April 23, 2013 / 4:27 PM / 7 years ago

Overseas development aid can help EU growth

BRUSSELS (Reuters) - Budget cuts and slowing growth have led European governments to consider cutting funding for overseas development, a move the EU’s development commissioner regards as short-sighted, arguing that Europe gains from spending abroad.

EU Commissioner for Development Andris Piebalgs speaks to Reuters during an interview at Chatrium hotel in Yangon February 13, 2012. REUTERS/Soe Zeya Tun

Funds must be used effectively and aid carefully targeted, says Andris Piebalgs, the Latvian in charge of Europe’s development aid budget, but there should be no questions over whether it is worthwhile or long-term beneficial.

“Our growth very much depends on demand from developing countries,” Piebalgs told Reuters in an interview on Tuesday. “There is no way we can provide for our own lives if we don’t manage to deal with poverty.”

While the United States has returned to slow growth, Japan and the euro zone are still muddling through recession. Europe will only be able to grow long term if it finds new markets for its products, he said.

“Our jobs and our growth and our social system very much depend on how other regions are growing, and in Africa the demand and potential for consumption is enormous because people are only starting to consume like other parts of the world.”

But building up those markets is problematic.

Piebalgs wants to ensure public funding through aid is able to create the bare essentials needed for markets to expand in developing countries, where scarce resources are often consumed by spending on defense and primary health.

One of his aims is to build up electricity networks, helping to establish solid energy infrastructure whether via public-private development initiatives or direct budget support.

“As a private investment it doesn’t work because markets are rather small, and the possibility for profit is nearly non-existent,” he said, underlining why foreign support is essential. “Which business will go to an African village, invest in the energy sector and expect a return on his investment?”

Having reliable energy can then unblock other areas that countries can exploit to accelerate their develop, such as storing agricultural output and stabilizing food supplies.

But energy infrastructure is costly and the EU does not have limitless resources. Rather than paying for a new energy plant outright, the Commission is increasingly looking to leverage its annual 9 billion euro aid budget to generate extra finances.

“The whole idea is that we expect to leverage from one to eight from one to ten, but the first projects haven’t gone as well as I expect,” Piebalgs said.

Piebalgs on Tuesday signed an agreement to build a solar power plant in Burkina Faso, the largest project the Commission has funded so far, which should create power for 400,000 people.

The Commission put up 40 percent of the funding, or 25 million euros ($32.58 million), and the European Investment Bank and French Development Agency made up the remainder in loans.

EMERGING DONORS

The Commission provided 4 billion euros to African countries in 2012, which coupled with the amounts individual EU member states spend, makes the EU the world’s biggest provider of aid.

But emerging economies, such as Brazil, India, China and Turkey, are stepping up their aid contributions as their economies rapidly grow, gaining influence at the same time.

“Sometimes it is perceived as a huge growing source, but in reality it is commercial investment happening,” says Piebalgs, playing down the importance of developing world support. “The development part of this investment is rather limited.”

Too often, he said, capital from emerging countries comes with undesirable costs or strings attached, such as selling off mineral assets. Aid from the Commission and the wider EU is aimed at development, not at directly profit, he said.

“I remember from Latvia rather well that there is capital that is coming and saying if you do this, we will raise the money. But a lot of times it is not only very risky it is from rather untransparent sources. Development provides a good basis to develop in a transparent and sustainable way.”

Reporting By Ethan Bilby; editing by Luke Baker

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