II. Impact of past EU co-operation with its Southern African Associates

• 3. Merits of the LC-type preferential measures in stimulating the export and pverall economic performance of the recipient countries: Overview of the experiences of the SADC economies
  • 3.1 Overall development policy pertinence
  • 3.2 Geopolitical significance of the arrangement
  • 3.3 Impulse of the arrangement for economic performance
  • 3.4 Political inspiration of the arrangement
• 4. Factors counteracting the development efforts of the SADC economies in the aftermath of the Lomé Convention
  • 4.1. Inherent deficits of the instruments of the Lomé Convention
  • 4.2 Barriers attributable to the adverse economic environment

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II. Impact of past EU co-operation with its Southern African Associates

Considering the significance of trade and development co-operation in the LC, both export and overall economic performance indicators provide plausible criteria for assessing the achievements as well as limits of the arrangement. To highlight the impact of past EU co-operation with its Southern African Associates, the strengths and limits of the LC in augmenting the development efforts of the SADC States are analysed against that background. At the same time, it is taken into account that the performance of the SADC economies cannot be explained in terms of the impact of LC only.

3. Merits of the LC-type preferential measures in stimulating the export and pverall economic performance of the recipient countries: Overview of the experiences of the SADC economies

The systematic proliferation of the LC membership is probably the most obvious evidence for its merits. For the Southern African ACP States, it has probably been the most important international arrangement at all. The reasons are obvious: considering the prevalent barriers on both the domestic and the international level, the economic situation of the recipient economies would, ceteris paribus, have worsened without the LC. Besides the static welfare gains from trade preferences for the beneficiary countries (tied to both the price and the foreign exchange subsidy programmes STABEX and SYSMIN), there are also dynamic welfare gains from trade and production that the LC could stimulate: technical efficiency for the producers and exporters, changes in factor supplies, overall growth of the capital stock, etc., as well as social welfare gains such as increases in incomes, consumption, and in living standards in the recipient economies. [The stimulation of technical efficiency in the beneficiary countries induced by stringent regulations and stiff competition in the EU market; the changes in factor supplies and the overall growth of the capital stock are induced by the inflow of real resources through the cumulation regulations, industrial co-operation, the development of human capital, special EU loans to the SADC economies, FDI, etc.]
Overall, pertinence of its development policy, the generous and participative character of the arrangements within that framework, their geopolitical status, their economic significance, as well as their political inspiration clearly are outstanding merits of the LC.

3.1 Overall development policy pertinence

Related to the overall development policy pertinence, the first obvious advantage of the LC is its comprehensiveness. Definitely, the LC is the most comprehensive North-South co-operation agreement. The areas of co-operation have been expanded in subsequent Lomé arrangements, thus, as shown in Lomé IV, playing a role in virtually every social sphere. They include such diverse areas as trade development, protection of the environment, enterprise development, etc. The broad range of the areas of co-operation together with the respective instruments have helped the SADC to fight economic and social hardship. The total transfers associated with all these areas of co-operation from Lomé I to Lomé IV are shown in appendix 2 for all ACP States.

The significance of the EDF in the international development assistance denotes another merit of the LC. In the absence of a conducive environment in the region to stimulate resource in-

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flows through conventional sources (e.g., venture capital, FDI), the transfers to the SADC under the LC constituted a significant and reliable source of resource transfer to Southern Africa. The development policy of the LC gains weight because the EU is not compelled by any national or international obligation to finance the arrangement but is doing this voluntarily. The generous and participative arrangements embody further outstanding aspects of the LC. The LC is the most generous North-South international financing programme. It has been continuously modified over time, and under Lomé IV, all financing except for funds managed by the European Investment Bank (EIB) is carried out in the form of grants. In the case of EIB resources, ACP borrowers, (i) are entitled to an interest rate cut of 4 percent, and (ii), through this subsidy, in real terms, they have to bear generous interest rates ranging from 3 to 6 percent only. The interest rate on risk capital is limited to 3 percent and is, under certain conditions, born by the EU. Furthermore, the LC permits the recipient countries to allocate the resources in accordance with their individual development policies which underlines the goal of fair participation in the decision process.

3.2 Geopolitical significance of the arrangement

The geopolitical significance of EU-SADC co-operation consists in the LC being, in relative terms, the best established platform for North-South dialogue that stresses partnership and solidarity. It is a crucial platform bringing together the North and the South as equal partners, despite the clear economic and political weight of the North. Compared to other multilateral arrangements where the interests of the North and the South collide, the relatively democratic attributes of the arrangement deserve to be pointed out as well.

Presumably, it was these very aspects and the mutual respect that enabled this settlement to survive the turbulences of an ideologically bi-polar international system during the cold war era, although several ACP members belonged to the 'wrong' ideological camp. Therefore, although the critics of the arrangement have blamed the erosion of common interests for hampering the achievements of the LC, the survival of the arrangement can partly be traced back to commitment to co-operation, based on mutual respect, partnership and solidarity rather than purely commercial interests. In sum, geopolitically, the LC represents an approved platform for the North-South dialogue.

3.3 Impulse of the arrangement for economic performance

To highlight the economic impulse of the LC, it is important to consider the trade and investment aspects, as they reflect the production efforts of the SADC economies in the aftermath of the LC. To estimate the trade impulse of the LC we will look at the impact of the arrangement on international market access, on export prices, and on fluctuation in export revenues and foreign exchange earnings. The pattern of flow of FDI will be used as a proxy for the impact of the arrangement on investments.

3.3.1 Impact on access to international markets

The LC nominally eases access of ACP exports to the EU market. In this regard, the LC confers duty-free access to the EU market for 99.5 percent of all ACP export products. Notably, the EU is the most important trade partner of the SADC economics, which is why a significant share of total revenues of the SADC countries is generated through exports to the EU.

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Table 2:
Proportion of export revenues ascribed to aggregate exports of selected SADC economies to the EU in selected years under Lomé I to Lomé III (in percentage)

Sources: The following data sources have been used for the computations: Angola: (IMF) DOTS Yearbook 1993: 70–71, and 1990: 80–81; supplemented with own calculations, Malawi: (IMF) DOTS Yearbook 1993: 281 and 1990: 283; supplemented with own calculations, Tanzania: (IMF) DOTS Yearbook 1993: 374–375, and 1990: 376–377; supplemented with own calculations, Zambia: (IMF) DOTS Yearbook 1993: 421–422, and 1990: 422–423; supplemented with own calculations, and Zimbabwe: (IMF) DOTS Yearbook 1993: 423–424, and 1990: 424–425; supplemented with own calculations.

The profiles of export revenues depicted in table 2 for a sample of 5 SADC economies under Lomé I to III confirm the high proportions of export revenues ascribed to the exports to the EU. For instance, almost 70 percent of Malawi's export revenues in 1979 was attributable to its exports to the EU, while a comparable figure for Zimbabwe in 1982 was more than 90 percent. In 1989, Malawi drew over 58 percent of its exports revenues from the EU. Similarly, significant figures are demonstrated for the remaining countries during the observation period. Notably, during the course of Lomé I to III, the dependence of some SADC economies on the EU market is above the African average of 46 percent of export revenues and/or the ACP average of 40 percent of export revenues generated through exports to the EU (Matambalya 1997, European Commission 1996).

Another provision is the exclusion from the MFA. Through this exclusion, ACP clothing and textile exports to the EU enjoy competitive advantage over exports from other developing economies, as they are not subject to formal quantitative restrictions. Southern African ACP States have benefited from this arrangement, as displayed in table 3 for a sample of 4 SADC economies for the years 1988–1992. For instance, textile products constitute the single largest export group for Lesotho, accountable for an average of 46.75 percent of revenues associated with the country's exports to the EU for that period.

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Table 3:
Revenue share of textile products in total exports of selected SADC economies to the EU in selected years under Lomé III and IV

Notes: a … includes woven cotton only.

Source: Matambalya, 1997: 164. The quoted source relies on a further source: EUROSTAT.

3.3.2 Impact on export prices

In general, minimum or reference price regulations indirectly ensure the retention of a certain economic rent by ACP exporters to the EU. The retention of larger shares of the final value of exports constitutes a form of aid to the ACP exporters, because the transaction leads to a static transfer of revenue from the EU budget to exporters from the beneficiary country. Special merit is attributed to this particular kind of assistance because it directly benefits the ACP companies.

To more precisely describe the impact of the LC on export prices, we may take into account the arrangements concerning reference pricing. For example, the beneficiaries of the beef and sugar protocols realize prices in the EU market higher than the world market price. Four producers which now belong to the SADC group (Mauritius, Malawi, Swaziland and Tanzania) have been net beneficiaries under the sugar protocol since its creation in 1975. The corresponding country annual quotas under Lomé I to Lomé IV are 487,200 tons, 20,000 tons, 116,400 tons, and 10,000 tons for Mauritius, Malawi, Swaziland, and Tanzania respectively. For a small economy, this could imply considerable economic advantages as exemplified by Mauritius and, to a limited extent, by Swaziland. Largely because of the generous sugar protocol, Mauritius and Swaziland control more than 60 percent of sugar exports from Africa (Protocol 3 on ACP sugar, Article 3 of the LC, Ikiara 1996). Thus, the economic success story of Mauritius is closely linked to EU transfers to the country through the sugar protocol. In general, the SADC States represent a quarter of the 16 ACP States that benefit from the sugar protocol under Lomé IV.

The beef protocol is beneficiary (under Lomé IV) to some 6 ACP States, with the most important exporters from the Southern Africa region being Botswana, Swaziland and Zimbabwe with annual country quotas of 18,916 tons, 3363 tons and 9,000 tons respectively (Protocol 7, Article 2 of the LC). Furthermore, the protocols allow for a transfer of quotas between ACP States or between different years when supply fluctuations make the utilisation of the quota for a specific country and/or period impossible. The solidarity towards ACP states embedded in the arrangements is underscored by the continuation of the quota system under subsequent Lomé arrangements, despite the oversupply of those commodities in the EU market as shown in table 4 covering selected years in the pre-Lomé era and during Lomé I to IV, depicting the high degree of EU self-supply of sugar and beef.

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Table 4:
Comparison of German and aggregate EU average degree of self-supply of selected agricultural products in percent, 1956–1995, selected years

Notes:
a … figures for 1965, 1966 and 1966 refer to West Germany, while figures for 1993/94 refer to reunited Germany,
b … tentative figures,
c … while data for 1977 refer to the EU of 10, data for 1993/94 and 1995 cover the EU of 12,
e … data for 1965/1966,
f … data for 1977/78,
g … data for 1987/88,
NA … data not available.

Sources: Presse- und Informationsdienst der Bundesregierung: "Europa 2000 – Die Europäischen Union der fünfzehn Staaten", Omnia Verlag, Bonn 1996. The quoted source relies on a further source: Bundesministerium für Ernährung, Landwirtschaft und Forsten.

3.3.3 Impact on fluctuations in export revenues and foreign exchange earnings

Guaranteeing access to markets has not only implications for export production but also for the volume of export and export revenues. Therefore, in conjunction with the other preferential provisions (e.g., price stabilisation programmes, protocols, etc.), the market access guaranty has ensured the SADC economies relatively stable export earnings, despite fluctuations in production, unfavourable world market prices, and movements in exchange rates. Concerning export revenues, empirical results suggest that the SADC economies enjoy a relatively stable demand of their exports to the EU. To highlight these relations, general tests of instabilities associated with SADC exports to the EU conducted for three SADC economies indicate that two of them (Malawi and Tanzania) could maintain relatively stable exports to the EU as compared to the rest of the world (table 5). Although the performances of the SADC economies remained below the global average, the predominance of ties to the EU market over the rest of the world is apparent for Malawi and Tanzania, while the observed deviation of Angola's performance may be attributable to the fact that the major market for its key product (crude oil) is not the EU, but the USA.

Table 5:
Instability indices of revenues ascribed to exports of selected SADC economies under Lomé I to III

Notes:
SEE … index of instability of export revenues estimated by the standard error of estimate,
CV … index of the instability of export revenues estimated by the Coefficient of Variation Measure.
The instantaneous growth rate of revenues ascribed to SADC exports is estimated by a semilogarithmic trend model.

Source: Matambalya 1997: 86 and 138.

Notably, the instantaneous growth rates of revenues associated with the exports of Angola and Tanzania to the EU were higher than rates attributed to exports to the rest of the world. Tanzania recorded a real negative instantaneous growth rate of 6.4 percent with respect to its exports to the rest of the world, while no country recorded a negative export growth rate with respect to its exports to the EU. Altogether, the observed relative stability and growth pattern of export revenues may be attributable to the 'preference effect' of the LC. To this extent, it may be argued that such measures as preferential access to the EU market in conjunction with the extension of quotas and minimum prices for selected exports guaranteed the SADC economies at least partial stability of export earnings (cf. Matambalya 1997).

As discussed above, the STABEX programme provides protection against losses in export earnings from agricultural commodities due to unforeseen circumstances, and covers fluctuations in the price and/or quantity of selected products on which the economies of the ACP countries depend. In the Southern African region, typical agricultural commodity exports, such as coconuts, coffee, cloves, cotton, tea, cashew nuts and kernels, sisal, cloves, hides and skins, benefit from this arrangement. Similarly, the SYSMIN programme provides protection against losses in export earnings from specified minerals upon which the economy depends. Typical mineral commodity exports of the SADC economies, such as copper, cobalt, iron ore, manganese, bauxite and aluminium, etc., benefit from this arrangement (cf. Matambalya 1997, The Courier No. 120, March-April 1990). Considering that, in absolute terms, high instabilities are associated with the export revenues of most SADC economies (compare World and SADC exports in table 5), the LC provides a crucial device for abating the foreign account deficits in that region). In the case of Zambia, for instance, the total disbursements to support balance of payments amount to ECU 169.4 millions (cf. Nakalonga 1996). [This amount comprises not only SYSMIN transfers, but also disbursements tied to the structural adjustment programme, the Indicative Programme, and the Cross-Border Facility (cf. Nakalonga 1996: 1).]
Generally, Zambia is the major recipient of SYSMIN transfers, receiving as much as 24.4 percent of aggregate SYSMIN disbursements from 1980 to 1990 (Lomé II through Lomé IV). This amount together with the allowance that Botswana has received makes up for 38.8 percent of all SYSMIN disbursements during that time (cf. Kappel 1996: 33).

3.3.4 Impact on investments

The historical significance of the EU in Southern Africa is underlined by the following citation:

"The dominance of the affiliates of MNCs of the EC in the ACP countries is in almost all the cases to be attributed to their former metropolitan countries. The EC shares in foreign affiliates

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in Barbados, Guyana, Papua New Guinea, and Zimbabwe are identical or almost identical to those of their former metropolitan country, viz. the UK … In Botswana, Kenya, Malawi, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, 70 percent or more of the foreign affiliates belong to the British Multinationals." [Agarwal, Dippl, Langhammer: "EC trade policies towards associated developing countries: barriers to success", J.C.B. Mohr (Paul Siebeck), Tübingen, 1985: 102.]

Notably, the LC is the only EU trade regime that allows both the EU and the beneficiary states to participate in production cumulation. Generally, notwithstanding the rather limited size of FDI by international standards and its sectoral bias [One of the most common criticism of FDI from industrialised states to developing countries is that it usually concentrates on the primary sector. As a result, such investments are blamed for largely neglecting sectors of economic importance to the host economies.], it is obvious that – on top of the significance of historical links – the terms of access to the EU market under the LC influenced the decisions of companies to invest in the SADC region (cf. AWEPAA 1992: B17, Agarwal et al. 1985). More recently, from 1991 to 1993, 7 SADC economies (Angola, Zambia, Namibia, Swaziland, Botswana, Mozambique, and Mauritius) were among the 16 highest ranking FDI destinations in Sub-Saharan Africa (excluding the RSA) with Angola at the 2nd and Mauritius at the 16th position. Also ranking high were both the Seychelles (12th position) and Madagascar (13th position), another two states in the region which may be integrated in an extended SADC (cf. Kappel 1996: 11). [Again, if including the RSA beyond the current Lomé arrangements in the analysis, the significance of the EU's investments in Southern Africa becomes even more lucid. In 1992, for instance, the EU was the source of 53 percent of cumulated FDI in the country, clearly surpassing the USA (18.1 percent), Switzerland (12.3 percent), Japan (1.6 percent) and Hong Kong (1.5 percent) (cf. Wellmer 1996: 143, Matambalya forthcoming).]

3.4 Political inspiration of the arrangement

The LC institutionalises political relations through the ACP-EU Council of Ministers, the Committee of Ambassadors, and the joint ACP-EU Assembly (where the EU is represented by members of the European Parliament). Considering the relative political maturity of the EU compared to their SADC counterparts, this kind of political interactions between the EU and the SADC States is useful for the SADC States to learn from the EU's experience. Moreover, the EU has played a key role in the democratisation process, which has been implemented in all SADC States, through support in the organisation, as well as the financing and the supervision of multi-party elections in virtually all SADC States. This assistance helped to create the foundation for sound political and economic governance.

Notably, EU-SADC political structures could provide a good platform for the general exchange of political experiences, if applied in a strategic and continuous way. Even if political ties will remain subject to specific conditions, to the extent that political conditionality does not abrogate the sovereignty of the SADC States, there is a humanitarian justification to use such relations as an instrument to achieve political and economic stability, as well as goals aimed at consolidating democratic values.

4. Factors counteracting the development efforts of the SADC economies in the aftermath of the Lomé Convention

To assess the shortcomings of the LC, it is important to consider the entire spectrum of factors hampering the developing efforts of the SADC economies. However, these obstacles can only in part be associated with the shortcomings of the LC-type preferential measures. In this analysis, we categorise the pertinent obstacles into three classes: those attributable to the inherent deficits of the LC instruments, those imposed by the internal environment, and those imposed by the global environment.

4.1. Inherent deficits of the instruments of the Lomé Convention

The proposition that the EU's policy stance against its ACP Associates is not necessarily

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appropriate does not question the essence of the EU co-operation with its developing Associates as a whole. It rather expresses genuine concern about the appropriateness and capability of the specific policies to reach the desired goals under the given global and domestic environment. Accordingly, the barriers cited here refer both to the inherent deficits of the LC and the EU to match the development needs and priorities of the ACP.

4.1.1 Preference redundancy and erosion of preference margins

A careful study of the various trade preferences under the LC suggests that despite their positive impulse they are nevertheless prone to some shortcomings that either render them redundant or, at least, contribute to the erosion of their margins. Among other things, the LC does not provide carte branche on many products of most interest to the SADC economies, and several policy restrictions exist along-side EU preferences. [These restrictions include: the rule of origin, the safe guard clauses, the specifications on standards, the quotas, the Common Agricultural Policy (CAP), etc. The CAP, for example, de facto perpetuates protectionism of agricultural products. The policy identifies a number of 'sensitive agricultural goods' for which either no preferences are provided at all or EU tariffs remain prohibitive. Some of the products falling under the CAP regulations include beef and veal, dairy products, cereals and rice, products processed from cereals and rice, fruits and vegetables, products processed from fruits and vegetables, raw tobacco, and merchandise under EU regulation No. 1059/69 (chocolates, food for children, biscuits, etc.) (cf. FES 1976: 16). ]
The severity of the quota restrictions can be demonstrated by looking at two products, i.e., apples and pears. Under the LC arrangement the ACP states could export duty free up to just 1,000 tons of each to the EU market (cf. Stevens et al., 1993: 96). Likewise, although the LC provides for flexible arrangements as far as industrial export goods from the beneficiary countries are concerned, this flexibility is severely restricted by the rules of origin (cf. Grynberg 1996, Stevens et al., 1993: 97). This rule also erodes the benefits of the ACP countries' exclusion from the MFA (cf. Ikiara 1996).

Likewise, the ambiguous nature of reference prices constitutes a further complex provision of the LC. While ensuring minimum price levels that usually lie above the world market prices they may eliminate the price advantage in case the SADC exports are artificially made too expensive for the final consumer. In other words, unless they are tied to quotas large enough to absorb a substantial part of the export potential of the beneficiary economy, the economic rent gained through minimum price regulations could be cancelled out by the loss of economic rent through price-induced reductions in the volume of sales. Finally, considering that most of the exports of the SADC economies to the EU consist of mineral or agricultural raw materials, mostly bulky in nature, and that under most commodity supply contracts the shipping costs are paid by the exporter, the low ratio of value to weight associated with high transportation costs constitutes a significant loss from the preference margin.

4.1.2 Limits characterising EU demand of SADC goods

The demand pattern for goods exported by the SADC countries to the EU is a matter of concern. Here, too, a number of technical barriers to the export performance of the SADC can be identified. Some of the obvious characteristics of the export portfolio which further erode the actual preference margins are the concentration of the SADC exports on a few primary products, the surge in global supply and the falling demand due to the development of synthetic substitutes and the reduction of input intensity as a result of technological innovations. Tables 6 and 7 show to what extent exports of the SADC economies to the EU are usually divided up among only a few products or product groups. Throughout the subsequent Lomé Conventions, for instance, copper has been attributable for more than 80 percent of Zambia's share of revenues of relevant exports to the EU (table 7). If we consider that the lowest single-product share observed in table 7 pertains to the tobacco share in Zimbabwe's exports (20.25 percent in 1988), the mono product character of the export portfolios is not only evident for Zambia, but for the other sample economies as well (cf. Matambalya 1997, Matambalya 1995, Reinhart and Wickham 1994).

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Table 6:
Composition of main export products of selected SADC economies to the EU from 1988 to 1992 and corresponding shares of export revenues

Notes:
a … denotes number of products or product groups used in the computation,
b … based on 7 (instead of 6) product categories, the additional product being fish,
c … depicts average of the observed years.

Source: Matambalya 1997: 139–143.

In addition, the high level of EU self-supply in many categories of typical exports of the SADC economies, such as sugar, beef and veal, limits the capacity of the EU to absorb substantial exports (table 4). According to these observations, the EU is a confined market for the products traded by the SADC and other ACP States (cf. Stevens et al., 1993: 90).

Table 7:
Share of the main export product of selected SADC economies to the EU in total exports, from 1988 to 1992, in percent

Notes:
a … depicts average of the observed years,
b … denotes average of textile products from 1989 to 1992 inclusive.

Source: Matambalya 1997: 139–143.

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Also, besides intra-ACP competition, the situation is exacerbated by the proliferation of arrangements linking the EU to the international system including, in ascending order of generosity, the GATT/WTO, the Free Trade Agreements, the Generalised System of Preferences, the Association Agreements, the Preferential Trade and Co-operation Agreements, and the Super Generalised System of Preferences (cf. Matambalya 1997). Considering single trade regimes for access to the EU market, severe interactions exist between the LC and SGSP programmes which lead to a 'cancelling out effect' of the individual trade regimes. Comparably, such instruments as STABEX and COMPEX compete, for instance, for the same limited resources made available by the EU to stabilise agricultural export revenues.

4.1.3 Peculiarities of the Lomé Convention which complicate its management

Managing the LC is a challenge to both the EU and its ACP Associates. Its organisational complexity, the little transparency of the modalities regulating the distribution of welfare gains induced by the trade preferences, uncertainties concerning both the magnitude of anticipated aid (particularly the non-programmable portion of the EDF) and the transient character of the contract, leverage on vested interests, as well as confined aid efficiency may be singled out as important shortfalls complicating the management of the LC. However, often, the recipient economies themselves hamper the formulation of viable economic development strategies. In this regard, the LC provides a relatively complex arrangement with a broad spectrum of co-operation areas and a multitude of instruments, but the labyrinth of the provisions as well as their lack of transparency constitute a mere challenge. Thus, it is not surprising that actors in the ACP have difficulties to understand the complex system of provisions and conditions, as well as the actual benefits tied to them. The fact that some of the largest ACP exporters were unaware of the existence of the margin of trade preference for their cocoa to the EU, a situation that apparently holds for many SADC exporters, corroborates this sceptical view of the LC (cf. Grynberg 1996, ECDPM 1996a). Furthermore, because the LC instruments were traditionally aimed at public sector needs, often, only a small number of government officials have appropriate important knowledge about the LC. The centralisation of the co-operation might have aggravated the lack of diffusion to other key actors in the socio-economic spheres of the ACP (cf. ECDPM 1996a, ECDPM 1996b).

The LC also suffers from the absence of clear and transparent modalities for the distribution of the preference margins. For many commodities enjoying preferential access to the EU, the margin of preference is part of the overall negotiated price. Theoretically, this margin can either be passed on to the exporting economy or be retained by the EU. [The margin is passed on to the exporting economy when it is retained by the producer and/or the exporter. Conversely, the margin remains in the EU if it is conveyed to the consumer and/or it becomes part of the trading margin of the importer.]
It can also be shared proportionately or disproportionately by the involved parties. One of the technical weaknesses of the LC is that it does not clarify how the preference margins should be distributed among the producer, the exporter, the importer and the final consumer. The fact that for some commodities as cocoa the importer slices off a large share of the preference margin is subject to criticism (cf. Grynberg 1996). [The evident flaws ascribed to this trade regime are: (i) insofar as the price rise ascribed to the utilisation of the mar gin is not passed on to the final consumer, the level of EU demand will not be affected even if the ACP economies constituted a significant source of the product in question, (ii) to the ACP producer and/or exporter who does not participate in sharing the preference margin, the only gain consists in the guarantee of market access.]

Furthermore, the efficiency of LC is constrained by uncertainties tied to the allocation of aid funds and the transient character of the arrangement. Both country and regional shares of aid funds invariably indicate the benefits accruing to the individual states and regions; therefore, the procedure to allocate these funds to the individual ACP States is a contentious issue, mainly because the LC lacks viable criteria for

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ranking the recipient sectors and/or economies (cf. Gonzales 1996, Kappel 1996). Scepticism is also associated with the division of financial resources under the Convention into programmable and non-programmable assistance. Such a settlement could imply 'diversion' and 'covert conditionality' of aid. Notably, programmable assistance is allocated according to geographic criteria and is either regional or country specific. If EIB 'own resources' loans are excluded [Although these resources are in large part non-program mable, certain amounts may be earmarked for specific countries depending on their ability to repay under 'own resource' loan conditions (cf. AWEPAA 1992: b7).], programmable assistance constituted 61 percent of total financial aid available under phase I of Lomé IV. Non-programmable assistance representing a substantial share of total aid is not allocated according to geographic criteria, but is issued under specific conditions (cf. AWEPAA 1992: B6). Non-programmable assistance (excluding EIB 'own resources' loans) constituted 29 percent of total financing available under phase I of Lomé IV. The distribution of both the STABEX and the SYSMIN funds (both are non-programmable) are blamed for their non-transparency. The controverse distribution of programmable assistance is probably best articulated by the fact that from 1980 to 1990 more than two-thirds of all SYSMIN resources were allocated to just four ACP economies: Zambia, Zaire, Guinea and Guyana. Similarly, the transient character of the Lomé Convention (Lomé I to III as well as the pre-Lomé arrangements were each due for review after five years, while in Lomé IV the duration was extended to ten years) did not provide a reliable and stable base for planning (cf. Kappel 1996: 32–33, Matambalya 1997: 175). Apparently, uncertainties provoked some kind of planning ahead trying to anticipate developments related to the LC.

Leverage on vested interests constitutes another factor that limits the efficiency of the LC in stimulating development. Notably, if the EU interests are guided by specific returns on aid, there is a real risk of tying this aid to overt and/ or covert conditions, thus making assistance vulnerable to 'vested' interests of the EU rather than 'common' interests between the EU and its ACP Associates. Some circumstances provide loopholes for double entendre concerning the distribution of the benefits from aid. For instance, the STABEX funds were initially disbursed to governments and not directly to the producers. Likewise, particular interests are blamed for deficiencies of the technical assistance programme. The amount of 'tangible aid' available to the recipient economies is substantially reduced by expatriate salaries, consultancy fees, etc. [Tangible aid is the portion of tangible investments like infrastructure, etc., after subtracting money flowing back to the EU. The flow of large shares of funds under technical assistance as expatriate salaries, consultancy fees, etc. to the firms of the EU donor countries (which enjoy exclusive bidding power) substantially reduces real effective aid.]
Citing the World Bank, Grynberg reports that for the Pacific ACP region technical assistance makes up for about 45 percent of total aid, while the 'tangible' proportion of this aid is probably below 50 percent (cf. Grynberg 1996). Uncompetitive pricing, as experienced in the SADC region, is also caused by aid conditionality, particularly the phenomenon of tied-aid: concerning Southern Africa in particular, in their analysis of the barriers to intra-regional trade, Maasdorp and Whiteside report that:

"Bilateral donors tend to tie a proportion of their aid (usually about one-third) to suppliers in their own countries. This often makes the cost of the project considerably higher than it would be if the recipient country were free to obtain the inputs from the cheapest source. A good example of this is to be found in upgrading the Railway line between Swaziland and Maputo. Italy made available a grant to Mozambique for upgrading its portion of the line, while Swaziland was to receive a loan. But this was tied to use of Italian contractors and rail. The Swaziland Railway could have obtained cheaper steel from Zimbabwe, while South African contractors would also have cost less …."
[Maasdorp and Whiteside 1993: 22.]

In a world divided along ideological lines, the existence of vested interests was also underlined by the use of aid as a device of foreign policy to attain and/or consolidate political influence in the recipient economies (cf. Hauchler 1993: 33–36), a practice that was favoured by the transitory character of the arrangement. Obviously, for this kind of diplomacy the aptness of

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development policy to provide extended aid only played a secondary role (cf. Shultz 1985: 40–47).

Finally, the LC is characterised by a disposition to a laissez-faire approach to disbursing funds, without adherence to efficiency criteria in the utilisation of such aid. Under the subsequent Lomé arrangements, the beneficiary economies did not need to prove good performance to get access to further fund instruments. [By comparison, the Marshal plan was tied to stringent performance criteria compelling the participating West European economies to work together. ]
Supporting futile forms of economic, social and political governance is one of the logical consequences of disbursing money without evaluating on a regular basis economic and political records of the recipient. Notably too, the prevalent situation made it difficult to pass on the benefits of the LC to the majority of the ACP States. Critics say that these instruments represent devices of a network of clientele relations, whereas the LC as a whole constitutes a platform of collective patronisation with questionable impulse for endurability of the development of the ACP economies.

4.1.5 Scarcity of aid resources

The scarcity of aid resources constitutes a further problem that invariably leads to languid and/or scant response of the LC to ACP economic development needs. The sluggish response of the LC to the development needs of the ACP is indicated by the delayed recognition of crucial aspects of a sound development programme and/or the absence of a stronger focus on provisions already included in the arrangement. In this case, too, concrete examples articulate the significance of this aspect for the SADC economies: although primary conditions of the economies were recognised as obstacles to development and included in the areas of co-operation, the question whether the respective measures were apt to effectively blend the existing development potentials with development objectives of the region was not paid attention to. Generally, the activities propagated by the LC concentrated on the use of external income base in terms of aid to combat adverse terms of trade and economic underdevelopment, instead of augmenting the internal income base by supporting and transforming internal production. Due to that strategy, in general, the important objective promoting sustainability as well as competitiveness in those economies could not be achieved. Also, in defiance of clear evidence of deficits in political governance, the improvement of the political environment was deferred due to geo-political considerations. The LC did not prevent the emergence and consolidation of de facto 'one party' and 'military regime' cultures in many ACP States. Besides, debt obligations and other external commitments that distressed the development prospects of the region were not of big enough concern in the LC.

The lack of reaction of the LC to the ACP needs is emphasised by the growing gap between the development needs and objectives of the ACP economies on the one side and the available LC financial means on the other side. Real per capita aid has continually decreased between subsequent LCs: (i) by 30 percent in Lomé II as compared to Lomé I, (ii) by 12.5 percent in Lomé III as compared to Lomé II (cf. Gonzales 1996). The annual per capita disbursements under EDF 1 to EDF 7 amounted to ECU 2.1 and ECU 5.2 respectively. In phase II of Lomé IV, too, the annual EU disbursements per capita to the ACP remained below 6 ECU. By comparison, the annual intra-EU disbursements to support the economic transformation in the new eastern provinces of Germany (formerly German Democratic Republic) for the same period amount to about ECU 2723 per capita, resulting in a ratio of intra-EU disbursements to EU-ACP disbursements of about 471:1 (cf. Matambalya 1997: 161–162 and 177, Presse- und Informationsdienst der Bundesregierung 1996, Schmuck 1996: 15, and The Courier No. 120, March-April 1990).

4.1.6 Limits articulating special costs of preferences

The LC can also be made responsible for triggering a chain of related reactions in investment,

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production and trade associated with special costs: the adjustment of economic production structures in line with incentives provided by the LC, the creation and propagation of internal production inefficiencies and/or erosion of allocational efficiency as a result of the wrong signals sent to the recipient economies, and the fostering of production and trade diversion to meet the LC contract obligations. Therefore, the various costs of preferences cited above can be summed up in adjustment, structural, efficiency, and diversion costs of preferences.

To the extent that the SADC production and trade efforts be misguided by the LC, adjustment costs of preferences may be ascribed to the growing SADC's trade deficit and total debt. Special loan programmes, although being offered under generous conditions, partly expand the debts of the recipient economies. The problem becomes even more serious if such loans are abused and/or not extended to reliable entrepreneurs. Reported cases of the abuse of funds under the open general licence (OGL) programme partly financed by the EU underline this problem (cf. Matambalya 1993). Among further factors contributing to an increase in total debt are the continuous incursion of new debts and the failure to meet debt repayment obligations (i.e., armotisation and interest). The debt crisis is aggravated by adverse price shocks to traditional ACP exports (due to the stagnation or decrease of global commodity prices that could not be captured by the extension of LC preferences) and the simultaneous increase in prices for most of the ACP import specialities (industrial goods). Indeed, the combined effects of the pattern of trade and debt can at least partially be ascribed to the accumulation of debts in the SADC region: While in 1980, a sample of 8 SADC economies (i.e., excluding Angola, Namibia, Mauritius and the RSA) had a combined debt of US $ 7855 millions, by 1989, the debt had reached a new level of US $ 22,129 millions. Remarkably, during Lomé IV between 1992 and 1993, Mozambique, Tanzania and Zambia rescheduled their debts with the Paris Club of Countries (cf. Matambalya 1997, Matambalya 1995: 108, IMF 1993).

Furthermore, encouraging economic activities mainly in the so-called 'traditional sector' invigorates production and export structures seriously hindering the necessary structural adjustment process. The portfolios of the exports to the EU of a sample of 8 SADC economies in selected years parallel to Lomé IV, highlighted in tables 4 and 5, seem to confirm these deficits. Notably, single or few products make up for large proportions of total exports, with this concentrations of exports having far reaching structural implications.

Finally, there are special costs of the LC-type arrangements ascribed to a loss in welfare through production and trade diversion. The likelihood of the distortion of welfare by trade preferences is manifested by trade diversion, production diversion and a combination of the two. The diversion of SADC exports from third countries to meet obligations in the EU market amounts to a serious extent considering the limited capacity of most SADC economies to remain competitive in their important main export goods (cf. Matambalya 1997: 180).

4.2 Barriers attributable to the adverse economic environment

4.2.1 Internal distresses

Efficiency of the LC is also constrained by intrinsic features of the SADC economies that manifest unfavourable macroeconomic environments struggling with structural bottlenecks in investment and production, with economic policy deficiencies, infrastructural constraints, and backwardness both in technology and in the development of human capital. Additional constraints such as the immaturity of the political system as well as overall social instability contribute to this adverse scenario.

Incentives to invest are difficult to establish in the SADC region due to a multitude of factors including: internal tribal clashes and the urban-rural development gap, economic dualistic structures, particularly the asymmetries between the modern and the traditional sectors, asymmetries between the state and private sectors, un-

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derdevelopment of a wide range of industries and trade support services [Such as, business consultancy, engineering capabilities, product design and development, standardisation and qual ity assurance, industrial management and stock of skilled labor, research and development etc. ], and an overall underdeveloped entrepreneurship. Besides, except for the RSA, there is a conspicuous underdevelopment of international economic links in investment, production and trade in that region (cf. Matambalya 1997: 182–183, Matambalya 1995, SADC 1993, Maasdorp and Whiteside 1993, Østergaard 1989).

The deficits of the propagated economic policies particularly materialise in monetary and fiscal performance deficits. In the past, excessive borrowing from the banking system caused monetary expansions and, therefore, inflationary tendencies. For example, in the year 1992, Tanzania experienced a monetary expansion of 40 percent and an inflation of 20 percent (cf. Matambalya 1995: 98–122, Bukuku 1994: 2–5). Likewise, the high ratios of government spending as proportions of the GDP with high budget allocations to recurrent items (like salaries for civil servants and payments to public enterprises) are characteristic for the disputable fiscal policy stance and government spending practices of the SADC economies. In Swaziland, they made up for 40 percent of government expenditure in 1988 (cf. Matambalya 1995: 98–122, Maasdorp and Whiteside 1993: 20).

In addition, infrastructural constraints, mainly in the transport and communications sector, restrain the development efforts in Southern Africa to a great extent. In a region with such large geographical distances, the poor state of both inner- and inter-state transport and communication networks exacerbates the challenges not only to the realisation of economic development projects within the individual states, but also of the regional integration efforts (cf. Matambalya 1995: 123–124, Østergaard 1989). Also, the poor level of literacy in the region has a negative impact on both the qualitative and the quantitative character of the productive forces and, therefore, on the quality of economic governance. The apparent incapability to develop human resources cuts short the chances for success of such policies as regional production cumulation and industrial co-operation. This factor is also responsible for the high costs of technical assistance that reduces the proportion of tangible aid and does not pay tribute to the changing character of labor as a production factor which is increasingly becoming dependent on skills and technology to gain and/or maintain competitiveness.

Finally, the efforts to expedite the development of the Southern African ACP States have been undermined by adverse social conditions, particularly the immaturity of the political forces of the region, and the social instability partly attributed to this situation. The liberation war and civil wars, the destabilisation through apartheid, and the refugee problem are some of the factors that manifest the troubled social and political situation in the region (cf. Matambalya 1997: 185–187).

4.2.2 Distresses imposed by the international environment

The third general source of influences that restrain the smooth unfolding of the positive attributes of the LC and the development potentials of the Southern African ACP States is the international system. Negative influences of historical and contemporary circumstances include: conflicts of interests, the geopolitical significance of the region, as well as the adverse aggregate pattern of resource flows between the SADC and the EU which reflect the pattern of resource flows between developed and the developing economies.

Because the links between the EU and the ACP States exist at different levels and involve many actors, some of the factors restricting the mutual benefits of these links are connected with the influence of realpolitik. Realpolitik erodes eventual gains from the LC to the degree that the arrangements interfere with real circumstances in the international system. A number of factors are responsible for this scenario: (i) official EU policy towards its ACP Associates inter-

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feres with the prevalent global economic philosophy modelled along the triad doctrine, (ii) there is inconsistency between the multilateral inter-governmental arrangements on the one side and the policies of TNCs and TCCs on the other side; the TCCs are blamed for their hesitance to comprehensively participate in domestic investment by going multi-domestic, as well as for transfer pricing practices, (iii) the relations between the EU and its ACP Associates is subject to conflicts between EU preference policies and provisions of such multilateral arrangements, as the international coffee agreements that influence EU-SADC trade of coffee and the GATT/WTO that governs global trade generally, (iv) further inconsistencies are induced by conflicts between policy declarations and vested interests of the EU (cf. Matambalya 1997, Matambalya 1995, Prodi 1990, Østergaard 1989, Agarwal et al. 1985).

Geopolitically, both the superpower conflicts and the influence of the instabilities connected with the RSA impaired the economic relations between the Southern African region and the EU. The region has been affected by conflicts originating from the ideological division during the cold war era. Moreover, the SADC economies suffered severe losses in population and property as a result of systematic sabotage acts including both direct and indirect military interventions of the apartheid regime which were estimated by UN and SADC sources at US-$ 62.45 billions (concerning sabotaged development projects) while 1.5 million people died in the original 9 SADC States from 1980 to 1988. These factors contributed to insecurity and uncertainty in the region, impeding invaluable investments and destroying development efforts (cf. Matambalya 1995: 61, SADCC 1992: 19–22, Sauer 1988: 101). The end of the cold war did not necessarily improve the attractiveness of developing economies like the SADC States as co-operation partners, presumably because development in those countries has never been perceived as resulting in a growing communist threat to the western industrialised world. On the contrary, significance of North-South co-operation is eroding: while in 1987 about 50 percent of the development assistance budget of the EU was allocated to the ACP States through the LC, by 1995, the proportion has declined to about a third (cf. Haupt 1997: 8).

Real effective assistance is also eroded by resource outflows through profits, dividends, repatriated or withheld investable surpluses, expatriate salaries, transfer pricing, etc. Past studies suggest that, (i) just using one aspect of transfer pricing (i.e., the manipulation of terms of trade by over-invoicing of imports and under-invoicing of exports) Zimbabwe has lost about US-$ 100 millions every year, (ii) various SADC economies have lost about 25 to 40 percent of their GDP due to outflows of profits, dividends, expatriate salaries, transfer pricing practises, repatriated and/or withheld investable surpluses, etc. It is also suggested that transfer pricing in Africa may double the value of declared profits (cf. Matambalya 1997: 169–171, Matambalya 1995: 135–141, Østergaard 1989: 41, Peet 1984: 59). This considerable outflow of resources exacerbates the devastation of the base for sound economic development, and subsequently contradicts the intentions of the LC. Therefore, this pattern of resource flows is associated with long-term costs for the SADC economies, and suggests that resource flows between the SADC and the EU are characteristic for general flows between developed and developing economies with the latter being on the losing side.

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