has to be criticized also because the UNCTAD raised the reference value from at least 0.7 % of the GNI to 1.0 %: Finally the donor countries didn’t care for this raising of the reference value. The Development Assistance Committee was more successful in regard to the demand to grant financial assistance under the most favorable conditions possible. Thus the DAC recommended that, in regard to the ODA, the grantin-aid element in the form of transfer payments and concessions on loan conditions should amount to at least 86 % of the total financing. The current quota is on the average 92 %. The ‘Development Center’, founded in 1962, takes on a special meaning in this context. It is a research institution, supported by 23 OECD countries as well as Argentina with Brazil, and in close collaboration with the developing countries supposed to help solve the practical problems of lasting development assistance: In concrete terms, the Development Center is active in •

the limitation of population growth,

•

the expansion of the private sector in developing countries,

•

the entry of developing countries to international financial markets,

•

debt management, and

•

concrete promotion of savings formation.

•

Of ever more importance for the Development Center is the necessity to allow the developing countries to participate more vigorously in the increasing economic globalization.

7.3.4 Excursus: World Economic Performance – in GDP – An Overview Within the presentation of the member countries of the OECD, Figure 7.1 already gave an overview of the different development of these countries, which all belong to the richer nations of the world, including an overview of population and economic power. Due to the contents of Section 7.3.3 the necessity to coordinate development policies became obvious by explaining the area of responsibility of the Development Assistance Committee (DAC). 181

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To concretize this necessity, Figure 7.3 gives an overview of the highly unequal status of development in a global comparison. The following parameters are depicted for selected countries of all relevant geographical country groups: •

the variation of population between 2001 and 2006; here it becomes apparent, that primarily rather poor countries partly show a very high growth of population, which is at least not very beneficial for the increase of the per capita income;

•

the amount of the GDP in the year 2005, measured for one thing in purchasing power parity (PPP) and for another thing in current exchange rates of the year 2005 (ExR);

•

a comparison of the per capita income in PPP for the years 2000 and 2005;

•

the evaluation of the per capita income in the year 2005 alternatively in PPP and ExR-calculation.

(Memo: In the bilingual Figures 7.3 the purchasing power parities between US-$ and Euro are calculated by 1 Euro = US-$ 1.17 – based on the calculations made by DEKA BANK, 2004, and [www DEKA BANK 03/2004]. The valid official exchange rate between Euro and US-$ was 1 Euro = US-$ 0.9236 in the year 2000, and for 2005 this relation amounted to 1 Euro = US-$ 1.2441: cf. DEUTSCHE BUNDESBANK, Monatsbericht August 2006, table X, p. 74*.)

The main predication of an evaluation in purchasing power parities is, that ‘exact’ exchange rates arise as a function of the national purchasing power (thus of the respective price level): So, for instance, an evaluation of the GDP in purchasing power parities states, which value this in any country generated value added (i.e. in goods and services) would have there denominated in the currency of a reference country (usually in US-$). Hence, the net value of the good is considered in the meaning of a basket of goods’ view. (On definition and also criticism on the purchasing power parity theory see in detail the bilingual textbook: EIBNER, 2006c, Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Section 13.1, pp. 232.)

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7 Excursus: World Economic Performance Country (-groups) selected countries, graded by GDP per capita 2005 in PPP

Population 2001 2006 in mill.

in mill.

GDP 2005 2005 PPP in bn. US-$

The richest Countries (for comparison): 0.06 0.07 4.5 Bermuda 0.4 0.5 30.7 Luxembourg 4.5 4.6 194.1 Norway 278.1 298.4 12,360 USA 7.2 7.5 241.8 Switzerland 82.1 82.4 2,063 Germany Eastern Europe: 2.0 2.0 43.4 Slovenia 10.3 10.2 199.4 Czech Republic 1.4 1.3 22.3 Estonia 10.1 10.0 162.6 Hungary 5.4 5.5 87.3 Slovakia 3.6 3.6 49.2 Lithuania 33.6 38.5 514.0 Poland 2.4 2.3 30.3 Latvia 4.3 4.5 55.8 Croatia 145.5 142.9 1,589 Russia 7.7 7.4 71.5 Bulgaria 66.5 70.4 572.0 Turkey 22.4 22.3 183.6 Romania 2.0 2.1 16.0 Macedonia 48.8 46.7 340.4 Ukraine 10.4 10.3 70.7 Belarus 3.5 3.6 19.0 Albania 10.7 9.4 41.2 Serbia Latin America: 37.4 39.9 518.0 Argentina 15.3 16.1 187.1 Chile 3.8 4.1 44.7 Costa Rica 101.9 107.5 1,067 Mexico 3.4 3.4 33.0 Uruguay 174.5 188.1 1.556 Brazil 40.3 43.6 337.5 Colombia 3.0 3.2 22.8 Panama 23.9 25.7 153.7 Venezuela 27.5 28.3 164.5 Peru 5.7 6.5 29.1 Paraguay 12.7 13.5 56.9 Ecuador 11.1 11.4 39.2 Cuba 8.3 9.0 26.0 Bolivia 4.9 5.6 16.1 Nicaragua 7.9 8.3 14.1 Haiti

GDP per capita 2000 2005 2005

in ExR in bn. US-$

PPP in US-$

PPP in US-$

in ExR in US-$

4.5 31.8 246.9 12,490 367.0 2,730

49,200 49.100 36.300 34.600 30.400 26.300

69,900 55,600 42,300 41,800 32,300 30,400

69,900 63,600 53,700 41,800 49,000 36,900

35.2 109.4 12.2 106.4 43.1 23.5 246.2 14.4 34.9 740.7 25.8 332.5 72.7 5.3 75.1 26.7 8.7 19.2

12,000 12,900 10,000 11,200 10,200 7,300 8,500 7,200 5,800 7,700 6,200 6,800 5,900 5,800 3,800 3,700 3,000 2,300

21,600 19,500 16,700 16,300 16,100 13,700 13,300 13,200 11,600 11,100 9,600 8,200 8,200 7,800 7,200 6,900 4,900 4,400

17,600 10,700 9,400 10,600 7,800 6,500 6,400 6,300 7,800 5,200 3,500 4,700 3,260 2,500 1,600 2,600 2,400 2,000

182.0 115.6 19.4 693.0 13.2 619.7 97.7 14.9 106.1 69.8 7.3 30.7 19.7 9.7 5.0 3.9

12,900 10,100 6,700 9,100 9,300 6,500 6,200 5,800 6,200 4,500 4,700 2,500 3,400 2,900 2,700 1,900

13,100 11,300 11,100 10,000 9,600 8,400 7,900 7,200 6,100 5,900 4,900 4,300 3,500 2,900 2,900 1,700

4,600 7,200 4,700 6,500 3,900 3,300 2,200 4,700 4,100 2,500 1,100 2,300 1,800 1,100 900 400

183

Part C Country (-groups) selected countries, graded by GDP per capita 2005 in PPP

7 OECD

Population 2001 2006

GDP 2005 2005

2000

GDP per capita 2005 2005

in mill.

in mill.

PPP in bn. US-$

in ExR in bn. US-$

PPP in US-$

PPP in US-$

in ExR in US-$

2.4 5.9 6.0 2.0 22.8 66.1 16.7 69.5 23.3 3.2

2.6 6.4 0.7 2.4 27.0 68.7 18.9 78.9 26.8 3.8

111.3 154.5 15.8 44.8 338.0 561.6 72.3 303.5 94.1 2.6

98.1 114.3 11.0 52.8 264.0 181.2 25.8 92.6 46.5 3.9

22,800 18,900 15,900 15,000 10,500 6,300 3,100 3,600 2,500 600

43,400 24,600 23,000 19,200 12,800 8,300 3,900 3,900 3,400 700

37,700 17,900 15,700 26,400 9,800 2,600 1,400 1,200 1,700 1,000

43.6 1.6 9.7 1.9 30.5 30.8 13.8 15.9 126.6 66.3 53.6

44.2 1.6 10.2 2.0 32.9 33.2 15.9 17.3 131.9 74.8 62.7

533.2 17.2 83.5 15.0 233.2 138.3 46.0 40.8 174.1 62.8 40.7

187.3 9.0 30.9 5.7 85.3 51.9 28.0 15.4 77.3 8.8 7.3

8,500 5,800 6,500 5,200 4,100 3,000 1,000 1,900 1,000 700 600

12,000 10,500 8,300 7,400 7,200 4,200 3,200 2,400 1,400 900 700

4,200 5,600 3,000 2,610 2,600 1,600 1,800 900 600 100 100

4.3 22.4 47.9 23.0 61.8 1,300 82.8 228.4 967.5 78.5 144.6 134.7 22.0 26.8

4.5 23.0 48.9 24.4 64.6 1,314 89.5 245.5 1,095.4 84.4 165.8 147.4 23.1 31.1

124.3 631.2 965.3 290.2 560.7 8,859 451.3 865.6 3,611 232.2 393.4 304.3 40.0 21.5

110.6 323.4 801.2 125.8 183.9 2,225 91.4 270.0 719.8 43.8 89.6 63.6 n. a. 7.0

26,500 17,400 16,100 8,400 6,700 3,600 3,800 2,900 2,200 1,700 2,000 1,800 1,000 800

28,100 27,600 20,400 12,100 8,300 6,800 5,100 3,600 3,300 2,800 2,400 2,100 1,700 800

24,600 14,100 16,400 5,000 2,800 1,700 1,000 1,100 700 500 500 400 n. a. 200

19.4 3.9 0.9

20.3 4.1 0.9

640.1 101.8 5.4

612.8 94.6 1.9

26.400 20.500 6,100

31,900 25,200 6,000

30,200 23,100 2,100

6,062

6,525

60,710

43,070

7,100

9,500

7,000

Middle East: Un.Arab Emirates

Israel Bahrain Kuwait Saudi Arabia Iran Syria Egypt Iraq

Gaza/ West Bank

Africa: South Africa Botswana Tunisia Namibia Algeria Morocco Angola Cameroon Nigeria Ethiopia Congo (Zaire) Asia: Singapore Taiwan Korea (South) Malaysia Thailand China Philippines Indonesia India Vietnam Pakistan Bangladesh Korea (North) Afghanistan Oceania: Australia New Zealand Fiji WORLD total

184

7.4 The Practical Importance of the OECD for Business Activities Figure 7.3:

Overview on population 2001/ 2006, GDP 2005 – calculated in purchasing power parity (PPP) and official exchange rates 2005 – as well as of per capita income (GDP) 2000/ 2005 calculated in PPP (2000/ 2005) and official exchange rates (ExR) 2005 (data from CIA, 2001; CIA, 2006; [www CIA Factbook 11/2001]; [www CIA Factbook 09/2006]; own calculations; and [www Welt in Zahlen 09/2006] for Cuba and Gaza/ West Bank). All GDP numbers in US-$.

The high differences in the GDP calculation related to purchasing power parity and exchange rate primarily result from the international relevance and respectively from the concrete transnational ‘usability’ of the particular national currency:

The stronger the valuation of a currency (like for example the Swiss franc) and hence the demand for this currency in relation to the reference currency of the US-$, the more differs the GDP upward in the exchange rate calculation from the calculation in purchasing power parities; in Figure 7.3 this becomes obvious for Switzerland, Norway, Germany, and Luxembourg in the year 2005. On the other hand the Gross Domestic Product will differ in the exchange rate calculation more downward from the purchasing power parity the more unsound and for international transactions more unusable the respective currency is: Drastically examples for this are nearly all developing countries: Their currencies are mostly shattered due to high rates of inflation, it exists (often in consequence of (civil) wars) no trust in the function for the long-term store of value of these ‘currencies’. From the economic point of view, this is a dramatic situation for the concerned countries, because they can purchase imports almost solely with foreign currencies. But those foreign currencies – valued in national currency – are far more expensive compared to the national currency, that stands for the real domestic economic power.

7.4

The Practical Importance of the OECD for Business Activities

The OECD regularly produces publications on current economic development, which are among the most respected data sources in the world and describe in detail the international economic situation and development. In this respect these publications also present ever more important reading material for companies in the wake of the globalization of business.

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Worth mentioning in this context above all is the semiannually appearing publication Economic Outlook, which describes in detail the international economic situation and makes forecasts regarding the short- and midterm economic development: •

OECD: Economic Outlook.

In addition, the economic development of all member countries is analyzed in regular turns in a respective ‘country report’, which can provide valuable information for all exporting companies. See the relevant: •

OECD: Economic Survey.

From the enormous variety of publications of the OECD, above all the analyses of the financial markets of the OECD countries can also be valuable: •

OECD: Financial Market Trends.

The reviews of short-term indicators of the economic development of the Eastern European countries are in the same league: •

OECD: Short-Term Economic Indicators – Transition Economies.

The work of the OECD is important for business decisions in so far as regulatory and economic policy conditions are described and developments are noted that can be of high importance for enterprises. From OECD publications, statements and prognoses about further national and international economic development can be made, which may be very useful for strategic business segment expansions and can give export-oriented companies important information on the economic development of relevant export markets. In this context especially the already-mentioned codices of the OECD on the regulation of free capital movement and on the liberalization of trade and invisible transactions (monetary flows) are important. These codices are in general relevant for direct investments in foreign countries, for dividend transactions from abroad, and for exporting activities. Also of crucial importance are especially the Multilateral Agreement on Investments (MAI) to equate foreign investments and direct investments with domestic investments and the agreements on investment protection and the rules for dispute arbitration.

186

7.5 Review Questions

7.5

Review Questions

7.1

From which organization emanated the OECD? Name the intention and the year of the foundation.

7.2

Which goals and tasks does the OECD pursue?

7.3

Does the OECD make decisions binding its member states?

7.4

Name the most important committees of the OECD.

7.5

Which more recent tasks does the OECD or, more precisely, the CMIT face?

7.6

Which primary tasks does the DAC have?

7.7

What is the reason, that the in current exchange rates calculated Gross National Income of developing countries is mostly much lower than their in purchasing power parities valued GNI?

7.8

What is the main advantage of the OECD for the business person?

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8

8 The EU

Economic and Political Integration of Europe through the European Union (EU)

The following chapter gives an overview of central fields of the recent economic integration of the European Union. The treaties cited in the following can be found in paper version e.g. in: •

Alfredo PANARELLA, 1995 (Maastricht ECT and EUT),

•

Anthony COWGILL/ Andrew COWGILL, 1999 (Amsterdam ECT and EUT),

•

Anthony COWGILL/ Andrew COWGILL, 2004 (ECT and EUT in the recent – 2007 – relevant version of the Treaty of Nice including its amendments until 2005).

In the worldwide web all relevant treaties can be found as shown in more detail in the bibliography: •

EEC-Treaty [www EECT],

•

Single European Act [www SEA],

•

Maastricht ECT [www Maastricht ECT],

•

Maastricht EUT [www Maastricht EUT],

•

Amsterdam ECT [www Amsterdam ECT],

•

Amsterdam EUT [www Amsterdam EUT],

•

Nice ECT [www Nice ECT],

•

Nice EUT [www Nice EUT],

•

Treaty of the 1st Eastern EU-Enlargement 2004 [www Act of 1. Eastern EU-Accession],

•

Treaty of the 2nd Eastern EU-Enlargement 2007 [www Act of 2. Eastern EU-Accession].

If statements regarding the ECT or EUT are not specified, they always refer to the treaties of Nice in the updated version, which were legal by the press date of this book ([www Nice ECT] and [www Nice EUT]; see also COWGILL/ COWGILL, 2004). Sources and analyses referring to the European policy in the broadest sense can be found in the for decades eminently respectable monthly journal: INTERNATIONALE POLITIK, EUROPA ARCHIV, available in a German and an English version, also on the Internet: http://en.internationalepolitik.de/. 188

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In the following contents the reader will be introduced to the following topics of European Integration: •

In Section 8.1 the most important stations defining the way to economic integration in Western Europe are briefly mentioned.

•

Beginning with Section 8.2, the institutional framework of the European Union is presented showing the treaty fundamentals of the European integration and its central steps of integration,

•

in Section 8.3 the decision-making bodies of the European Union are introduced. There is an explanation of what bodies with what powers guide and decide the economic-, political-, and social integration of Europe.

•

Building on this, Section 8.4 briefly sketches the legislative procedure of the European Union.

•

Section 8.5 answers the questions, which financial resources the Union has and how these are used.

•

The still financially most important area of European activity – agricultural policy – is explained in Section 8.6 in the form of an assessment of current positions as well as of a discussion of perspectives.

•

Section 8.7 explains the most important achievement of the European Union regarding European integration – the single market.

•

Section 8.8 describes the activities of the European Union in the framework of economic regional- and structural adjustment policy.

•

The research- and development policy of the European Union is discussed in Section 8.9.

•

Section 8.10 surveys the discussion on extending the European Union by the addition of a social union.

•

Section 8.11 contains concluding comments on the main effects of the introduction of the Euro in the European Economic and Monetary Union.

Readers more interested in the areas of ‘European Monetary Union’ and ‘European Monetary Policy’ are referred to the also bilingual textbooks of • EIBNER, 2006c: Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Chapter 15: The European Monetary Union, and • EIBNER, 2008a: Understanding Economic Policy – Anwendungsorientierte Wirtschaftspolitik, Part C: Monetary- and Currency Policy of the European Central Bank. 189

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8.1

8 The EU

Integrating Steps on the Way to the European Union: From the ECSC to the Nice Treaty

8.1.1 Phases of Economical and Political Integration in Western Europe After World War II it was obvious, that the European future could only be created with a close political- and economical integration: On the one hand to make conflicts or even wars in Western Europe a priori impossible; on the other hand to establish a counterbalance to the at that time strong increasing political and economical power – the Soviet Union, because the ‘cold war’ between the superpowers USA and the USSR became already apparent in the late 40s. However, a reasonable political- and economical integration is associated more or less with a loss of sovereignty for the integration willing states. But at first, there was a lack of consensus for this in Europe. Hence, most of the states – especially Great Britain – had a negative opinion about the first general (and at that time by the USA massive promoted) possibilities of a closer integration of Western Europe. This had been imaginable in the framework of the 1948 founded OEEC (cf. Section 7.1) or the 1949 founded and to date still existing Council of Europe: Only loose, purely intergovernmental organization forms were accepted, so the Council of Europe and the in Section 7.1 mentioned OEEC obtained no supranational authority to decide. The Council of Europe rather had the goal anyway, to define certain basic values by means of a loose integration. Also, its integration power was already interfered by the East-West-conflict due to the high membership shortly after the foundation. A first genuine integration structure including a supranational character was realized with the ratification of the ‘European Coal and Steel Community’ (ECSC) in 1951. With the formation of the ECSC the European integration started, which hit its preliminary and current peak by the foundation of the European Economic and Monetary Union (EEMU) in 1999. The ECSC and so the today’s European Union has its origin in a plan announced in 1950 by the then French Minister of Foreign Affairs, Robert SCHUMAN, to promote a more intense economic integration of Western Europe. 190

8.1 Integrating Steps of the EU The primary goal of the SCHUMAN Plan and the ECSC respectively was to place the German coal and steel industry under European control. In the wake of the cold war, a united Europe with Germany incorporated into the West had first priority, the entire coal and steel industry of the Benelux countries, France, Germany, and Italy was put under European control within the framework of the ECSC – in order to avoid a one-sided, permanent loss of German sovereignty, which would inevitably have led Germany to separate from the ECSC later on. A central target of the early European unification idea primarily was the reconciliation between the ‘hereditary enemies’ Germany and France, who had a poor relation since the Napoleon Wars and especially since the war of 1870/71. The SCHUMAN Plan was followed by ambitious attempts to tighten the political European integration: In 1950 the attempt was started to implement a uniform defense policy by the ‘PLEVEN Plan’ (named after the at that time French war minister and later prime minister René PLEVEN): This idea led to the foundation of the European Defense Community, EDC, on May 27th 1952. So, the first effort was carried out to institutionalize also a political and defense policy collaboration beside an economic integration. With the so-called ‘BEYEN Plan’ (named after the at that time Dutch foreign minister Johan W. BEYEN) of 1953 a macroeconomic integration was already conceived, but was first realized after many years by the Single European Market concept and the completed customs union. The suggestion for the foundation of a European Political Community, the EPC, was more extensive and presaged already aspects of the 1993 instituted European Union. But a drier setback for these sophisticated integration steps was the year 1954, in which the contract of the European Defense Community, EDC, was not ratified by the French National Assembly: Hence, the 1952 founded EDC was political dead. Also a political European integration in terms of the planned EPC was abortive as well as its full economic integration. In order to compensate for this dramatic setback of a closer political integration in those days, the economic integration was pushed (step-by-step) consequently in the following years.

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Over the conference of Messina in 1955 and the famous ‘SPAAK report’ (named after the at that time Belgian foreign minister and for several times Belgian prime minister, Paul-Henri SPAAK) the integration evolved in the foundation of the European Economic Community (EEC) as a European customs union with the signing of the so-called ‘Treaties of Rome’ on March 25th 1957. The aim was an increasing tighter economic integration in the future and the foundation of the European Atomic Energy Community (EAEC). With the formation of these two European communities the permanent emancipated incorporation of Germany was signed and sealed at the same time. The 6 founder members of the ECSC, the EEC and the EAEC: France, the Low Countries (also known as BeNeLux – Belgium, the Netherlands and Luxembourg), Germany and Italy, are the main initiators of the European integration down to the present day.

Figure 8.1:

Ratification of the ‘Treaties of Rome’ for the foundation of the EEC and EAEC in Rome on March 25th 1957. (First row 5. and 6. position from the left: The German representatives, Federal Chancellor Dr. Konrad Adenauer and Prof. Dr. Walter Hallstein, State Secretary of the Foreign Office.) (Source: Bundesarchiv.)

Although the signatory states of the EEC initially settled for ‘only’ one customs union with a uniform external tariff concerning third states, other further integration goals were already formulated. 192

8.1 Integrating Steps of the EU

The intention of the ‘foundation fathers’, especially of the first German Federal Chancellor Konrad ADENAUER, the Belgian Foreign Minister SPAAK, the French Robert SCHUMAN and Jean MONNET and above all the Italian Alcide de GASPERI, was to establish a common European market (Single European Market) in the long run and to come to a successive convergence of the national economic policies in the meaning of an increasingly geared European economic and financial policy. The European non-member states – especially Great Britain – were very surprised by the extremely successful economic integration of the EEC. They firstly thought a too close connection of the national economic development could only harm. Hence, Great Britain – because of several political motives – wanted to avoid the foundation of the EEC as a customs union with supranational character by all means and tried to found a ‘Great European Free Trade Area’ within the scope of the OEEC. However, this attempt failed in 1958 especially by the resistance of the French president de Gaulle and the other EEC members, who looked upon the customs union only as the beginning of a much closer economic integration. After Great Britain suddenly saw itself excluded from the core European integration, the European Free Trade Association (EFTA) was founded on its initiative in the Swedish Saltsjöbaden on June 21st 1959 by Denmark, Great Britain, Norway, Austria, Portugal, Sweden and Switzerland. In contrast to the EEC, the EFTA achieved no supranational status: In fact, it remained to date on an intergovernmental organizational structure of a pure free trade area between the member states, without any body of rules and regulations for a third party trade. The EFTA countries recognized very fast the predominance of the integration concept by the EEC: Accordingly, Great Britain tried to join the EEC already in 1963 and again in 1967; both times the entry failed because of the veto by the French president de Gaulle, who did not want to loose the French political supremacy in the EEC in consequence of a British accession. The joining of the EFTA countries into the EEC and the EC respectively during the 70s and 80s as well as the composition of the EU are presented in detail in Section 8.2. The integration power of the EEC was and still is the unique track record of an intergovernmental integration will and an associated relinquishment of national sovereignty for the creation of supranational integration and resultant welfare benefits in the whole economic and global policy. Based on Article 14 of the EEC Treaty of 1957 and of three accelerated decisions, the 193

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8 The EU

complete abolition of bilateral customs duties with, however, unified external tariffs was achieved by July 1st 1968. Besides the original, primary goals of the EEC, • common agricultural policy (cf. Section 8.6), • common trade and economic policy (cf. Section 8.7), • common competition policy as well as • common transportation policy new tasks such as especially • regional economic policy and economic adjustment policy (cf. Section 8.8), • research and technology policy (cf. Section 8.9), • the beginning way to a social union (cf. Section 8.10), and • environmental policy increasingly appeared. Together with other content-oriented and institution-oriented regulations – such as especially a strengthening of the rights of the European Parliament – these new tasks received their legal foundation from • the Single European Act (SEA) of 1986 (cf. [www SEA]), which embodied the first big contract modification of the EEC Treaty, which changed the EEC Treaty (in Title II), effective July 1st 1987. Title III altered the ECSC Treaty. Moreover, the SEA, Title V, created for the first time an institutional basis for the • European Political Cooperation (EPC), which incorporated a foreign policy for the Community as a mid-term goal of an integrated European Union.

After the realization of the European Single Market on January 1st 1993 (see Section 8.7), the idea of a political union again came increasingly to the forefront of further efforts for integration. Accordingly, the EEC Treaty was once again changed and supplemented in important respects by means of the so-called Treaty on the European Union, effective November 1st 1993 and better known as the Maastricht Treaty, where the implementation of the common currency – the Euro – (cf. Section 8.11) placed the highlight. On the base of the members of the European Union as of 2007, Figure 8.2 gives an overview of the most important economic facts about these countries as well as – in column 2 – the time of entry in the EEC of the 6, the EC of the 9 and 12 respectively, and the EU of the 15 and 25 resp. 27. 194

8.1 Integrating Steps of the EU

Population Year of 2005 entry (million)

Country

Belgium

Area (km²)

GDP in GDP per GDP 2006 ExR capita (bn. Euro) in 2006 per in PPP * 2006 Exchange capita Rates (ExR) (EU 15 = 100) (Euro)

1952

10.4

30,510

313.041

29,800

108

1952

82.5

547,030

1,781.121

28,300

102

1952/90

60.6

357,021

2,307.967

28,000

101

Italy

1952

58.5

301,320

1,473.117

25,100

91

Luxembourg

1952

0.5

2,586

32.300

70,200

254

Netherlands

1952

16.3

41,526

529.245

32,400

117

Denmark

1973

5.4

43,094

221.362

40,800

148

Great Britain

1973

4.1

244,820

1,889.211

31,200

113

Ireland

1973

60.0

70,280

173.848

40,900

148

Greece

1981

11.1

131,940

194.777

17,500

63

Portugal

1986

10.5

92,931

152.450

14,400

52

Spain

1986

43.0

504,782

976.503

22,200

81

Austria

1995

5.2

83,858

256.464

31,000

112

Finland

1995

8.2

337,030

167.371

31,900

115

Sweden

1995

9.0

449,964

299.242

33,000

120

385.4

3,238,692

10,768.019

24,500

100

9,250

14.307

18,500

67

France Germany

Total (EU-15) 2004

Cyprus

1.3

Czech Rep.

2004

2.3

78,866

109.696

10,700

39

Estonia

2004

3.4

45,226

12.818

9,500

35

Hungary

2004

0.4

93,030

92.768

9,200

33

Latvia

2004

38.2

64,589

15.336

6,700

24

Lithuania

2004

5.4

65,200

23.341

6,900

25

Malta

2004

2.0

316

4.769

11,700

42

Poland

2004

10.2

312,685

269.802

7,100

26

Slovakia

2004

10.1

48,845

42.870

7,900

29

Slovenia

2004

0.7

20,253

29.415

14,700

53

Bulgaria

2007

7.8

110,900

24.260

3,100

11

Romania

2007

21.7

238,400

90.085

4,200

15

489.0

4,326,252

11,497.486

20,800

84.5

Total (EU-27)

* GDP-information at market prices, valued in exchange rates; the right column assesses the GDP per capita in purchasing power parity (PPP) to show the people’s already attained purchasing power in the acceded states relative to the average of the former EU 15, that is fixed with 100.

Figure 8.2:

Main facts about the 27 member states of the European Union (Data from EUROSTAT, 2007b, p. 51; [www EUROSTAT 11/2006]; own calculations)

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8.1.2

8 The EU

Overall Social Objectives, Tasks and Perspectives of the European Union based on the Treaties of Maastricht, Amsterdam, and Nice

The EU Treaty of 1992, which is also referred to as the Maastricht Treaty, contained – as the foundation treaty of the European Union – a catalogue of goals for the development of the EU up to the year 2000 including the foundation of the European Monetary Union (cf. Section 8.11 and the remarks on the European Central Bank in EIBNER, 2008a: Understanding Economic Policy – Anwendungsorientierte Wirtschaftspolitik, Part C). The Treaty of Amsterdam, however – as the result of the conference of governments in 1996/ 1997 on the reform of the European treaties – realizes important steps in order to bring the European Union closer to its citizens and to affirm its political identity more vigorously. In order to give these intentions legal underpinnings, the contents of both the EU- and the EC Treaties were once again fundamentally revised and got a new structure in 1997, and named as the Treaty of Amsterdam it replaced the Treaty of Maastricht. The Amsterdam Treaty pushed the European Union forward above all in the following four main areas: 1. Strengthening of common foreign and security policy as a guarantee of peace and external security: Title V, Art. 11 – 28, Amsterdam EU Treaty (previously Art. J1 – J18, Maastricht EU Treaty), and Title I, Art. 3, Amsterdam EU Treaty (previously Art. C, Maastricht Treaty). 2. Improvement of cooperation in the areas justice and home affairs, especially with the goal of improving the fight against (organized) crime and terrorism including a strengthening of Europol and a common asylum and immigration law: Title VI, Art. 29 – 42, Amsterdam EU Treaty (previously Art. K1 – K14 Maastricht EU Treaty), and especially Title IV, Art. 61 – 69, Amsterdam EC Treaty (previously Title IIIa, Art. 73i – 73q, Maastricht EC Treaty). The Schengen Agreement – i.e., the abolition of intra-EU border checks in EU countries with common borders – was also incorporated into the Amsterdam EU Treaty as Protocol No. 2. 3. Improvement of the efficiency and capacity for action of the European Union, by means of a review of its decision-making 196

8.1 Integrating Steps of the EU processes. Especially an extension of the use of majority decisions is supposed to help to remedy the reform impasse and accelerate the decision making. 4. Strengthening of the democratic fundamentals and the closeness of the European Union to its citizenry by strengthening protection of the basic rights of EU citizens (cf. Art. 17 – 22, Amsterdam EC Treaty) and strengthening social welfare including European employment policy (Part I, Art. 3 (1i) and Part III, Title XI Amsterdam EC Treaty; cf. also Section 8.10 of this book on the social policy of the European Union). In addition, the actions of the EU are being brought more into line with the principles of environmental protection, and sustainable development is being made an expressed goal of the European Union (cf. Part III, Title XIX, Art. 174 (2), Amsterdam EC Treaty). During the contract negotiations of Nice in February 2000, it was planned to prepare the European Union, particularly institutionally, for the admissions of the Eastern European countries. But the concluded Treaty of Nice (December 11th 2000) did not live up to these expectations. So, a decisive reform of the agricultural policy was missed. Also it was not demonstrated, how a sustainable regional and structural policy of the EU including the accessing countries could be realized. Likewise, the institutional reform is not worth to bear this name, because the weighting of the votes in the Council, the Commission and the Parliament (cf. Figure 8.4) represents a consensus on the lowest common denominator: It was not succeeded to tighten the institutional structure of the European Union due to a strengthening of its capacity to act also with 25 or more member states. The inability of the at-that-time 15 EU-countries to agree upon an elementary and sustainable reform of the European Union institutions is a heavy mortgage on the future of this historically extremely successful integration. With the since 2004 in-total 25 member countries, that grew to 27 states with Bulgaria and Romania on January 1st 2007, a reform of the clumsy institutional general framework becomes at least not easier than before, because essential reform aspects require unanimity. The feasibility and dynamics of integration of the EU will be barely possible in the future. The great danger is the stagnation of the political integration process, which seems to be confirmed by, among other things, the failure of the European 197

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Constitution due to the defeated referendums in France and the Netherlands during the ratification process of the member states in 2005. Particularly the Eastern European states do not (yet) stand mentally unrestricted by the political identity of the ‘acquis communautaire’ of the European political integration. Regarding the membership in the European Union, the most important things for these countries are several financial transfers to modernize the political system and the (agricultural) economy in the broadest sense. While the Western European member states want to enlarge the EU in the long run to a political union under an additional abandonment of national sovereignty (with exception of Great Britain and to some extent Denmark and Sweden), the Eastern European countries are rather still in a phase of national self-discovery. For them, a substantial displacement of national sovereignty fields to a supranational institution like the EU is at least currently too early. As a consequence of history, also the perceived protection against the feared hegemony of Russia is of central relevance for the EU-membership of the Eastern European states. The latter is perhaps in the future an additional encumbrance to political integration. The resultant tight dependence of a lot of the Eastern European countries on the USA harbors another political trigger for necessary institutional and political integration steps of the European Union. If the present EU is not able to take unanimous positions on questions of foreign- and security policies, which, because of the GASP, is always an integral component of the EU agreement, or if member states tolerate violations of human rights and international law e.g. via prisoner transports by the US secret service, or shelter secret jails and/or torture instruments, that – by the way – constitute a massive and severe breach of the UN-charter of basic rights and the European Council’s human rights catalogue which apply to all EU member states, then one would expect an even greater lack of interest in the political and social integration process from an EU with 27 or even more than 30 member states (including Croatia, Macedonia, Montenegro, Serbia, the Ukraine, Turkey et al.) rather than a speedup of the conversion to a homogeneous (social-) political cultural area of European integration and identification. Especially with regard to the accelerating globalization, and in this case particularly with the rise of China as a future economical and political superpower in mind, this cannot be in the European interest for securing the future. 198

8.2 Summary of European Integration

8.2

Summary of Important European Integration Steps

Figure 8.3 gives an overview of the most important steps of European integration, as already described in Section 8.1 and as explained in the following respectively, especially in Sections 8.3.7 (EU Constitution) and 8.11 (EEMU).

Chronology of European Integration April 16th 1948

Foundation of the Organization for European Economic Co-operation (OEEC).

May 5th 1949

Foundation of the Council of Europe.

th

May 9 1950

SCHUMAN Plan for the foundation of a European Coal and Steel Community.

April 18th 1951

Foundation of the European Coal and Steel Community (ECSC). Signatory countries: Belgium, France, Germany, Italy, Luxembourg, the Netherlands.

1953

Failure of the BEYEN Plan for a broad constitution of a total political European integration.

1954

Failure of the European Defense Community (EDC) due to the non-ratification by the French National Assembly.

October 23rd 1954

Foundation of the Western European Union (WEU) by the incorporation of Germany and Italy into the ‘Westunion’ of the so-called ‘Brussels Pact’ (B, F, GB, L, NL) of 1948, with the goal of establishing a Western European Defense Community inside the NATO; the WEU is currently reanimated and completed as a military cooperation form inside the EU.

March 25th 1957

Ratification of the Treaties of Rome: Foundation of the European Economic Community (EEC) and the European Atomic Energy Community (EAEC). Signatory countries: Countries of the ECSC.

June 21st 1959

Foundation of the European Free Trade Association (EFTA), effective since May 3rd 1960. Signatory states: Austria, Denmark, Great Britain, Norway, Portugal, Sweden, and Switzerland; later joined: Finland (March 27th 1961), Iceland (March 1st 1970), Liechtenstein (1995). 199

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July 1st 1968 st

January 1 1973

Completion of the EEC’s customs union. North expansion of the EC: Entry of Denmark, Great Britain and Ireland (at a simultaneous exit from the EFTA by Denmark and GB).

January 1st 1979

The European Monetary System (EMS) comes into effect.

June 1979

First direct election of the European Parliament.

st

January 1 1981

1st South expansion of the EC: Entry of Greece.

January 1st 1986

2nd South expansion of the EC: Entry of Portugal and Spain (at a simultaneous exit from the EFTA by Portugal).

July 1st 1987

Single European Act (SEA). Important amendments of the EEC Treaty: - Determining the goal “Single European Market ‘92”, - Decisions with qualified majority in most of the areas and - Contractual fundament of a ‘Common Foreign and Security Policy’.

October 3rd 1990

Joining of the GDR to the Federal Republic of Germany and integration into the EC.

January 1st 1993

Start of the Single European Market.

November 1 1993

st

The Treaty of Maastricht comes into effect. Transformation of the EEC and EC agreements into the union treaties: - Graduated scheme to form the Economic and Monetary Union (EEMU), - Foundation of the European Union (EU).

January 1st 1994

Implementation of the European Economic Area (EEA), comprising the EU and the remaining EFTA countries.

January 1st 1995

4th Expansion by the Union: Entry of Austria, Finland and Sweden (at a simultaneous exit from the EFTA).

July 16th 1997

Agenda 2000 by the European Commission on the expansion of the European Union.

October 2nd 1997

Ratification of the Treaty of Amsterdam.

th

March 30 1998

200

Start of the Negotiations of accession with 8 Eastern European states, Cyprus and Malta.

8.2 Summary of European Integration January 1st 1999

Start of the European Economic and Monetary Union (EEMU) by merging the monetary sovereignty of the National Central Banks to the European Central Bank (ECB) and introduction of the Euro as the common accounting currency. Signatory states: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

Dec. 11th 2000

Treaty of Nice.

st

January 1 2001

Entry of Greece into the European Monetary Union as the 12th country.

January 1st 2002

Introduction of the EURO as the solely binding single European currency also in the cash payment transactions; abolition of the national currencies.

February 28th 2002 Appointment of the EU-Convent for the composition of to June 2003 a European Constitution and institutional reforms. May 1st 2004

3rd South expansion: Cyprus, Malta; 1st Eastern expansion: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia.

May 2005

Failure of the EU Constitution’s ratification process.

st

January 1 2007

Entry of Slovenia as the first Eastern European country into the European Monetary Union (introduction of the Euro).

January 1st 2007

2nd Eastern expansion: Bulgaria, Romania.

January 1st 2008

Entry of Cyprus and Malta into the European Monetary Union (introduction of the Euro).

Prognoses of possible following integration steps: Expected Expansion of the EEMU

Introduction of the Euro in Latvia 2008, Estonia and may be Slovakia in 2009, Lithuania and may be Bulgaria 2010, Poland not before 2011, even later (2013?) the Czech Republic, Hungary, Romania.

Coming Accession States

Membership negotiations already started with Croatia (entry 2010?) and Turkey (entry probably not before 2020). Possible further accession states are Macedonia (2012?), Montenegro, and possibly much later also Albania, Bosnia & Herzegovina, Serbia and Ukraine, may be also Georgia.

Figure 8.3:

Chronology of important European integration steps

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Organizational Structure of the European Union

8.3

Before selected areas of European political integration are presented, first, based on the 2007 EU treaties in the version of the Nice agreement and the following add-on transcripts, a summary of the main decision-making units of the European Union will be given as hereafter listed. They are: •

the Council and the European Council (Sections 8.3.1 and 8.3.2),

•

the Commission (Section 8.3.3),

•

the European Parliament (Section 8.3.4),

•

the most important Committees (Economic and Social as well as for the Regions) inside the organizational structures of the European Union (Section 8.3.5) and

•

the European Court of Justice (Section 8.3.6).

•

The ECOFIN Council is the most important EU body to control the Stability and Growth Pact criteria and will be presented in Section 8.11.3 in the framework of the European Monetary Union.

In the following discussions, all contract references (articles) correspond to the Treaty of Nice – except when otherwise declared explicitly. An official table of accordance, which enables a comparison between the new (Nice) article numbering of the Amsterdam (and also Nice) Treaty of the European Union and the numbering of the Maastricht Treaty, can be found among others in Chapter I 1a in the collection of dtv-Beck, 2005, pp. 27 – 28, or in the „Treaty of Amsterdam amending the Treaty on European Union, the Treaties Establishing the European Communities and Related Acts” – Official Journal C 340, 10 November 1997 – in its Annex to Article 12: [www Amsterdam EUT]. A comparison of new article assignments regarding the Treaty of Nice and the original European Community Treaty (ECT) – for example of Maastricht – is provided in the same source (dtv-Beck, 2005) in Chapter I 2a, pp. 153 – 161, or also in the above mentioned Annex [www Amsterdam EUT]. Figure 8.4 gives an overview (as of beginning 2007) of the respective representations of the several countries in the institutions of the European Union based on the Treaty of Nice, mentioned in the paragraphs below. 202

8.3 Organizational Structure EU – Member State

Austria

Voices in the Members in the Council of Commission Ministers 10

1

Members in the European Parliament

Members in the ESC and the Committee of the Regions

18

12

Belgium

12

1

24

12

Bulgaria

10

1

18

12

Cyprus

4

1

6

6

Czech Republic

12

1

24

12

Denmark

7

1

14

9

Estonia

4

1

6

7

Finland

7

1

14

9

France

29

1

78

24

Germany

29

1

99

24

Great Britain

29

1

78

24

Greece

12

1

24

12

Hungary

12

1

24

12

Ireland

7

1

13

9

Italy

29

1

78

24

Latvia

4

1

9

7

Lithuania

7

1

13

9

Luxembourg

4

1

6

6

Malta

3

1

5

5

Netherlands

13

1

27

12

Poland

27

1

54

21

Portugal

12

1

24

12

Romania

14

1

35

15

Slovakia

7

1

14

9

Slovenia

4

1

7

7

Spain

27

1

54

21

Sweden

10

1

19

12

EU – total:

345

27

785

344

Figure 8.4:

Matrix of the member states’ presence in the most important institutions/ bodies of the European Union in the year 2007 – accordant to the treaty of Nice [www Nice ECT] and the treaty of accession of June 21st 2005 (cf. OFFICIAL JOURNAL of the EU, 2005: L 157, or [www Act of 2. Eastern EU-Accession])

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Figure 8.5 gives an overview of the institutional assignments of the European Union organs of the ‘EU-27’ organization chart, as of 2007.

How the EU works European Council

Fundamental decisions made by the 27 Heads of Government

Commission

Council of Ministers

Proposals

“Legislature”:

“Executive”:

27 Members, 1 per Member State

Decisions

27 Commissioners, 1 per Member State Economic and Social Committee

Inquiries, Control, Vote of Confidence, Vote of no Confidence, Approval of the Commission

European Court of Justice

Committee of the Regions

Budgetary decisions, Hearing, Co-decision

The European Court of Auditors

European Parliament 785 Representatives Malta 5 6 Cyprus, 7 Estonia, Slovenia 9 Luxembourg Latvia

99

Germany 78 14 France, 18 19 Ireland, 27 35 24 Poland, Great Britain, Denmark, Austria, Romania Lithuania Belgium, Spain Finland, Italy Bulgaria Czechia, Slovakia Netherlands Greece, Sweden Hungary, Portugal

Figure 8.5:

204

13

54

Decision making in the EU, as of 2007 (own update of GLOBUS Infographik, picture 5599)

8.3 Organizational Structure

8.3.1 The Council of Ministers The Council (cf. Part V, Title I, Art. 202-210, Amsterdam EC Treaty) is the central decision-making body of the European Union. It consists of a representative of each member state. The presidency of the Council (also known as the Council of Ministers) alternates every six months among the member states. For example, Germany held the Council presidency in the first half of 1999 and the first half of 2007. One focal point of the 1999 presidency was the Balkan crisis and NATO involvement in the province of Kosovo; another one the approval of the Agenda 2000. The main focus of the German presidency in 2007 was to restart the discussion on the European Constitution (compare for the Constitution: Section 8.3.7), but the BerlinDeclaration of March 2007 intending to renew European integration efforts [www EU 03/2007a] even didn’t mention it, because of strong resistance to a formal constitution by some member states as especially Great Britain and Poland. The Council decides on all collective tasks of the EU mentioned in Part I, Art. 3(1), Amsterdam EC Treaty: a) tariff policy and protectionist measures, b) foreign trade policy, c) single market in the sense of the four basic freedoms: the free movement of goods, persons, services and capital, d) asylum and immigration policy, e) agriculture and fishing, f) transportation policy, g) competition policy, h) alignment of laws, as far as necessary for the common market, i)

coordination of employment policy,

j)

social policy and social funds,

k) economic and social solidarity, l)

environmental policy,

m) strengthening of industrial competitiveness, n) research and technology policy, o) construction and improvement of trans-European transportation and communication networks, p) health care policy, 205

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q) professional education and advancement of culture, r) development policy, s) promotion of the association of European overseas countries and territorial areas, t) consumer protection, u) energy policy, civil emergency protection and tourism promotion, v) equality of men and women (Art. 3(2) ECT). Moreover, the Council makes the decisions in the Common Foreign and Security Policy (CFSP) on the basis of the guidelines by the European Council (cf. Section 8.3.2) according to Title V, EU Treaty. It also decides on judicial and police cooperation in criminal cases according to Title VI, EU Treaty, when this cooperation goes beyond Art. 3(1)h, ECT. The Council decides since the Treaty of Nice either •

unanimously

•

with a qualified majority or

•

with a simple majority of its members (thus de facto of its member states).

With regard to a qualified majority, the votes of the member countries in the Council as declared in the Treaty of Nice, Art. 205(2) ECT and the Treaty of Accession of Bulgaria and Romania (OFFICIAL JOURNAL of the EUROPEAN UNION, 2005 Art. 22, p. 35) are weighted as follows: • Germany, France, United Kingdom, and Italy each 29 votes, • Poland, and Spain each 27, • Romania 14, • the Netherlands 13, • Belgium, Czech Republic, Greece, Hungary, and Portugal each 12 votes, • Austria, Bulgaria, and Sweden each 10, • Denmark, Finland, Ireland, Lithuania, and Slovakia each 7 votes, • Cyprus, Estonia, Latvia, Luxembourg, and Slovenia each 4, • Malta 3 votes. A qualified majority amounts to 255 of a possible total of 345 votes. Thus a blocking minority amounts to 90 votes. On a purely arithmetical basis, a qualified majority is conceivable only with the agreement of at least 12 (large) of the 27 countries. With a blocking minority, four (large) countries are already able to block all decisions that require a qualified majority. 206

8.3 Organizational Structure If a decision has to be made with a qualified majority, after Art. 205 (4) ECT a member of the Council can apply for a verification if the ‘demographic security net’ – a majority of 62 % of the total EU population as a component for the validity of a qualified decree – was fulfilled: Is it proved, that the stipulation was not met, the resolution is seen as not passed. But this discretionary clause allows that big countries can be overruled by a majority of smaller ones as the case may be, if nobody insists upon the demographic majority. This is a lasting alleviation for the decision making in the European Union; furthermore such a relinquishment of the 62 % rule can lead to a suitable request for a reward in other votes within the scope of socalled ‘Package Deals’. This can generate also a consensus. Decision making with a qualified majority is developing ever more into the dominant kind of decision making in the Council. Unanimity – which is not opposed by abstentions from voting according to Art 205(3) ECT – is only still necessary in cases of •

treaty enlargements,

•

introduction or definition of new community tasks,

•

fundamental decisions of wide importance (whereby this is, of course, an elastic concept when it comes to national interests) as well as in the areas of

•

culture (Art. 151 ECT) and

•

social security and social protection of employees (Art. 137(1), letter c). (Cf. also Section 8.10.)

The Council is composed of different personnel depending on the particular agenda. Accordingly, the Council has met since 1960 as a rule as the council of ministers with a particular portfolio, i.e., who hold the same portfolio. As early as 1958, it was decided to install a Permanent Representatives Committee (COREPER), whose members have ambassadorial rank, better to prepare the contents of ministerial meetings and to ease the burden of the ministerial decision makers. This Permanent Representatives Committee is subdivided into two levels: •

the professional-administrative level with working parties and committees of the Permanent Representatives Committee and

•

the professional-political level with the actual Permanent Representatives or their stand-ins. 207

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8.3.2 The European Council You have to distinguish between the the Council (also known as the Council of Ministers) and the European Council. At their Paris summit meeting of December 10th 1974, the heads of state and government of the then European Community decided for the future to meet at least twice a year as the European Council. The European Council is not literally a body of the European Union: it cannot make decisions. Its task according to Art. 4, Amsterdam EU Treaty, is rather to “... provide the Union the necessary impetus for its development ...” and to “... define the general political guidelines thereof.” The European Council consists of the heads of state and government of the member countries as well as the president of the European Commission. The European Council is assisted by the foreign ministers of the individual member countries as well as a further member of the European Commission. The European Council reports to the European Parliament after every meeting and presents it with an annual written report on the progress of the Union. The European Council has right to start initiatives as does the European Commission. This, however, partially limits the right of the Commission to start initiatives, since the Commission cannot take initiatives running counter to the wishes or intentions of the European Council and since the Commission is increasingly busy with the initiatives of the European Council. Besides having this general right of initiative, the European Council

208

•

establishes the guidelines and principles of the common foreign and security policy (Art. 13 (1) Amsterdam EU Treaty),

•

decides common strategies in the areas in which important common interests of the member countries exist (Art. 13 (2) Amsterdam EU Treaty) and

•

comes to decisions, that are required for a determination and realization of a Common Foreign and Security Policy based on the general guidelines defined by the European Council.

•

In addition, once a year the European Council receives a first draft of the Council by the member states regarding the main features of the economic policy of the members and the community based on a commission report. A conclusion on the essentials of the economic

8.3 Organizational Structure policy has to pass the European Council by a qualified majority. The Council has to transpose this conclusion and must send it up to the European Parliament (Part III, Title VII, Art. 99 (2) Amsterdam EC Treaty). This procedure is relevant particularly in the course of monitoring the economic policy of the member states in the framework of the Stability and Growth Pact: If a member state breaches this pact, the Council is able to impose obligations and publish them with a qualified majority by recommendation of the Commission to increase the pressure for economic reforms. Section 8.11.3 will get back to this topic.

8.3.3 The Commission The European Commission represents the common interests of the European Union and thus displays the executive. The structure of the Commission with representatives of the member states can be seen in Figure 8.4. The Commission of the EU currently (2007) consists of one Representative per member state (Art. 213, Amsterdam EC Treaty), who are appointed for 5 years by the Council with allowance of the European Parliament. The president of the Commission is appointed by the Council’s qualified majority in the line-up of the head of governments, and the European Parliament must give its assent (Art. 214 (2) ECT). The protocol about the extension of the European Union by February 26th 2001, changed lastly January 16th 2003, constitutes beyond, that Art. 213 ECT has to be changed from the joining of the 27th European Union member state on. Then, the number of commissioners will lie beneath the number of member states. The number of 20 Commissioners, as it was given before the first Eastern expansion, is envisaged, but not binding constituted yet. The commissioners will be chosen unanimously by the Council on the basis of an equitable national rotation principle – that still has to be established. The Commission operates independently of the governments of the member countries; it is responsible only to the European Parliament, which can force the Commission to resign by a vote of no confidence. The Commission is responsible for the orderly functioning and the development of the common market and within this framework has to 209

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•

monitor the application of the treaty and the regulations made by various bodies on the basis of the EC Treaty,

•

make recommendations and give opinions (right to start initiatives) regarding areas mentioned in the EC Treaty,

•

make decisions within its own scope of authority and assist in decisions of the Council and the European Parliament,

•

exercise the authority which the Council has given it in order to carry out the rules which the Council has enacted (cf. Part V, Title I, Article 211, EC Treaty), as well as

•

to manage the Community funds – thus the EU budget (Art. 274 ECT).

The Commission is assisted by around 20,000 co-workers (whereby when assessing this number, one must consider that large cities such as Hamburg or Cologne have more employees). Moreover, the Commission reports annually on the activities of the Union (EUROPEAN UNION: General Report on the Activities of the European Union). In order to accelerate the decision-making process, a large number of decisions are handled by intra-mural mailing of documents: The assent to a document is considered as given, if no objection is raised within a prescribed period. Important decisions are prepared for a meeting of chefs de cabinet by the process of the A- and B points: If these achieve unanimity, then the Commission decides without further discussion (process of the A-points); given varied views by the chefs de cabinet, the Commission decides after discussion (process of the B-points). The Commission issues •

regulations,

•

directives and

•

recommendations or opinions.

Regulations are in all parts and in every member country directly binding and lawful, i.e., they take precedence above national law. Each year about 4,000 or 5,000 regulations are issued. Directives take precedence above national law with regard to their goals, so member countries are obliged to transform the goals and contents of 210

8.3 Organizational Structure directives into national law. The member countries are allowed to choose for themselves, however, exactly how this is done.

Recommendations or opinions are on the contrary non-binding.

8.3.4 The European Parliament These days, the European Parliament as the representative of the citizens of the European Union has to do more significantly far reaching tasks than on its first election in 1979. It emanated from the 1952 founded ‘Common Assembly’ of the ECSC. In its initial meeting in 1958, the ‘Assembly of the three European Communities’ (ECSC, EEC and EAEC) decided to call itself ‘European Parliament’. Until 1979, the European Parliament consisted of 142 (Europe of the Six) and 198 (Europe of the Nine) parliamentarians respectively. They were sent by the individual member countries without voter participation. The first direct election to the European Parliament took place in 1979, and later after the southern extension of the EC (Europe of the Twelve) there were 518 parliamentarians. The elected Members of Parliament (MP) consider themselves predominantly as champions of the idea of European integration and therefore unite themselves (apart from the French right and the Scottish separatists) in multi-country caucuses of colleagues with similar fundamental political convictions. After the northern extension, the German reunification and the two Eastern extensions of the EC, the European Parliament (by 2007) consists of 785 members elected for 5 years. The MPs are elected according to Part V, Title I, Art. 190 Amsterdam EC Treaty from the individual member countries as follows: •

99 from Germany,

•

78 each from France, Italy, and United Kingdom,

•

54 from Poland and Spain,

•

35 from Romania,

•

27 from the Netherlands,

•

24 each from Belgium, Czech Republic, Greece, Hungary and Portugal,

•

19 from Sweden,

•

18 from Austria, and Bulgaria, 211

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•

14 each from Denmark, Finland, and Slovakia,

•

13 from Ireland, and Lithuania,

•

9 from Latvia,

•

7 from Slovenia,

•

6 from Cyprus, Estonia, and Luxembourg, and

•

5 from Malta.

At first the rights of the parliament were purely advisory, but the institution European Parliament – without, however, to this day being a real legislature – continued to be strengthened in the wake of the reform endeavors since the Single European Act of 1987. The powers of the European Parliament were strengthened once again in the Amsterdam EC-Treaty, which defines three types of parliamentary participation: 1. Assent: The approval of the European Parliament is necessary for the admission of new member countries as well as in the cases of sanctions against member countries and the definition of the tasks of the Structural Funds. 2. Co-decision (Art. 251 ECT): On legislative procedures as described in Figure 4.7 of Section 8.4, left column. 3. Cooperation (Art. 252 ECT): On legislative procedures as described in Figure 4.7 of Section 8.4, right column. 4. Consultation: In regard to all other legal acts and decisions. Hitherto a big point of criticism has been that the European Parliament does not have an active and binding right to start legal initiatives. Thus far this has been a prerogative of the European Council (cf. Section 8.3.2) and the Commission (cf. Section 8.3.3). But in the framework of so-called private bills the parliamentarians are able to call on the Commission via a resolution of the European Parliament to submit adequate proposals on questions, which require in the Parliaments view a composition of a community act. Also the by the Parliament stipulated general right of co-determination and co-decision on majority decisions of the Council is not implemented so far and not even discussed by the Council respectively. So, also with the second Eastern extension in 2007 nothing changed: The number of seats rose to 785, but an effective fortification of the European 212

8.3 Organizational Structure Parliament is not associated. Another main reason is the limited sympathy of the national governments and parliaments for ascending rights of codetermination and adjudication by the European Parliament while the national sovereignty would decrease. Only in the framework of the contract negotiations of Nice the European Parliament was successful. There it obtained an equality of treatment with the Council and the Commission concerning the granting of a right to sue before the European Court of Justice (ECJ).

8.3.5 Most Important Committees The two most important committees of the EU are •

the Economic and Social Committee, ESC (Art. 257 – 262 EC Treaty), and

•

the Committee of the Regions (Art. 263 – 265 EC Treaty).

The Economic and Social Committee (ESC) has the task of informing the Commission and the Council – within the framework of planned measures or community projects of all kinds – as to the opinions of the affected business, consumer and employee groups; conversely, the ESC has to ensure that these multi-national interest groups receive first-hand information. In the ESC (after the 2. Eastern expansion of 2007), 344 representatives of various groups from the business and social spheres of the 27 member countries sit for a period of four years. Especially the representatives of industry, agriculture, transportation, employees, merchants, craftsmen, the learned professions and consumers in general are accounted for. The Committee of the Regions with likewise 344 members in the same composition as the ESC was created in 1993 by the Treaty of Maastricht. It has the task for the federal bodies of the EU member countries, i.e., provinces, regions, autonomous areas and local government units, to enable a direct, but only consultative, participation in the decision-making processes of the EU. This committee expresses its views to the Council or Commission above all on questions of education and culture, health care, transEuropean networks as well as structural and regional policy. The assignment of the members in these two important Committees can be found in Figure 8.4 in Section 8.3.

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8.3.6 The European Court of Justice The European Court of Justice (Art. 220 – 245 ECT) based in Strasbourg has the task of ensuring the observance of the law in the application and interpretation of the community treaties. 27 judges, who are elected after agreement by the governments of the member countries for six years, discharge this task according to Chapter 1, Paragraph 4, Art. 220 – 245, Amsterdam EC Treaty. The judges are assisted by eight advocates-general. The European Court of Justice offers the following possibilities for legal proceedings to be undertaken by the plaintiffs named in parentheses: •

action for breach of contract (Commission and member countries),

•

action for nullity of certain legal acts (Council, Commission, Parliament, and member countries, but also individuals concerned),

•

action for excessive delay (Council, Commission and member countries),

•

preliminary rulings, in which advanced determinations are supposed to give standards to national courts for the correct interpretation of certain concrete treaty contents (national courts).

•

In the EU Constitution – which failed during the ratification process in 2005 – an unrestricted competence of the European Court of Justice was intended in all matters of human and basic rights according to the regulations of the European Union charter of the basic rights. With the failure of the Constitution, the basic rights catalog of the EU is still no component of the European contract law and for this reason beyond the jurisdiction of the European Court of Justice.

8.3.7 The EU-Convent: The Failed Constitution Within the resolution of the European Council in the Belgian Laeken in December 2001 for the convening of a “Convent for the European future”, new grounds of decision making were broken in the European Union for the first time. The big challenge for the formulation of a European Constitution should be acquired in a preferably wide consensus to increase the acceptance of this integration work in the future. A solution in a small circle of the European heads of state and government should be prevented.

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8.3 Organizational Structure

8.3.7.1

The Constituent Convent

It was common practice so far to come to reform steps or even fundamental decisions via hardly manageable democratic negotiations inside the Council of the European Union.

The CONVENT – Composition and Chairmanship 1. Composition of the Convent:

2. The Chairmanship:

1

President

- President is Valéry Giscard d‘Estaing

2

Vice-Presidents

- Vice-Presidents are Jean-Luc Dehaene and Giuliano Amato

15 Representatives of the Heads of State and Government

3 Representatives of the coming Presidencies: Spain, Denmark, Greece

30 Members of the 2 National ParliamenNational Parliaments tarians 16 Members of the 2 European ParliamenEuropean Parliament tarians 2 Representatives of the Commission

2 Commissioners

13 Representatives of the Government of the Candidate States 26 Members of the Parliaments of the Candidate States

3. Observer Status in the Convent: 3 Representatives of theEconomic and Social Committee 3 Representatives of the European Social Partners 6 Representatives of the Committee of the Regions - The European Ombudman - The Presidents of the European Court of Justice and the European Court of Auditors as well as Experts can be invited in addition.

12 Members (No Representatives of the Candidate States are planned as Parlamentarians or as Vice-Presidents.)

105 Members (For every Member (102) one Representative is additionally named.)

Figure 8.6:

Composition of the European Union’s Convent (cf. Europäische Zeitung, 2002, p. 10)

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With the Convent a more democratic legitimated – and therewith largely freed of national interests – decision making body was established for the first time. The Convent took up its work on February 28th 2002 in Brussels under the chairmanship of the former French president Valéry Giscard d’Estaing and ended its work on July 10th 2003 with the submission for the Constitution of the European Union. The larger democratic legitimation derives from the diversified composition of the Convent members, as shown in Figure 8.6. Other than in previous governmental conferences, where scarcely comprehensible reform packages were negotiated behind close doors, the 117 representatives (and 102 deputies) of the governments, the then 15 national parliaments, the European Parliament, the Commission as well as the in that time 10 candidate countries should work out a treaty reform until June 2003, which brings back Europe closer to its citizens. The Convent had three main tasks: •

First of all, the contracts of the European Union should be clearer and more intelligible,

•

secondly it had to become apparent, which tasks the EU should take on and which tasks should remain in the liability of the member states in accordance with the principle of subsidiarity,

•

thirdly it had to be defined, how decisions could be made in an expanded union in the future, which are democratic authorized and efficient.

With the presented Constitution scheme the Convent had largely realized these requirements: Central results of the Constitution discussion by the Convent, which were finished and presented to the public on July 10th 2003, were: 1. The incorporation of the basic rights charter in the Constitution, which were solemnly proclaimed by the EU, 2. institutional reforms as for example

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8.3 Organizational Structure •

an at least partial realignment of the competences in the EU with the main aspects: further rules expansion for qualified majority decisions in the Council; fortification and professional approach for the establishment of the European Council and the Council of Ministers; enlargement of the European Parliaments right to be more involved in decisions and thus to be more involved in the European integration, as well as above all

•

the election of the Commission’s president by the European Parliament to increase the democratic legitimation of the Commission,

•

a stronger accent of the subsidiarity principle, which assigns the European Union only those new tasks that could be solved worse by the national states,

•

to improve the coordination of a Common Foreign and Security Policy and to appoint an EU Foreign Minister,

•

strengthen the cooperation in the area of interior (home) security in the EU including a closer judicial collaboration,

•

the contribution of more responsibilities like the organization of a self-contained development cooperation (development aid) by the EU.

8.3.7.2

Main Contents of the Constitution: Protection of the Citizenships and Advancement of European Integration

The subsequent administration conference, following the Constitution draft by the Convent, enacted the new European Constitution on June 18th 2004 after intensive discussions. The Constitution was solemnly signed on October 29th 2004 in Rome by the heads of state and government of all 25 EU member countries. Although the Constitution was not ratified and so de facto failed due to the referendums in France and the Netherlands in spring 2005, the main contents, which are different from the existing European Union agreement, are given in the following:

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A main aspect of the Constitution is the inclusion of the basic rights charter of the EU as an independent Part II. This charter was already proclaimed with some ceremony in December 2000 – but it is not absolutely binding due to the failed ratification process of the constitution: -

The charter ensures the human dignity in Chapter I, the right of living and inviolacy, the prohibition of torture and inhuman or humiliating punishment and treatment, the statutory prohibition of hard labor;

-

Chapter II grants the freedom of people, the right of liberty and security, the esteem of private life and family circle, the protection of personal data, the right of matrimony and family, the freedom of thought, conscience and religion, the freedom of speech and information, the right to education, occupational liberty, entrepreneurial freedom, protection of ownership, and right of asylum;

-

Chapter III assures the equal rights and non-discrimination like e.g. equality before the law, the plurality of cultures, religions and languages, the non-discrimination of women and men, protection of the children’s rights, rights of elderly people and the integration of handicapped persons;

-

Chapter IV anchors solidarity in the professional life and family circle, environmental- and consumer protection;

-

Chapter V grants civil liberty like an active and passive voting right, the right for a good administration, right for the access to documents, the right for petition and public advocates, freedom of movement and residence, diplomatic and consular asylum.

-

Chapter VI vouches for judicial rights as the right for an effective legal remedy and a neutral court of justice, the presumption of innocence, the right of defense and the principle of proportionality regarding punishments in relation to the criminal offence etc.

-

The final Chapter VII contains besides regulatory statutes especially the prohibition of the rights’ misuse:

8.3 Organizational Structure Every action that intends the abolishment or a restriction of the anchored rights and freedoms in the charter is forbidden. The European Court of Justice is liable for the observance of the charter in all fields of the EU as well as the member states. The charter is more comprehensive than the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) of the European Council, signed on November 4th 1950 in Rome and ratified by all member states of the EU. Whereas the ECHR is limited to civil and political rights, the whole spectrum of (the above-named) basic rights is covered by the charter. In addition, the Constitution envisages the EU’s incorporating to the European Convention of Human Rights. Hence, an exit from the Convention or its disregard by the member states is not possible anymore. This cannot be evaluated high enough, if an entry of further South-eastern countries is considered, because basic rights are partially not fully stabilized in some of these states, yet. So, the Constitution includes a catalog of ethical values into the Union’s agreement for the first time. The European Union then is only amenable for those countries, that respect and implement this catalog of ethical values; the EU has the right to take adequate measures in case of irreverence of those values by member states. •

The Constitution also offers a set of institutional reforms: -

Thus, for the in Section 8.3.2 mentioned European Council the rotation of the chairmanship is repealed, instead a chairmanship is institutionalized, which is elected by the Council for 2½ years by a qualified majority.

-

The in Section 8.3.1 explained Council of Ministers is divided into two parts, first in a ‘Council of General Affairs’, which corresponds to the former Council of Ministers and is furtheron led by the rotation principle and second in a new ‘Council of Foreign Affairs’, whose chairman is the new originating ‘Foreign Minister of the European Union’. He is elected with a qualified majority by the European Council and with acceptance by the president of the Commission (who is elected by the European Parliament). 219

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-

The procedure of the ‘qualified majority’ is changed in such a manner, that the already in Section 8.3.1 mentioned demographic clause will increase from 62 % to 65 % of the represented population and the blocking minority of 35 % will only apply, if it stands at least for four countries. 75 % of the states must additionally vote for submissions, which are not initiated by the Commission or the EU Foreign Minister.

-

The legislative and budget authorities of the European Parliament will be invigorated. The right for the election of the Commissions president is of protruding importance. The seats in the European Parliament are limited to 750 in advance of further entries, whereas the several states are represented by at least 6 and at most 96 parliamentarians.

•

•

220

In the area of the ‘Common Foreign and Security Policy’ (CFSP) beside the already mentioned appointment of the ‘European Foreign Minister’ a number of new legal foundations will be established and also clearly defined: -

Implementation of a ‘solidarity clause’ between the member states in case of a terrorist attack or a natural disaster,

-

update of the so-called ‘Petersberg missions’ (named after the first EU-Afghanistan-Conference under the leadership of the then German Foreign Minister Joschka Fischer at the Petersberg in Bonn), where EU operations for the stabilization of the situation after conflicts and measures for the combat against terror, including actions on the sovereign territory of third states, are stronger connected with tasks of a military guidance and procedures of disarmament,

-

commitment to support every EU state, who is a victim of an armed offensive on its sovereign territory as well as

-

miscellaneous regulations for a fortified military collaboration including the establishment initiating fund for the military defense of the European Union.

In the area of the finance of development (development aid) two main innovations are implemented:

8.3 Organizational Structure

•

•

-

The condition for a European development fund in the EU budget will be formed, whereby a common European development aid will be possible and

-

a European volunteers corps for humanitarian missions will be set up.

There are also amendments in the area of judicial cooperation: -

The constitution anchors in this frame an extensive changeover to resolutions within the scope of a qualified majority for the first time,

-

moreover an approach of elementary penal norms is stipulated; an aspect, which is especially in the face of a possible Turkish entry to the EU of great importance,

-

also a European Public Attorney’s Office will be established, whereby especially cross-border acting organized delinquency should be fight easier.

A multiplicity of further amendments of the previous agreements can be found in the areas of: -

health policy (EU-wide obligations to inform on certain diseases),

-

energy policy, sport, civil defense (emergency management), as well as

-

the implementation of a common European aerospace policy in the area of joint-task research and technology development.

8.3.7.3

Concluding Valuation of the Constitution and of the Consequences of the Failure during Its Ratification Process

All things considered, the EU Constitution – which de facto failed due to the referendum in France on May 29th 2005 as a part of the ratification process – illustrated a big advancement compared to the current agreements of the European Union.

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The constitution combines in a concise way the acquirements of the European integration for about 50 years now. The simplification of the decisionmaking enables in addition a more efficient working.

Because of the constitution the EU becomes more democratic in many areas: The role of the European Parliament (EP) is strengthened especially because of the right to elect the Commission’s president. The legislative and budget competence is increased. Also the national parliaments are invigorated: Especially due to the implementation of an ‘early warning-system’ to control the observance of the subsidiarity principle, the ‘special contribution’ of the national parliaments for the democratic life in the union is explicitly honored. The constitution features essential advantages for the citizens of the EU member states: First, the basic rights charter liability, second the at least rudimental implemented right for private persons to sue before the European Court of Justice. The EU citizens have at their disposal better legal warranties due to the enlargement of the court’s competences. Also you have to keep in mind the stronger – enforceable – importance of the already repeatedly mentioned subsidiarity principle, whereby the EU citizen receives a kind of protection against the leviathan of an often ‘harmonization addicted’ EU Commission. Moreover, also the EU citizens receive the right to apply for new EU initiatives. Last but not least, the implementation of a Convent for future contract revisions will be institutionalized.

The EU Constitution failed mainly because of a massive lack of information by the people and their diffuse fear of a not adequate communicated ‘uniform Europe’. For political informed people the failure of the EU Constitution is a political desaster for future European integration, which concerns the life of every European directly, because each additional paralysis of the European political integration including its institutional slimming down will impact the European competitiveness – and therefore possibilities for the employment in all member states – in a negative way.

222

8.4 Legislative Procedure Especially the incorporation of the basic rights charter into the agreement of the European Union in a time of increasing eroding social basic rights (catchword: globalization) and eroding human rights (catchword: „Is torture justifiable e.g. to repel terrorist attacks?”) would have justified the ratification of the Constitution. The prospects of success for a new attempt to ratify a European Constitution seem to be chanceless at least in a medium-term perspective: Due to the entry of the 10 South and Eastern European countries in the year 2004, the accession of Romania and Bulgaria in 2007, as well as the medium- and long-term planned entries of further South-eastern European states including may be also Turkey, the reform pressure inside the EU will increase conspicuously. Hence, the great danger exists, that the current institutional weakness and also the paralysis of the decision power by the EU possibly becomes more obvious and – which is severe – the democratic structures that would have been enabled by the ratification of the Constitution cannot be reached.

The Legislative Procedure of the European Union

8.4

In Section 8.3.3 regulations and directives of the EU were already mentioned as part of EU law and as taking precedence over national law. There is still no uniform procedure for the realization of EU laws (regulations and directives). Rather the decision-making process is dependent on the respective policy area about which a decision is to be made. Since the Treaty of Maastricht, however, the role of the European Parliament has been clearly strengthened. An act goes through the legislative procedure without problems, if Commission, Council and European Parliament approve. If divergent views appear, then various coordinating or mediating steps are necessary – depending on whether it is a matter of a •

co-decision procedure or

•

cooperation procedure.

These decision making processes are briefly sketched in Figure 8.7: 223

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Two Legislation Methods of the EU "Co-decision" (Article 251 ECT); "Cooperation" (Article 252 ECT) The European Commission formulates a "suggestion". This suggestion is forwarded to the European Parliament (EP) and Council. The EP takes a stand on the suggestion in a first reading. The Commission may rework the suggestion. In the first reading the Council of the European Union deals with the suggestion; the Council passes a "general point of view" (GP). so far the methods are equal based on Articles 251 and 252 ECT; from now on they differ:

"Co-decision" as of Article 251 ECT

"Cooperation" as of Article 252 ECT

In the second reading of the "GP" the EP may case a): approve; case b): change; case c): announce the rejection.

In the second reading of the "GP" the EP may case a): approve; case b): change; case c): refuse.

The Council proceeds in the second reading: case a): Council approves finally; case b): Council approves changes by the EP and approves finally; case c): Council refuses changes: Meditation Committee

The "GP" returns to the Commission: the Commission can accept changes made by the EP or refuse them by announcing a reason.

Meditation Committee

The Council finally decides in second reading:

(equally balanced by Council and EP) finds

case a): with qualified majority,

a) a common draft,

case b): unanimously, as far as the examined Commisson's suggestion gets changed,

b) no common draft: the legal act failed.

case c): unanimously.

a): if Council and EP approve the "common suggestion" in a third reading, the legal act passes; b): if Council and EP refuse the "common suggestion" in a third reading, the legal act is failed.

Figure 8.7:

224

Legislative procedures of the EU according to the Articles 251 and 252 ECT

8.5 Budget

The Budget of the European Union

8.5

As a supranational organization, the European Union has its own budget, which – as mentioned in Section 8.3.3 – is spent by the Commission on the basis of specifications set by the Council and the European Parliament. In the year 2005 the total budget of the European Union amounted to about Euro 101 bn. (cf. Figure 8.9). This corresponds to a sum of Euro 220 per resident and year (with about 460 million inhabitants of the EU, cf. coming Figure 8.10 for more detail).

8.5.1 The Revenues of the European Union Since 1970, the European Union finances itself solely by own resources. These are basically provided by the member states and accrue automatically. Hence, the European Union does not dispose of autonomous controlled sources of revenue; it does not have any tax competence up to now. But this competence was inter alia stipulated by the that time president of the Commission, Romano PRODI, during the decision finding processes of the institutional EU reform during the Nice Treaty negotiations. The payment level for the member states is determined unanimously by the Council and has to be ratified by the national parliaments. For the time period 2000 – 2006, it was decided, that the value of 1.27 % of the GNI as a limit is not allowed to be exceeded. Since 2007 the maximum payment is limited to 1.24 % of GNI. While the funds for the European Communities were originally raised by means of contributions from member countries, the Communities have had their own funds since 1970: •

Agrarian levies (raised on the import of farm products from nonEU-member countries) amounting to about 3 % of the total revenues;

•

(agricultural) duties and sugar levies based on a common tariff for the traffic with third states amounting to some 12 % of the total revenues;

•

so-called own resources due to the value added tax (amounting to 1 % of the member states’ tax revenue, reduced in the year 2002 to 0.75 % and in 2004 down to 0.5 %) amounting to only 15 % of the EU’s total revenues. 225

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It was decided in the finance reform of 1988 that the member countries would participate in the financing of the communities on the basis of the performance of their Gross National Income: Thus the countries of the European Union additionally finance this need of expenditure, which exceeds the income of the points 1 to 3, up to a defined percentage (since 2007 a maximum of 1.24 %) of their GNI, as a so-called ‘fourth supplementary contribution’. Over the years an averaged ‘support quantity’ of about 42 % of the total revenues was financed, actually (2007) it finances nearly 70 %. Figure 8.8 provides an overview of the shifted weighting of the several pillars contributing to the own resources of the EU budget at the expense of the value added tax capital resources up to GNI funded resources. Under ‘traditional own resources’ there are subsumed agrarian levies as well as (agricultural) duties and sugar levies.

Figure 8.8:

Percentage of the various contributions to the total EU-revenue in the year 1996 in comparison with 2007 (from [www EU 05/2007b])

Also taxes for EU servants, fines, or an EU budget surplus of the previous year accrue. The total revenues of the budget are defined under strict observations of the principle of balance, viz the income corresponds exactly to the expenditure (Art. 268 ECT); an indebtedness is forbidden.

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8.5 Budget

8.5.2 The Distribution of the Individual EU-Member-Countries’ Contributions 1995

2005

total in mill. €

in % of EU-total revenues

total in mill. €

in % of EU-total revenues

Germany

21,324.1

31.4 %

20,136.3

20.0 %

France

11,876.8

17.5 %

16,854.1

16.7 %

EU-Member States’ Contributions

Italy

6,413.7

9.5 %

13,546.7

13.4 %

United Kingdom

9,251.6

13.6 %

12,157.1

12.1 %

Spain

3,645.2

5.4 %

9,474.9

9.4 %

Netherlands

4,349.6

6.4 %

5,947.1

5.9 %

Belgium

2,680.1

4.0 %

4,023.8

4.0 %

Sweden

1,658.3

2.4 %

2,654.3

2.6 %

Austria

1,762.9

2.6 %

2,144.0

2.1 %

Denmark

1,295.4

1.9 %

1,989.0

2.0 %

Ireland

985.2

1.5 %

1,801.6

1.8 %

Portugal

864.9

1.3 %

1,527.0

1.5 %

Finland

887.4

1.3 %

1,464.9

1.5 %

Greece

664.8

1.0 %

1,442.5

1.4 %

Luxembourg

167.6

0.2 %

227.0

0.2 %

67,827.6

100 %

95,390.3

94.6 %

total (EU-15)

Poland

-

-

2,327.2

2.3 %

Czech Republic

-

-

990.2

1.0 %

Hungary

-

-

833.2

0.8 %

Slovakia

-

-

359.0

0.4 %

Slovenia

-

-

274.7

0.3 %

Latvia

-

-

207.0

0.2 %

Cyprus

-

-

150.0

0.15 %

Lithuania

-

-

129.8

0.1 %

Estonia

-

-

99.7

0.1 %

Malta

-

-

50.1

0.05 %

total (EU-25)

-

-

100,811.2

Figure 8.9:

100 %

Total own resources of each EU member state committed to the EUbudget 1995 and 2005 in absolute and relative figures (Data from EUROPEAN COMMISSION 2006, Table 4f, p. 133)

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The above presented Figure 8.9 responds to the question, to which amount the individual EU member countries are involved in financing the budget of the European Union based on the in Section 8.5.1 illustrated raise of own financial resources; depicted are the national entire gross payments of contributions using the example of the years 1995 (EU of the 15) and 2005 (EU of the 25) in an absolute and relative view. Figure 8.10 now in a graphical way gives an overview of the relative allocation of the individual member states’ financial dues to the EU-budget as presented in Figure 8.9 and also shows the distribution of EU-contributions for each country in a per capita examination.

EU - Member Countries' Contributions to the EU-Budget in 2005 500

25

450

350 300

15

200

10

150 100

5

50 0

0 Luxembourg Ireland Belgium Denmark Netherlands Sweden Finland Frankreich Austria Germany Italy Spain Cyprus Great Britain Portugal Slovenia Greece Malta Czech Republic Hungary Estonia Slovakia Poland Latvia Lithuania

EU Gross Contribution in %

250

EU Gross Contribution per Capita in Euro

400

20

EU-budget 2005: Gross-contribution to the EU-budget in % EU-Budget 2005: Contribution per capita in Euro

Figure 8.10:

228

EU member countries’ contributions to the EU-Budget in 2005 (own calculations based on Figures 8.2 [population] and 8.9 [absolute and relative gross contributions of each country to the EU-budget])

8.5 Budget Figure 8.11 gives an overview of the current German gross contribution (2004) as well as its forecasted progression until 2013. Forecast of Germans Gross Contribution to the EU - Budget in billion Euro

35 30 25 20 15 10 5 0 2004

2007

2008

2009

2010

2011

2012

2013

Year

Figure 8.11:

Overview of the progression of Germany’s gross contributions to the EUbudget (2004 to 2013) (from HANDELSBLATT, 2005a, p. 8)

The German gross contribution to the EU, which is achieved annually, contracts considering the set-off by the assigned EU-payments of about 50 – 60 % to the remaining net dues – decreasing primary because of the agrarian subsidies (cf. for this also Section 8.6) and the payments in favor of the former GDR regions and their economic development (cf. for the regional and structural funds Section 8.8). In 2004 the net contribution amounted to Euro 8.5 bn. to be compared with the in Figure 8.11 apparent gross contribution of about Euro 22 billion. Again and again the net contributor position of the individual member states is discussed. Of course, Germany is the biggest net contributor by reason of its big economic power in the EU. The allocation of its expenditure burden in the European Union is finally based on the fundamental idea of a horizontal revenue sharing, as it is a 229

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part of the financial constitution in every modern country (cf. the also bilingual book of EIBNER, 2009: Understanding Fiscal Policy: Taxes, Environmental Policy, Social Security – Anwendungsorientierte Finanzwissenschaft: Steuern, Umwelt, Soziale Sicherung): The budget should also serve the equalization of the living conditions in all EU regions. Accordingly, the economic more powerful states of the EU take a bigger part on the EU expenditure than the economic weaker countries, as already clarified in Figure 8.10. Beside the orientation of the EU-revenues on the member states’ economic power, above all the several structural funds, which will be explained more detailed in Section 8.8, serve for the special encouragement of economic weak member states and EU regions. Figure 8.12 gives an overview of national net contributing positions by example of the year 2000.

Transfer of Net Resources to the EU - Budget in 2000 in billion Euro

6 4 2 0 -2 -4 -6 -8 -10 D

Figure 8.12:

GB

NL

F

S

A

B

L

DK

FIN

I

IRL

P

GR

E

Net transfer position of the EU-member states in the year 2000 in billion Euro (according to Handelsblatt, 2002, p. 6)

However, this traditionally very high German net contributing position with its peak of Euro 11 bn. in the year 1995 was significantly dropped by Federal Chancellor Schröder from Euro 8.3 bn. in the year 2000 to only Euro 6 bn. in the year 2005. 230

8.5 Budget Figure 8.13 gives an overview of the net contributing positions of all EU member countries in the years 1995, 2000 (EU-15) and 2005 (EU-25). EU Member States

1995

2000

2005

balance in mill. €

balance in mill. €

balance in mill. €

Spain

+ 7,676.4

+ 5,343.3

+ 6,017.8

Ireland

+ 3,588.9

+ 3,813.6

+ 3,900.5

Portugal

+ 2,571.3

+ 2,167.7

+ 2,378.0

Greece

+ 2,088.9

+ 1,719.9

+ 1,136.6

Finland

– 70.8

+ 273.3

– 84.8

Luxembourg

– 54.9

– 57.0

– 86.7

Denmark

+ 502.1

+ 239.7

– 265.3

Austria

– 788.1

– 448.9

– 277.9

Belgium

+ 463.0

– 223.6

– 606.8

Sweden

– 673.6

– 1,060.6

– 866.9

– 2,657.0

– 2,984.0

– 1,529.0

– 62.0

+ 1,191.7

– 2,199.8

Netherlands

– 554.2

– 1,552.8

– 2,636.7

France

– 937.9

– 749.7

– 2,883.5

– 11,092.3

– 8,290.1

– 6,064.3

United Kingdom Italy

Germany Balance (EU-15)

0

0

– 4,068.8

Poland

-

-

+ 1,853.2

Hungary

-

-

+ 590.1

Lithuania

-

-

+ 476.4

Slovakia

-

-

+ 270.9

Latvia

-

-

+ 263.9

Czech Republic

-

-

+ 178.1

Estonia

-

-

+ 154.3

Slovenia

-

-

+ 101.5

Cyprus

-

-

+ 90.3

Malta

-

-

+ 90.1

Balance (EU-25)

-

-

0

Figure 8.13:

Operative balance of individual EU member countries’ net-commitments (Data from EUROPÄISCHE KOMMISSION, 2006, Tab. 6, p. 138)

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As already illustrated in Figure 8.11 the German net contribution again will increase in the following years in the course of the European Council’s agreement from December 2005 to about Euro 10 bn. to € 12.5 billion.

Positive on the strong German net contribution position is the resulting political impact in the EU. This expenditure position also weakens considering the great trade advantages, which arise from the unresisted exchange of goods and services with the EU: Hence, in the year 2006 about US-$ 725 bn., i.e. more than 62 % of all German export activities (amounting to US-$ 1.162 bn.), accounted for the EU states; at the same time the herefrom resulting positive trade balance (exports minus imports) with US-$ 178 billion compared with the total trade balance surplus of about US-$ 210 bn. is surpassingly high in international comparison (cf. Deutsche Bundesbank, Monatsbericht März 2007, p. 70*). With further regard to the jobs created through these high German exports in the EU, the welfare net effect of the German net contribution position in the EU is more than positive: the economic prosperity of Germany would be dramatic lower without a membership in the EU and thus without the high transfer payments to the economical weaker EU states, which are – because of the subsidies – placed in the position to ask for German deliveries and performance.

8.5.3 Expenditure of the European Union Figure 8.14 gives an overview of the pattern of expenditure of the EU budget in the time period 2001 – 2006 in consideration of the payments for the accession states. On the expenses’ side the agricultural expenditure traditionally dominate with about 43 %, whereas this part was clearly reduced from before 50 % within the agenda 2000. The expenditure for structural and regional policy are strongly increasing for years (1997: 32 %, 2004: nearly 35 %). Due to the Eastern expansion of the EU these expenses will develop to the most important cost pool of the EU (also it has to evolve to the most important one, if the EU wants to adhere on the goal of an at least relatively rectified economic development – in other words an essential integration harmonization – of all EU countries and regions). 232

8.5 Budget FISCAL FRAME FOR THE EU-25

for 2001 – 2006 in mill. Euro

Liability funds

2001

2002

2003

2004

2005

2006

1. Agriculture

42,800

43,900

43,770

42,760

41,930

41,660

38,480

39,570

39,430

38,410

37,570

37,290

Development of the rural room

4,320

4,320

4,320

4,320

4,320

4,320

2. Structural policy measures

31,455

30,865

30,285

29,595

29,595

29,170

Structural funds

28,840

28,250

27,670

27,080

27,080

26,660

Cohesions funds

2,615

2,615

2,615

2,515

2,515

2,510

3. Internal areas of policy

5,950

6,000

6,050

6,100

6,150

6,200

4. External areas of policy

4,560

4,570

4,580

4,590

4,600

4,610

5. Administration

4,600

4,700

4,800

4,900

5,000

5,100 400

CAP-expenditure

6. Reserves

900

650

400

400

400

(currency) reserve

500

250

0

0

0

0

Reserve for emergency aid

200

200

200

200

200

200

Reserve for guarantee

200

200

200

200

200

200

3,120

3,120

3,120

3,120

3,120

3,120

7. Subsidies to prepare the accession agriculture structural policy instruments to prepare the accession PHARE (candidate countries) 8. Expansion agriculture structural policy measures internal policy areas administration

520

520

520

520

520

520

1,040

1,040

1,040

1,040

1,040

1,040

1,560

1,560

1,560

1,560

1,560

1,560

-

6,450 1,600 3,750 730 370

9,030 2,030 5,830 760 410

11,610 2,450 7,920 790 450

14,200 2,930 10,000 820 450

16,780 3,400 12,080 850 450

-

OBLIGATIONS in total

93,385

100,255

102,035

103,075

104,995

107,040

PAYMENTS in total

91,070

98,270

101,450

100,610

101,350

103,530

4,140

6,710

8,890

11,440

14,210

thereof: Expansion Payments in % of the GNI

1.12 %

1.14 %

1.15 %

1.11 %

1.09 %

1.09 %

Margin for unexpected expenditure

0.15 %

0.13 %

0.12 %

0.16 %

0.18 %

0.18 %

1.27 %

1.27 %

1.27 %

1.27 %

1.27 %

1.27 %

Own resources ceiling as % of GNI Figure 8.14:

Expenditure of the European Union 2001 – 2006

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Figure 8.15 outlines the allocation of EU expenditure on the main fields of application:

EU - Expenditures in 2004 in % Total: 100.1 bn. Euro Agriculture 43.5% Miscellaneous 12.6%

Research/ T echnology 4.0% Administration 5.7%

Figure 8.15:

Structural Policy 34.2%

The expenditure of the EU in 2004 (cf. HANDELSBLATT, 2005b, p. 1)

For the budgeting of the years 2007 – 2013 the EU regroups its fields of expenditure; Figure 8.16 gives an overview of the intended distribution of the EU budget resources for the years 2007 – 2013:

EU - Budget Draft: 2007 to 2013 Agricultural Policy 29 %

Sustainable Cultivation/ Protection of Natural Resources 10 %

Foreign Policy Tasks 9%

Figure 8.16:

234

Administrative Tasks 3%

Structural and Regional Policy 46 %

Union Citizenship, Law, and Home Affairs 3%

The EU budget draft 2007 to 2013 (cf. HANDELSBLATT, 2005a, p. 8)

8.6 Agricultural Policy In contrast, the expenditure of only 3 % for home affairs and judicial policy and 9 % for the common European foreign and security policy are relatively marginal. Hence, the EU is far from ensuring a real sustainable nation state spanning sovereign function against modern challenges of outer and interior imminence of security as well as the law and order due to organized crimes and insufficient controlled and regulated immigration over the common external borders. Especially in default of reforms in the areas of the agrarian- (cf. Section 8.6) and the structural policy (cf. Section 8.8), the EU is primary an assign office for subsidies.

Organization of the European Agricultural Policy

8.6

8.6.1 Treaty Basis and Objectives of the European Agricultural Policy The basis of agricultural policy is contained in Part III, Title II, Art. 32 – 38 of the Amsterdam EC Treaty. According to Art. 32 of the EC Treaty, the common market also includes agriculture and the trade in agricultural products. Thus the EU (or its predecessors the EEC and the EC) is not only concerned with European cooperation on an industrial or trade level. Rather from the beginning of the idea of a European unity, it was certain that a common agricultural policy would have to be an inseparable component of this idea. Article 33 (1) of the EC Treaty mentions the following goals of this Common Agricultural Policy: •

to increase agricultural productivity,

•

to ensure a suitable income for those persons working in the agricultural sector,

•

to avoid price fluctuations in the agricultural sector,

•

to ensure the availability of supplies and that these reach customers at reasonable prices. 235

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Especially the goal of income maintenance has moved into the foreground of the common European agricultural policy in the meantime. The goals of an increase in productivity and a guaranteed supply at suitable prices have rather moved into the background as a result of decades of over-capacity in the agricultural sector. On the basis of these goals and the further specifications in the treaty, the common agricultural policy is filled in by the regulations of the Council. Agricultural policy therefore – at least as it refers to market policy – is completely in community hands. Thus, besides the outward-looking trade policy, it is to date the only real community policy. In the 1970s, farm structure policy and finally fisheries policy were added as further sub-areas of the common European agricultural policy. The founding of a European community, at first the EEC, would not have been possible without the parallel development of a common trade policy and a common agricultural policy. France and Germany as the two politically and economically most important countries of Western Europe had very divergent conceptions of the meaning of a European community. France has favorable conditions for agricultural production and therefore was above all interested in the realization of a common agricultural market organization. Germany, however, in the wake of World War II had lost its agriculturally productive areas in the east and was therefore dependent on industrial growth for its further economic development. That’s the reason why Germany accorded the highest priority to a common European trade policy and the dismantling of trade barriers within the framework of the EEC. The price for Germany of a common trade policy was to agree to a common agricultural policy; and the price for France of a common agricultural policy was the agreement to a common trade policy. So, in the final analysis, the EEC and thus the development of the European Union is the result of a package deal. (For more information in detail concerning European integration’s history see URWIN, 1994.)

8.6.2 Instruments of the Common Agricultural Policy (CAP) At the Conference of Stresa in 1958, the fundamentals of a common agricultural policy were worked out. The common-agricultural-market price policy has been applied since 1965 (cf. for this also EIBNER, 1996a and 1997, pp. 20). 236

8.6 Agricultural Policy The agricultural market organization, which is at the center of the market and price policy, leads to a demarcation of the European Union agricultural market from the world market and to a stabilization of prices within the EU. Basically, a total of 21 existing market regulations can be classified according to 3 principles of organization: •

market regulations with price support,

•

market regulations with external protection,

•

market regulations with direct income payments.

Within the framework of the market regulations with price support, 70 % of agricultural products in the market regulations come with a price and sales guarantee. Among them are the most important grains, sugar, milk products, meat, certain fruits and vegetables as well as table wines. If a part of the production cannot be sold for a definite price (the intervention price), government intervention agencies will buy it for this price and store it. Products taken from the market in this way will be put back into the EU agricultural market, if market conditions allow this or if these products are exported (with in part devastating consequences for agricultural production in Third World countries, if the European Union subsidizes its agricultural exports so heavily that the exports are cheaper than the Third World countries’ own production). If necessary, however, products can also be destroyed, i.e., burned or composted. Originally, this market intervention presented an unrestricted price guarantee for the products. In the meantime, however, this intervention mechanism has been organized more flexible for many of them; and interventions only occur if the market price falls short of definite price levels which are clearly under the intervention price. Moreover, in the meantime, the market regulations for milk and sugar contain quotas, i.e., the price support is granted only for a certain amount produced by individual producers or farms. Payments have to be made to the authorities for amounts which exceed the limits. These payments lead to a situation in which only reduced revenue is obtained for sugar and no revenue at all for milk. Within the framework of market regulations with common external protection, about one-fourth of agricultural products are protected from third-country competition only by import levies and customs duties, without any price guarantee for the internal EU market. Among these products are eggs, poultry, some fruits and vegetables, fancy plants and quality wines. 237

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Within the framework of market regulations with direct income benefits, supplementary or lump-sum benefits are granted for some agricultural products:

Supplementary benefits serve to insure a sufficient income for the producers or farmers without consumer prices having to be raised. Thus the producers of olives, tobacco and durum wheat receive a benefit additional to protection from imports and to price supports. Lump-sum benefits are granted for products, which are produced in the EU only in small amounts. Among them are flax and hemp, cotton, silk worms, hops, seeds and fodder.

8.6.3 Farm Structure Policy The Conference of Stresa in 1958 also defined farm structure policy as a further goal – in addition to price and income safeguards in the agricultural sector. The Manshold Plan provided a ‘first draft’ for this in December 1968. The main goal was a reduction by 50 % of those working in agriculture and two routes to this goal were proposed: Younger employees were supposed to take up positions in industry by means of measures to promote mobility and older employees in agriculture were supposed to leave by means of measures to promote early retirement. Further goals were a reduction of land used for agricultural production by 8 % and the promotion of large production facilities. This structural policy led to an enormous rise in productivity, which raised the degree of self-sufficiency in almost all agricultural products of the former European Economic Community to far above 100 %. At the same, however, a few agricultural concerns became ever larger and there was a considerable reduction in the number of smaller concerns. In many structurally weak areas, the rural population drifted away, since the agricultural jobs disappeared and corresponding industrial positions did not materialize. For this reason, there was an about-face in European structural policy as early as 1975. Thus since 1975 – on the basis of the directive on the promotion of agriculture in mountainous regions and other unfavorable locations – there has been an attempt to stop the emigration of the rural population in order to prevent a further worsening of the economic strength of marginal rural areas. Since 1985, investment assistance funds and other subsidies have also again benefited smaller concerns. 238

8.6 Agricultural Policy

8.6.4 Costs and Financing of European Agricultural Market Organization and Support for Rural Development since 2007 For a long time European agricultural market organization claimed roughly over 50 % of EU funds. However, Figures 8.14 to 8.16 in Section 8.5.3 show that the expenditure for agricultural policy are decreasing in relative terms and are currently (2007 – 2013) around 40 % of EU funds. The expenditure until 2006 were made predominantly by way of EAGGF, i.e. the European Agricultural Guidance and Guarantee Fund supporting prices, and therefore being in duty for the financing of minimum prices. Entering into force on January 1st 2007 the EAGGF was restructured into a solely Guarantee Fund as •

European Agricultural Guarantee Fund (EAGF)

and as a new instrument to improve and finance the policy of rural land management, the •

European Agricultural Fund for Rural Development (EAFRD)

was introduced, and especially to support the fishery the •

European Fisheries Fund (EFF).

Supplementary to those manifold areas of subsidy-payments of EAGF and EAFRD, the following scopes are separately assisted within the framework of the focus on ‘LEADER’: − a local development strategy designed to select the best development plans by local action groups representing public-private partnerships, − implementing cooperation projects between areas involved, − networking of local partnerships. For the period 2007 to 2013 the EFF provides financial means amounting to Euro 3.8 bn. to make the fishery economy more adaptable and especially to promote a sustainable fishery and aqua culture in Europe. This new fund replaces the until 2006 relevant instrument of the FIAF. The EAGF covers a financial volume of Euro 293 bn. for the period of 2007 239

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– 2013 and with expenditure managed jointly by the member states and the Commission, the EAGF will finance the following (from [www EAGF 04/2007]): •

refunds for exporting farm produce to non-EU countries,

•

intervention measures to regulate agricultural markets,

•

direct payments to farmers under the CAP,

•

certain informational and promotional measures for farm produce implemented by member states both on the internal EU market and outside.

Centrally managed by the Commission, EAGF financing will cover the following: •

the Community’s financial contribution for specific veterinary measures, veterinary inspections and inspections of foodstuffs and animal feed, animal disease eradication and control programs as well as plant health measures,

•

promotion of farm produce, either directly by the Commission or via international organizations,

•

measures required by Community legislation to conserve, characterize, collect and use genetic resources in farming,

•

setting up and running farm accounting information systems,

•

farm survey systems.

EAFRD allocates financial transfers amounting to the total volume of Euro 69.75 bn. in the period 2007 to 2013. Main goals of this agricultural fund are the followings: 1.

Improving the competitiveness of the agricultural and forestry sector by support of measures of restructuring: With this instrument for the first time also farmers are encouraged to participate in schemes that promote quality food and that give consumers assurances of the quality of a product or production method. However, this promotional activity still represents a marginal area of European agricultural policy and is far away of an ecological orientation.

240

8.6 Agricultural Policy 2.

Improving the environment and the countryside by supporting land management. The aim is to contribute to sustainable development: Supported are methods of land use compatible with the need to preserve the natural environment and landscape, protect and improve natural resources. The main aspects to take into account include biodiversity, water and soil protection, climate change mitigation, and the management of NATURA-2000-sites. Natura 2000 is a set of areas in the Member States in which plant and animal species and their habitats must be protected. Protection arrangements are laid down by the "Birds Directive" (1979) and the "Habitats Directive" (1992). Community legislation lists the species of fauna and flora and the habitats that are of special interest because of their rarity or vulnerability, and especially the species and habitats at risk of extinction. Following proposals from the Member States, the Commission designates areas for protection of these species and habitats, classified under 7 biogeographical regions of the EU (Alpine, Atlantic, Boreal, Continental, Macaronesian, Mediterranean and Pannonian). The network comprises Special Protection Areas for the conservation of over 180 bird species and sub-species and Special Areas of Conservation for the conservation of over 250 types of habitat, 200 animal species and over 430 plant species. Natura 2000 today accounts for over 20 % of the land area of the EU. The Member States are responsible for managing these areas and must ensure conservation of the species and habitats designated by Community law. While human activities, such as farming, are still authorised within these areas, they must be compatible with the aim of conservation. From [www Natura 2000b].

3.

Improving the quality of life in rural areas and the diversification of the rural economy. Within this topic different targets are financed as the promotion of tourism, renovating and developing villages, preserving and making the best use of the rural heritage, or also vocational training for economic operators on the countryside.

EAFRD financial transfers to Germany amount to a total volume of Euro 8.11 bn., distributed to the Federal States as illustrated in Figure 8.17: 241

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State BadenWurttemberg Bavaria

transfers in € 610,734,085 1,253,937,691

Berlin and

1,062,502,693

Brandenburg Hamburg Hesse

Bremen

Figure 8.17:

MecklenburgWest Pomerania

transfers in € 882,073,131

North RhineWestphalia

292,473,418

RhinelandPalatinate

245,251,123

Saarland

28,274,565

25,346,315

Saxony

926,806,992

218,371,489

SaxonyAnhalt

817,480,48

Lower Saxony and

State

815,380,162

SchleswigHolstein

237,703,054

Thuringia

692,748,985

Allocation of the financial means of the European Agricultural Fund for Rural Development amounting to 8.112 bn. Euro as distributed to the German Federal States 2007 – 2013 (data from [www LEADER 04/2007]; own depiction)

In contrast to the support programs before 2007, tight monitoring mechanisms are integrated from now on: “In order to enhance the quality, efficiency and effectiveness of implementation, the rural development policy and its programmes are evaluated in three stages. The first evaluation, carried out by the Member State, identifies and, in particular, assesses the medium and long-term needs, objectives and quality of the implementing measures. The second evaluation is carried out during implementation of the programme. It examines, in particular, the state of progress of the programme. In 2010, ongoing evaluation shall take the form of a separate mid-term evaluation report, proposing measures to improve the quality of programmes and their implementation. In 2015, evaluation takes the form of a separate ex-post evaluation report. These evaluations should aim to draw lessons for the rural development policy by 242

8.6 Agricultural Policy identifying the factors that have contributed to the success or failure of programme implementation, the socio-economic impact and the impact on Community priorities. Lastly, the Commission must compile a summary of these evaluations to be finalised by 31 December 2016 at the latest.” (From

[www ELER 04/2007a].) The great problem of these euphorious remarks, however, is the lack of relevant consequences in case of an inefficient or even unadjusted use of subsidies.

8.6.5 The Necessity for a Fundamental Reorganization of the European Agricultural Policy In 1991, the EU Commission presented a white paper on the future development of the Common Agricultural Policy (CAP). It contained a judgment critical of the previous common agricultural policy, whose crucial weakness was seen in the European agricultural market policy that was conceived when the EEC was still a net importer of agricultural products. In the meantime, however, the EU alongside the USA had developed into the largest agricultural exporter in the world. A second point of hard criticism was the fact that, in spite of expenditure of eventually 40 % of the whole EU budget for income and price stabilization, the European agricultural market organization has not succeeded in raising the income of farmers to that of the industrial and service sectors. A third point of criticism was the distribution of funds: 80 % of the funds which the EAGGF distributes benefit only about 20 % of the concerns. In May 1992, the EC agriculture ministers agreed to the hitherto most extensive reform of agricultural policy. The primary goal was a clear reduction of amounts produced; a secondary goal mentioned for the first time is a clear improvement of the quality of agricultural products, e.g., by means of an environmentally sound production. In detail, the following reforms were approved: •

clear price reductions (e.g., about 35 % for grains and ca. 10 % for milk), 243

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•

introduction or reduction of production quotas (e.g., by means of land withdrawal quotas for grains and lower milk quotas),

•

direct income assistance as compensation for the income shortfall of farmers as a result of land withdrawal and smaller quotas,

•

programs for the promotion of ecologically sound production,

•

forestation programs,

•

early retirement schemes for older farmers (analogous to the proposals of the above-mentioned Manshold Plan).

However, these programs did not lead to the desired extent of cost reductions of the European agriculture policy. Also, a farewell from the tons’ ideology to a more quality-conscious or an ecologically oriented policy on subsidies did not occur. Hence, an urgent reform of the European agriculture policy is needed, which will be sketched in the following.

8.6.5.1

External Challenges

A basic reform of the European agricultural policy is inevitable not only because of the high expenditure, but also against the background of important international tasks and responsibilities, such as: •

the further expansion of the EU – an expansion motivated primarily by agriculture – to South-eastern European states up to Turkey,

•

the implementation of the international stipulation for the retention of biological diversity,

•

the realization of the agreements within the framework of the agenda 21, the action program for the 21st century in terms of a ‘sustainable development’, therefore of a sustainable development also in agriculture, and

•

the negotiations about the liberalization of the international agricultural trade as well as the reduction of national agricultural subsidies in line with the WTO.

Since 1995 the WTO (cf. Chapter 1) increasingly regulates also the international agricultural trade; its goal is an entire liberalization of the farm products’ markets. 244

8.6 Agricultural Policy So, in the long run, the market access of farm products which come from outside Europe also would be freed of national European legislation, as with the level of national export subsidies and especially the level of agricultural subsidies, in line with the market regulations. Particularly the last ones function as trade barriers and distortions of competition-burdens for Third World suppliers. In the long run the EU can elude this pressure only with a fundamental agricultural reform up to direct income grants or up to a promotion of quality instead of quantity. In the course of international treaties, e.g. about the WTO, it has furthermore to be pushed for the establishment of environmental standards in farming. Moreover, the states and communities of states should receive a high degree of sovereignty, to develop and use independent quality standards for agricultural goods and the food economy. At the same time, they should be entitled to regulate those imports which are produced under unacceptable standards in order to prevent the glut of their own market by inferior products. Such a qualified protection is essential for both producers and consumers, and should definitely be anchored in the WTO agreement. In this context the trade agreement on wine between the European Union and the USA – which was agreed by the EU against the strong resistance of the responsible German minister of agriculture, Horst Seehofer – should be mentioned as a deterrent example. Here, from 2006 on, it is allowed to import wine from the USA, which is made with methods that are prohibited in some EU states. On the international farming markets the European Union has to turn away from the strategy to gain competitive advantages in the world market via price dumping as well as to distort at the same time relative market prices with the help of export subsidies. Competition via quality must be sought instead.

8.6.5.2

Internal Inefficiencies

Moreover it is highly apparent that a fundamental reform is not only necessary, but also financially more favorable, than to be plagued by the current inefficiencies and wastefulness of the current European agrarian market organizations. The renunciation of a pure volume thinking like in the 50s and 60s in favor of a modern agrarian policy oriented toward quality and health must be realized. 245

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Endeavors by the (agrarian) policy to correct the negative consequences of a policy which is based on the requirements of the 50s and therefore out of date show the high expenditure that are resulting from a symptom-oriented reform thinking which is not prepared to reform the European agricultural organization from ground up. Finally, also the BSE crisis, followed by the purchase and destruction of millions of bovines in the EU as well as the combustion of cadaver flour, including the reimbursements to the concerned farmers, is an almost unavoidable result of a misguided European agriculture policy: Again, misguided not only in terms of ethical or ecological criteria, but also in an economical approach: The management of the BSE crisis cost (and still costs) billions of Euro, which upset (and still upsets) all long-termed scheduling of the agrarian market organization. It is obvious that the BSE spread traces back to contaminated animal feed and not directly to company structures. But at the same time it is highly apparent that the European agriculture policy is geared to quantitative and not to qualitative standards. Hence, those farmers or agribusinesses which produce the greatest mass but not the best quality, realize the highest subsidies or market-organization subventions. Thus BSE symbolizes a problem of misguided European agricultural policy just as compelling as the production and/ or use of genetically modified or, as the case may be, nutritionally inferior plants or animals. An industrialized animal or plant production which is geared to the maximum output will more and more depend on preferably cheap methods of animal husbandry, nutrient supply and methods of plant breeding as well as pest management due to continually falling margins. In this case it is irrelevant, which ‘resources’ are used for the production of feedstuff. The industrially oriented animal producer is solely interested in the nutritional value, i.e., the protein and energy concentration. Also the already on ethical grounds questionable feeding of carcass meal to, e.g., ruminant animals becomes arguable in this case, since it is economically rational. Especially in this context the close mingling of lobbyists and politics (for instance agribusiness, officials of the National Farmers’ Union and bureaucrats in the ministries of agriculture) is problematic, which should hinder a fast and drastic reform of the agricultural policy in the future: 246

8.6 Agricultural Policy This is a phenomenon that was already described in the philosophy of science by Mancur OLSON in 1965 with his book “The Logic of Collective Action” or lobbying in general, which is a prime reason for the rise and decline of nations (cf. OLSON, M., 1982: “The Rise and Decline of Nations”). Also Susan STRANGE (1996/2000: “The Retreat of the State. The Diffusion of Power in the World Economy”) deals with the deprivation of rational, national policy by non governmental group interests. (Cf. also the appropriate book reviews in the „Lexikon ökonomischer Werke“ (encyclopedia of economic literature): EIBNER, 2006a and 2006b.) Other main problems of agrarian market inefficiency are the quota system and the direct payments. The quota systems basically were, and still are, reasonable instruments to limit boundless price guarantees for a maximum production quantity. However, it is a classical planned economy instrument which does not fit in a market-oriented system. Finally, quotas symbolize new created assets – for example milk quotas have today more value than the cows which give the milk. In many cases the inventory of quotas on a farmyard already defines its intrinsic asset. Because of the quota system the setting up of a business is almost impossible for young farmers: Missing quotas represent high market-entry barriers. In the meantime, the biggest share of aid money in the European agriculture policy is taken up by direct payments, which were implemented with the reform in 1992 and which are remitted as an acreage subsidy for certain crops (especially grains, maize, oilseeds) and as an animal subsidy for certain farm animals (bulls, bullocks, mother cows, sheep). For farms with more than 90 tons annual production these direct payments are tied to the idling of 15 % of the acreage. Here, the problem is that an acreage reduction of 15 % will hardly ever lead to a proportional output decline: Those fields which were idled are the least productive and least fertile. Realistic estimates assume an output decline of 5 – 10 %, which is already compensated after 7 years due to improved seeds as well as more productive cultivation methods and therefore increasing productivity gains. Moreover, the surveillance of the 15 % rule threats to be a bureaucratic nightmare, because this program really invites frauds: 247

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Besides classical frauds, also a manipulative split-up of farms into virtual 90 tons units for the utilization of special programs for peasants is invited. The pure administrative costs for the EU agrarian policy already add up to more than 2 billion Euro/ year. Also from the market-economy viewpoint, compensation payments for idle land can no longer be justified: These are payments for doing nothing – a complete converse to all accepted and necessary principles in an achievement-oriented society.

8.6.5.3

Starting Points of a Reorientation of Agricultural Policy

In this respect, a new European agricultural policy, which no longer serves special group interests, has to be implemented on several points. Particularly the direct payments and the policy on subsidies have to be reorganized: •

Instead of the hitherto several animal and plant bonuses, a uniform basic subsidy for all sustainable managed farmlands has to be paid according to stipulated ecological criteria; this is associated with an output decline and a qualitative advancement of the products.

•

Equalization and compensation payments as well as quotas have to be abolished, because they codify a market-economically senseless, this means unprofitable, production and lead to an encrustment of the system via high market-entry barriers.

•

General regulations for international trade must embody the goal of a consumer-, animal- and environment-friendly agriculture: Hence, export subsidies for living animal transports have to be cancelled and a local marketing of agricultural products must be promoted.

•

The agrarian policy has to be more decentralized according to the subsidiarity principle: The Commission should only have the right to intervene via regulations and not via process politics. Here, especially the rural development as a second pillar of the common agricultural policy has to be expanded seriously and developed as the heart of the agricultural policy in terms of an integrated development of rural areas. The programs of the second pillar have to be revised in such ways that they are able to respond flexibly to regional different requirements.

248

8.6 Agricultural Policy Moreover, competences and responsibilities should be transferred from the EU to the regional level, keeping in mind the subsidiarity within a European framework. Thus, agrarian environmental programs could be designed, which correspond to the ecological criteria of the basic subsidy and offer area-wide incentives for more environment and animal protection as well as nature conservation. This decentralization of agrarian policy is arguably one of the most important aims which needs to be realized in the future. The role of the European Commission should be restricted to only ground rules and general conditions. The implementation of those guidelines should be relinquished to the member states and, inside these states based on the principle of subsidiary to the smallest possible decision-making bodies. Because in the ecologists’ opinion only regional measures can embed a sustainable agriculture into the characteristics of a specific region. In reality the regional differences in the community are too large to satisfy them with streamlined regulations. For example, the averaged company sizes range from 4 ha in Greece to 69.7 ha in Great Britain. The grain outputs range from 1.5 tons per hectare in Portugal to 7 tons per hectare in the Netherlands. •

Consumer and environment protection must be strengthened effectively in the framework of a common agricultural policy: −

Quality criteria for sustainably produced agrarian products have to be defined.

−

Binding obligations to label all ingredients of the food and to mark genetically modified food have to be implemented imperatively and with complete declarations.

−

The legal minimum standards for agriculture within the scope of the agrarian law (fertilizer law, pest-management law, feedstuff law, livestock-husbandry clauses, etc.) and the environmental laws (nature-conservancy law, soil- protection law, etc.) have to be made more precise. If applied to an animal and environmental practice, increases might be required.

An efficient alternative to counter dung and pesticide scandals could be, e.g., an ecological tax reform, where chemical products (such as pesticides) are taxed according to ecological criteria. 249

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For the security of high-value EU products a qualified exterior protection (import restrictions) for consumers and producers is obligatory and has to be anchored in the WTO to guard the market against inferior products (as already claimed in Section 8.6.5.1).

Here, the agricultural reform, which was promoted 2004 by the former EU agrarian Commissioner FISCHLER and is partly realized within the reform of CAP in 2007, is – against immense resistance by France and also Germany – predominantly on the right track: •

Direct payments should be uncoupled from the agricultural production, they are instead to be paid as income aid if sharply increased costs of environmental and animal protection as well as food safety are encountered by the beneficiaries.

•

From 2004 on, the direct assistances should be decreased 3 % annually step-by-step, a total of 20 % by 2010: The agricultural subsidies saved in this way, amounting to Euro 600 million per year, should be used for the promotion of an extensive ecological cultivation and for conservation of the landscape.

•

For the support of primary small agricultural units the flat assistances shall be limited to a maximum of Euro 300,000 per farm, whereas the amount for the first two employees shall be increased by Euro 5,000 per person and for each following employee by Euro 3,000 per person. (This regulation was rejected especially by Germany, because losses of income for the large East German farms – emanated from the former agricultural production cooperatives (LPGs) – were expected. But regarding regulatory policy this intention by the EU has to be embraced because, in a competition, helping small and middle-sized companies must have priority over industrial agrarian production.)

•

The grain intervention price ought to be reduced 5 % from 2004 on. Market guarantees for rye should be repealed entirely and the rice guarantee should be halved.

•

The market regulations for sugar, tobacco and olive oil need to be reformed, i.e., reduced from 2003 on, those for milk from 2005 on.

Only the future can show if even a realization of all these programs will really lead to the aspired long-termed cost reduction in the European agricultural policy. However, the experiences with all reform attempts, not only since 1992, put one in a more sceptical mood: 250

8.7 Single Market So far, the European Union always tried to arrange the existing subvention scheme to be more ‘sparingly’ in the sense of system compatibility, instead of trying to reform it fundamentally including a system modification as postulated in the previous paragraphs. With 27, or in the future even more member states, the transformation of such a reform will not be easier: •

On the one side, because many of the countries which joined in 2004, and all countries which did join the EU by 2007 or will join later, still have a strong agricultural sector, they will ask for high agrarian subsidies from the EU budget and will have only a little interest in a reform at the expense of the agrarian disbursements,

•

on the other side, because – as already explained in Section 8.1.2 – the EU was not successful in reforming the institutional decisionmaking structure inside the EU in such a way that also a union with 27 or more members remains politically dynamic and is able to modify itself.

Thus, the danger exists that, without an institutional reform, the EU will be politically unable to act sufficiently and so possibly be stymied in further integration attempts as well as in its ability to reform.

The Single Market Idea

8.7

The creation of a European single market was already a central goal of the EEC Treaty (cf. [www EECT]): •

establishing a common market: Part I, Art. 2, EEC Treaty of 1957,

•

elimination of customs duties, of quantitative restrictions on the import and export of goods and of other measures with the same effect (cf. Sections 1.2 and 8.1): Art. 3(1)a EEC Treaty/ EC Treaty,

•

elimination of the barriers to the free movement of persons, services and capital: Art. 3(1)c EECT/ ECT.

Of main importance nowadays are especially Part III, Title I; as well as Part III, Title III, Art. 39 – 60, EC Treaty; and the new Title IV, Art. 61 – 69, on movement of persons, which lay the foundation for the freedom of movement of persons, goods, services and capital. 251

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The by the Single European Act (cf. [www SEA]) new implemented Articles 8a – c EECT (today Art. 18 – 20 Nice ECT) then required the complete adoption of these four goals or basic freedoms by January 1st 1993. The Single Market Idea of the EECT was completed in the Maastricht ECT especially by the Art. 3d and Art. 100c – d ECT (entry and personal traffic in the single market including a uniform visa design) and Art. 8a ECT (free choice of residence for European Union citizens), the current (Nice) Art. 18 ECT. The Amsterdam EC Treaty extended the single market concept in the new Article 3(1)i ECT with support for the coordination of employment policy, which presents a totally new element of European single market responsibility (cf. Section 8.1.2). The current status of liberalization in the single market can be seen as satisfactory. Intra-European trade has been extensively liberalized or is free. The following positive developments can be mentioned: •

liberalization of capital movements,

•

opening up of government procurement agencies regarding the award of construction and supply contracts,

•

extension of EC regulations to previously excluded sectors (energy, water, transportation and telecommunications),

•

liberalization of financial markets (banks, insurance companies), and the

•

liberalization of transportation services (e.g., air transport- and road cabotage – Cabotage: The permission to accept follow-up orders also for transnational transports to increase the efficiency of freight vehicles on outward, return and transfer transports.)

To date, however, the dismantling of tax frontiers has not been carried out satisfactorily. Thus up to now

252

•

the transition from the destination principle to the origin principle of tax liability including cross-border input tax deduction with regard to consumption taxes,

•

the establishment of ranges for national tax rates with the goal of EU harmonization, and

8.7 Single Market •

the retention of tax revenues according to the destination principle by means of the development of an EU-wide clearing system

have not allowed a resolutely adoption. The origin principle of tax liability is basically valid for private transactions, while cross-border commercial trade is taxed according to the destination principle. In addition, the destination principle continues to be valid for certain consumption taxes. In the realm of tax harmonization, the EU Council of Ministers has only agreed to minimum rates for diverse consumption taxes and the value-added tax: 15 % normal rate and 5 % reduced rate (e.g., for food and printed matter, etc.). Great advances in the liberalization of the movement of people are becoming obvious above all because of the abolition of the internal borders among EU countries which have signed the so-called Schengen Agreement. Above all, the introduction of a guaranteed, general right of EU-wide residency for students, retired persons and the non-employed is indispensable for the ‘unified Europe of citizens’ – aspired to in the EU Treaty. In the same connection one can also see the introduction of suffrage for EU citizens corresponding to their residency within the European Union – but for the time being only at a municipal level. Collaboration in the areas of internal security and the fight against internationally organized crime and drug abuse as well as immigration and asylum policy is not yet satisfactory. Finally, one can evaluate positively the mutual recognition of university diplomas and occupational training certificates, provided the training in the latter case takes less than three years. But to which extent such drastic regulation activities in the area of education, as e.g. the realization of so-called ‘Bologna process’ – the Europewide substitution of diploma study courses by Bachelor and Master Degrees – make sense remains to be seen: On the one side it is worth thinking, whether this reorganization might result in a qualitative worsening of the education due to the fact, that, 8 semester lasting diploma study courses are substituted by 6 or 7 semester lasting Bachelor study courses.

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It can be doubted, that the German competitiveness will be invigorated in this case, because on a jutting dimension it depends on the general and professional educational level of the employees and thus on the ‘factor labor’. Also another argument, which should justify the transformation of the final diploma degrees to Bachelor and Master, will not withstand: As an advantage of the Bachelor study courses the significantly shortened period of education is expressed regularly:

8.8

•

This argument is questionable under the already mentioned qualitative aspects just as under consideration of the current problems at the job market. Because of the high unemployment rates in the EU and particularly in Germany, this market does not really suffer on the more or less late availability of young graduates and professionals.

•

Furthermore, the duration of study will increase for a large number of students, contrary to the aim of a noticeable shortening. A lot of students will recognize that a Bachelor degree is not sufficient enough for an aspired prosperous academic career: Hence, a couple of them will attend on a master’s degree program, whereby the standard period of study will raise from 8 semester at the diploma courses to 10 semester at the Bachelor-Master-programs.

Regional- and Structural Policy

According to Art. 158 ECT the community particularly has the goal to minimize differences of the development status in the several regions and to decrease the handicap of the most unprivileged areas in the European Union.

8.8.1 Regional and Structural Policy for the Adjustment of Different Development Levels in the European Union Structural policy is one of the areas of the European Union which is becoming increasingly important. At first, structural policy limited itself merely to the coordination and financial support of national structural policy measures: 254

8.8 Regional- and Structural Policy As early as the beginning of the 1960s, the first two structural funds of the EEC were founded to serve these purposes (Art. 159 ECT): •

the European Social Fund (Art. 146 ECT) and

•

the Agricultural Structure Fund (EAGGF, cf. Section 8.6).

Then in the mid 1970s, a common regional policy and – as its most important instrument – •

the Regional Fund (European Regional Development Fund, ERDF, Art. 160 ECT)

were introduced. Finally, the Single European Act (SEA) extended the EEC Treaty by the addition of the Title “Economic and Social Cohesion” with the Articles 130 et sqq. (today this is Title XVII, Art. 158 – 162, Amsterdam EC Treaty). The Maastricht Treaty put increasing value on this new goal in that the support for cohesion was written into the list of tasks of the EC (Art. 2) and into the fundamental objectives of the EU (Article B, Maastricht EU Treaty = Article 2, Amsterdam/ Nice EU Treaty). The Committee of the Regions (cf. Section 8.3.5) is an important consultative body in the area of structural policy decisions in the EU (Art. 263 – 265 ECT). Thus the various areas of structural policy up to then were brought together into a common structural policy conducted by the EU, and they were coordinated with measures of the European Investment Bank (EIB, cf. Art. 9 ECT), which likewise supports investment projects to open up less developed areas. Parallel to this, the financial resources for the European Social Fund and the Regional Fund were considerably increased twice (1989 – 1993 and 1994 – 1999). 1992 and 1999, the promotion catalogues were fundamentally revised and •

1993 the Cohesion Fund for the specific assistance of the so-called cohesion countries Greece, Ireland, Portugal and Spain (Art. 161 ECT) as well as

•

1994 the fourth structural fund, the Financial Instrument for Fisheries Guidance (FIFG)

were founded. 255

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The assistance sum of the promotion period 2000 – 2006 was restricted, because a part of it had to redeploy additional capital to the adjustment programs for the accession countries, as Section 8.8.5 will show. To date, the regional economic power in the EU is developed very differently: For instance, Figure 8.18 shows that Dessau in Saxony-Anhalt is economic weaker than the Spanish Extremadura or Calabria in Italy. These regional and structural economic differences will aggravate dramatically due to the Eastern expansion of the EU.

Figure 8.18:

Regional differences in the GDP per capita of the EU states in the year 1997 (from [www EU 06/2002])

In this respect, an active regional and structural policy by the European Union is inevitable. Meanwhile, the regional policy by the EU features prosperities on the way to a long-termed adjustment in the standard of living: Hence, from 1987 – 1997 the average Gross Domestic Product per capita in the four poorest regions of the European Union increased from 54.2 % to 61.1 % of the EU average; on a national level even larger achievements were reached: The four poorest EU states – Greece, Portugal, Spain, Ireland – increased their GDP per capita from 67.6 % to 78.8 % of the EU average. 256

8.8 Regional- and Structural Policy

8.8.2 The Regional and Structural Funds by the European Union The regional and structural policy is created by the already mentioned four specific structural funds ESF, EAGGF (since 2007: EAGF and EAFRD), ERDF, FIFG (since 2007: EFF), and the Cohesion Fund. 1.

The European Social Fund (ESF) was already formed in 1957 within the framework of the EEC. Its target was to encourage the employment and the mobility of the employees. Due to full employment in the European community, in the 1950s and 1960s the fund had no significant function. In the course of the first oil crisis in 1973 the first European recession occurred and the development gap in the EC became more noticeable. With the incorporation of Great Britain, Ireland and especially Greece a common intensive adjustment policy was necessary, its meaning increased with the admission of Portugal and Spain. Currently, the fund has the task to promote the professional (re-) integration of unemployed persons and unprivileged groups basically by financing educational, training and employment measures.

2.

The European Agricultural Guidance and Guarantee Fund (EAGGF) (department ‘adjustment’) finances measures for the encouragement of rural development and assistance for farmers especially in regions, which have to catch up a development backlog, as already mentioned in Section 8.6. The department ‘guarantee’ of the EAGGF supports the rural development within the framework of agrarian policy in other parts of the EU. Since the year 2007 these tasks are financed by the in Section 8.6.4 commented guarantee- and development funds EAGF and EAFRD.

3.

The European Regional Development Fund (ERDF) finances particular selected low developed regions: especially in Greece, Portugal, Spain, Southern Italy and the former GDR region in Germany. Infrastructural extensions, investments in plant and equipment for the employment creation, local development projects and aid for small and medium-sized enterprises (the so-called SME) are financed.

4.

With the in 1994 established Financial Instrument for Fisheries Guidance (FIFG) the primarily for the southern states Greece, Portugal, Spain and Southern Italy economic still important fishing is subsidized and economical supported as well as modernized. Since 2007 this duty is taken over by the also in Section 8.6.4 introduced newly founded European Fisheries Fund (EFF). 257

Part C 5.

8 The EU The Cohesion Fund was established in 1993 for projects in the areas of environmental protection and transportation infrastructure, but only to countries whose per capita GDP is below 90 % of the community average and which are member of the monetary union or have set up and are pursuing a convergence program for entry into the monetary union. Thus a close relationship has been created between active Community structural policy and the countries’ will to integrate. Hence, not only because of this reason e.g. for Greece it was important to join the monetary union as quickly as possible within the introduction of the Euro.

8.8.3 Scope and Objective of the European Structural- and Regional Policy until 2006 The European regional and structural policy is a real community policy, which is based on the financial solidarity of the economic stronger with the economic weaker union members. The EU assigns a high relevance to this internal development task, as shown in Figure 8.19:

Annual resources of the EU structural funds and the Cohesion Fund 40.000

in bn. Euro

30.000

20.000

10.000

0 1988 1990 1992 1994 1996 1998 1999 2000 2002 2004 2006

Figure 8.19:

258

Structural subsidies payed by the EU 1988 – 2006 (data from [www EU 07/2002], p. 2)

8.8 Regional- and Structural Policy For the period 2000 – 2006 all in all Euro 195 billion for the 4 structural funds plus Euro 18 billion for the Cohesion Fund were provided. In total, the structural subsidy by the EU amounts to 213 billion Euro; this equals 0.46 % of the European Union’s GNI. By the end of 1999, these structural aids were assigned after six targets; since 2000 there are three so-called promotion objectives and four additional uses, which are illustrated in Figure 8.20:

Structural subsidies of the years 2000 – 2006 Structural fund:

213 bn. Euro 182.45 bn. Euro

Aim 1

135.90 bn. €

Aim 2

22.50 bn. €

Aim 3

24.05 bn. €

Common initiatives (CI)

10.44 bn. €

Fishery assistance

1.11 bn. €

Innovative measures

1.00 bn. €

Cohesion fund Figure 8.20:

18 bn. Euro

Allocation of the structural subsidies by aims and uses (Data from [www EU 07/2002], p. 1)

Aim 1 is defined in dependence on the area: Regions with a development backlog shall be assisted; in the time period of 2000 – 2006 this support covered 50 regions, where 22 % of the EU population live. Aim 2 supports regions with structural problems, independent of the type, whether industrial, rural, urban or concentrated on fishing; in 2000 – 2006 18.5 % of the EU population fell under these targeted aids. Aim 3 is defined thematically: Educational and training systems shall be modernized and also the employment shall be promoted. Figure 8.21 gives an overview of the regional distribution of the structural subsidies by the aims 1 and 2.

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Azores (P)

Madeira (P)

Figure 8.21:

Regional distribution of the capital from the EU structural funds by destinations 1 and 2 including the Spanish (Canary Islands), the French (Guadaloupe, Martinique, Réunion, Guyana) and the Portuguese (Azores, Madeira) overseas territories (from [www EU 05/2002])

Due to the common initiatives (CI) four special programs were financed until 2006: •

260

With the help of EFRE, Interreg III subsidized the cross-border collaboration for the promotion of a nationwide regional planning (e.g. also for the combat against flood),

8.8 Regional- and Structural Policy •

Urban II supported innovative strategies for the reactivation of cities and quarters affected by crisis,

•

Leader+ backed local strategies for the promotion of sustainable rural development by the adjustment division of the EAGGF, respectively since 2007 the EAGF (cf. Section 8.6.4),

•

Equal tries to eliminate causes for discrimination on the labor market by means of the ESF.

The support of the fishery by the FIFG had the aim to modernize the production structures in fishing and aquaculture as well as to adapt these structures to the demand and overfishing. Hence, in an operation until 2006, which is seen as problematical especially by Spain and Portugal, 8,600 ships, this corresponds to 9 % of the EU fishing fleet, should be wrecked (cf. KERSTING, 2002, p. 12) to react adequately on the decline of the fish stock and to save a sustainable use in the future. Under the promotion concept of innovative measures the Commission wants to support new, not yet practiced development strategies particularly in the fields of information technology, technological innovation, regional identity and sustainable development. The Cohesion Fund is proportioned on the 4 lowest developed states, from 2000 – 2006 the following numbers accounted for: •

Spain Euro 11.160 bn. (compared to € 9.251 bn. in the years 1993 – 1999),

•

Portugal Euro 3.300 bn. (compared to 3.005 bn. €),

•

Greece Euro 3.060 bn. (€ 2.998 bn.) and

•

Ireland Euro 720 million (compared to € 1.495 bn. in the years 1993 – 1999).

Figure 8.22 gives a final overview of the distribution of the structural funds’ financial means to each supported country. It is probably surprising, that behind Spain, which receives most of the subsidies, Germany (before Italy and Greece) is the second largest beneficiary of absolute assistance (primary for its eastern new federal states); with regard to the relative support in Euro per capita Greece, Portugal and Spain are in front of all other EU states by far.

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Distribution of the Structural Funds Assistance for the EU Member States 2000 – 2006 in mill. Euro per Country and in € per Capita Aim 1

Aim 2

Aim 3

CI

Spain

38,096

2,651

2,140

1,958

200

45,045

1,204.2

Germany

19,958

3,510

4,581

1,608

107

29,764

372.1

Italy

22,122

2,522

3,744

1,172

96

29,656

522.5

Greece

20,961

0

0

862

0

21,823

2,129.5

Portugal

16,414

0

0

671

0

17,085

1,822.4

Great Britain

6,251

4,695

4,568

961

121

16,596

287.1

France

3,805

6,050

4,540

1,046

225

15,666

274.6

123

795

1,686

651

31

3,286

218.1

3,088

0

0

166

0

3,254

922.9

Netherlands Ireland

Fishery

Σ/Country Σ/Capita

Sweden

722

406

720

278

60

2,186

253.7

Finland

913

489

403

254

31

2,090

416.9

Belgium

625

433

737

209

34

2,038

203.7

Austria

261

680

528

358

4

1,831

235.7

Denmark

0

183

365

83

197

828

160.6

Luxembourg

0

40

38

13

0

91

235.1

135,954 22,454

24,050

10,290

1,106

193,854

532.3

Σ EU total Figure 8.22:

Distribution of the EU structural funds’ subsidies to the single beneficiary states in the time period 2000 – 2006 in absolute- (mill. €) and per capita figures (€)

8.8.4 Scope and Objective of the European Structural- and Regional Policy since 2007 In 2007 structural- and regional subsidies became totally new arranged for the period between 2007 and 2013. During that period, Euro 308 bn. will be spent to finance regional growth agendas (by the ERDF), to stimulate job creation (by the ESF) and to support the geographic eligibility of European regions (by the ERDF) as well as the convergence (by ERDF, ESF and Cohesion Fund): •

262

81.5 % of the total amount will be concentrated on the Convergence objective, under which the poorest member states and regions are eligible, to catch up with average standard of living within the EU. Based on a regional GDP below 75 % of the EU average, regions are eligible for the Convergence objective; this objective concerns 84 regions in 17 member states.

8.8 Regional- and Structural Policy

Euro 12.5 bn. of the total convergence objective of Euro 251.2 bn. are reserved for the so-called ‘Phasing-out-regions’ which develop out of the eligibility criteria. •

16 % of the money will be concentrated within the Structural Funds on supporting innovation, sustainable development, and better training projects under the ‘Regional Competitiveness and Employment’ objective. Elegible to this objective are 168 regions representing 314 mill. inhabitants; within these, 13 so-called ‘Phasing-in-regions’ which are home to 19 mill. inhabitants are subject to special financial allocations due to their former status as Objective 1 regions.

•

2.5 % will be available for cross-border, transnational and interregional cooperation under the ‘European Territorial Cooperation’. The population eligible to this objective amounts to 181.7 million.

It is expected, that the cohesion and regional policy stimulate additional growth of about 10 % in the regions lagging behind and thus more than 2.5 million new jobs will be created as a result. However, in order to achieve this aim it seems to be urgently necessary to reduce the bureaucratic effort in the execution of regional and structural promotion. Moreover, diverse irregularities and insufficiencies in the handling of concrete programs up to economic completely absurd aid activities have to be identified and turned off via adequate controlling instruments. Whereas the requirement of the second point of criticism, which implies a comprehensive controlling of the implementation and the results, has not yet been structural realized, at least the cohesion and regional policy within the new regulation will operate in a more simple and efficient way. Reasons for the improvement are, that e.g. the number of instruments will be reduced from 6 to 3, a new proportionality principle will provide less bureaucracy, the number of programming steps will be reduced from three to two, national eligibility rules apply instead of community rules and finally member states and regions are asked for more responsibility and transparency by the funds’ management. So e.g. in the new period starting 2007 the Cohesion Fund will contribute alongside the ERDF to multi-annual investment programs managed in a decentralized way, rather than being subject to individual project approval by the Commission as it was until 2006. In this respects the new promotion concept looks to be more promising than the former one. 263

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Distribution of the Structural Subsidies in EU Member States for the years 2007 – 2013 in mill. Euro per Country and in € per Capita OBJECTIVE: Convergence Cohesion Fund

Estonia Czech Rep. Hungary Malta Slovenia Slovakia Lithuania Portugal Latvia Greece Poland Cyprus Bulgaria Spain Romania Italy Finland

1,019

1,992

7,830

15,149

7,589

12,654

252

495

1,239

2,407

3,433

6,231

1,363

2,647

2,722

15,240

2,034

3,965

3,289

8,379

19,562

39,486

Figure 8.23:

264

Phasing out

Phasing in

1,865

399 254 5,779

407

436

584 363

2,015

3,873

3,250

18,727

5,769

11,143 18,867 10,553

1,434 388

4,495

per country

per capita

47

3,058

2,352.3

346

23,697

2,323.2

344

22,452

2,245.2

14

761

1,902.5

93

3,739

1,869.5

202

10,264

1,866.2

80

4,090

1,778.3

88

19,147

1,740.6

97

6,097

1,693.6

186

18,217

1,656.1

650

59,698

1,550.6

25

581

830.0

159

6,047

817.2

497

31,536

788.4

404

17,317

776.5 442.2

491

935

107

1,532

306.4

8,370

756

23,450

284.6

9,123

775

12,736

208.8

261

134

815

203.8

1,268

173

2,019

201.9

1,446

236

1,682

186.9

914

228

1,301

162.6

9,468

155.2

159

12,522

Subsidies

25,647

579

177,082

Subsidies

752

3,771

158

Σ in €

4,761

420

2,436

3,133

Territorial Cooperation

Σ mill. €

879

2,838

61,560

Regional Competitiveness and Employment

373

194

Germany France Ireland Belgium Sweden Austria Great Britain Luxembourg Netherlands Denmark Σ EU total

Convergence

OBJECTIVE Regional Competitiveness and Employment

883

10,387

5,349

642

45

13

58

116.0

1,477

220

1,696

106.0

453

92

545

38,743

7,360 307,069

90.8 629.5

Distribution of the new structural subsidies in EU member states for the years 2007 – 2013 (from EUROPEAN UNION, 2006, p. 3 or [www EU 12/2006b, p. 3], and own calculations)

8.8 Regional- and Structural Policy

No longer a formal part of the structural funds are the already in Section 8.6.4 mentioned funds in the framework of the Common Agricultural Policy of the European Union, the •

European Agricultural Guarantee Fund (EAGF), the

•

European Agricultural Fund for Rural Development (EAFRD) and the

•

European Fisheries Fund (EFF),

which all came into force by January 1st 2007. Integrated in the new instruments of regional furtherance there is also the European Investment Bank (EIB). Using three new regional policy instruments, that are financed by the Commission of the EU together with the EIB and partly also by the European Bank for Reconstruction and Development (EBRD, cf. Section 5.2), in the years 2007 – 2013 member states shall be supported to establish a sound and efficient management of the funds and to make better use of financial engineering instruments (cf. [www EU 04/2007b], p. 4): 1. The ‘Joint Assistance in Supporting Projects in European Regions’, called JASPERS, seeks to develop co-operation between the EUCommission, the EIB and the EBRD in order to pool expertise and to assist member states and regions in the preparation of major projects. 2. The ‘Joint European Resources for Micro to Medium Enterprises’, JEREMIE, is an initiative of the European Commission, together with the EIB and the European Investment Fund, in order to increase access to finance for the development of micro, small and medium-sized enterprises in the regions of the EU. 3. In cooperation with the EIB the European Commission promotes sustainable investment in urban areas by the ‘Joint European Support for Sustainable Investment in City Areas’, JESSICA. Instituted by the Treaty of Rome and created in 1958, the already mentioned European Investment Bank (EIB) is the European Union’s financing institution. For 50 years it plays a significant role in the development financing of poor regions: 265

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Currently there are given loans of about Euro 50 billion for development projects of EU member states (that is about 90 % of EIB’s total loans; to non-EU countries there go 10 %, mainly to the countries being associated with the EU of the Mediterranean and to the Western Balkans). In 1994 the European Investment Fund (EIF) was set up to support the development of high-growth small and medium-sized enterprises (SMEs) and/ or those active in new technologies. The EIB is the majority shareholder and operator of the EIF. In 2000 the EIB Group was created, consisting of the EIB and the EIF. Within the Group, the EIB grants medium and longterm bank loans, while the EIF specializes in venture-capital operations and providing guarantee for SMEs (cf. [www EIB 03/2007b], p. 1).

8.8.5 Structural Promotion of the Accession States From the year 2007 on, the regional and structural subsidies have to be reallocated exceedingly in favor of the new accession countries. For years, the EU already supports the economic modernization and alignment of the joining countries in a very intensive way. The reduction of the structural aid by the EU for the hitherto member states since the year of the maximal promotion (1999) is directly associated with the so-called ‘pre-accession furtherances’ and the regular involvement of the new member countries in the EU regional and structural policy since their entry. For the years 2000 – 2006 an entry preparing regional and structural promotion for the 10 Eastern European accession countries amounting to Euro 2.645 bn. was payed. Figure 8.24 gives an overview of the distribution, whereby between 2004 and 2006 only Bulgaria and Romania received these pre-accession furtherances. Due to the PHARE program technical help in the administrative sector is provided for the preparation of the entry.

SAPARD allocates means for agriculture and rural development and via ISPA the EU supports investments in environment and transport. Here, no fixed amounts per country were determined, but in each case fluctuation margins, where funds can be displaced as needed inside of the joining countries. 266

8.8 Regional- and Structural Policy

Pre-accession assistance for the Eastern European candidate countries 2000 – 2006 in mill. € PHARE Bulgaria

SAPARD

ISPA

Σ

100

52.1

83.2 – 124.8

235.3 – 276.9

Czech Republic

79

22.1

57.2 – 83.2

158.3 – 184.3

Estonia

24

12.1

20.8 – 36.4

56.9 – 72.5

Hungary

96

38.1

72.8 – 104.0

206.9 – 238.1

Latvia

30

21.8

36.4 – 57.2

88.2 – 109.0

Lithuania

42

29.8

41.6 – 62.4

113.4 – 134.2

Poland

398

168.7

312.0 – 384.8

878.7 – 951.5

Romania

242

150.6

208.0 – 270.4

600.6 – 663.0

Slovakia

49

18.3

36.4 – 57.2

103.7 – 124.5

Slovenia

25

6.3

10.4 – 20.8

41.7 – 52.1

Σ

1,085

520

1,040

2,645

Figure 8.24:

Pre-accession assistance for the 10 Eastern European entry states by the EU in the time period 2000 – 2006 in mill. Euro

A problem for the acceptance of these promotion measures are the irregularities regarding the usage of the donations granted by the European Commission, which were among others analyzed by the European Court of Auditors (ECA) and which are depicted in the annual reports concerning the financial year 2005: Thus, the disbursements primarily within the scope of the Common Agricultural Policy and the structural policy are still afflicted with significant mistakes, which cause excessive or not eligible payments. For this reason, increased efforts for the organization of adequate monitoring and control systems in the new member countries are indispensable. (Cf. European Court of Auditors, 2006, pp. 8, also shown in [www EU-COURT of AUDITORS 11/2006].)

2007 the new ‘Instrument for Pre-Accession Assistance’ (IPA) substitutes the old instruments of pre-accession assistance, that became obsolete by the accession of the 14 new EU-member states of middle- and East Europe. This framework incorporates the PHARE, ISPA and SAPARD system through the creation of a single framework for assistance along with ‘structural funds’ and ‘rural development funds’ (EAFRD) components. 267

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The objective is to prepare the candidate countries as e.g. Croatia, Macedonia, Montenegro, Turkey, better for the implementation of the structural funds and the European Agricultural Fund for Rural Development (EAFRD) after accession. The IPA is designed to address the needs of the beneficiary countries within the context of pre-accession in the most appropriate way. Its main aim is to support institution-building and the rule of law, human rights, including the fundamental freedoms, minority rights, gender equality and non-discrimination, both administrative and economic reforms, economic and social development, reconciliation and reconstruction, as well as regional and crossborder cooperation (from [www IPA 04/2007b]). To ensure targeted, effective and coherent action, the IPA is made up of five components, each covering priorities defined according to the needs of the beneficiary countries. Two of these components concern all beneficiary countries: the ‘support for transition and institution-building’ and the ‘cross-border cooperation’. The aims of these components are, respectively, to finance capacity-building and institution-building, and to support the beneficiary countries in the area of cross-border cooperation between themselves, with the member states or within the framework of cross-border or inter-regional actions. The other three components are aimed at candidate countries only: •

the ‘regional development’ component is designed to prepare the countries for the implementation of the European Union’s cohesion policy, and in particular for the European Regional Development Fund and the Cohesion Fund;

•

the ‘human resources development’ component concerns preparation for cohesion policy and the European Social Fund;

•

the ‘rural development’ component is concerned with preparation for the Common Agricultural Policy and related policies as well as for the European Agricultural Fund for Rural Development (EAFRD).

Assistance under the IPA mainly supports the following targets: • investment, procurement contracts or subsidies, • administrative cooperation, involving experts sent from the member states, • action by the European Union acting in the interest of the beneficiary country, and • budget support (granted exceptionally and subject to supervision). 268

8.9 Research- and Technology Policy

8.9

Research- and Technology Policy

8.9.1 Approaches and Targets of a European Research and Technology Policy A common European research and technology policy started with the EURATOM treaty in 1957: Due to a united research and control of the supply with the raw material uranium, adequate reactor types had to be developed and an international competitive and autonomous nuclear energy production had to be organized. However, by reason of national egotisms this intended common research was only realized rudimentary. Only in 1968, the Commission presented a first program for the coordination of single state efforts in fundamental research (COST). In 1974 research programs, based on Art. 235 EECT, were issued on the principle of ‘cost-splitting’ in the areas of power, basic and raw materials, information technologies and medical science. In 1978, the European program for the Forecasting and Assessment in the Field of Science and Technology (FAST) started. In 1984, the implementation of the today known research and technology policy of the European communities began with ESPRIT, which is the ‘European strategic research and development program in the field of the information technologies’ and had from 1984 – 1988 a furtherance sum of Euro 750 million in funds. With the Single European Act the aims and measures for a common future research and technology policy were defined for the first time. In the Treaty of Maastricht of 1993 the research and technology policy was constituted in the articles 130f – 130p as an important target of the EU (Art. 163 – 174 Amsterdam ECT). To attain this goal, to encourage the international competitive position of the EU (Art. 163 ECT) by strengthening the scientific and technological basis, the EU implements the following actions in accordance with Art. 164 ECT: a) realization of programs for research, technological development with and between companies, research centers and universities, 269

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b) advancement of the cooperation with third countries and international organizations, c) distribution and evaluation of the results, d) encouragement of the education and the mobility of the scientists from the community, and the European Union ‘coordinates their activities, to ensure the coherence of the single state policies and the policy of the community’ (Art. 165 ECT). A big drawback in the efficiency of the European Research- and Technological Policy is that, different to the USA, Japan or also China, European centres of excellence are scattered across a politically as well as linguistically heterogeneous continent and that in spite of all collaborative actions having been initiated at European and Community level there still is an absence of adequate networking and cooperation. This may lead to a loss of growth and competitiveness in an increasing global economy in Europe having the consequence that it might not successfully achieve the transition to a knowledge-based economy: •

The average research effort in the European Union is currently only 1.8 % of its GDP, as against 2.8 % in the United States and 2.9 % in Japan (Germany 2.3 %), and, what is more, this gap seems to be on the increase, because

•

the difference between total public and private expenditure on research in the US and Europe amounted to some Euro 60 billion in 1998, as against Euro 12 bn. in 1992.

•

The trade balance in high tech products shows a deficit of Euro 20 billion per year in Europe.

•

In terms of employment researchers account for only 0.25 % of the industrial workforce in Europe, as against 0.7 in the United States and 0.6 % in Japan.

•

The number of degree-level European students in the United States is twice as high as the number of American students at that level in Europe. (From COMMISSION of the European Communities, 2000, pp. 4 – 5.)

Research and Technology account for 25 to 50 % of economic growth:

270

8.9 Research- and Technology Policy Both areas so have a strong influence not only on competitiveness and employment, but also are responsible for the quality of life of Europeans. If technological progress creates the jobs of tomorrow, it is research which creates the jobs of the day after tomorrow. Recognizing it this way, a weak trend in R&D could therefore have a negative influence on the development of employment in Europe in the years ahead. By creation of the so-called European Research Area (ERA) the European Commission is trying to walk up to this situation since the year 2000. ERA is supposed to regroup all Community supports for the better coordination of research activities and the convergence of research and innovation policies of the EU member states and the European Union – at national and EU levels.

Activities to promote the European Research Area, ERA

ERA

Figure 8.25:

The ERA as a catalysator in the coordination of European Research and Technological Policy including the 6th Framework Program FP6 (from [www EUROPEAN UNION 03/2007b])

8.9.2 The Realization of Current Research- and Technological Policy Within the scope of the EU Research and Technological Policy the following types of programs can be named: 271

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direct actions,

•

indirect activities,

•

concerted operations and

•

horizontal actions.

8 The EU

Direct actions are inhouse researches in the Joint Research Centers (JRC), like, for instance, the research plant for nuclear fusion and energy generation JET; the member states are involved directly, the financing is realized to 80 % by the community budget. Indirect activities are programs with research contracts on the principle of ‘cost-splitting’ (Cost Shared Actions), like programs with an industry involvement, which are assisted with 50 % as a rule; projects in cooperation with public research facilities are financed up to 100 %. Concerted operations are attempts of the Commission to initiate and coordinate supranational research activities, whereas the community provides no financial research contribution, but coordinates and intensifies the intergovernmental cooperation at its own expense. An example is the arrangement of COST, Coopération Scientifique et Technique, as a public and supranational acting research establishment. Horizontal actions are contributions for futurology, the evaluation and stimulation of research activities in general, the exchange of education and science and for the technology transfer. Within the scope of the horizontal furtherance the EU subsidies shall be just amounted to that point, where private or national research or cooperation achievements are stimulated. An overview of the priorities of the EU research policy gives Figure 8.26 on the example of the Sixth Framework Program by the EU with an amount of about Euro 16 billion. In contrast to previous programs, which wanted to support the cooperation of national research facilities primary, the EU now concentrates on the formation and fortification of common research programs and the organization of so-called ‘Excellence Networks’, in which the best research capacities of the European regions are clustered.

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6th European Union Framework Program 2001 – 2006 in billion Euro 1. Research bundling 1.1 Prior subject areas in research 1.1.1 Genomics and biotechnology in ordinary of the medicine a) Advanced genomic and its applications b) Combat of the most important diseases

13.020 10.750 2.150 1.100 1.050

1.1.2 Technologies in the information society

3.600

1.1.3 Nanotechnologies, intelligent materials and new methods of production 1.1.4 Aerospace

1.300

1.1.5 Food safety and health risks 1.1.6 Sustainable development a) Sustainable energy systems b) Sustainable country traffic c) Global changes and ecosystems

1.1.7 Citizens and modern governance in an open European knowledge-based society 1.2 Specific activities, which cover a broader field of research 1.2.1 Strategy in anticipation of future science and technology requirements by the European Union 1.2.2 SME-specific research activities

1.000 625 1.850 630 600 620

225

2.270 800 450

1.2.3 Special activities of international cooperation

300

1.2.4 Tasks of the Joint Research Center

720

2. 2.1 2.2 2.3 2.4 3. 3.1 3.2

Design of the European Research Area Research and innovation Human resources and mobility Research infrastructures Science/ Society

Fortification of the foundation pillars of the European Research Area Promotion of the coordination of the research activities Promotion of a coherent development of the policy Total subsidies

Figure 8.26:

2.830 275 1.680 800 75 420 370 50

16.270

Appropriation of funds within the scope of the Sixth Framework Program by the EU in 2001 (details from European Commission, 2001)

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The new Seventh EU Framework Program (FP7) for funding research in Europe will run from 2007 – 2013. This FP7 is also designed to respond to Europe’s employment needs, its competitiveness, and the quality of peoples life. The following activities are planned with a budget of nearly 40 billion Euro:

7th European Union Framework Program 2007-2013

in billion Euro

Health

7.350

Food, Agriculture, and Biotechnology

2.170

Information Society

11.197

Nanoscience & Nanotechnology, New Technologies of Production, Material science

4.270

Energy

2.590

Environment, and Climate Change

2.240

Transport and Aviation

5.250

Socio-economic Research and Humanities Security and Space Total Subsidies for Non-nuclear Cooperation in Research Figure 8.27:

700 3.500 39.267

Appropriation of planned funds within the scope of the Seventh Framework Program by the EU in 2005 (data from [www EU 08/2006])

Additionally there are some more Euro 4.061 bn. for cooperation in nuclear research in the scope of the European Atomic Community. Concluding there have to be mentioned the ‘Marie Curie Actions’ within the European research and technology policy: This program is aimed at the development and transfer of research competencies, the consolidation and widening of researchers’ career prospects, and the promotion of excellence in European research. The actions are open to researchers in all fields of scientific and technological research from the EU Member States, from countries associated with FP6 or FP7 and from third countries.

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8.10 Social Union Individual researchers as well as businesses, universities and research organizations can benefit from Marie Curie Actions by •

the Marie Curie Conferences and Training Courses,

•

Marie Curie Research Training Networks,

•

the Marie Curie Individual Fellowships

•

Marie Curie Host Fellowships for Early Stage Research Training,

•

Marie Curie Host Fellowships for the Transfer of Knowledge,

•

the Excellence Promotion and Recognition Actions,

•

the Marie Curie Chairs, and

•

the Return and Reintegration Actions as e.g. the European and International Reintegration Grants.

Eligibility for the various schemes is based on research experience and expertise, not age. All levels are covered from researchers at the start of their career to world-class researchers with well-established scientific expertise. (Cf. [www EU 07/2006].) The amount spent within the 7th Framework Program for ‘Marie Curie Actions’ comes to 4.728 bn. Euro.

8.10 The European Union on the Way to a Social Union A European social policy in the narrow sense of the word was defined in the Maastricht Treaty, Title VIII, for the first time. The tasks mentioned there were comprehensively broadened in the Amsterdam EC Treaty, Title XI, with explicit recourse to the European Social Charter of 1961 and the Community Charter of the Fundamental Social Rights of Workers of 1989. The Treaty of Amsterdam explicitly incorporated in Art. 2 EUT, which replaced Article B of the Maastricht EUT, the union target of a high level of employment. Accordingly, also Art. 3(1)i ECT was expanded by the demand for a coordination of employment policy in the member countries including the formation of a coordinated employment strategy. 275

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Furthermore Art. 3(2) of the Amsterdam EC Treaty was new: •

“In all the activities referred to in this Article, the Community shall aim to eliminate inequalities, and to promote equality, between men and women.”

The Treaty of Nice featured in Title XI ECT especially with the redesigned Art. 137 in paragraph 1, letters j and k, a second amendment of social responsibility. Generally, Art. 137(1) ECT subsumes the already in the Amsterdam agreement mentioned social intentions in the letters a to k: a) Improvement of the working environment to protect workers’ health and safety, b) working conditions, c) social security and social protection of workers, d) protection of workers when their employment contract is terminated, e) briefing and consultation of workers, f) representation and collective defense of the interests of workers and employers, including co-determination, but after Art. 137 (5) – due to the pressure of Great Britain and Denmark – without the right of representation in reference to wage, right for coalition, to strike and to lockout, so this point finally converts to a senseless paper tiger, g) conditions of employment for third-country nationals legally residing in Community territory, h) occupational integration of persons excluded from the labor market, i) equality between men and women on the place of employment, j) combat of social exclusion, k) modernization of the systems for social protection, irrespective of letter c. Adding to this, Article 140 requires coordinated action in all areas of social policy.

Chapter 2 of Title XI, Articles 146 – 148, regulates the tasks of the already in Section 8.8 mentioned European Social Fund. The objective of this fund is “…to render the employment of workers easier and to increase their geographical and occupational mobility within the Community, and to facilitate their adaptation to industrial changes and to changes in production 276

8.10 Social Union systems, in particular through vocational training and retraining.” (Art. 146 ECT).

Chapter 3 of Title XI defines comprehensive tasks of the community for the development of a high-quality general and professional education for the youth, especially due to the advancement of the occupational basic education as well as mobility. Title XII deals with the tasks for the community to further evolve culture and cultural diversity, Title XIII makes representations to the joint health care, and Title XIV deals with consumer protection. A further strengthening of the social responsibility of the EU and in this respect especially of the concrete contents of a common employment policy is the focus on a controversial discussion amongst the member countries.

Minimum Wages in the European Union €/ h Bulgaria Romania Latvia Lithuania Slovakia Estonia Poland Hungary Czech Republik Portugal Slovenia Malta Spain Greece Belgium Great Britain Netherlands France Ireland Luxembourg

0.53 0.66 0.99 1.00 1.32 1.33 1.34 1.50 1.76 2.82 3.02 3.47 3.99 4.22 7.93 7.96 8.13 8.27 8.30 9.08 0

Figure 8.28:

2

4

6

8

10

Legal minimum wages of EU countries in Euro/ hour, as of the year 2007 (Data from SIEVERS, 2007, p. 4)

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An example is the discussion within the EU concerning minimum wages: Although many EU-countries already have minimum wages at their legal disposal – cf. Figure 8.28 – the EU-Social-Commissioner Vladimir SPIDLA claims for a standardized legal EU-minimum wage, that is of no consent as yet. How important a standardized lower limit of salaries nevertheless is in the EU, indicates the above Figure 8.28: Minimum wages especially in the Eastern European member states depict a level that is not really tolerable for European countries in terms of social welfare. Continuous enhancement of a European social and employment policy is welcome as a counterweight to current globalization tendencies from increasing corporate concentration and deregulation of labor law and job protection, which are causing an increasing displacement of labor market power from the employees’ to the employers’ side. This further strengthening basically is welcome because in the framework of the locationpreference-for-international-business discussion sole national efforts especially in such cost-sensitive areas as social or environmental policy are irresponsible. The Community initiative EQUAL, as a part of the financial support by ESF, is to combat all forms of discrimination and inequalities on the labor market and to facilitate the social and occupational integration of asylum seekers. The European Union is also developing an integrated strategy to combat social exclusion and discrimination on grounds of sex resp. sexual orientation, race or ethnic origin, religion respectively beliefs, and disability or age. There are policies and programs in this area, particularly under article 13 (combating discrimination) and article 137 of the EC-Treaty (promoting social integration). Part of this strategy is the Community initiative EQUAL with its main focus on labor market measurements. Despite this increasing relevance, which the EU awards to the social component for the protection of employees’ rights, this new joint task is institutional poorly developed by reason of the dismissive attitude of particularly Great Britain and Denmark: Decisions of the Council within the scope of the above mentioned Art. 137(1), letters c, d, f and g are not subject of qualified majority decisions, but have to be made unanimously. This applies expressively for Art. 137(1) c; the regulations under the letters d, f and g can be conveyed into the process of the qualified ruling after an unanimous decision by the Council, cf. Art. 137(2) b sentence 3. 278

8.11 European Economic and Monetary Union

8.11 The European Economic and Monetary Union (EEMU) A unified currency and monetary policy is a substantial means of bringing economic integration into the political arena. Accordingly, this was a new main objective of the Maastricht EU Treaty. It should not be surprising that this idea of a stronger monetary and currency policy was not really a new goal. Rather the reflections about wishing to pursue a common European monetary policy were already relatively old: In 1970, the then prime-and-finance minister of Luxembourg, Werner, defined in the so-called WERNER Plan the first steps in creating an Economic and Currency Union (ECU), which in turn was built on the Treaties of Rome and the currency and monetary freedom found there and also on a firm exchange rate structure with full currency convertibility. However, fundamentally divergent views about the path to a deeper political integration of the EC countries prevented a realization. A great monetary policy break-through, however, was the European Monetary System (EMS) created on the basis of a German-French initiative by Chancellor Helmut SCHMIDT and President Giscard d’ESTAING in 1979. The EMS required fixed parities among the participating currencies, allowed a maximum fluctuation of exchange rates of +/– 2.25 %, and above all introduced the ECU as the single European currency unit for accounts and transactions, which according to Art. 109g Maastricht ECT (now Art. 118 ECT) finally was even the reference unit for the exchange of national European currencies into the single European currency, the Euro, at January 1st 1999. The regulations of the EMS included the following objectives: •

The creation of a European currency unit, the ECU, as unit of account,

•

an exchange rate and intervention system to stabilize the exchange rates of the countries within the EC respectively the EU,

•

support mechanisms: loan facilitation in case of problems in the balance of payments and for interventions to support the set parities to the ECU,

•

building of an European fund for monetary policy cooperation. 279

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All countries in the European Community or later European Union were members of the EMS; however, Great Britain and Sweden didn’t participate and Greece participates only since beginning 1998 in the exchange rate mechanism to stabilize the exchange rate at maximum fluctuation margin of +/– 2.25 % against the bilateral central rates. Italy had an expanded fluctuation margin of +/– 6 %. (For more details to the EMS see: EIBNER, 2006c, Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Chapter 14.3.) The EMS functioned relatively well until August 1993, corrections of the parities at irregular frequencies could not be avoided due to very different rates of inflation and economic convergence, and Italy repeatedly had to leave briefly the exchange rate community due to high devaluations. Still, the EMS could for the most part ensure exchange rate stability in the European Union for about 20 years. The only major crisis to hit the EMS was the great currency market speculation against the central rates of the EMS in summer of 1993, which resulted in an interim forced broadening of the maximum fluctuation margins to +/– 15 % (on August 2nd 1993) that nearly caused the collapse of the EMS. This was preceded by a long period of missed parity adjustments, which had to be quickly corrected under the pressure of international currency speculation due to different price level developments (purchasing power parity theory!) and to different interest rates (interest rate parity theory!) in the member countries of the European Union. (Compare for more details concerning the theory of exchange rate determination: EIBNER, 2006c, Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Chapter 13.) Ultimately, this was a forced correction of politically misdirected („A strong nation does not devalue!”) fixed exchange rates (parities or central rates), but was also an essential condition for the unproblematic foundation of the European Monetary Union in 1999. Then, in the first instance 11 member countries of the EMS irrevocably fixed their exchange rates and introduced the Euro as the new common currency. With this step, the EMS was concluded. The goal of the Maastricht Treaty, to introduce a single European currency by 1999, would not have been possible without the experiences of the EMS. 280

8.11 European Economic and Monetary Union

8.11.1

Legal Basis and Organizational- and Institutional Structure of the EEMU

Art. 3a(2) ECT (today’s Art. 4(2) ECT) as a component of the Single European Act (SEA) of 1985/86 requires in addition to the introduction of an economic policy – which is based on a close coordination of the economic policy of the member countries, on the single market and on the establishment of common objectives – “… the irrevocable fixing of exchange rates leading to the introduction of a single currency, the ECU, and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition.” (Cf. Art. 4(2) ECT.) Building on this, the Council of Ministers of the European Union decided in December 1991 (Art. 102a – 109m, Maastricht EC Treaty) to form an Economic and Monetary Union (Articles 116 – 124 ECT). For the introduction of a common European currency, a three-stage plan to implement a European Monetary Union was defined in Title VI of the Maastricht EC Treaty:

Stage I already started in 1990 on the basis of the by the Single European Act supplemented Art. 3a, EECT and had as a goal the liberalization of movements of capital, a closer economic coordination of the various governments and central banks as well as an incorporation of all EU member countries in the firm exchange rate system of the EMS. Stages II and III of the economic and monetary union, respectively the introduction of a single currency – the latter not referred to as the ECU, as in the beginning favored by the French and Belgians, but rather as the EURO under pressure from Germany – were fixed as found in Art. 109e – 109m Maastricht EC Treaty (Articles 116 – 124 ECT).

Stage II started on January 1st 1994 with the founding of the European Monetary Institute (EMI) in Frankfurt as a precursor of a European Central Bank (followed by the ESCB: European System of Central Banks) which was supposed to make the technical and administrative preparations for the monetary union of 1999. 281

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The primary goal of the EMI was to prepare the following ESCB’s monetary instruments in order to come into operation (cf. in detail: EUROPEAN MONETARY INSTITUTE, 1997). Moreover, the ministers of the Economic and Financial Affairs Council (ECOFIN Council) came into the possession of new instruments to promote convergence (Art. 99(3) EC Treaty): •

Every year in spring the Council approves the main features of economic policy, in which the common objectives regarding inflation, control of public deficits, and since 1995 also employment are laid down.

•

It discusses the economic policy of the member countries on the basis of national convergence programs (in which the individual countries define a strategy for the quick fulfillment of convergence criteria) and of the convergence report of the Commission.

•

The Council decides which countries are showing an excessive deficit and recommends measures to the countries concerned to remedy this situation. If these recommendations are not carried out, then the Council can decide to publish them and thus put considerable public psychological pressure on the government concerned.

•

Moreover it can instruct the European Investment Bank (EIB) to check the lending policy of member countries and require that a member country makes a non-interest-bearing deposit of suitable size until this country's deficit is rectified. In addition, it can impose fines.

Stage III was scheduled to begin (cf. Art. 109j (4), Maastricht EC Treaty) on January 1st 1997 or at the latest on January 1st 1999, in so far as a majority of EU countries (starting year 1997) or at least some EU countries (starting year 1999) fulfilled certain criteria, which are known as ‘convergence criteria’ (today’s Art. 121 ECT). After no country but Luxembourg was able to fulfill the convergence criteria (cf. Section 8.11.3) by January 1st 1997, the EEMU began for all member countries of the EU at that time with the exception of Denmark, Greece, United Kingdom and Sweden on January 1st 1999 with the introduction of the Euro – which is the sole means of making payments since the beginning of the year 2002 and which replaced the circulation of cash of the thitherto national currencies of the EEMU states by January 1st 2002. 282

8.11 European Economic and Monetary Union With the start of the year 1999 the autonomy of monetary policy for the states of the European Union, which take part on the European Economic and Monetary Union (Greece became member on January 1st 2002 of the Euro zone), was transferred to the European System of Central Banks (ESCB).

Figure 8.29: The European Central Bank in Frankfurt/ Main (from Amt fü r amtliche Verö ffentlichungen der Europäischen Gemeinschaften, 1999, p. 21)

By means of a political decreed multinational communitization of one of the most important responsible bodies of national economic policy – the national central banks – with the ESCB a unique attempt of economic integration was dared in modern economic history.

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Since January 1st 1999 the European System of Central Banks (ESCB) is the sole supporting organization for the common monetary policy of the EEMU countries due to the task transfer of the hitherto independent National Central Banks of the EEMU states inside the European Union. According to Article 105(2) of the Amsterdam EC Treaty, the fundamental duties of the ESCB are to define and to execute the monetary policy of the community, to realize exchange transactions in line with the currency autonomy of the European Council, to hold and to administer the official monetary reserves of the member states as well as to promote the smooth functioning of the payment systems. The main objective of the ESCB according to Art. 105 EUT is to guarantee price stability. If it is possible without impairment of the price stability aim, the ESCB supports the general economic policy in the European Union. An accession of additional EU-member states to the EMU is basically not only possible, it is strongly expected as an integral part of European integration inside the European Union. However, countries planning to enter the Euro-zone have to prove the fulfillment of the in the next Section explicitly shown convergence criteria; one of those criteria is the requirement, that strong tensions on the exchange rate mechanism (ERM), also known as ‘EMS II’, may not originate from one member country: In reality, a maximum range of +/– 2.25 % about the defined parity for the exchange rates of the countries who want to join the Euro must be observed for two years. Since January 1st 1999 the EMS II works as a so-called accession empowering Exchange Rate Mechanism (ERM II) for countries, who intend to join the Euro-zone in the foreseeable future. (For more details to EMS I and also to EMS II/ ERM II compare the explanations in the also bilingual textbook of EIBNER, 2006c: Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Chapter 14.3.) With the accession to the EMS II a maximum fluctuation margin of +/– 15 % about the declared parities of the currencies is initially stipulated for countries willing to participate. If the implementation is successful, this fluctuation margin can be reduced to the accession empowering maximal fluctuation margin of +/– 2.25 % upon the request of the affected country. From those EU countries, which didn’t want to be a member of the Eurozone at the time of the EMU foundation, only Denmark has entered the EMS II so far: 284

8.11 European Economic and Monetary Union Since June 28th 2004 Denmark agreed to a narrowed fluctuation margin of +/– 2.25 % in order to be prepared for its future membership to the EEMU. The EMS II as an exchange rate mechanism (ERM II) is an important bridge especially for the new EU member states in Central and Eastern Europe as well as in the Mediterranean, who acceded on May 1st 2004 and January 1st 2007, and also for all the countries interested in a membership in the EU. Estonia, Lithuania and Slovenia were the first three new EU member states who joined the ERM II on June 27th 2004. In May 2005 also Latvia, Malta, and Cyprus became members of the ERM II. Slovakia joined the EMS on March 16th 2007. But all of these countries still act on the basis of their currencies’ maximum fluctuation margin of +/– 15 % related to the Euro central rate (as of April 2007), although Malta and Cyprus already maintain their parity in the range of +/– 2,25 % for a long time. Current information regarding the ERM II incl. relevant central rates and stipulated fluctuation margins are provided by the European Central Bank on its website (cf. [www ECB 03/2007]).

8.11.2

Objectives and Organization of the European Central Bank

In its basic elements, the European monetary order of the ECT corresponds completely to the former German monetary orders. In many aspects, it is even more concise and better than the former German monetary system: The independence of the European System of Central Banks (ESCB) as Central Bank of the EEMU – consisting of the European Central Bank (ECB) in Frankfurt/ Main in Germany and the attending national central banks as dependent institutions – has a high ranking in the European Union.

The most important objective of the European System of Central Banks (ESCB), according to Article 105(1) ECT, is to guarantee price stability. To this end, it supports the general economic policies or integration policies of the European Union, as long as this is possible without jeopardizing the objective of price stability: The ECB only has a limited supportive obligation of the general economic policy of the government, ‘as long as it doesn’t counteract the protection of price stability’. According to Article 105(2) of the EC-Treaty, the fundamental responsibilities of the ESCB are the following: 285

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•

to establish the monetary policy of the Union and to implement it,

•

to carry out foreign exchange transactions in accordance with the currency autonomy of the European Council,

•

to maintain and manage the currency reserves of the member states, as well as

•

to promote the trouble-free operation of the various currency systems.

The organizational structure of the ECB or the ESCB sketched in Figure 8.30 is built on a federal principle. The term ESCB describes the ECB in the narrower sense, seated in Frankfurt/ M., and the National Central Banks of the EEMU member countries.

ESCB European System of Central Banks National Central Banks:

European Central Bank (EZB) Executive Board : • • •

President Vice-president up to 4 additional members

Members elected for 8 years by the EU-Council.

The executive branch for monetary policy in all EEMU member states

Figure 8.30:

286

Governing Council: Executive Board Presidents of the National Central Banks The decision making body for all monetary and interest rate policy

• •

-----------------------------------------------

General Council: z

z

Presidents of all National EU Central Banks President and Vice president of the ECB

A: B: D: E: F: FIN: GR: I: IRL: Lux:

Österreichische Nationalbank Nationale Bank van België Deutsche Bundesbank Banco España Banque de France Suomen Pankki TPΑΠΕΖΑ TΗΣ ΕΛΛΑΛΟΣ

Banca d‘Italia Central Bank of Ireland Institut Monétaire Luxembourgeois NL: De Nederlandsche Bank P: Banco de Portugal SLO: Banca Slovenija

Responsible authorities for the national money supply and national control of the banks

Organizational structure of the European System of Central Banks (as of 2007)

8.11 European Economic and Monetary Union A major portion of the policy-making authority has been given to the executive branch, so that the German Central Bank will also be an important monetary policy-making agent in the future, above all on the national financial markets.

The most important decision-making body is the ECB Council, to which belong the members of the ECB Executive Board and the presidents of all the member states’ Central Banks of the European Economic and Monetary Union. The Governing Council determines – normally on the basis of submissions by the Executive Board – the entire spectrum of European monetary policy even down to the management and administration of the bank. So, the Governing Council has the autonomous power of decision about the growth of the money supply and the economic interest rate level in the whole Euroarea. Here, the Governing Council is completely independent of the member states’ governments in the European Economic and Monetary Union. It normally meets every 14 days to make decisions with a simple majority of votes cast. These decisions are eagerly anticipated by national and international financial markets. The European Central Bank has the sole right, according to Article 106 of the Amsterdam ECT, to authorize the issuance of banknotes within the European Monetary Union. The Executive Board, the most important executive branch, is comprised of the president, vice-president, as well a maximum of four additional members, all of whom are named unanimously by the European Council for a term of 8 years. In monetary policy matters a simple majority is required; in the case of a tie, the vote of the ECB president is the tie-breaker. As the first president of the European Central Bank in 1998 was elected Willem F. DUISENBERG from the Netherlands – it was against the bitter opposition of the French President Jacques Chirac, who was trying to push his own candidate, the president of the French Central Bank, Jean Claude Trichet. In 2003 TRICHET became the second president of the European Central Bank, although he was prosecuted by the French Public Attorney’s Office: In order to keep the reputation on a proper point, a search for an alternative would have been a more welcome decision, whereas this was politically not enforceable towards the French president Chirac indeed.

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In addition to his function as the official representative of the ECB, his most important responsibility as president is to conduct the meetings of the Governing Council as well as those of the Executive Board. The following list outlines the additional members of the Executive Board elected in 1998 as well as the after the end of their incumbency elected successors – competences by June 2006: •

Christian NOYER (France), his special areas are “administration and personnel”, “legal services”, as well as “risk management”, for 4 years as vice-president of the ECB – redeemed on June 1st 2002 by the Greek Lucas D. PAPADEMOS for 8 years;

•

Sirkka HÄMÄLÄINEN (Finland) for 5 years in the areas of “financial market management”, “cost control and organization” – detached on June 1st 2003 by the Austrian Gertrude TUMPELGUGERELL for 8 years (for a long time there existed a veto by Belgium though, that initially insisted on his representative against the resistance of all other Euro-countries; this situation made once again consequently clear, that the mandatory unanimity for the filling of an Executive Board’s post in the European Council is rather a pointless regulation);

•

Eugenio Domingo SOLANS (Spain) for 6 years, responsible for “information technology”, “statistics” and “banknotes” – being followed on June 1st 2004 by the Portuguese José Manuel GONZÁLES-PÁRAMO for 8 years;

•

Tommaso PADOA-SCHIOPPA (Italy) for 7 years, responsible for “international and European relations”, “funds transfer systems and supervisory matters” – followed on June 1st 2005 by another Italian, Lorenzo Bini SMAGHI, for 8 years;

•

Otmar ISSING (Germany) for 8 years as chief economist of the ECB with responsibility for the areas of “economics” and “research” – redeemed on June 1st 2006 by the former president of the Deutsche Bundesbank, Jürgen STARK for 8 years; in addition, he represents the ECB, along with the vice-president, on the Economic- and Finance Committee of the European Union.

This guarantees, that the Executive Board will be able to continue its job in a qualified way without any major disruptions.

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8.11 European Economic and Monetary Union Although the members of the Executive Board, like the members of the ECB Council, serve a term of 8 years, these terms were staggered in the first appointments in order to prevent a situation whereby, at the end of the first term, all directors would have to be replaced at the same time. These staggered first appointments, which only guaranteed the German Director of the Executiv Board, Professor Dr. Otmar ISSING, a full term of the normal period of office of 8 years, made sure that also future appointments within the Executive Board are staggered. The national central banks as additional executive bodies, represented by their presidents, are responsible for translating business transactions and administrative matters into action in the individual countries. The national central banks are especially concerned with the money supply and cashless financial transactions within the country. The organizational structure of the ESCB is extended further by the so-called ‘General Council’: According to Article 45(2) of the constitution of the ESCB, the General Council consists of the president, the vice-president as well as the presidents of the national central banks of the member states of the European Economic and Monetary Union. Also the presidents of the central banks of those states that are members of the European Union but not yet of the EEMU are included – and here is the reason for the term ‘expanded’. These additional members of the Executive Board may take part in the sessions of the General Council but do not have a vote. This General Council includes also the presidents of the central banks of the countries that are now members of the EU but not the EEMU since the two round of the Eastern-expansion (May 2004 and January 2007) of the European Union. In all likelihood, these are the following: Bulgaria, Estonia, Cyprus, the Czech Republic, Hungary, Latvia, Lithuania, Malta, Poland, Romania and Slovakia. This council is intended primarily to provide a platform for an exchange of information and experiences between the “Ins and Outs” so that the monetary policies of the non-euro nations do not diverge significantly from the policies of the current member states of the European Monetary Union.

8.11.3

Convergence Criteria and the Economic Stability Pact

The ECB’s prohibition to issue loans to the European Union and the member states is regulated more strictly than the German Central Bank’s (Deutsche Bundesbank) prohibition to issue loans to federal and state governments. 289

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This seems to ensure a stringent stability oriented policy. However, there still is a risk due to the fact that the economically sensible convergence criteria already by establishing the EEMU could not be met by all states, and still until today cannot be met by quite a lot of countries – including Germany 2002 – 2005. Specifically, the convergence criteria according to Art. 109j (1) Maastricht EC Treaty and the “Protocol on the convergence criteria referred to in Article 109j of the Treaty establishing the European Community” (corresponding to Article 121 of the Amsterdam EC Treaty and the “Protocol on Convergence Criteria According to Article 121 of the ECT”) that have to be fulfilled by EU member states, if they want to become member of the EEMU, were and are: • Annual new net-borrowing must not exceed 3 % of GDP, • total indebtedness is not allowed to exceed 60 % of GDP. The following three convergence criteria, which were relevant at implementing the common currency, are logically now after establishing the EEMU only relevant for new member countries willing to join the monetary union: • The rate of inflation of a member country shall not exceed 1.5 % of the average rate of inflation of the three countries with the lowest rates of inflation (now: the EU’s rate of inflation); • The nominal long term interest rate shall not exceed the average of the comparable interest rate of the three countries with the lowest rates of inflation by more than 2 percentage points (now: the nominal long term interest rate of the EU); •

Strong tensions on the exchange rate mechanism of the EMS (now: the EMS II) must not originate from a potential EEMU member state for at least two years, i.e. there is a maximum deviation from the currency’s parity to the Euro by +/– 2.25 %.

According to an interpretation covered by the EU Treaty, EU countries can also become members of the EEMU, if they have failed to meet the convergence criteria named in the above-mentioned protocol but have had great success along the way to fulfill these criteria. Figure 8.31 provides an overview of the achieved convergence of the years 2003 and 2004. While the interest and inflation criteria could be met by all Euro countries (as well as the 5th criterion of exchange rate stability in the EMS for at least 2 years), the deficit criterion and the debt criterion were – and still are (!) – not permanently met and sometimes only through ‘creative bookkeeping’, such as the sale of government property like shares, companies, 290

8.11 European Economic and Monetary Union

real estate etc. as well as valuation manipulation (also in Germany), whereby the evil term of ‘valuation manipulation’ could be replaced by the term ‘creative accounting’. Convergence criteria according to the „Maastricht treaty“ 2003 and 2004 Deficit or surplus in % of the GNP

Threshold value in 2003 and 2004: -3.0

Rate of inflation

Threshold value in 2003: 2.7; 2004: 2.2

Figure 8.31:

Public indebtedness in % of the GNP

60 % or sufficiently declining

Long-term interest rate

Threshold value in 2003: 6.1; 2004: 6.3

Achieved convergence of the Euro-countries in 2003 and 2004 (from [www statistik.at 04/2005])

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Especially for those countries, that recently acceded to the EU, the convergence criteria are certainly of particular importance, because a membership in the EEMU is not possible without their fulfillment. Figure 8.32 provides an overview of the realization of the important convergence criteria regarding national debt, as they constitute in the year 2006 for the in the year 2004 acceded countries of Eastern- and Southern Europe:

EU – Accession states of 2004

Convergence: Criteria of a maximum annual net-borrowing of 3 % of GDP as of 2006

Convergence: Criteria of a maximum total indebtedness of 60 % of GDP as of 2006

Estonia

+ 2.6

3.7

Latvia

– 0.4

10.7

Lithuania

– 1.2

18.4

Slovenia

– 1.6

28.5

Poland

– 1.9

42.0

Cyprus

– 1.9

64.7

Malta

– 2.6

68.3

Czech Republic

– 3.5

30.6

Slovakia

– 3.7

33.1

Hungary

– 10.1

67.5

– 3.4

41.2

Average value Figure 8.32:

Level of the convergence criteria regarding national debt of the 10 EU accession countries of 2004 for the year 2006 (Data from EUROPEAN CENTRAL BANK, 2007, p. 91)

The for the reader possibly surprising awareness is, that the accession countries are fulfilling the debt criteria for the convergence much better than many countries, that already acceded to the Euro area. Accordingly, Slovenia already acceded to the EU in 2007, Malta as well as Cyprus will become member of the European Economic and Monetary Union on 1.1.2008, Estonia and Slovakia possibly on 1.1.2009. The further above-named convergence criteria regarding inflation and exchange rate stability are so far not adequate converted in the other countries. 292

8.11 European Economic and Monetary Union Although according to monetarist theory, high government budget deficits and a high public debt do not immediately limit the stability of monetary value, as long as these deficits are not financed by the central bank, there is still the danger that high budget deficits may result in raising interest rates owing to high governmental loan demands and a decrease in private investment activities with corresponding growth losses. In such a situation, there is a danger that the ECB experiences a collapse of stability policy, since high interest rates are not quite helpful for economic growth and employment. Thus, there is the danger that the stability of the Euro could be jeopardized by a shaky financial policy of member countries. In order to prevent EU countries from fulfilling these criteria or showing great success along the way towards fulfillment only at the time of the convergence check until June 30th 1998 and then after admission to the EEMU ignoring the convergence criteria with impunity (e.g., in the form of higher public deficits), a so-called Stability- and Growth Pact was agreed to under German pressure. This economic Stability- and Growth pact, which was agreed in December 1996 as part of the Dublin council meeting of the heads of state and government of the EU, is designed to ensure that convergence criteria are kept, especially of government debt and after the introduction of the Euro. To be able to ensure this, this Stability- and Growth Pact consists of two mechanisms: Ö First, an early warning system was created that should, in conjunction with a multilateral financial surveillance, help prevent financial misdevelopments. Ö Second, a sanction mechanism was implemented that will be activated in case of excessive budget deficits and that can impose significant fines (cf. Article 104 paragraph 11 ECT). However, the problem here is that the agreed sanction mechanisms are not automatically activated for rule violations against the deficit criteria, but rather must be decreed by a majority in the council. There is indeed the danger that especially against huge and political weighty member countries the sanction mechanisms will not or just very late be proceeded.

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The compliance with the stability criteria is controlled by the Economic and Financial Affairs Council, the so-called ECOFIN, its competences were already mentioned in Section 8.11.1. The Stability and Growth Pact defines certain period objectives for every country, in which the national budget should be balanced. Only in times of a recession it is allowed that the net new indebtedness reaches the limit values of the convergence criteria. This stability pact was already concluded significantly due to the pressure of Germany and its Finance Minister Theo Waigel before the introduction of the Euro. The pact led to the situation that 8 of 12 EEMU states possessed about a budget surplus or at least an almost balanced budget in the year 2002, when the Euro was introduced as the single currency. In many cases the stability pact is accused to be too strict and would give insufficient leeway to the states to react adequate – i.e. fiscal expansive – to recessions, flood disasters, etc. This reproach is largely wrong: The stability objectives can be adapted to altered global economic settings by all means in a consensus. By the way, the objectives normally are voluntary commitment programs, like the French and German promises to balance the budget until 2004 or at the latest 2006 or the (meanwhile totally absurd) Italian promise of a balanced budget until 2003, which was, amongst others, a requirement for the joining of Italy to the EEMU in 1999 despite unfulfilled convergence criteria. Moreover, a singular breach of the stability criteria does result by no means in horrendous fines: In fact, ‘probational periods’ of more than one year are intended and the Council decides about sanctions. The example of Germany shows clearly, that with an appropriate political importance of the country a long lasting missing of targets in the area of indebtedness parameters (2001 – 2005) remain exempted from punishment by the EU and the stability pact respectively. Nevertheless the situation inside the EU shows, that most of the states have used the previous years for a budget consolidation. Needless to say, that states, which were not able for this, like particularly Portugal, Germany, France, and Italy, now have problems to comply with the debt ceilings according to the stability pact. But, to hold the stability pact responsible for labor market problems or economic recession is equally economical wrong as political irresponsible: 294

8.11 European Economic and Monetary Union The refusal of Germany’s chancellor Schröder in 2001 to receive the ‘letter of complaint’ by the Commission due to the violation of the stability criteria by reason of the too high public debt, has harmed sustainably the acceptance of the stability pact in the EEMU. In this respect, it is inapprehensible, that finally the from Germany against heavy European resistance established pact was breached by Germany itself as the first country. Since that time, the discipline effect of the stability pact is increasingly decreasing. Thus, it is a European challenge of high priority to make the stability pact again capable to reach a consensus: Only in this case it is possible to secure the monetary stability of the common currency and the business environment of a low interest level (cf. for instance the Chief Economist of the German Central Bank, Hermann REMSPERGER, 2002). The Stability and Growth Pact is an indispensable corset for discipline to bar the European Finance Ministers of substituting unpleasant steps of savings- or tax increases by the simply increasing of – interest raising and indirectly money supply heightening – public debt.

8.11.4

Observations on Potential Effects of the European Economic and Monetary Union on the further Development of Germany and the European Union

On the basis of the autonomy of the European Central Bank it can be assumed that in an institutional view the fundament is in place for the Euro to be able to reach the same stability as the Deutsche Mark had over the last 50 years. This view is supported by the up to now very low inflation rate of the Euro as well as by the very strong evolution of the Euro’s exchange rate compared with the relevant currencies in the world. Basically, however, from an economic viewpoint a monetary union can only exist at the end of a long process of harmonization and of a more or less identical economic activity and growth policy, in order not to lead inevitably to migratory movements and structural problems – as, e.g., the Germans have known them from the German-German monetary union of 1990 –, which for many years will demand high transfer payments from prosperous areas of the Union to less prosperous regions. 295

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Accordingly the in Section 8.8 already mentioned regional and structural funds are vitally important, which will be for a foreseeable period an elementary instrument not only for an economic harmonization in terms of an increasing equalization of living conditions in EU regions, but also an integral part for the continuity of the common currency in such an economic heterogeneous area like the European Union. The five following arguments out of an economist’s view indicate the chances for a well performance of the single European currency, which shall then show itself increasingly as a factor for rising political and economic stability:

1.

With a single European currency there are no exchange rate fluctuations, which hinder the efficiency of the single European market and burden exporters as well as importers with high risks or costs in the form of exchange rate fluctuations or expensive foreign exchange swaps or other hedge transactions. The costs of hedging against exchange rate risks were estimated to be around 0.5 % of the GNI of the EU, i.e., up to 50 billion Euro will be saved each year in costs to companies since the EEMU started. These savings will lead to a better cost structure for the companies within international competition and will mean the tendency to lower price levels for the consumer.

2.

A single European currency will promote investments and employment, on the one hand, because it will be taken for granted that in the framework of the European Monetary Union public deficits are under better control (remember the stability pact!) and therefore more money at more favorable interest rates of is at the disposal of private enterprise; on the other hand, because the European Central Bank on the basis of its conception has the necessary means at its disposal to fulfill its priority goal – safeguarding price stability – and will use these instruments accordingly. Since this is the case, the single European currency will indeed not only especially in the period 2002 – 2006, but also in the long run be able to bring about lower interest rates than it was the case in many countries of the EU before the introduction of the Euro. Therefore it will be able to promote a stimulation of business activity and a reduction of unemployment.

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3.

Due to its international acceptance, a single European currency promotes foreign trade and therefore employment in the EU, since, on the basis of the great economic strength of the countries concerned, it will become in the medium-term an international reserve currency. It outstrips the yen as an international reserve currency by far for a long time. In the long term, the Euro will catch up the US-$ as an internationally recognized invoicing and reserve currency: Especially the countries of Southeast Asia and especially China start substituting more and more of their national US-$ currency reserves into Euro nominated currency reserves. (Details on the increasing role of the Euro as a transaction, reserve and speculation currency on the international exchange and financial markets can be found in the also bilingual textbook of EIBNER, 2006c: Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Chapter 15.) Especially the replacement of the dollar with the Euro for the invoicing of European raw materials imports (above all oil) would make these vital imports more independent of exchange rate fluctuations (of the US dollar!) and spare the European producer and consumer high costs.

4.

The international competitiveness of Germany certainly grows at least inside the EU, since its sister countries within the European Union can no longer compensate for their productivity disadvantages as in the past by a currency devaluation against Germany. In fact, Germany continuously devalues in real terms since the beginning of the monetary union, because prices and wages are rising slower than in the other Euro countries, as Figure 8.33 shows. Furthermore German exports will be realized easier with main trade partners outside of the EEMU compared to the times of the DM: Although the Euro belongs to the hard currencies in the world it will not constantly be under the international pressure of revaluation – as was the Deutsche Mark.

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Advantage in Labor Costs for Germany owing to fixed Exchange Rates 140

Change in real unitized labor costs: 130

Spain

Index 1995 = 100

120

Italy

110

France

100 90

Germany 1995

Figure 8.33:

1997

1999

2001

2003

2005

Change in real unitized labor costs 1995 – 2005

Thus, as the last years have shown with comparatively very high excesses of exports of these countries (2001 – 2006), especially the exporters of the former hard currency countries in the European economic and monetary union – Germany, Netherlands, and Austria – are the winners in the monetary union. This is an aspect of the economic and monetary union which has scarcely been considered to date.

5.

A single European currency counts as a guarantor of a larger, international political- and economic stability. In addition to the process of economic union, a common European currency will also influence and accelerate the political integration of the EU countries very substantially. This will happen not least because the introduction of the single European currency eliminated the politically problematic monetary hegemony of the DM as it, e.g., influenced the European Monetary System (EMS) since its initiation in 1979 until the transfer into the European Monetary Union (cf. for more detail EIBNER, 2006c: Understanding International Trade: Theory & Policy – Anwendungsorientierte Außenwirtschaft: Theorie & Politik, Part C, Chapter 15.2). Up to the end of 1998, the DM fulfilled de facto a key currency function in Western Europe, i.e., in the final analysis only the German Central Bank was in the position to pursue an autonomous monetary policy.

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8.11 European Economic and Monetary Union All other European central banks in the EU or the EMS had de facto to go along with the monetary policy decisions of the German Central Bank, if they did not want to trigger larger exchange rate fluctuations – as a rule, to the detriment of their own currencies. With the introduction of a single European currency, the monetary policy dominance of Germany was cancelled. In the final analysis, only Germany lost its monetary policy autonomy. The other EU countries merely lost a privilege which they moreover had been able to use only in very limited fashion in the past. In the future they will get back this privilege by means of the right to a voice in decisions of the Governing Council of the European System of Central Banks and thus receive and carry out a new form of common currency and monetary sovereignty. But these countries will lose the capability to devaluate a national currency to gain advantage in trade with economically strong, productive producing countries, like Germany. Thus the introduction of the Euro especially for Germany not only is an economically as well as a politically surmountable step as the last years already have shown, but it is also a great chance to make Germany as a location of industrial production even more competitive for its companies as well as for its citizens.

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8.12

8 The EU

Review Questions

8.1

What are the basic objectives of the European Union?

8.2

With which treaties the history of the European Union begins?

8.3

Which treaties with which central objectives are considered to be the most important steps for the creation of the European Union after the establishment of the EEC?

8.4

Which were the main objectives of the treaty negotiations of Nice in 2001?

8.5

Describe the process of European integration in a tabular form.

8.6

Name the most important bodies of the European Union.

8.7

Give a review about the composition of the institutional EU bodies.

8.8

What is the difference between the Council of Ministers and the European Council?

8.9

Name the main tasks of the Council of Ministers.

8.10 What function does the Commission have? 8.11 Name the main tasks of the European Parliament. 8.12 Name the two most important EU committees and their main responsibilities. 8.13 Which responsibilities does the European Court of Justice have? 8.14 What was the specific importance of the ‘Convent for the European future’? 8.15 Sketch cooperation and the co-decision as they relate to the legislative procedures of the EU. 8.16 What kind of different revenues are at the disposal of the European Union? 8.17 Must the EU-budget always be balanced, or is there an indebtedness allowed? 8.18 Which EU member states contribute most to the Union’s revenues in absolute terms, which in relativ terms? Name the countries being the financial net-contributors.

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8.12 Review Questions 8.19 How can the strong net-financing position of Germany in the financing of the EU’s expenditure be assessed politically and economically? 8.20 Name the most important expenditure items of the EU budget. 8.21 Name the goals of the Common European Agricultural Policy. 8.22 Give a short description of the instruments of the Common Agricultural Policy. 8.23 Which main measures were employed as a consequence of the agricultural reform of 1992? 8.24 Give a short overview of the supporting financial means of the Common Agricultural Policy relevant since the year 2007. 8.25 Which external and internal reasons require a substantial reform of the European agricultural policy? 8.26 Which four basic freedoms did the single market concept of the EC realize? 8.27 Name the currently most important structural funds of the EU and explain their tasks. 8.28 Which purposes pursue the Cohesion Fund of the European Union? 8.29 Which three countries did receive the highest financial support of the structural funds in the years 2000 – 2006, which three countries did receive the highest amount of subsidies per capita? 8.30 Which tasks does the European Investment Bank have in line with the EU structural policy? 8.31 With which support programs since 2007 is the EU economically preparing the acceding countries within the scope of their accession? 8.32 What is the main target of the European Research Area (ERA)? 8.33 What are the most important program types of the EU research and technology policy? 8.34 Name the main promotion objectives of the research supporting program of the European Union. 8.35 How distinctive is the intention in the EU for the creation of a Social Union? 301

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8.36 What is the ECOFIN-Council and which important tasks has it in the framework of the EEMU? 8.37 Explain the conceptual difference between the ‘ESCB’ and ‘ECB’. 8.38 Which tasks does the ESCB have? 8.39 What are the objectives of the ESCB? 8.40 Name the convergence criteria, the Maastricht ECT determined as precondition for the introduction of the Euro. 8.41 Why is the compliance with the stability pact essential for the further positive development in the European Monetary Union? 8.42 What were and are the convergence criteria, that had and have to be fulfilled by countries willing to access the EEMU?

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Answer Key for the Review Questions 1.1 Your overview should correspond with the information given in Figure 1.2, Section 1.1.2. 1.2 The GATT is supposed to guarantee the necessary safety and dependability of international trade relations and to provide a step-by-step liberalization of world trade, in order to promote the objectives mentioned in the GATT Preamble, namely, an ‘increased standard of living’, the ‘realization of full employment’, a ‘high and continually increasing level of real income and effective demand’, the ‘full development of the resources of the world’, as well as ‘increased production and increased exchange of goods’. Cf. Section 1.2.1. 1.3 The Kennedy-, Tokyo- and Uruguay rounds. In the two first-named negotiation circles, an important reduction in tariff rates in international trade was achieved; in the Uruguay Round, especially the incorporation of services into the regulations and the institutionalization of treaty agreements in the form of a newly founded WTO were attained. Cf. Section 1.2.1. 1.4 The principles of non-discrimination in international trade; reciprocity in regard to the dismantling of trade barriers and liberalization, i.e., the dismantling of customs duties and other trade barriers. Cf. Section 1.2.2. 1.5 Transparent foreign trade control, legal certainty in international trade, limited legalization of protective measures or of exceptions. Cf. Section 1.2.3. 1.6 GATS encompasses in principle all tradable services. Suppliers of services must not be impeded by means of access quotas, monopolies, exclusive rights or ad valorem import quotas. Cf. Section 1.3. 1.7 The goal is to make existing international conventions on the protection of intellectual property more effective. Cf. Section 1.4. 1.8 The WTO carries out regular trade policy reviews (TPRM) and monitors regional trade and integration agreements. Cf. Section 1.5. 1.9 With the ‘Dispute Settlement Body’ (DSB) the WTO provides a framework for the resolution of disputes arising among its member states with regard to any of the WTO-agreements. If such a dispute 303

Answer Key for the Review Questions arises, the parties first must try to find an amicable solution. If they fail, the DSB formally can be called upon and then will upon request of either party establishes build an arbitral body consisting of three arbitrators that is called a ‘panel’. This panel after hearing the different arguments concludes the procedure by issuing its ‘report’ and as part of this report offers its ‘recommendations’. Cf. Section 1.6. 1.10 The great problem is, that these standards will not be achievable in the near future: Third world countries are competitive mainly because of ignoring even basic social and environmental standards. That is why these countries will not agree to the necessary multinational agreements that are urgently needed to save our environment and social standards of living and to strengthen Art. XX GATT. Cf. Section 1.6. 1.11 TRIMS liberalizes and lastingly protects foreign direct investments. Cf. Section 0.1. 1.12 The main problem is that in many cases development strategies of developing countries cannot be conducted autonomously anymore because of TRIMS. Due to TRIMS foreign investors reap the benefit of almost unrestricted liberty in countries of their investment plans and operate self-governed in their host countries regardless of domestic development strategies respectively local labor markets. Cf. Section 0.1. 1.13 The main fields of activity will be the effects of international widely diverging social and environmental norms on international trade and competition policy. Cf. Section 1.8. 2.1 The promotion of international trade in the interest of developing countries, harmonization of worldwide trade and development policy in favor of a better and quicker development especially of the Third World. Cf. Section 2.1. 2.2 A stronger integration of developing countries and countries in transition in the process of globalization. Cf. Section 2.1. 2.3 Foreign trade policy, development financing, stabilization of prices for raw materials. Cf. Section 2.2. 2.4 Little, since the experience of the last few years has shown that – while serious, market-related fluctuations in raw materials prices perhaps can be ironed out in the short term by the Common Fund (should the occasion arise at very high costs) – raw material agreements fail in the case

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Answer Key for the Review Questions of structural market price shifts, since they simply cannot be financed. Cf. Section 2.2.3. 3.1 According to Article I IMF Agreement: The coordination of monetary policy among member countries in order to realize the following objectives: expansion and balanced growth of international trade, an internationally high level of employment, high real income in all member countries with steady development of productive resources and full utilization of productive capacity. Moreover it has always been the task of the IMF to grant member countries financial assistance in case of balance of payments problems. Cf. Section 3.1. 3.2 On the basis of their high quota contributions: USA, Japan, Germany, France and Great Britain. Cf. Section 3.1. 3.3 The Bretton Woods system was an international system of relatively firm rates of exchange on the basis of the gold standard. The primary objective of this system was to minimize foreign trade risks internationally by means of exchange rates as constant as possible (a fluctuation margin of only +/– 1 %). Cf. Section 3.2. 3.4 New objectives are: Surveillance of the exchange rate policy of member countries in order to keep exchange rate fluctuations small and especially to promote the free exchange of currencies among members at all times, which includes also a monitoring function of the economic policies of the member states and particularly the development countries; the granting of short and middle-term financial assistance in case of balance of payments problems by means of diverse borrowing facilities; the granting of technical assistance to member countries. Cf. Section 3.3. 3.5 From 1974 on the IMF granted its member states special loans in the form of a so-called extended fund facility – which made borrowing possible to 140 % of the quota. Between 1974 and 1976 a special temporary oil facility was provided. The Compensatory and Contingency Financing Facility (CCFF) was created in 1988, giving developing countries the possibility of compensating unexpected liquidity losses caused by a fall in oil prices or a rise in grain import prices. This takes the form of a loan of up to 200 % of a country's subscription quota. The Structural Adjustment Facility (SAF), existing since 1986, is limited to the poorest developing countries. What is special about the SAF and the increase and prolongation of its financial resources in 1987 and 305

Answer Key for the Review Questions 1993 – within the framework of the Enhanced Structural Adjustment Facility (ESAF) – is that the imposition of the economic policy conditions is quite rigid and the World Bank as development financier has a hand in the shaping of the contract. The other side of this is that the rate of interest is only 0.5 %. Another liquidity instrument of the IMF is the Systemic Transformation Facility (STF), introduced in 1993, which was especially created to help the transforming countries of Eastern Europe in their transition to a market economy. New instruments are the Poverty Reduction and Growth Facility (PRGF) and the Fund of Debt Cancellation for the heavily indebted poor countries. Cf. Section 3.3. 3.6 Together with the World Bank the IMF coordinates the HIPC debt relief program and defines the entry requirements to this program. Cf. Section 3.4. 3.7 In favor of debt relief, it can be argued, that without retention of the indebtedness a permanent economic recovery is nearly impossible; against a debt relief it can be argued, that it is at least questionable, whether the because of a reduced interest payment growing foreign exchange and national resources in the future really will lead to a higher investment e.g. in infrastructure and education to bring enhanced welfare to the country. Cf. Section 3.4. 3.8 Arguable aspects are that the current debt relief programs enable a socialization of immense costs of misled economic policy by the creditor countries to the donor countries of the First World and hence to their tax-payers and bank customers without a reward. This criticism weighs all the more, because one must fear, that the favored states won’t practice a more rational economic policy in the future and that the disposable national economic resources will be used for military projects or private enrichments by the prevailing elites which might even worsen the suppression of the population. Cf. Section 3.4. 3.9 Under the term conditional lending by the IMF the obligation for the fulfillment of certain macroeconomic revaluation measures regarding the granting of credits is subsumed. Common conditions are, e.g., upward or downward revaluation of the national currency, belt-tightening measures for public budgets, especially cuts in subsidies; tax increases; public sector job pruning; reduction of the public sector share of the gross national product, et altera. Cf. Section 3.5. 306

Answer Key for the Review Questions 3.10 A main political problem lies in the loss of sovereignty caused by the conditional lending policy, in the sense that the debtor nation can no longer practice its own unrestricted monetary, exchange rate and financial policy. Further, it is not certain at all that the economic policy demands for loan-seeking member countries by the IMF lead to the desired successes. Cf. Section 3.5. 4.1 The ‘World Bank Group’ consists of four financing institutions: The International Bank for Reconstruction and Development (IBRD) as the proper World Bank, the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). Cf. Section 4.1 and in more detail Section 4.2. 4.2 The World Bank in contrast to the IMF does not give any loan commitments relating to economic activity or solvency but exclusively loan commitments relating to future development and growth. Cf. Section 4.2.1 4.3 Primary projects: energy supply, agriculture and rural development, transportation, promotion of industry. Secondary projects: urban development, small business, population, health, nutrition, technical assistance. Cf. Section 4.2.1. 4.4 The World Bank is a kind of institutional investor with favorable refinancing. It refinances its low-interest loans to developing countries on the one hand by means of its own capital (quota payments of members) and on the other hand primarily by means of its own borrowing on international capital markets, since the World Bank obtains money at far under the interest rates that other creditors would have to pay. Cf. Section 4.2.1. 4.5 IDA loans are as a rule interest-free. The term of such ‘gifts for a certain time’ is as a rule 50 years; the repayment begins after 10 years. Basically, the same types of projects are supported as the IBRD funds. The IBRD finances primarily the newly industrializing countries such as Brazil, Mexico, Turkey, Thailand, etc., from which a repayment of the loans is expected. The IDA by comparison benefits projects primarily in the poorest countries of the world (Sudan, Bangladesh, etc.), from which in the medium term no economic upswing and therefore no foreign exchange holdings for payments can be expected. Cf. Section 4.2.2. 307

Answer Key for the Review Questions 4.6 The IFC is supposed to assist private investment in the Third World by means to have a stake in private companies and to support companies by means of guarantees. Thus it acts only as a co-financier with private (i.e., non-governmental) enterprises. Cf. Section 4.2.3. 4.7 The MIGA offers insuring against non-commercial risks as expropriation, war losses, or lack of convertibility of dividends and capital transfers et al. GRIP even covers commercial risks (risk of investment loss). Cf. Section 4.2.3. 4.8 Important and highly informative publications of the World Bank Group – besides the information on its homepage www.worldbank.org – are the following: World Development Report, Global Development Report, World Development Indicators, the Annual reports of all the World Bank Group’s sister institutions, especially the MIGA Annual Report. A very good possibility extracting data of relevant economic figures for all World Bank member countries besides the World Development Reports presents ‘Data Query’ in the worldwide web, see [www WORLD BANK Data Query] in the bibliography. Cf. Section 4.2.4. 4.9 A report about the work of the institution solicited by the US-congress (the so-called Meltzer report) shows impressively that the World Bank with all its projects is everything but successful to date. More than 50 % of all projects aided by the bank were flops. Cf. Figure 4.4 in Section 4.3.1. 4.10 The main points of criticism of World Bank’s development policy are that World Bank projects mainly attempt to ‘cure the symptoms’ but do not attack the causes of socio-political and economic problems. Projects advance in a fashion which is too technologically oriented: the attempt is made, in part with an immense amount of capital, to realize stages of development which are not achievable at the socio-cultural or politically-economic levels. A second important point of critics is, that the elites of the respective country prefer projects whose proceeds go to a small caste of the already well-to-do. Thus these proceeds do not contribute to the development especially of the rural sector and therefore do not increase the purchasing power of the poor. Cf. Section 4.3.2. 4.11 Prime reasons for the inefficiency of most of the World Bank projects are the in many developing countries persisting strong dependency of a 308

Answer Key for the Review Questions bigger part of the rural population on great land owners and the also dramatic dependency of a bigger part of the commercial actors of the rural and urban population on monopolistic organized creditors and investors. Those donors not only allocate for the indigent majority the for their business required liquidity with horrendous excessive interests, but also lend the needed materials of all kinds such as sewing machines, fabrics or fishing boats with such exorbitant prices, which allow the poor almost no income. Only if the World Bank succeeds in breaking up the circles of impoverishment, it will be possible to reduce poverty. Cf. Section 4.4.1. 4.12 The basic work of the GRAMEEN Bank is to help out the rural people in the villages of Bangladesh with microloans without requiring collaterals. One credit is about US-$ 30 to 50. Because of a higher moral of repayment and to increase the role of women in the society, credits were mainly given to women. Only with such targeted, ‘first push’ financing for the destitute self-reliance can be reached in the Third World and the much too limited economic purchasing power of wide sections of the population be increased. Cf. Section 4.4.2. 4.13 In 1995 the World Bank founded the ‘Consultative Group to Assist the Poor’, having the target to mobilize financial resources for the purpose of lending microloans. 1999 the World Bank initiated the ‘World Bank Group’s Microfinance Institutional Action Plan’, which intention is to build a robust microfinance industry and to strengthen existing microfinance institutions to build their portfolios and extend outreach to the poor. Especially the IDA and IFC are heavily integrated in the worldwide attempts to expand the access to microloans. Cf. Section 4.4.3. 4.14 Since 1989 the World Bank has begun to take environmental issues more seriously as a result of the growing public criticism. A longlasting realization of the principle of ‘sustainable development’ in the day-today business yet is not imposed up to now. Cf. Section 4.5, see especially Figure 4.15. 4.15 The 1991 born Global Environmental Facility is financed by each 50% on the one hand by the United Nations Development Program together with the United Nations Environment Program, and on the other hand by the World Bank. The objectives of GEF are in the fields of climate change incl. programs to reduce carbon dioxide emissions, protection

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Answer Key for the Review Questions of the ozone layer, biological diversity, water protection, desertification and persistant organic pollutants. Cf. Section 4.5. 4.16 Of great importance is an even strengthened consideration of political, social and cultural dimensions within development policy; further more, projects of the World Bank have to be evaluated regarding their ecological consequences; another goal has to be the sustainable development; also policy-making capacities of the development countries especially in the area of economic policy and social-economic implications have to be even more keenly promoted, if the World Bank wants to approach its self-set target: To eliminate the poorness in this world. Cf. Section 4.5. 5.1 By means of selectively targeted financial aid, consulting activities and therefore by means of improved sources of finance, economic growth is supposed to accelerate; and thus a contribution can be made to the economic integration of the countries in the operational area of the bank concerned. Cf. Section 5.1. 5.2 Ordinary resources derive from the subscription payments of the member countries and from the funds borrowed in the capital markets by the Regional Development Banks. Special funds are especially soft, i.e. low-interest and long-repayment-period loans, which are extended above all to economically weak countries and sectors. These two sources of capital are kept strictly separate from one another as far as administration and accounting are concerned, in order not to damage the confidence of the international credit markets – which finance the Regional Development Banks. Cf. Section 5.1. 5.3 Political and economical arguments: the coalescence of Europe economically and politically should be assisted; markets in Eastern Europe should be opened up. Cf. Section 5.2.1. 5.4 The EBRD, having its seat in London, was founded by 39 countries in April 1991. In early 2007 61 countries, plus the European Union as institution and the European Investment Bank are members of the EBRD: Besides all European and non-European OECD countries including the EU and the EIB as investors all Central- and Eastern European countries are members. Besides Russia, Belarus, Ukraine, Albania, Croatia, Macedonia, Montenegro and Serbia these are also the Eurasian CIS countries Armenia, Azerbaijan, Georgia, Kazakhstan, Kirghizia, 310

Answer Key for the Review Questions Moldova, Tajikistan, Turkmenistan and Uzbekistan, as well as Egypt, Morocco and Mongolia. Cf. Section 5.2.1 and Figure 5.1. 5.5 Private and public investments only in Central- and Eastern Europe as well in the CIS-countries are financed by the EBRD. These investments must contribute to the development of the private sector, the privatization of state-owned businesses, the promotion of foreign direct investments via joint ventures, the creation and strengthening of financial institutions, equity investments, selective assistance of local small and medium businesses, environmental quality, or contribute to atomic reactor safety. Cf. Section 5.2.1. 5.6 The European Union determines the business policy of the EBRD: As of May 2007 the EU member countries (56 %) together with EU as institution (3 %) and the EIB (3 %) subscribe to shares of 62 % of the initial capital stock, whereof the donor-EU-countries owe 50.55 %. Cf. Section 5.2.2 5.7 Although having the political goal to support Eastern European countries in their transition to market economies, the EBRD works very profit-oriented and thus offers its financial aids only just below the usual market conditions of private business banks. Other business banks or international financial institutions are often able to offer financings for attractive private projects to the same conditions. On the one hand, this raises the question, whether the respective investments would have been also realized without the EBRD, on the other hand, whether the EBRD, by granting subsidized credits, not even hinders a further development of a private banking system. Cf. Section 5.2.3. 5.8 The practical meaning of the EBRD for the economic development of the Eastern European countries, especially in times of economic awakening, didn’t come up and isn’t coming up nearly to the expectations it had placed. Especially compared to the long existing European Investment Bank (EIB) which has the aim to grant long-term loans for European investment projects, the EBRD has significantly fell short of the expectation as an investment support for the transition countries: the EIB of its total lending of 40 bn. a year is granting loans at a total amount of Euro 3 billion a year to the Eastern European countries, while EBRD only can contribute some 2 bn. a year. Cf. Sections 5.2.3 and 5.2.4.

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Answer Key for the Review Questions 5.9 IADB, ADB, EBRD, and AFDB: In 2006 IADB approvals were US-$ 6.4 billion and it therefore by far rankes first among all Regional Development Banks; ADB: US-$ 6 bn., EBRD: US-$ 4.3 bn., AfDB: US$ 3.4 bn.. Cf. Sections 5.2 to 5.5. 5.10 At the beginning of 2007, members of ADB are 67 countries including 44 developing countries. With 48 regional countries these are all Asian countries east of Turkey except North Korea: Japan and all Southeast Asian countries, the Islamic successor countries of the Soviet Union (being members of the ADB and the EBRD), Afghanistan, China, India, Japan, Korea, Pakistan, Taiwan, the insular states of the Pacific Ocean as well as Australia and New Zealand. The 19 non-regional members are 16 Western European countries: Austria, the 3 BeNeLux countries, France, Germany, Great Britain, Ireland, Italy, all 4 countries of Scandinavia, Portugal, Spain, Switzerland; USA, Canada and Turkey complete to 19. Cf. Section 5.3.1. 5.11 The Asian Development Fund (ADF) is the biggest fund of the ADB and is regularly equipped with new capital of the member countries. Further Special Funds are a Technical Assistance Special Fund, having the task to help finance administrative and technical assistance projects for the benefit of the developing countries within the ADB; the Japan Special Fund established in 1988 to support the structural adjustment of regional developing countries, primarily projects are financed that provide technical and administrative assistance and advice; the Japan Fund for Poverty Reduction aimed at financing programs of the ADB’s new priority of an active poverty reduction; the Asian Tsunami Fund had the task to help regions affected by the Tsunami at the Indian Ocean in 2004; the Pakistan Earthquake Fund is targeted to support regions of North-Pakistan and the neighboring regions, that are affected by the earthquake on October 8th 2004. Concluding there is the ADB Institute (ADBI) since 1997 having been established by the ADB and the Japanese government to provide the necessary political and theoretical knowledge and information concerning development. Cf. Section 5.3.2. 5.12 Early 2007 47 countries belonged to the IADB: 26 Latin American countries (all but Cuba), USA, Canada, 16 European countries (Austria, Belgium, Croatia, Denmark, Germany, Great Britain, Finland, France, Italy, the Netherlands, Norway, Portugal, Slovenia, Spain, Sweden, and Switzerland), Japan, Korea, and Israel. Cf. Section 5.4.1.

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Answer Key for the Review Questions 5.13 Two independent institutions are bound to the IADB: the ‘InterAmerican Investment Corporation’ (IIC) and the ‘Multilateral Investment Fund’ (MIF). Cf. Section 5.4.1. 5.14 The Inter-American Investment Corporation is a legally independent but with the IADB affiliated organization which supports the aims of company foundation and modernization of small- and medium-sized companies in Latin America and the Caribbean. Cf. Section 5.4.2. 5.15 It is the primary source for the support of the development of the private sector in Latin America and the Caribbean. Cf. Section 5.4.3. 5.16 With 53 African and 24 non-regional members, in 2007, a total number of 77 member countries belong to the AfDB. Non-regional members (which have been admitted only since 1983 for being member of the AfDB) are the 14 Western European countries Austria, Belgium, Denmark, France, Finland, Germany, Great Britain, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland, as well as the USA, Canada, Argentina, Brazil, China, India, Japan, Korea, Kuwait, Saudi Arabia and the United Arab Emirates. Cf. Section 5.5.1. 5.17 Besides its ordinary resources the AfDB has the following Special Funds at its disposal: the Special Relief Fund (SRF) is a fund with about US-$ 8 million which shall support the poorest countries of the AfDB concerning war-induced burdens and in case of natural disasters; the Special Emergency Assistance Fund for Drought and Famine in Africa (SEAF) was established in Addis Ababa, Ethiopia, at the 20th meeting of the Organization of African Unity (OAU), 1984; another fund is the Mamoun Beheiry Fund, which was founded on October 31st 1970 by the previous president of the bank, the Sudanese Mamoun Beheiry; the Arab Oil Fund was equipped by Algeria in 1974 with a sum of about US-$ 20 million, targeted to financially support the energy supply of poorer AfDB countries. The most important fund of the AfDB is the African Development Fund (AfDF) which was established in 1972 and has been operating since 1974. It is responsible for lending long term development assistance to the poorest African countries, see Section 5.5.4. An important source of support is the Nigeria Trust Fund (NTF) equipped by Nigeria, see Section 5.5.5. Cf. Section 5.5.

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Answer Key for the Review Questions 5.18 This is a question to stimulate the reader’s own personal reflection: Often aid for development is used for personal enrichment projects by rulers not legitimated by the democratic process. These projects often strengthen the exploitation and suppression of the populace and thus further worsen their chances for development. This becomes true especially if Western financial aid finally leads to the effect that because of foreign financial transfers a diversion of domestic economic power into the fields of national terror or military armament up to finally becoming a nuclear power nation becomes possible, which then possibly directs itself against other developing nations and in turn sabotages their development, or which in the extreme case directs itself against the donor countries and this leads to political blackmail. Cf. Section 5.6. 6.1 An informal cooperation is useful because on the one hand, it may be useful for countries with a similar development and similar economic interests and perhaps also similar problems to come to an agreement among each other, before certain topics or problems are treated in formal inter-state panels, on the other hand it seems to be useful to discuss common interests or problems with those state groups first, that are hit directly by a problem or that can contribute to problem solutions. Cf. Section 6.1. 6.2 The G-7 goes back to the G-5 and the G-4, which were an informal board for the discussion of economic and monetary political questions by the representatives of the Finance Ministers and the Central Bank Chairmen of the USA, Great Britain, France and Germany; the G-8 are the G-8, expanded about Russia. Cf. Section 6.1.1. 6.3 On the one hand it was the attempt to realize the Keynesian motivated concept of the so-called ‘locomotive theory’ for the stimulation of a global economy growth, cf. Section 6.1.2; on the other hand the Plaza Accord and the Louvre Accord for the control of the exchange rate development of the US-dollar, cf. Section 6.1.3. 6.4 The G-10, as the group of the 11 greatest economies in the world according to the number of credits it has granted, primarily deals with problems of the global financial system. Cf. Section 6.2.1. 6.5 The G-20 have the two primary goals: stabilization of the world fiscal system and liberalization of the world trade. Other, secondary, goals are inflation reduction, low, growth-conducive commodity prices, consis314

Answer Key for the Review Questions tent financial market standards and also poverty reduction. Cf. Section 6.2.2. 6.6 With 131 countries at present, the G-77 comprises almost all developing countries of the world. The main aim is above all to find common positions for the negotiation carried on with the industrial states within the UNCTAD and to discuss general issues for a better integration of Third World countries in the world trade and in economic development. Cf. Section 6.3.1. 6.7 The G-24 are a special monetary board of the developing countries as a counterpart of the Third World to the G-10. It consists of respectively 8 alternating African, Asian and Latin American member countries. Cf. Section 6.3.2. 6.8 The Paris Club is a board for the common accomplishment of pecuniary difficulties of governmental debtors in the debtor countries together with all its creditor states. It was founded in 1956 in Paris. Cf. Section 6.4.1. 6.9 The London Club is an informal panel of international acting banks for the management of an occurring excessive indebtedness of debtor countries towards private creditors. The club was founded in 1976 in London. The Institute of International Finance, with seat in Washington and founded by international commercial banks, is a forum to improve the information about the indebted countries and the communication between the creditors. Cf. Section 6.4.2. 7.1 The OECD was founded in 1961 as the successor organization of the OEEC, whose too closely economic integration purposes were not realizable. Compared to the OEEC the OECD perceives itself primary as an information and coordination board. Cf. Section 7.1. 7.2 All facets to coordinate the national economic policies belong to the range of duties of the OECD. Cf. hereunto in detail Section 7.2. 7.3 No; it only advises, coordinates and passes resolutions with the character of recommendations. Cf. Section 7.3. 7.4 The Economic Policy Committee (EPC), the Committee on Capital Movements and Invisible Transactions (CMIT), the Committee on International Investment and Multinational Enterprises (CIME), the Committee on Financial Markets (CFM), the Development Assistance Committee (DAC). Cf. Section 7.3. 315

Answer Key for the Review Questions 7.5 Together with the CIME, the CMIT attempts to place the direct investment projects of OECD investors on the same footing with those of domestic investors and at the same time to provide investment protection and dispute mediation rules. Cf. Section 7.3.2. 7.6 Coordination of aid for development for the OECD countries participating in the DAC, including the reporting of the amount of and the conditions for official aid for development. Cf. Section 7.3.3. 7.7 The high differences in the GNI calculation related to purchasing power parity and exchange rate primarily result from the international relevance and respectively from the concrete transnational ‘usability’ of the particular national currency: The stronger the valuation of a currency (like for example the Swiss franc) and hence the demand for this currency in relation to the reference currency of the US-$, the more differs the GNI upward in the exchange rate calculation from the calculation in purchasing power parities. On the other hand the Gross National Income will differ in the exchange rate calculation more downward from the purchasing power parity the more unsound and for international transactions more unusable the respective currency is: examples for this are nearly all developing countries: Their currencies are mostly shattered due to high rates of inflation, it exists (often in consequence of (civil) wars) no trust in the function for the long-term store of value of these ‘currencies’. Cf. Section 7.3.4. 7.8 The various publications concerning economic analysis of countries and financial markets serve a good fundament for the assessment of (potential) foreign markets. Cf. Section 7.4. 8.1 The basic objectives are: to create a basis for an ever closer association of the European nations and to continue the process of creating an ever closer union of the European nations, in which decisions – according to the subsidiarity principle – are taken at the level which is as close as possible to the citizenry. Cf. Section 8.1.1. 8.2 On the basis of the SCHUMAN Plan the ECSC was founded in 1952 and with the ratification of the Treaties of Rome in 1957 the EEC and the EAEC were founded, from which the European Communities and today the European Union resulted. Cf. Section 8.1.1. 8.3 The Single European Act of 1987 with the resolution for the formation of the Single Market, the Treaty of Maastricht with the resolution for the introduction of a single currency and the Treaty of Amsterdam with the expansion of the community competences in the areas of foreign 316

Answer Key for the Review Questions and security policy, justice and domestic policy, abolition of internal borders and the protection of base rights of the union citizens. Cf. Section 8.1.2. 8.4 Main targets were reforms in the agricultural policy and tightening of the institutions and the decision-making mechanisms, which are necessary with regard to the Eastern enlargement of the European Union. Cf. Section 8.1.2. 8.5 Your depiction should correspond to Figure 8.3. Cf. Section 8.2. 8.6 The European Council, the Council of Ministers, the Commission and the European Parliament. Cf. Section 8.3. 8.7 Cf. Figure 8.4 in Section 8.3. 8.8 The Council is the main decision-making body of the European Union; the European Council, however, has the task of stimulating the EU in the direction of further integration. Cf. Sections 8.3.1 and 8.3.2. 8.9 The Council makes decisions on all mutual tasks of the European Union. Cf. Section 8.3.1. 8.10 Responsibility for the application and the adherence of treaties, initiating proposals for legislation, budgetary administration. Cf. Section 8.3.3. 8.11 Assent, co-decision, cooperation, consultation. Cf. Section 8.3.4. 8.12 The two most important committees of the EU are the Economic and Social Committee, ESC (Art. 257 – 262 EC Treaty), and the Committee of the Regions (Art. 263 – 265 EC Treaty). The ESC has the task of informing the Commission and the Council – within the framework of planned measures or community projects of all kinds – as to the opinions of the affected business, consumer and employee groups; conversely, the ESC has to ensure that these multi-national interest groups receive first-hand information. The Committee of the Regions has the task of enabling a direct, but only consultative, participation in the decision-making processes of the EU; and it does this for the federal bodies of the EU member countries, i.e., provinces, regions, autonomous areas and local government units. This committee expresses its views to the Council or Commission above all on questions of education and culture, health care, transEuropean networks as well as structural and regional policy. Cf. Section 8.3.5. 317

Answer Key for the Review Questions 8.13 The task of the European Court of Justice is the observance of the law in regard to the application and interpretation of the community treaties by means of decisions on breaches of contract, nullity suits, suits on the ground of excessive delay as well as by preliminary rulings. Cf. Section 8.3.6. 8.14 For the first time, beside the Council a more democratic authorized and for this reason largely freed of national state interest dominance decision making body dealt with institutional matters of the future structure and inevitable reforms in the European Union. Cf. Section 8.3.7. 8.15 Your comments should mirror the steps presented in Figure 8.7, Section 8.4. 8.16 The EU as own funds has agrarian levies, (agricultural) duties and sugar levies, own resources due to the value added tax, and as a socalled ‘fourth supplementary contribution’ revenues up to a defined maximum percentage of member states’ GNI (2007: a maximum of 1.24 %). Cf. Figure 8.8 in Section 8.5.1. 8.17 The budget of the EU by budgetary law definitely has to be in balance; an indebtedness is inadmissable. Cf. Section 8.5.1. 8.18 Your explanations should be based on Figures 8.9 and 8.10. Cf. Section 8.5.2. 8.19 Positive on the strong German net contribution position is the resulting political impact in the EU. This expenditure position is also weaken considering the great trade advantages, which arise from the unresisted exchange of goods and services with the EU. With further regard to the jobs behind these exports in the EU, the welfare net effect of the German net contribution position in the EU is more than positive: The economic prosperity of Germany would be dramatic lower without a membership in the EU and thus without the high transfer payments to the economic weaker EU states, which are – because of the money – placed in the position to ask for German deliverable and performance. Cf. Section 8.5.2. 8.20 Your comments regarding the revenues should mirror the information presented in Section 8.5.1, the explanations regarding the expenditure should correspond to Figure 8.15 in Section 8.5.3. 318

Answer Key for the Review Questions 8.21 Increase in agricultural productivity; guarantee of a suitable income and therefore prosperity for those persons working in the agricultural sector; avoidance of price fluctuations in the agricultural sector; guarantee to supply consumers and suitable prices. Cf. Section 8.6.1. 8.22 Market regulations with price support; market regulations with common external protection; and market regulations with direct income payments. Cf. Section 8.6.2. 8.23 Introduction or reduction of production quotas, compensation by means of direct income payments for the reduced income of farmers as a result of land withdrawal and smaller quotas, programs to promote ecologically sound production, afforestation programs, programs to promote the early retirement of older farmers. Cf. Section 8.6.3. 8.24 Relevant are the European Agricultural Guarantee Fund (EAGF), the European Agricultural Fund for Rural Development (EAFRD) and the European Fisheries Fund (EFF). The EAGF covers a financial volume of Euro 293 bill. for the period of 2007 – 2013 to finance refunds for exporting farm produce to non-EU countries, intervention measures to regulate agricultural markets, direct payments to farmers under the CAP, and certain informational and promotional measures for farm produce implemented by member states both on the internal EU market and outside. EAFRD in the same period allocates financial transfers amounting to the total volume of 69.75 bn. Euro: Main goals of this agricultural fund are improving the competitiveness of the agricultural and forestry sector by support of measures of restructuring; improving the environment and the countryside by supporting land management and improving the quality of life in rural areas and the diversification of the rural economy. For the period 2007 to 2013 the EFF provides financial means amounting to Euro 3.8 bn. to make the fishery economy more adaptable and especially to promote a sustainable fishery and aqua culture in Europe. Cf. Section 8.6.4. 8.25 External reasons: The European agrarian subsidies are permanently not compatible with the WTO policy, cf. Section 8.6.5.1. Internal reasons: 319

Answer Key for the Review Questions The European agrarian policy assists small and medium sized companies insufficiently, is too expensive, not sustainable oriented enough and inefficient particularly with reference to the system of quotas and direct payments; cf. Section 8.6.5.2. 8.26 Free movement of goods, services, capital, and persons. Cf. Section 8.7. 8.27 The European Social Fund (ESF) promotes the professional (re-) integration of unemployed persons and unprivileged groups basically by financing educational, training and employment measures. The European Guidance and Guarantee Fund (EGGF) is used to finance measures for the encouragement of rural development. The European Regional Development Fund (ERDF) finances among other things infrastructural extensions as well as investments in plant and equipment for the employment creation in low developed regions like for instance in Greece or Portugal. In addition there is the Cohesion Fund to support regions of very low per capita income. Cf. Section 8.8.2. 8.28 The Cohesion was established in 1993 for projects in the areas of environmental protection and transportation infrastructure, but only to countries whose per capita GDP is below 90 % of the community average. Cf. Sections 8.8.2 and 8.8.3. 8.29 The biggest assistance in absolute terms received Spain (45 bn. Euro), Germany (29.7 bn. €) and Italy (29.6 bn. €); in figures per capita the highest transfers were payed to Greece (2,129 Euro), Portugal (1,822 €) and Spain (1,204 €). Cf. Figure 8.19 in Section 8.8.3. 8.30 The EIB allocates favorable loans also in the range of its structural policy for investment projects (primary in the fields of infrastructure and energy supply, advancement of international competitiveness of the European industry, support programs for small and medium sized enterprises) in lower developed regions. Cf. Sections 8.8.3 and 8.8.4. 8.31 Since 2007 acceding countries become prepared by the ‘Instrument for Pre-Accession Assistance’ (IPA) for the implementation of the structural funds and the European Agricultural Fund for Rural Development after accession. Its main aim is to support institution-building and the rule of law, human rights, including the fundamental freedoms, minority rights, gender equality and non-discrimination, both administrative 320

Answer Key for the Review Questions and economic reforms, economic and social development, reconciliation and reconstruction, and regional and cross-border cooperation. Cf. Section 8.8.5. 8.32 Main target of the ERA is to raise Research and Technology as an important factor of economic development and to better network it europe-wide. The ERA is supposed to regroup all Community supports for the better coordination of research activities and the convergence of research and innovation policies of the EU member states and the European Union – at national and EU levels. Cf. Section 8.9.1. 8.33 Within the scope of the EU research and technological policy the following types of programs can be named: Direct actions, indirect activities, concerted operations and horizontal actions. Cf. Section 8.9.2. 8.34 Your comments should correspond to the information found in Figure 8.27 in Section 8.9.2. 8.35 Despite the increasing relevance, which the EU awards to the social component for the protection of employees rights, this new joint task is institutional poorly developed by reason of the bad attitude of particularly Great Britain and Denmark: Decisions of the Council within the scope of the social targets of Art. 137 (1), letters c, d, f and g are not subject of qualified majority decisions, but have to be made unanimously. Cf. Section 8.10. 8.36 The ECOFIN-Council supervises the convergence within the EEMU: It approves the main features of economic policy, in which the common objectives regarding inflation, control of public deficits, and since 1995 also employment are laid down and discusses the economic policy of the member countries on the basis of national convergence programs and of the convergence report of the Commission. The Council decides which countries are showing an excessive deficit and recommends measures to the countries concerned to remedy this situation. If these recommendations are not carried out, then the Council can decide to publish them and thus put considerable public psychological pressure on the government concerned. Moreover it can instruct the European Investment Bank (EIB) to check the lending policy of member countries and require that a member country make a non-interest-bearing deposit of suitable size until this country's deficit is rectified. In addition, it can impose fines. Cf. Section 8.11.1. 321

Answer Key for the Review Questions 8.37 The European System of Central Banks (ESCB) consists of the European Central Bank (ECB) in Frankfurt/ Main in Germany and the attending national central banks as dependent institutions – as shown in Figure 8.30. Cf. Section 8.11.2. 8.38 The fundamental duties of the ECB are to define and to execute the monetary policy of the community, to realize exchange transactions in line with the currency autonomy of the European Council, to hold and to administer the official monetary reserves of the member states as well as to promote the smooth functioning of the payment systems. Cf. Section 8.11.1. 8.39 The main objective of the ECB is to guarantee price stability. If it is possible without impairment of the price stability aim, the ECB supports the general economic policy in the European Union. Cf. Section 8.11.1. 8.40 Annual new indebtedness is not permitted to be above 3 % of the gross domestic product (GDP); total indebtedness is not permitted to rise above 60 % of GDP; the inflation rate of a member country is not permitted to be more than 1.5 % above the average inflation rate of the three countries with the lowest inflation; the nominal long-term interest rate is not allowed to be more than 2 % higher than the average of the three countries with the lowest inflation rates; for at least two years, a member country is not allowed to introduce severe tensions into the exchange rate mechanism of the EMS. Cf. Section 8.11.2. 8.41 The Stability and Growth Pact defines certain period objectives for every country, in which the national budget shall be balanced: Only with a responsible budget policy, which doesn’t finance missing reforms or low tax revenues by simply increasing public debt, an enduring internal and external stability of the Euro is guaranteed. Cf. Section 8.11.2. 8.42 Die debt-related convergence criteria require that the annual new netborrowing must not exceed 3 % of GDP, and total indebtedness is not allowed to exceed 60 % of GDP. Furthermore, the rate of inflation of a member country shall not exceed 1.5 % of the average rate of inflation of the three countries with the lowest rates of inflation (now: the EU’s rate of inflation); the nominal long term interest rate shall not exceed the average of the comparable interest rate of the three countries with 322

Answer Key for the Review Questions the lowest rates of inflation by more than 2 percentage points (now: the nominal long term interest rate of the EU); strong tensions on the exchange rate mechanism of the EMS (now: the EMS II) must not originate from a potential EEMU member state for at least two years, i.e. there is a maximum deviation from the currency’s parity to the Euro by +/– 2.25 %. Cf. Section 8.11.3.

323

Glossary ACCION: ACCION International, has pioneered parallel to the Ö GRAMEEN Bank and Ö FINCA in the fields of microloans, having disbursed 9.4 billion US-$ in microloans for 4 million clients; cf. Section 4.4.3. ADB: Asian Development Bank; founded 1965 as Regional Development Bank for Asia; cf. Section 5.3. ADF: Asian Development Fund; fiduciary development fund for strengthening developing programs of Ö ADB in poor Asian countries to very favorable conditions with credit terms up to 50 years; cf. Section 5.3.2. AfDB: African Development Bank; founded 1963 as Regional Development Bank for Africa; cf. Section 5.5. AfDF: African Development Fund; Fund to support development projects of poorer countries to very favorable conditions: The term of an AfDF credit can be up to 50 years including 10 free years, the interest rate amounts to symbolic 0.75 %.; cf. Section 5.5.2.2. ASEAN: Association of South-east Asian Nations; founded on August 8, 1967 as a political, economical and cultural association with the member states of Thailand, Indonesia, Malaysia, Philippines and Singapore, having the objective to integrate for better economical performance, social development and political stability. In 2007 members are additionally Brunei Darussalam, Cambodia, Laos, Myanmar and Vietnam; cf. Section 1.2.2.1. Amsterdam Treaty: Treaty from October 2nd 1997 as the result of the governance conference in 1996/ 97 for the reform of the European treaties about the Ö European Union, cf. Ö EUT; cf. Section 8.2. Banco del Sur: By initiative of Venezuela in June 2007 founded Development Bank of the South with the inaugural members Argentina, Brazil, Bolivia, Ecuador und Paraguay; cf. Section 3.5. 324

Glossary

Bank for International Settlements (BIS): Federation of the most important Central Banks for the purposes of cooperation and the simplification of the international payment transactions; cf. Section 7.3.1. Bretton Woods Institute: Summarized term for the Ö IMF and the Ö World Bank (Ö IBRD), founded 1944 in Bretton Woods/ New Hampshire; cf. Sections 3 and 4. CAF: Andean Development Corporation (Corporatión Andina de Fomento), Regional Development Bank to support the Andean states. Established in 1966 with the ‘Declaration of Bogotá’; business operations started in June 1970. Current members (2007) are Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Jamaica, Mexico, Panama, Paraguay, Peru, Spain, Trinidad and Tobago, Uruguay and Venezuela (founding members in bold); cf. Section 5.4. CAP: Common Agricultural Policy of the Ö EU; cf. Section 8.6. CARICOM: 15 Carribbean Islands in 1973 founded the Caribbean Community and Common Market. Purpose was a stronger economic cooperation as well as a better coordination in foreign policy. Member states are Antigua und Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Surinam, Trinidad and Tobago. Associated members are Anguilla, Bermuda, British Virgin Islands, Cayman Islands and British Turks- and Caicos Islands. CCFF: Compensatory and Contingency Financing Facility of the Ö IMF; cf. Section 3.3. CFM: Committee on Financial Markets of the Ö OECD; cf. Section 7.3.2. CFSP: Common Foreign and Security Policy of the European Union corresponding to Title V of the Ö EUT; cf. Sections 8.2, 8.3.1 and 8.3.7.2. 325

Glossary

Charter of the European basic rights: Component of the intended Constitution (Part II) by the EU: Codification of a comprehensive ethical values catalog of basic and civil rights in the broadest sense; cf. Section 8.3. CIME: Committee on International Investment and Multinational Enterprises of the Ö OECD; cf. Section 7.3.2. CMIT: Committee on Capital Movements and Invisible Transactions of the Ö OECD; cf. Section 7.3.2. Cohesion Fund: EU structural fund for the specific furtherance of the economic weak nations Greece, Ireland, Portugal and Spain; cf. Section 8.8.2. Conditional lending: The granting of loans is connected with the observance of certain economic obligations; this is practiced primary by the Ö IMF; cf. Section 3.4. Convent of the EU: In December 2001 established board for the formulation of a fundamental reorganization of the Ö EU, presented a draft for the Ö European Constitution on 10 July 2003; cf. Section 8.3.7. Council of Europe: Founded in May 1949 and still existing; had the goal to define certain basic values by means of a loose integration, its integration power was already interfered by the East-West-Conflict due to the high membership shortly after the foundation; cf. Section 8.1.1. Council of Ministers: Cf. Ö Council of the European Union. Council of the European Union: Main decision-making body of the Ö European Union; cf. Section 8.3.1. DAC: Development Assistance Committee of the Ö OECD; cf. Section 7.3.3.

326

Glossary

EAEC: Cf. European Atomic Energy Community, founded in 1957 with the socalled Ö Treaties of Rome; cf. Section 8.1. EAFRD: In 2007 founded as a new agrarian structural fund founded European Agricultural Fund for Rural Development in the framework of Ö CAP; cf. Sections 8.6.4 and 8.8.2. EAGF: European Agricultural Guarantee Fund in the framework of Ö CAP, founded in 2007 as a successor of Ö EAGGF; cf. Sections 8.6.4 and 8.8.2. EAGGF: European Agricultural Guidance and Guarantee Fun, in action until end of 2006; the department ‘adjustment’ financed measures for the encouragement of rural development and assistance for farmers especially in regions, which had to catch up a development backlog; the department ‘guarantee’ of the EAGGF supported the rural development within the framework of agrarian policy in other parts of the EU (2007 substituted through Ö EAGF and Ö EAFRD); cf. Sections 8.6.4 and 8.8.2. EBRD: European Bank for Reconstruction and Development; founded 1991 in London with the objective to promote economic development and the systems-transformation of East European countries; cf. Section 5.2. ECHR: European Convention of Human Rights of the Council of Europe, signed on 4 November 1950 in Rome; cf. Section 8.3.7.2. ECJ: European Court of Justice, supreme supervisory body (judiciary) of the Ö European Union; cf. Sections 8.3.6 and 8.3.7. ECOFIN: ECOnomics and FINancial Affairs Council of the Ö EU, which monitors amongst others the compliance with the stability criteria and which advises the member states of the Ö EEMU in economic issues. cf. Section 8.11.1. 327

Glossary

ECSC: European Steel and Coal Community, founded in 1951; cf. Section 8.1. ECT: Treaty establishing the European Community in 1986; cf. Section 8. EDC: European Defense Community; contract signed in 1952, failed due to non-ratification by the French National Assembly in 1954; cf. Section 8.1. EDRC: Economic and Development Review Committee of the Ö OECD; cf. Section 7.3.1. EECT: EEC-Treaty, treaty establishing the Ö European Economic Community 1957, which passed into the Ö ECT within the Ö Single European Act in 1986. EEMU: European Economic and Monetary Union of 1 January 1999, established with the Ö Maastricht Treaty; cf. Section 8.11. EIB: Instituted by the Treaty of Rome and created in 1958, the European Investment Bank (EIB) is the European Union’s financing institution. It contributes development loans primarily to the EU member states and borrows about 10 % of its total loans also to third countries, especially to the Mediterranean countries and the Western Balkans; cf. Section 8.8.3. EIF: The in 1994 founded European Investment Fund (EIF) was set up to support the development of high-growth small and medium-sized enterprises (SMEs) and/ or those active in new technologies. The Ö EIB is the majority shareholder and operator of the EIF; cf. Section 8.8.3.

EFF: The EFF as an agrarian structure fund provides financial means to make the fishery economy more adaptable and especially to promote a sustainable fishery and aqua culture in Europe (in 2007 the EFF substituted the until 2006 relevant instrument of the Ö FIAF); cf. Section 8.6.4. 328

Glossary

EFTA: European Free Trade Association, which was founded on June 21st in 1959 in the Swedish Saltsjöbaden with the founder members Denmark, Great Britain, Norway, Austria, Portugal, Sweden and Switzerland. Currently (2007) the members of EFTA are: Iceland, Liechtenstein, Norway and Switzerland; cf. Section 8.1.1. EMS: European Monetary System: attempt to guarantee relative exchange rate stability between the currencies within the European Communities from 1979 to 1998 through the establishment of parities to the ECU with maximum permissible bilateral fluctuation margins of +/– 2.25 %, 6 %, or 15 %. EMS II: Continuation to the Ö EMS for countries in the European Union within the scope of the so-called exchange rate mechanism (ERM) that have not yet entered the European Monetary Union (Ö EEMU); cf. Section 8.11.1. EPC: Economic Policy Committee of the Ö OECD; cf. Sections 3.3 and 7.3.1. ERM: Exchange rate mechanism, cf. Ö EMS II. ESAF: Enhanced Structural Adjustment Facility of the Ö IMF; cf. Section 3.3. ESC: Economic and Social Committee of the Ö EU; cf. Section 8.3.5. European Bank for Reconstruction and Development (EBRD): Development bank to support the economic restructuring and transformation of Eastern Europe, founded in London in 1991; cf. Sections 4.2.1 and 5.2. European Commission: Executive authority with proposal rights of the Ö European Union; cf. Sections 8.3.3 and 8.3.7.2.

329

Glossary

European Communities: The three European Communities: Ö ECSC, Ö EEC and Ö EAEC; cf. Section 8.1. European Community (EC): The three Ö European Communities: Ö ECSC, Ö EEC and Ö EAEC joint within the framework of the Ö Single European Act (SEA) of 1986 to the one European Community (EC); cf. Sections 8.1 and 8.2. European Constitution: Contract paper of the Ö European Union, which is based on a draft by the EU Convent and which was solemnly signed on 29 October 2004 in Rome by the heads of state and government of all 25 EU member states. With the help of this document, the contractual basis of the EU ought to be completely restructured and expanded. However, due to the declining referendums in France and the Netherlands in spring 2005, the ratification de facto failed; cf. Section 8.3.7. European Council: Superior EU board, consisting of the EU heads of state and government, whose task is, according to Article 4 EUT, to give impulses to the EU and to define the general political objectives; cf. Sections 8.3.2 and 8.3.7.2. European Economic Community (EEC): Founded in 1957 with the so-called Treaties of Rome; cf. Section 8.1. European Investment Bank (EIB): Institution of the Ö European Union with legal entity, based in Luxembourg; allocates loans for the development in lower developed regions and for investment projects, which are in many member states’ interest; cf. Sections 8.8 and 8.11. European Monetary Institute (EMI): For the introduction of a common European currency, a three-stage plan was defined in Title VI of the Maastricht EC Treaty; Stage II started on 1 January 1994 with the founding of the European Monetary Institute (EMI) in Frankfurt as a precursor of a European central bank (ESCB), which was supposed to make the technical and administrative preparations for the monetary union of 1999; cf. Section 8.11.1. 330

Glossary

European Parliament: Envisaged Legislature of the Ö European Union, still with limited voice; cf. Sections 8.3.4 and 8.3.7.2. European Political Cooperation (EPC): Coordination in Foreign Policy of the Ö EU, implemented in the Ö Single European Act; cf. Section 8.1.1. European Regional Development Fund (ERDF): Structural fund by the EU for the subsidy of economic weak regions, particularly in Greece, Portugal, Spain, Southern Italy and the region of the old GDR in Germany; cf. Section 8.8.2. European Social Fund (ESF): Structural fund by the EU to encourage the employment and the mobility of the employees inside the Ö European Union; cf. Section 8.8.2. European Union (EU): Founded on 1 November 1993 with the treaty about the Ö European Union (Ö Maastricht Treaty), the Ö EUT; cf. Section 8. Europol: European Police Office, power according to Title VI of the Amsterdam EUT; cf. Section 8.2. EUT: Treaty about the foundation of the Ö European Union, became effective on November 1st 1993, better known under the designation Ö ‘MAASTRICHT-Treaty’; transfers the Ö European Community into the Ö European Union, and expands the contracts institutionally and by further community responsibilities; 1997 fundamentally revised as the so-called Ö Amsterdam Treaty; 2001 fundamentally revised as the socalled Ö Nice Treaty; cf. Section 7, particularly Sections 8.1 and 8.2. (FIFG): Financial Instrument for Fisheries Guidance, EU structural fund for the fishery modernization in the southern countries Greece, Portugal, Spain and Southern Italy (in 2007 substituted through the Ö EFF); cf. Section 8.8.2. FINCA: The Foundation for International Community Assistance (FINCA International) is a non-profit, microfinance organization, founded by John 331

Glossary Hatch in 1984. FINCA is the innovator of the village banking methodology in microloans and is widely regarded as one of the pioneers of modern day microfinance. With its headquarters in Washington, DC, FINCA has 21 affiliated host-country institutions (affiliates), in Latin America, the Caribbean, Africa, Eastern Europe, the Caucasus and Central Asia. It serves 500.000 microloan clients with outstanding loans in 2006 of US-$ 100 million. Along with Ö GRAMEEN Bank and Ö ACCION International, FINCA is considered to be one of the most influential microfinance organizations in the world; cf. Section 4.4.3.

FTAA: Free Trade Area of the Americas, planned panamerican Free Trade Area for all 34 American countries (for the time being without Cuba); founding negotiations since 1994, up to now without realization. G-4: Informal board for the discussion of economic and monetary political questions by the representatives of the Finance Ministers and the Central Bank Chairmen of the USA, Great Britain, France and Germany; recently substituted by the Ö G-7, resp. the Ö G-8; cf. Section 6.1.1.

G-5: Ö G-4 extended about Japan; cf. Section 6.1.1.

G-7: Ö G-5 extended about Italy and Canada, board of the heads of state and government of these countries at the same time, cf. Section 6.1.

G-8: About Russia extended board of the heads of state and government of the Ö G-7; cf. Section 6.1.

G-10: The group of the G-10 represents the 11 greatest economies and consist of the Ö G-7 and the Netherlands, Belgium and Sweden as well as Switzerland as ‘associated member’ of the ‘decade’ (the term G11 has never established); cf. Section 5.2.1. G-20: 1999 initiated body by the G-7 as a reaction to the financial crisis in the 90s, which makes the aid for the stabilization of the world fiscal system and the liberalization of the world trade to its business; cf. Section 5.2.2. 332

Glossary

G-24: The Group of the 24 was founded in 1972 by the Ö G-77 as a special monetary board of the emerging and developing countries. The G-77 consists of respectively 8 alternating African, Asian and Latin American member countries; cf. Section 6.3.2. G-77: The main informal board of the developing countries is the G-77, which originates in the so-called “Committee of the 75” and was founded in 1964 by ministers in order to prepare for the foundation of UNCTAD; cf. Section 6.3.1. GATS: Multilateral agreement inside the Ö WTO: Council for the trade in services (General Agreement on Trade in Services); cf. Section 1.3. GATT: Multilateral agreement inside the Ö WTO: Council for the trade with goods (General Agreement on Tariffs and Trade); cf. Section 1.2. GEF: Global Environment Facility, 1991 founded as a partnership of different implementing and executing agencies with a 50 % share of the World Bank Group; GEF is the largest provider of grant funds to developing countries for a wide range of projects that help protect and improve the regional and global environment; cf. Section 4.5. GRAMEEN BANK: Grameen Bank is one of the oldest poverty-oriented microloan institutions, founded by Muhammad YUNUS, who received the Nobel peace prize of 2006 for this support to people living below the poverty line; the Grameen Bank grants so-called entrepreneurial self-help micro loans to the destitute and thereby helps them to set up and keep up new businesses; cf. Section 4.4.2. GRIP: ‘Guaranteed Recovery of Investment Principal’ of the Ö IFC, which within the framework of direct investments extends the work of Ö MIGA and guarantees against losses resulting from commercial risks; cf. Section 4.2.3. 333

Glossary

HIPC: Heavily Indebted Poor Countries, the group of the heavily indebted developing countries, which acquire the debt relief programs by the Ö G7, the Ö EU, the Ö IMF and the African Development Bank (AfDB); cf. Sections 3.3, 3.4, 5.5 and 6.1.3. IADB: Inter-American Development Bank, founded in 1959 as Regional Development Bank for Latin America; cf. Section 5.4 IBRD: International Bank for Reconstruction and Development, largest institute of the Ö World Bank Group; initially responsible for the cofinancing of reconstruction in Europe with low-interest loans; since 1950 the loan financing of development in the Third World and since 1990 most notably also in Eastern Europe by means of (co-) financing of concrete individual projects has occurred; cf. Section 4.2.1. ICSID: International Centre for Settlement of Investment Disputes, founded in 1966 and part of the World Bank Group, responsible for a multilateral coordination of international direct investments; cf. Section 4.2.3. IDA: International Development Association, originated in 1960 and part of the Ö World Bank Group, responsible for the support of the poorest developing countries in the world; IDA loans are as a rule interest-free; cf. Section 4.2.2. IEA: International Energy Agency; cf. Section 7.3. IFC: International Finance Corporation, founded in 1956 and part of the Ö World Bank Group, responsible for the development oriented granting of loans to assist private investment activity in developing and emerging countries; cf. Section 4.2.3. IIF: Institute of International Finance, Forum, with seat in Washington, to improve the information about the indebted countries and the commu334

Glossary nication between the creditors, created by international acting commercial banks; cf. Section 6.4.2.

IMF: International Monetary Fund, 1944 founded Ö Bretton Woods Institute with the task to coordinate the monetary policy among the member states as well as to combat national and international financial crisis; cf. Section 3. IPA: Instrument for Pre-Accession Assistance, established 2007 to support coming EU-accession states as e.g. Croatia, Macedonia, Montenegro, Turkey; cf. Section 8.8.4. ISPA: Instrument for Structural Policy for Pre-Accession of the EU, financial support in the area of economic and social cohesion, and in particular for environment and transport policies for the period 2000 – 2006, preparing the acceding countries for their accession to the EU in 2004 and 2007; cf. Section 8.8.4. ITO: International Trade Organization, failed attempt to found an International Trade Organization under the umbrella of the United Nations in 1948, with the target to liberalize the world trade; cf. Section 1.1.1. LDCs: Least Developed Countries; cf. Section 2.2.2. London Club: Informal panel of international creditor banks for the management of an occurring excessive indebtedness of debtor countries and founded in 1976 in London; in contrast to the Ö Paris Club basically no interest dues are converted; cf. Section 6.4.2. Maastricht Treaty: Treaty about the Ö European Union, became effective on 1 November 1993; cf. Ö EUT; cf. Sections 8.1 and 8.11. MAI: Multilateral Agreement on Investments of the Ö OECD; cf. Section 7.3.2. 335

Glossary

MDRI: Program of the IMF, putting into action a debt relief proposal in end of 2005, initially advanced by the G-8, which called for the cancellation of 100 percent of the claims of three multilateral institutions Ö IMF, Ö IDA, and the African Development Fund (Ö AfDF) on countries that have reached, or will reach, the completion point under the enhanced Ö HIPC initiative; cf. Section 3.4. Megascience: Sub-organization of the Ö OECD for the development and furtherance of research in certain high-tech fields of research (e. g. ‘The Neutron Sources Working Group’, which deals with the neutrons partition); cf. Section 7.2. MERCOSUR: Mercado Común del Sur, founded 1991 in Ascunción as South American free trade area with the member states Argentina, Brazil, Paraguay, Uruguay (all of them since 1991), Venezuela (since 2005), and the associated countries Chile (1996), Bolivia (1997), Peru (2003), Ecuador and Colombia (both since 2004). MIGA: Multilateral Investment Guarantee Agency for the promotion of direct investments, founded in 1988 as assurance alternative against uncommercial risks of direct investments and youngest member of the Ö World Bank Group; cf. Section 4.2.3. Multifiber Arrangement (MFA): MFA; in 1974 within the scope of GATT created regulations for the predefinition of quotas and limits for imports of textile exporting countries into Western industrialized countries to protect the textile industry there. With the conclusion of the Uruguay Round, the abolition of all MFA quotas over 4 grades of a liberalization of quotas until January 1st 2005 was resolved and implemented; cf. Section 1.2.3. NAFTA: North American Free Trade Agreement, founded 1994; currently (2007) the members of NAFTA are: Canada, Mexico and the United States of America.

336

Glossary

Nice Treaty: Treaty of 11 December 2000 as the result of the government conference in 2000 for the reform of the European treaties about the Ö European Union, cf. Ö EUT; cf. Section 8.2. ODA: Official Development Assistance developing countries receive from the governments of donor countries; cf. Sections 2.2.2 and 7.3.3. OECD: In 1961 from the Ö OEEC emanated Organization for Economic Cooperation and Development; cf. Section 7. OEEC: Organization for European Economic Cooperation, founded in 1948 in Paris, 1961 substituted by the Ö OECD; cf. Section 7.1. Paris Club: Board for the mutual accomplishment of pecuniary difficulties of governmental debtors in the debtor countries together with all creditor states, founded in 1956 in Paris; cf. Section 6.4.1. PHARE: Promoting structural adjustment facility of the Ö EU for the 10 Eastern European Accession States, founded in 1989 as ‘Poland and Hungary: Aid for Restructuring of the Economies’; cf. Section 8.8.4. Qualified majority decision: Voting procedure in the Ö EU; a resolution is accomplished, if at least 255 of a possible total of 345 votes accede in the Ö Council of Ministers and if at least 62 % of the EU population are represented by these votes; cf. Section 8.3.1. SAF: Structural Adjustment Facility of the Ö IMF; cf. Section 3.3. SAPARD: Special Accession Programme for Agriculture and Rural Development of the Ö EU for the Eastern European Accession States in the years 2000 - 2006; cf. Section 8.8.4. Schengen Agreement: In 1985 the abolition of intra-EU border checks in EU countries with 337

Glossary direct, common borders was stipulated in the so-called Schengen Agreement (Schengen is a city in Luxembourg); the agreement was therefore the starting point for the from border control unhindered passenger traffic and movement of goods between the participating Schengen countries; cf. Sections 8.1.2 and 8.7.

Single European Act: Single European Act (SEA) of 1986, which embodied the first contract modification of the EEC Treaty and which changed the EEC Treaty (in Title II), effective 1 July 1987; the primary objective was the creation of a Single European Market on 1 January 1993; cf. Sections 8.1, 8.2, 8.7, 8.8 and 8.11. SME: Small and Medium-sized enterprises; an institution based on an ‘Alliance for Jobs’ in a more global dimension, originated by the Ö OECD; cf. Section 7. Sustainable Development: Sustainable economic development, particularly in terms of an economic growth by means of a sustainable use of environmental resources; cf. Sections 7.2, 7.3.2, 8.2 and 8.6.5.1. TPRM: Body of the Ö WTO for the review of the members states’ trade policy (Trade Policy Review Mechanism); cf. Section 1.5. TRIPS: Multilateral agreement inside the Ö WTO: Council for the trade with services (Trade Related Aspects of Intellectual Property Rights); cf. Section 1.4. UNCTAD: United Nations Conference on Trade and Development; Suborganization of the United Nations, founded in 1964 as a body of the UN plenum and based in Geneva with the primary objective to promote international trade on behalf of the developing countries; cf. Sections 2, 6.3 and 7.3.3. UNIDO: United Nations Industrial Development Organization, Organization of 338

Glossary the United Nations for the industrial development; special organization as a body of the UN plenum with the objective to promote developing countries on the development and enlargement of their industrial structures, founded in 1966; cf. Section 7.3.3.

World Bank Group: Second so-called Ö Bretton Woods Institute; founded in 1944 with the aim to support the rebuilding after the Second World War via favorable development loans, today in general active in the development financing; cf. Section 4. World Trade Organization: Emanated from the so-called Uruguay Round of the Ö GATT in 1955, special organization of the United Nations with the purpose to further free world trade of any sort, eliminate non-tariff trade barriers and reduce customs duties; cf. Sections 1, 6.1.3 and 8.6.5.1.

339

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International Management Eberhard Dülfer International Management in Diverse Cultural Areas Internationales Management in unterschiedlichen Kulturbereichen 1999 I 1.052 S. I 64 Abb. I gb. € 54,80 I ISBN 978-3-486-25205-7 Global Text • Basics. • Long-term Fields of Operation for International Management. • The Process of Internationalization. • Business Systems Used Abroad. • How to Consider the Unfamiliar Environment: The Core Problem of international Management. • Influences of the Global Environment on Management, Labor and Consumption Behavior in Host Countries. • Particularities of the Interactional Relationship in Foreign Business from the Perspective of the Decision Maker (Manager). • Challenges for the Manager Abroad. • Grundlagen. • Langfristig aktuelle Operationsfelder des Internationalen Managements. • Die Internationalisierung der Unternehmung. • Auslands- Geschäftssysteme. • Berücksichtigung des fremden Umfeldes als Kernproblem des Internationalen Managements. • Einflüsse der globalen Umwelt auf das Führungs-, Arbeits- und Konsumverhalten in Gastländern. • Besonderheiten der Interaktionsbeziehungen im Auslandsgeschäft aus der Sicht des Entscheidungsträgers (Manager). • Anforderungen an den Auslandsmanager. Professor Dr. Dr. h.c. Eberhard Dülfer war von 1967 bis 1991 geschäftsführender Direktor des Instituts für Kooperation in Entwicklungsländern an der Universität Marburg.