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Lomé III: the search for greater effectiveness: European Community-LDC cooperation

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1985
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Michael Blackwell

The Lomé Convention unites the European Community and a group of African, Caribbean, and Pacific (ACP) states in an agreement which includes among its most notable features trade preferences, aid, and special facilities. When it first entered into effect in 1975, it was heralded as the only agreement that brought industrial countries and developing countries together as equal partners in mutual recognition of their interdependence in seeking economic growth and development, and as a step forward in the construction of a New International Economic Order.

Over the years some of the initial optimism has dissipated; indeed, some ACP spokesmen have claimed that the two sides now relate to each other more as aid donors and recipients than as equal partners. Although acknowledging that many ACP states have not derived all of the economic benefits they had hoped for, the European Community has argued that the Convention grants these states greater access to Community markets and the greater share of EC aid flows. In the Community’s view, the ideal of partnership has not been abandoned and the failure of many ACP states to derive greater benefits from the Convention is best explained by the inappropriate policy stances adopted by their governments.

The 1983–84 negotiations for the third Lomé Convention were rooted in these contrasting perspectives and often echoed the broader debates that practitioners and scholars alike have lately engaged in on the effectiveness of aid, the respective merits of competitiveness and appropriate domestic policies versus trade preferences in stimulating export growth, and the role of special facilities in helping countries adjust to fluctuating demand for their commodities. This article examines the issues raised and the agreements reached in the course of negotiating the Lomé III Convention and pays particular attention to the changes in its language and emphasis.

Background

Lomé has as its origin the European Community’s decision in 1957 to set up a European Development Fund (EDF) worth $581 million—quite separate from the general Community budget and from members’ bilateral aid budgets—to be used over a five-year period to make development grants to their predominantly African overseas countries and territories. By 1963 many of these had become independent and a more formal agreement, the First Yaoundé Convention, was concluded to specify the nature of trade preferences and development assistance that the Community was prepared to offer its partners. When the United Kingdom formally achieved EC membership in 1973, some of the developing countries of the Commonwealth decided they would join with the Yaoundé Convention participants and some other African countries to form a group of African, Caribbean, and Pacific States that would approach the Community as a common negotiating body and seek a new, wider Convention. The ensuing negotiations resulted in a five-year Convention, which was signed at Lomé, Togo, in 1975 and has subsequently been renewed twice. Lomé III has a financial endowment of ECU 8.5 billion (in June 1985, one ECU or European Currency Unit was worth about $0.73), compared with ECU 5.5 billion under Lomé II and ECU 3.5 billion under Lomé I. The number of signatory ACP countries has risen from 46 in Lomé I to 66 in Lomé III.

Although all three Conventions have contained a wide variety of provisions, ranging from assistance with agricultural development to cultural cooperation, their major features have centered around joint management of trade preferences, aid provisions, and special facilities, namely, STABEX (the system for the stabilization of export earnings) and SYSMIN (a special facility for mining products). The Lomé III agreement effected changes in each of these areas.

Participants in the Lomé Convention are:

European Community: Belgium, Denmark, France, the Federal Republic of Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, and the United Kingdom. Portugal and Spain are expected to become participants in 1986.

ACP states: Angola, Antigua and Barbuda, the Bahamas, Barbados, Belize, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, the Central African Republic, Chad, the Comoros, the Congo, Djibouti, Dominica, Equatorial Guinea, Ethiopia, Fiji, Gabon, The Gambia, Ghana, Grenada, Guinea, Guinea Bissau, Guyana, the Ivory Coast, Jamaica, Kenya, Kiribati, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, the People’s Republic of Mozambique, Niger, Nigeria, Papua New Guinea, Rwanda, St. Christopher and Nevis, St. Lucia, St. Vincent, São Tomé and Príncipe, Senegal, Seychelles, Sierra Leone, Solomon Islands, Somalia, Sudan, Suriname, Swaziland, Tanzania, Togo, Tonga, Trinidad and Tobago, Tuvalu, Uganda, Vanuatu, Western Samoa, Zaire, Zambia, and Zimbabwe.

Trade provisions

The drafters of the first Lomé Convention were convinced that the extension of trade preferences to the ACP countries would boost their export capacity and hence encourage economic growth and development. Looked at purely in terms of EC-ACP trading relations, this objective does not seem to have been achieved. Although ACP exports to the Community, excluding crude and refined petroleum products, have increased in value by 51 percent between 1976 and 1983, their share of total EC imports from outside the Community during this period fell from 6.3 percent to 4.5 percent, while their share of imports into the EC from all developing countries remained stable at around 19 percent. During the same period the trade balance in the Community’s favor rose from ECU 3.5 billion to ECU 4.4 billion. However, it is not possible to draw definite conclusions from these figures about the effects of the Lomé Convention on trade. For example, they mask the fact that some individual ACP states have considerably increased and diversified their exports to EC markets. The Community view is that these figures—taken in conjunction with the evidence that many ACP states have limited themselves to traditional exports, have failed to match the productivity and quality advances of Asian and Latin American competitors, and have seen a consequent decline in their exports—suggest that the full benefits of trade preferences can only be enjoyed by countries with domestic policies that encourage a dynamic and flexible productive sector.

The ACP states, while not totally rejecting this analysis, argue that some elements of the Convention, in fact, hinder the growth of their exports. They claim, for example, that the Convention’s safeguard clause tends to inhibit growth in areas where they could enjoy the greatest dynamic comparative advantage and provides a powerful disincentive to their industrial development. The Community has pointed out that it has never invoked the safeguard clause and has only asked one ACP country—Mauritius—to accept a voluntary export restraint agreement (for textiles). It feels there is room for increased exports of even sensitive products and that the specter of the safeguard clause is used rather unfairly to excuse weakness in the ACP countries’ productive capacity.

The ACP countries advance similar arguments with regard to the rules of origin. In their view more lenient rules of origin would encourage greater external investment. The Community’s response is that the rules of origin of the Lomé Convention are considerably more generous and flexible than those applied by the Generalized System of Preferences. The Community notes that very few countries have taken advantage of the exceptions that are offered and it is concerned that any further liberalization would probably serve only to open a back door to its markets for its industrial country competitors, while bringing few real economic benefits to the ACP countries themselves.

Several ACP states argue that they could rapidly increase their exports to the Community if the freedom of access granted to manufactured goods applied also to agricultural products covered by the EC Common Agricultural Policy. Special arrangements are provided for beef, rice, sugar, rum, and bananas, which are of great value for a few ACP countries; on the whole, however, access for agricultural products is no more generous than that offered to countries outside the Convention. The Community has made a few minor concessions on agricultural trade in the Lomé III Convention—mainly designed to broaden and speed up consideration of requests for preferential access—but holds out little hope of any major liberalization in this area.

In short, the Community believes that ACP countries are unlikely to increase their exports unless they take action themselves to boost their productive capacity and improve their competitiveness. For this reason, the new Convention offers greater possibilities for the financing of measures to help individual ACP states develop coherent trade strategies; train personnel in export-related jobs; enhance the quality of products, particularly by adapting them to market requirements; and improve infrastructure, notably for transport and storage facilities.

Aid

Under each Lomé Convention the financial endowment of the EDF is divided between the special facilities, regional aid programs, and individual country programs. For the latter category the Commission draws up an indicative program with each ACP country and earmarks specific resources according mainly to the country’s population and GDP per capita.

The effectiveness of aid granted under the Lomé Convention has come under close scrutiny in recent years, most notably in the “Pisani memorandum” prepared in 1982 by the Commissioner then in charge of development affairs, Edgard Pisani. In the Lomé III negotiations, both sides recognized that much aid granted under previous Lomé Conventions had been used inefficiently, with only a limited impact on development. The ACP states faulted delays in the selection and financing of development projects and cited an overcentralized decision-making process in Brussels and cumbersome bureaucratic procedures. To the Community the problem was more fundamental. Its evaluation of the effectiveness of Lomé aid led to the conclusion that efficiency was less related to the quality of the goods or services provided than to the degree to which local skills and initiative were stimulated. Pisani went so far as to say that “below a certain threshold of effectiveness and relevance, aid becomes an evil, for it nourishes illusions and encourages passivity.” In this light, it seemed imperative that new Lomé resources should be used less for new capital projects and more for integrated sectoral programs, particularly with a view to agricultural and rural development.

To achieve this shift in emphasis the Community negotiators asked their ACP counterparts to accept a “policy dialogue,” which would precede the choice of schemes to be financed from Lomé resources. Initially, many ACP states took grave exception to this term, believing it to be a euphemism for EC control of their development plans and thus an encroachment on their national sovereignty and incompatible with the principle of equal partnership. In the end no direct reference was made to policy dialogue in the new Convention and spokesmen for both sides were at some pains to emphasize that the ACP states retained their contractual right to choose the way in which aid would be used. However, the ACP states agreed to include in the first chapter of the Convention a statement to the effect that “support shall be provided in ACP-EEC cooperation for the ACP states’ own efforts to achieve more self-reliant and self-sustained development” and to reach this objective “special efforts shall be made … to promote rural development, food security for the people and the revival and strengthening of agricultural production potential in the ACP states.” The Community hopes that this language and the new emphasis on programs, sectoral development, and the stimulation of national potential that it implies will lead to a much more detailed consideration of a country’s overall objectives and, hence, automatically, to a more thorough dialogue on the policies needed to achieve them. It remains to be seen, however, whether the Community and the individual ACP states will in reality be able to come to a more united appreciation of the optimal way in which the Convention’s resources can be used.

STABEX

A major part of the debate on aid efficiency was focused on the utilization of STABEX resources. STABEX is probably the most distinctive feature of the Lomé Convention. It grew out of the Community’s recognition in the early 1970s that aid tended to be less effective in countries experiencing instability in their export revenues. STABEX was introduced in the first Lomé Convention as a means of alleviating this problem and now compensates ACP states for loss of export earnings from any of a list of 48 agricultural products and subproducts.

Although there is a certain amount of overlap between STABEX and the IMF’s compensatory financing facility, there are many differences, two of the most notable being that (1) STABEX takes no account of earnings from other merchandise exports or of the country’s overall balance of payments position in calculating the compensation for a shortfall in earnings from one of the covered commodities (in other words, a country can draw from STABEX even if there is an upward trend in its overall export earnings) and (2) drawings are not limited by any equivalent of the member’s quota in the Fund, but by the resources the Community allocates to the scheme for a particular period. Given the limited number of commodities covered, these features of STABEX have led to situations in which a relatively high proportion of the available resources has been directed to a small number of countries.

STABEX worked fairly smoothly during its initial period of operation, 1975–79. The ECU 382 million set aside to finance it met all the eligible claims. Despite an increase in its resources to ECU 557 million, however, the scheme ran into serious difficulties at the beginning of the Lomé II period, as the prices of several commodities dropped rapidly in comparison with the average prices of the reference period. In both 1980 and 1981, claims of up to ECU 1 million were met in full, but transfers to meet larger claims had to be reduced by about one half. The system regained its equilibrium in 1982 and 1983 as the high commodity price years of the late 1970s dropped out of the reference period.

In preparing for the Lomé III negotiations, the European Community, while acknowledging that many STABEX claims could be attributed to reasons beyond a claiming country’s control, such as adverse market or climatic conditions, argued that many others could be explained by falling levels of production and competitiveness. This situation, it believed, was often brought about by the low priority some governments had given to agriculture, notably by policies that set producer prices too low, and by inefficient transportation and other infrastructural problems. The Community felt that several ACP countries had failed to use STABEX resources to tackle these problems, employing these funds instead to meet the most pressing demands on the national budget on the frequently tenuous grounds that this represented a permitted diversification away from the troubled export sector. After long discussions of principle on how free the claiming country’s authorities should be to decide the best use to which STABEX payments could be put, it was agreed that financing diversification measures would be permissible; however, the Community obtained the insertion of language that “Every request for a transfer shall, in addition to the necessary statistical data, include substantial information on the loss of earnings and also the programmes and operations to which the ACP state has allocated or undertakes to allocate the funds.” This is much stronger than the corresponding Lomé II text, which provided only that the ACP state should give the Community “some indication of the probable use to which the transfer will be put.” In addition, the new Convention permits the Community to suspend decisions on subsequent claims if a satisfactory account of the transfer has not been rendered one year after the transfer decision was made. These two new provisions should help the Community to ensure that the use of STABEX funds is directly related to the reasons for the shortfall in export earnings concerned.

Major provisions of the Lomé III Convention

Trade

• Free access to EC market for all manufactured products where materials originate in the ACP states or in the Community.

• Free access for manufactured products containing materials from other sources if, among others, (1) nonoriginating materials account for less than 5 percent of total material costs, and (2) certain types of processing of the nonoriginating materials have been carried out.

• Exception to the rules of origin granted, inter alia, when nonoriginating materials represent at least 60 percent of value of finished product or when these materials originate in UN-designated least developed countries.

• Conditions of access for all agricultural products sometimes more preferential, never less so. than those offered to third countries.

• Community can take safeguard measures if trade provisions result in serious disturbances in economic sector of a member state or jeopardize external financial stability.

• Financial and technical assistance provided to assist development of ACP trade potential.

Aid

STABEX

• Provides compensation for a loss of earnings from exports to the Community and, in some cases, to the rest of the world, if: (1) the product(s) represented at least 6 percent of the claiming country’s total exports during claim year (1.5 percent for landlocked, island, and least developed countries); and (2) earnings from product fell at least 6 percent during claim year (1.5 percent for landlocked, island, and least developed countries) compared to earnings during a reference period (generally the preceding four years).

• All claims considered simultaneously in year following claim year.

• Transfers repayable if earnings increase sufficiently during seven-year period following claim year (no such obligation for landlocked, island, and least developed countries).

SYSMIN

• Provides assistance to help overcome adverse consequences of a fall in ability to produce or export copper (and associated cobalt), phosphates, manganese, bauxite (and alumina), tin. or iron ore.

• Country eligible if at least 15 percent of total export earnings derived from a covered mineral (10 percent for the landlocked, island, and least developed countries).

• Country can be eligible, by exemption, if 20 percent (12 percent for landlocked, island, and least developed countries) of total export earnings derived from any combination of mining products other than precious minerals, oil, and gas.

Financial endowment for 1985–89
Grants to individual ACP statesECU 4.360 million
Emergency aid210 million
Aid for refugees80 million
Interest rate subsidies for European Investment Bank loans210 million
STABEX925 million
SYSMIN415 million
Special loans600 million
Risk capital600 million
Loans from EIB1,100 million
Total8,500 million

SYSMIN

Increasing the efficiency of aid and promoting the productive use of special facility resources were also at the heart of negotiations concerning SYSMIN. SYSMIN was introduced with the Lomé II Convention and came into effect in 1980. It was designed to help ACP countries cope with any serious temporary problems beyond their control which caused, or were projected to cause, a decline in their capacity to export certain specified minerals. Unlike STABEX, SYSMIN was not designed to compensate for a decline in export earnings. Its resources were expected to be used primarily to help maintain production capacity during adverse market conditions and their release was made conditional upon Commission examination and approval. The Community was careful to avoid any element of automaticity, so that multinational mining companies could not organize their activities with the express purpose of becoming eligible for transfers.

In its first four years of operation SYSMIN benefited only four countries—Guyana, Rwanda, Zaire, and Zambia. During the negotiations for Lomé III, a number of the ACP countries complained about this and noted that under Lomé II only some 12 countries were potential beneficiaries of the system. The Community agreed to go some way toward meeting these concerns. While it was unwilling to change the list of covered minerals, it did agree to open a “second window” to SYSMIN resources. This provided exceptions, on a case-by-case basis, for ACP countries deriving 20 percent of their export earnings (12 percent for the landlocked, island, and least-developed countries) from a combination of mining products other than precious minerals, oil, and gas, but not necessarily those mentioned specifically in the Convention. The opening of this “second window” to SYSMIN resources is expected to benefit a number of ACP states, notably, Botswana, Niger, and Zimbabwe.

The Community also liberalized the detailed criteria for the eligibility of claims by agreeing to consider using SYSMIN funds to remedy problems caused for major development projects, when the financing from the mineral sector on which they depend is seriously cut back or terminated, and also made more explicit that SYSMIN funds can be used to deal with structural as well as cyclical problems. Under the new Convention, the system can be used not only following “accidents” or “grave political events” but also in cases of adverse technological developments (such as the substitution of plastics for copper in traditional copper uses) or adverse economic developments (such as the inflationary impact of an oil price increase on mining operations).

Perhaps the most important change in the provisions for SYSMIN in the Lomé III Convention is in its orientation. Under Lomé II the main purpose of interventions was to maintain production capacity during a difficult period. Under the new convention the aim will be “to reestablish the viability” of the mining sector concerned. This will allow the Community not only to finance improvements to the production infrastructure but also, when it is considered to be in the best interests of the ACP country concerned, to finance orderly reductions in production capacity.

Conclusion

Although some signatories of the Lomé Convention feel that it falls short of what was originally hoped for, all are agreed that its overall effects have been beneficial. There is considerable satisfaction on the ACP side that the real value of the Convention has been maintained at a time when several Community members have been actively considering cuts in aid budgets and when the real value of some other multilateral funds, such as IDA, has been reduced. There is also satisfaction that the latest Lomé Convention offers some new benefits to the ACP countries and promises a new flexibility and a streamlining of administrative procedures. On the Community side there is hope that the new Convention will be more effective in promoting economic development and that through its institutions it will continue to provide one of the most significant forums for the North-South dialogue.

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