Analysis

Europeans and development cooperation: there are opportunities too!

by Stelios Christopoulos

If politicians in Europe see jobs as their primary concern, it is probably because the citizens regard unemployment as their most serious problem. In the Europe of the Fifteen, the average unemployment rate was about 10% in 1985 dropping to 7.5% in 1990. By 1994, it had risen to a record high of more than 11%. By contrast, unemployment in the United States fell below 6.5% in 1994 and the figures for 1995 reveal a continuing downward trend. In Japan, the proportion of people without work remained below 3% in 1994. Assuming there is no change in current trends, the most recent demographic projections suggest that there will be 70 million people over the age of 65 in the EU by the year 2020, out of a total population of 348 million. This is 18 million more than there are today. The proportion of over-65s is, thus, projected to rise from 15% at present to 20% in less than 25 years. These two elements - an ageing population and ongoing structural unemployment - clearly reveal that European society lacks a degree of dynamism compared with its competitors.

In an attempt to address this problem, albeit partially, the President of the European Commission, Jacques Santer, launched a European employment pact in April 1996. There are three underlying reasons for this initiative - Europe's endemic unemployment, the need to reestablish a climate of confidence as a prerequisite for renewed investment and consumption, and the need to fit the creation of the single currency into an overall economic strategy aimed at increasing growth, competitiveness and employment in Europe.

'I'm young, help me find a job', is the heartfelt plea of many of young Europeans. But what chance is there that their cry for help will be answered in a difficult global environment?

We have seen the globalisation of strategic relationships in a range of key areas including the environment, the management of energy resources, health, demography and security. The trend has been accelerated by rapid technical progress in the fields of transport and telecommunications. This process has not taken the big multinational companies by surprise - they were already free of the constraints of sovereignty or space, and were quick to globalise their structures. These enterprises have become more competitive by taking advantage, wherever possible, of the most favourable production conditions, particularly regarding raw materials and employment conditions. More spectacular still has been the growth of international trade: in 1990, the volume of world trade was 11.5 times as great as it had been 40 years earlier. During the same period, global production only increased fivefold.

What this means nowadays is that employment in the EU Member States is directly affected (and some would say threatened) by the world situation. Productivity and growth conditions in Europe are no longer sufficient to ensure full employment. Competition from developing countries, with their low wage bills and undervalued currencies, is too great for countries in the EU. Their position is not the same as that of the multinational companies. They do not have the structures to deal with swiftly evolving events, nor are they capable of controlling the process of globalisation. This is demonstrated, inter alia, by their inability to respond to the financial speculation which turns capital away from productive investment. Today, for example, for every US dollar in circulation, there are at least 30 dollars which are the product of financial speculation. This is not money from productive work by any particular person, but money which is the product of a financial 'virtual reality' and which is usually reinvested in financial speculation.

Countries are beginning to realise the need to pool their national skills and cooperate at a regional level, in order to enhance their business competitiveness and take on the challenges of the globalised trading system. But the level of integration implied by this strategic choice must be sufficiently comprehensive if it is to make up for the reduced capability of countries to respond on an individual basis. This process of regionalisation may well be a prerequisite for regulating the world economy in such areas as exchange parities and financial speculation.

And what of Europe in particular? Despite having a head-start on other regional groupings (such Asean, Nafta and Mercosur), the situation is not too rosy. Owing to the lack of a full internal market, Europe is unable to compete on equal terms with the United States or Japan. The internal market still comes up against blocks in important areas, as evidenced by problems over the European employment pact. And there are a number of other defects which make the internal market insufficiently competitive in the context of globalisation. It is true that a more coherent environment has been created for European companies, with common regulations and rules of competition enabling them to distribute their goods and services among the EU's consumers. But despite the appearance of a domestic, or single, market, it is one which is devoid of a genuine internal policy in keeping with its size. This is what distinguishes it from the internal markets of the United States or Japan.

The explanation for the disparity may lie in the fact that the most recent moves towards the single market, through 'Single Act', date from 1987. This was before the upheavals which so decisively signalled the globalisation trend. Despite the criticisms sometimes levelled at it, it is a genuine single market which is largely open to the outside world (with only a few exceptions, notably as regards the Common Agricultural Policy, where it is recognised that there is a need for progressive adaptation). But there is still no single currency, nor is there a genuine common commercial and economic policy. The EU is unable to react to change at world level in the same way as its competitors. The common customs tariff, together with protective measures such as the anti-dumping regulations, are still not sufficient to solve all the Union's problems. What is needed on top of this is an active common policy component.

Yet, as the European employment pact makes clear, the EU holds a trump card in an increasingly interdependent world. The proviso is that it must speak with one voice, enforce multilateral rules and open up new markets for itself, because, as the document points out 'exports create jobs...'

In 1994, the developing world received 37% of global direct foreign investment ($84 billion) as against less than 20% at the beginning of the 1980s (the flow of foreign exchange is regarded nowadays as the principal factor influencing development). This is a spectacular increase but the resources are not 'fairly' distributed from the point of view of either the investing countries or the recipients. For example, southeast Asia is currently the world's most dynamic region. Yet, not to put too fine a point on it, it is virtually ignored by European investors. Only 3% of European overseas investment is directed towards this zone. Likewise, Europe's market share in the region is no more than 5%. The US has invested between two and three times more in south-east Asia while Japanese investment is four times higher.

In 1994, sub-Saharan Africa attracted just 0.8% of direct foreign investment ($1.8 billion). And there is no evidence that Europeans have invested more than the Japanese or Americans in this region. This is despite the highly optimistic outlook for the situation in Africa offered by the late Ron Brown, the former US Trade Secretary. On returning from a tour of Africa with American businesspeople in February 1994, he remarked that major opportunities were opening up in that continent, with spectacular returns on investments - at the time, the best in the world. His regret was that so few people were aware of the situation. Undoubtedly more significant still was the declaration made in Washington before his departure for Africa to the effect that the United States would no longer leave African markets exclusively to the former colonial powers.

So although others are beginning to explore the possibilities offered by Africa, Europe is still sceptical. A similar scepticism prevailed during the 1960s when it was assumed that the lot of south-east Asia would be famine, and few development prospects. Given the historical links between Europe and Africa, the geographical proximity of the two continents, and the pressing problems faced by the 'old' continent vis-à-vis its competitors, such an attitude appears difficult to explain. In the years since the former European colonies in Africa gained independence - and despite the creation of an institutional cooperation framework (the Lomé Convention, which many regard as a model of development cooperation) - many Europeans clearly no longer wish to be involved in Africa. The explanation for this lack of interest may be the difficult conditions within African countries - obstacles preventing access to markets, the lack of liberalisation or political instability.

But this analysis in not entirely convincing. More ACP countries are democracies than ever before in the post-independence era. As for Africa - a much-debated ACP region - it is wrong to talk purely in terms of internal conflict, famines or the AIDS epidemic. There are countries in this continent with growth rates of between 5% and 6%, and several examples of where European companies have successfully penetrated local markets.

The need to highlight the existence of genuine business opportunities in ACP countries and to make the European public aware of development aid success stories, were among the main conclusions to come out of the first meeting of a television delegates' network, organised by the European Commission's Development Directorate-General on 31 January 1996.

Any European company chairman interested in expanding into an ACP country - thereby enlarging the company's market and enhancing its competitiveness - is likely to acknowledge the possibilities, if offered back-up from the EU or from national governments. But they will then probably point to the complications which remain - and with some justification.

With this in mind, it is worth reiterating the fact that specialised institutions exist for facilitating contact with the ACP countries. In 1995, for example, the Centre for the Development of Industry (CDI) was involved in 367 projects, assisting, free of charge, in the expansion or rehabilitation of industrial companies in ACP countries, in partnership with European business. Although the number of such projects is constantly increasing (190 in 1993,229 in 1994), it is still a long way short of what is needed. But it should be stressed that the CDl's approach, which involves promoting the creation of networks, appears to work. The establishment OF ACP contact networks in ACP countries makes it easier to identify potential areas for involvement and to prepare better for European institutional and sectoral networks. There are several successful projects which have led to the creation or safeguarding of jobs in Europe.

Also in 1995, the European Investment Bank (EIB) granted ECU 430 million in loans to businesses in various sectors in 29 ACP countries. This includes an increase in the Bank's activity in Africa over previous years.

What, then, of the effect of Europe's development cooperation policies on the European market ? According to the most conservative estimates, for every ECU 100 granted in aid, the Community 'gets back' ECU 48 in the form of jobs, supplies and technical assistance. This figure does not take account of additional 'secondary' business generated by, for example, the supply of spare parts or the provision of technical advice. This business can be quite significant given the degree of penetration achieved by European companies in the markets of many developing countries. Nor does the estimate include any new business opportunities directly arising from the links established between the companies involved in aid projects and the recipient countries. Thus, it is clear that when a project is set up, it may well have extra beneficial effects for Europe through additional flows of goods and services.

The 'return' on aid is even greater in Member States' individual bilateral programmes. For example, tied aid from countries such as Belgium, Italy and the United Kingdom leads to a payback of more than 70%. Another point is that as Europe's industrial rules are harmonised, the success of a single European company in penetrating a particular developing country market may pave the way for companies in other EU Member States, thus benefiting the Union as a whole. Tied aid creates favourable conditions for setting up European companies and for placing European goods and services in other markets.

While the return on aid may be described as satisfactory, the same is not true of the number of companies that benefit or of the actual turnover involved. One wonders whether this weakness is due to a lack of information about existing resources and facilities, or whether there still a lack of confidence about countries which, despite the progress they have made, are still politically unstable and therefore unpredictable.

One might also wonder whether the time is right for investment. Our answer would be that, even though financial speculation is currently governed by global economic considerations, which prevent productive targeting of capital, this situation cannot last. There is a worldwide move to rectify the situation.

We all need to be aware that time is no longer on our side. In many sectors, European companies still have a competitive edge over businesses from third countries, owing to their degree of specialisation and technological expertise. But if they are to survive, they must take on a worldwide dimension. In particular, they should pay attention to the comparative advantage that they have in the ACP countries on account of their special skills, historic links, geographical location and, above all, the institutional connections between these developing nations and the 'old' continent.

Although problems do exist and although both European and ACP bureaucracy can sometimes discourage private operators from exploring the potential of the developing world (and more particularly the ACP region), they should not give up. Europe's challenge is to help them to exploit this potential whilst not raising false hopes.

Nothing can take the place of the shared experience and confidence which arises spontaneously in full knowledge of the facts. In this regard, we feel, there is still much to be done. In both Europe and the ACP countries, one way to succeed is to increase the number of networks representing industrial, economic and financial interests at various levels, and to assist them in identifying opportunities more effectively. This would help to create a new dynamism and renewed vigour in Europe.