Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Oktober 2004

Inhalt The supply side: the flawed Union....................... 1 The demand side: a neighborhood of failing states.......................... 2 Exporting stability – some history and basic philosophy...................... 6 The EU’s inadequate toolbox for stability export................................................ 8 1. Trade liberalization..............................................8 2. Foreign direct investment.....................................9 3. Migration.......................................................... 10 4. Aid................................................................... 10 5. Policy dialogue.................................................. 11 6. Enlargement..................................................... 11 7. Protectorates..................................................... 13 Options of a reluctant and helpless hegemon... 14 Security................................................................ 14 Democracy............................................................ 14 Prosperity............................................................. 15 Conclusion: the failing hegemon........................ 16 Bibliography....................................................... 17 Eine Zusammenfassung finden Sie auf der Heftrückseite ISBN 3-89892Internationale Politikanalyse Abt. Internationaler Dialog Friedrich Ebert Stiftung D – 53170 Bonn Internet: www.fes.de/ indexipa.html E-Mail: info.ipa@fes.de

Internationale Politikanalyse Europäische Politik, Oktober 2004 Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States T he European Union(EU) is today in the process of digesting its“big-bang” enlargement, a period of slow growth after the introduction of the euro, and the cumbersome process of obtaining agreement on a Constitution that still faces a number of crucial obstacles, including referenda in several rather Eurosceptical member states. On top of all that, the enlarged Union must redefine its relations with the world after the end of the Cold War and after September 11. In this connection, it has agreed upon its first official security strategy(EU 2003a; Flechtner and Lerch 2004). The EU’s intention is to be a source of stability in a world full of – partially – new threats(terrorism, failing states, diseases, crime, drugs). In particular, it wants to export stability to its neighborhood, the“Wider Europe”(EU 2003b). This paper analyses first the supply side of stability export: What are the resources and interests of the enlarged EU? On the demand side, we look at the political economy of the neighboring countries and try to identify the causes of their instability and the origins of the threats emanating from these often failing states. In the final section, we evaluate the instruments and policies at the EU’s disposal in light of the problems they have to solve. To summarize our central finding: The present policies of the EU are barely appropriate to accomplish the chosen mission of stability export. In many cases, strong interests on the EU side prevent the implementation of helpful policies and, in some cases, even lead to harmful ones. The supply side: the flawed Union If a body wishes to export stability it had better have a supply of it on which to draw. But how stable and, perhaps more to the point, how powerful is the European Union after enlargement? Even before enlargement, a number of general indicators of EU power looked impressive. The Union had 383 million inhabitants, many of them rich in international comparison. With an average income per capita of 25,00 0 Euro , the EU’s total gross domestic product(GDP) was 9.5 billion Euro in 2001, almost as much as the US economy. How do these vast resources translate into power that can be projected abroad? Its member states spend, on average, 1.9% of GDP on defense and 0.3% on aid. Compared to the USA, which spends 3.1% on defense and 0.1% on aid, Europe is militarily weak but relatively generous(albeit far from the 0.7% target it has agreed on). More impressive is the economic role of Europe in the world, and in particular in Wider Europe. Europe is the world’s biggest exporter and investor and a major host region to foreigners (migrant workers, refugees). The size of its foreign economic relations is probably the EU’s biggest power asset, particularly vis-à-vis its neighborhood whose economies strongly depend on European markets and investment, and remittances from migrants working in the EU. Enlargement changes that picture less than one would expect, given the number of new countries joining the EU, ten, representing an increase of 66% and bringing total membership from 15 to 25. The new EU-25 represents a growth in population of about 20%, but in terms of economic output(GDP) of only around 5% because of the low per-capita income of the new member states. That small increase adds even less to the size of the EU’s foreign economic relations as the new member states do most of their trade with the old EU and invest little abroad. Their defense spending as a share of GDP corresponds more or less to the EU average. The EU’s total expenditure on defense thus increases by only 5%, so adding less than the equivalent of 15% of Germany’s defense budget. The poor new members are even thriftier donors of development assistance, spending on average 0.03% of GDP, that is, less than one tenth of the old EU’s average share of 0.33%. In fact, enlargement adds a lot more voice than muscle to the EU’s power profile. The enlarged EU-25 still lacks a coherent foreign and security policy. Although the new members subscribe to the basic outline of the Common Foreign and Security Policy(CFSP) of the EU as part of the acquis communautaire , and, as opinion polls show, their populations share most of the foreign-policy views and

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 2 priorities of those of the old member states, their govbut at the same time undermining the tax base and the ernments have occasionally adopted different policies social security system. (Dauderstädt 2004b). The regional focus of their aid The major positive effect of Monetary Union has efforts is Eastern and South Eastern Europe rather than been the more rapid growth of the periphery(Greece, the traditional Third World. During the Iraq crisis of Spain, Portugal, and Ireland) thanks to falls in interest 2002/2003, the governments of the then accession rates, which have boosted consumption and investcountries took the US position, contrary to some old ment. While the official regional and cohesion policy of member states(France, Germany). It remains to be the EU has not reduced the income disparities between seen how much consensus the enlarged EU can muster the richest and the poorest EU regions(Funck and Pizwhen it has to deal with a new crisis in its neighborzati 2003; Tarschys 2003), economic and monetary unhood. ion has at least reduced those between rich and poor Generally, the EU’s capacity to form a consensus member states. EMU, with its uniform nominal interest and take decisions will diminish with enlargement. rate set by the ECB, continues to do this as the fasterThere will be a growing tendency to seek to preserve growing periphery countries have higher inflation rates the status quo and increasing difficulties in agreeing and thus lower real interest rates which spur on on reforms or new policies as the diversity of interests growth and inflation, while the slow-growing center and priorities increases(Dobbins, Drüner, and Schneifaces high real interest rates which dampen growth der 2004). Particularly with regard to the CFSP, the and prices(Bofinger 2003). The star performer has willingness of member states to support a strong subeen Ireland which is now the second richest EU pranational role for the EU seems to depend on the member state measured in terms of GDP per capita. strength of the European component of national idenThe kind of predatory growth characteristic of poor tity and the structure of domestic regional governance countries, based on cheap labor, low tax rates, and (Koenig-Archibugi 2004). While the identities of the public goods financed by EU funds, will face increasing new members are not substantially less European than opposition from the richer countries which financed those of the old ones, their domestic governance is those EU policies in the first place and are losing jobs usually highly centralized. Thus we might expect only and tax revenue to these competitors. Inequality inweak support for a more supranational EU foreign polcreases and unemployment might be reduced only by icy on their part. lowering wages as public sector employment becomes These difficulties in reaching a consensus will be too expensive. In the end, domestic demand will recompounded by a growing number of economic and main sluggish as people save even more to replace social conflicts concerning distribution of income and declining social protection. Foreign competition and wealth within the EU-25(Boix 2004; Dauderstädt European integration will be blamed, fueling political 2004a). Deepening integration due to the Single Market apathy and populist movements. Europe may no and Monetary Union has led to competitive pressures, longer remain a model of social justice and peace. Ecoparticularly on the continental welfare states that make nomic weakness undermines not only hard power up the old core of the EU. These welfare states in any (defense spending), but also its soft power in terms of case had to deal with massive demographic changes, market opportunities, foreign direct investment, and de-industrialization, and the unintended side-effects aid. Europe still attracts people and states from Wider (moral hazard, free-riding,“tragedy of the commons” Europe who want to live here or become member scenarios as a consequence of the welfare state – for states, respectively. However, this attraction is and has example, free health and education) of their own favoralways been based to a large extent on an unrealistic able characteristics. Contrary to the goals and expectaimage of Europe as a place where the poor(people as tions of the Lisbon Strategy, the EU is far from becomwell as countries) can get rich easily. ing“the most competitive knowledge-based economy” (Sapir 2004). Growth has been sluggish, unemployment remains high, and public finances are shaky. Liberalization(“negative integration”) has fostered productivity The demand side: a neighborhood of failing states growth which has not been translated into output growth because of the stability bias of the ECB’s moneIf you exclude Switzerland, Norway, and Iceland, the tary policy and the Stability and Growth Pact. The enlarged EU is surrounded by states that are to some shadow economy is growing rapidly, ameliorating the degree failing. They remain unable to perform one or situation of those excluded from the formal economy, more of the three core state functions satisfactorily: welfare, security, and representation(Milliken 2002).

Internationale Politikanalyse International Policy Analysis Unit Even the new member states are still poor young democracies. Beyond the borders of the enlarged EU, Table 1: The pyramid of poverty below the EU(in$) The size of the income gap between the EU-15 and its neighbors is enormous and increases in proportion Region/country EU 15 8 new member states** Bulgaria+ Romania Turkey Western Balkans Ukraine, Belarus, Moldova Russia Caucasus Central Asia Israel Maghreb Mashriq Middle East*** Sub-Saharan Africa Per capita income at exchange rate parity 21 000 4 590 1 730 2 530 1 770 787 1 744 623 741 16 750 1 580 1 680 3 152 460 Compared to the EU 100 22 8 10 8 3 8 3 3 70 6 7 12 2 Per capita income at PPP Compared to the EU 24 000 100 10 900 46 6 130 25 5 830 24 6 770 27 4 700 20 6 862 29 2 760 12 3 480 14 19 630 79 4 260 17 3 550 15 6 830 28 1 750 7 ERDI* 1.0 2.3 3.5 2.3 2.0 6.0 3.9 4.4 4.7 1.2 2.7 1.9 2.2 3.8 Source: World Bank, World Development Indicators 2003; for EU-15 the value given for EMU has been adjusted. Notes: * ERDI= Exchange Rate Deviation Index;** without Cyprus and Malta(no data);*** Iran, Kuwait, Saudi Arabia, Yemen(others no data). poverty, as a rule, increases in proportion to distance to geographical distance – with the exception of Israel from Brussels(see Table 1). Current candidates for EU and some oil exporters with small populations. Measmembership Bulgaria and Romania could not join the ured in exchange rates, the disparities range from 22% EU in 2004 because they were late reformers whose of the EU average for the new member states to 2% transition process started slowly. The western Balkans for Africa. Based on purchasing power parities, the gap still has to overcome the consequences of war and diminishes substantially ranging from 46% to 7%. The ethnic strife. In the former Soviet Union, segments of difference between exchange rate parity and purchasthe old communist nomenclature have managed to ing power parity which is expressed by the Exchange relabel and redesign their rule: behind the façade of Rate Deviation Index(ERDI) in the last column of Tademocracy and a market economy political and ecoble 1 has important implications for relations between nomic power remains highly concentrated. On the the EU and its neighbors. The higher the deviation, the eastern/southern rim of the Mediterranean, Israel is the more attractive Europe becomes for migrant workers, only rich democracy, but even the Jewish state is torn in particular commuting ones because they can live by ethnic-religious conflicts and in a permanent state even on low European wages several times as long in of war, due to its policy of occupation and annexation. their home country, while European investors can pay The Arab world is poor – except where oil revenues low wages there which still allow the employees to live flow abundantly – and oppressed by authoritarian redecently because of the multiplied purchasing power. gimes. Sub-Saharan Africa – the backyard of Europe Aid spent on local inputs also goes a long way due to and its post-colonial heritage – is the poorest and most that deviation. Elites in poor countries able to get their wretched part of the planet, rife with civil war, dictahands on revenue from rich countries – be it aid, extorship, and disease. port revenues, or loans – will be even more tempted to 3

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 4 monopolize these(rent) incomes because of their enor- rent economy,” Societies of that type are dominated Table 2: Interdependence of the three state functions of security, welfare, and representation/democracy Impact on Security Welfare Representation/democracy Condition Security Welfare Representation/ democracy – Welfare reduces conflicts and provides the necessary resources to produce security. Democracies do not go to war against each other (Spanger and Wolff 2004) Domestically, they allow the non-violent resolution of conflicts(Hegre 2001; Spanger and Wolff 2004), in particular regarding redistribution(Boix 2003). Security(peace, monopoly of force, secure property rights) is a necessary condition for welfare(Collier 1998). – Democracies promote(or at least do not prevent) growth (Barro 1997: 49–87; Przerworski 2000) and social justice(Merkel and Krück 2003). They attract more foreign direct investment(Jensen 2003) and make aid more effective (Kosack 2003). Security(peace, monopoly of force) is a necessary condition for democratic representation. Welfare increases the capacity and propensity to political participation(Lipset 1959; 1960; Putnam 1993; Inglehart 1997; Diamond 1999) and prolongs the life expectancy of democracies(Przerworski 2000). – enormous real value in domestic markets(see below). Catching up thus implies closing that gap by means of a real appreciation of the local currency, which can occur through higher inflation and/or revaluation. Historically, growth in the external value of the local currency has been responsible for a large proportion of overall catch-up(Artner and Inotai 1997). However, most countries in Wider Europe are not only relatively poor, but often also not full-fledged democracies and involved in conflicts. These factors form a triple set of state failures which are interlinked and mutually reinforcing, as Table 2 shows. The syndrome of interdependent and mutually reinforcing state failures is the consequence of various historical influences, including communism(in Central and Eastern Europe) and colonialism(in the Middle East and Africa). It is perpetuated by the actions of powerful societal groups which benefit from these structures. Although the specificities vary substantially from society to society in Wider Europe, a basic pattern emerges which can be described as an“authoritarian by a particular political economy in which the state and the ruling elites rely on revenues from rents rather than work, innovation, or income and corporate taxes. Poor taxation weakens representation. Legitimacy is not secured by rules but by patronage. Such societies tend to produce instability(although it is often artificially concealed by oppression). The monopoly of violence and the provision of security as a public good are often the major state functions, absorbing most state revenue, and the power base of the ruling elite. Contentious competition for that power and the resources that go with it is the central political game in many poor countries. Their lack of welfare, freedom, and security causes the threats feared by the relatively prosperous and democratic Europe: migration, organized crime (trade in people and drugs, prostitution, money laundering), terrorism(Kitschelt 2004), and disease. Table 3 presents some stylized characteristics of such regimes by comparing them with democratic market economies.

Internationale Politikanalyse International Policy Analysis Unit Of course, these stylized facts paint a black-and- more or less defective democracies(Merkel 1999) like white picture. In fact, many advanced democracies – Albania, Russia, Ukraine, the Caucasian republics or for example, Italy – show(increasingly?) signs of clien- Turkey. Economically, post-communist societies tend to tism, patronage, corruption, tax avoidance, a shadow be more industrialized and tax-based with relatively economy, and so on, behind a façade of media de- open economies and a regulation-based public adminiTable 3: A comparison of two ideal-type political economies Government Status of citizens Change of government Opposition Media State revenue Beneficiaries of state activities Public administration Major source of income Shadow economy Foreign economic relations Democratic market economy Elected, accountable Citizens with rights, in particular to vote Competitive, free, fair elections Legal parties and civil society, decentralized power Pluralistic, critical Taxes More or less everybody: (changing) majorities, protection of minorities Rational bureaucracy; occasional corruption Labor and entrepreneurship Increasing, but still below 20% of GDP Open, liberalized Authoritarian rent economy Self-appointed elites, without accountability or responsibility Subjects and victims of violence Heritage, putsch, revolution, regime change Illegal resistance movements,(regional) warlords Censored , gleichgeschaltet [forced into line] Rents(customs duties, commodities) Patronage networks based on families, ethnicity, religion or region(nepotism) Part of the patronage network, endemic corruption Access to rents, jobs in the state sector, politically protected and controlled market niches Informal economy is a major pillar of population survival strategies Politically controlled, important source of rents mocracy, preventing efficient and transparent govern- stration. Less developed countries in Central Asia, the ance. There are also“legitimate” forms of rent-seeking Middle East, and Africa depend much more on revein advanced economies: for example, patents or intel- nues from commodity exports and aid which in turn lectual property rights. All advanced democracies sub- feed their patronage systems. Since 1990, both politistantially regulate their economies in a way that bene- cal and economic liberalization have advanced, albeit fits certain segments of society, thus creating“rents” more in the former communist countries than in the by comparison with incomes derived from an unreguSouth. Table 4 presents an overview of the progress of lated, ideal-type market economy. Still, they are much transition towards a democratic market economy closer to the ideal-type democratic market economy within Wider Europe. described in the second column of Table 3 than most Any attempt to stabilize these societies has to take of the societies in the EU’s neighborhood. Within into account the political economies on which they are Wider Europe, the degree to which societies fit the based. Although they differ in size, there is always a “ideal-type” authoritarian rent economy described in modern sector that largely follows the rules of the column 3 varies substantially, too. Politically, they formal global economy. However, it often consists of range from dictatorships like Syria, Libya, Saudi Arabia foreign investments, mostly in the raw materials sector or some Central Asian republics to semi-authoritarian and to a lesser extent in manufacturing and services. regimes such as Algeria, Jordan, Egypt, Belarus, and Besides the modern formal sector, there is a huge in5

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 6 formal sector, including subsistence agriculture. The the other the opposition/liberation/resistance moveoutput of the informal sector allows many people to ment. Second, the threat most feared was commusurvive on extremely low wages. The public sector folnism, that is, the risk of a failing state turning into a lows formal rules, but since they are often ambiguous communist regime allied with the Soviet Union(or and not adequate or enforceable, they barely conceal China). Subsequently, efforts to stabilize allied regimes Table 4: Transformation Index(Bertelsmann) Region/country 8 new member states* Bulgaria+ Rumania Turkey Western Balkans** Russia Ukraine, Belarus, Moldova Caucasus*** Central Asia**** North Africa***** Middle East****** Political transformation 4.9 4.0 3.4 3.4 3.0 2.3 2.2 2.0 1.8 1.5 Transformation to a market economy 4.6 3.5 3.3 3.1 3.0 3.0 2.5 2.3 2.6 2.3 Status Index 9.5 7.5 6.7 6.5 6.0 4.6 4.7 4.2 4.4 3.8 Management performance 8.6 7.0 7.0 6.1 5.6 3.8 3.8 3.2 3.5 2.6 Source : Calculations by Franziska Riegelmann, based on http://www.bertelsmann-transformation-index.de/11.0.html Notes: * without Cyprus and Malta(no data). ** Bosnia-Herzegovina, Albania, Croatia, Macedonia, Serbia and Montenegro. *** Georgia, Azerbaijan, Armenia. **** Afghanistan, Bangladesh, Nepal, Pakistan, Uzbekistan, Turkmenistan, Kyrgyz Republic, Tajikistan, Kazakhstan. ***** Morocco, Algeria, Tunisia, Libya, Egypt. ****** Lebanon, Iraq, Iran, Saudi-Arabia, Yemen, Syria. t V h a e lu e e n s d r e a m ng ic e c f o ro rr m up 1 ti – o 5 n ( a d n e d m c o l c ie ra n c ti y sm an w d h m ic a h rk r e e t p e re c s o e n n o t my) the true access paths to public goods. As this paper will argue, most policies of rich democracies assume markets and administrative and political structures that work rationally and follow the rules; as a result, they are bound to fail or to produce unintended consequences. Exporting stability – some history and basic philosophy Oppression and inequality are particularly likely to lead to civil war and terrorism. Traditionally, the rich countries of the EU(or, more generally, of the OECD) have cared little about state failure in its three dimensions (security, welfare, representation). First, there was less state failure in the past(before 1990) as the superpowers tended to stabilize their clients during the Cold War. Conflicts tended to be between proxies, with one bloc supporting the government it was allied with and an f d oc 1 u – s 1 e 0 d ( f t i r r a st ns o i n tio s n ec m ur a it n y a , g s e e m co e n n d t) o ; n th w e e S l t f a a t r u e s , a In n d d ex on = ly as a distant third on democracy. Military aid and intervention were used to achieve the first goal. As an additional policy, development assistance evolved out of the American effort to stabilize the front-line countries of Western Europe and South East Asia. In the case of Europe, development cooperation mostly continued policies from colonial times(public investment, preferential trade arrangements, state determined prices for exports). Democracy promotion was used as a pretext to undermine communist dictatorships rather than as a universal rule, though it gained momentum in the 1980s with, among other things, the establishment of the National Endowment for Democracy by the US government and the activities of German political foundations in Portugal and Spain. After the collapse of communism, the policies of Western countries – and of the EU in particular – changed as the neighboring countries started their ambitious reforms. The end of the Cold War reduced international support for many authoritarian regimes in

Internationale Politikanalyse International Policy Analysis Unit the developing world and opened up new opportunilateral policies(by the UN, World Bank, IMF, WTO, and ties for democratization. At the“end of history,” deso on) that provide not only financial and technical asmocracy and the market economy have been presistance, but create a regulatory international environsented as panaceas to all the problems of the world. ment that interferes substantially and deeply with doGiven the interdependence of democracy and prospermestic economic policy. Those multilateral activities are ity(see Table 2), turning all neighboring countries into complemented by bilateral public policies that codemocratic market economies has seemed the optimal shape the economic development of the partner counway of producing stability. The post-communist transitries. The regulatory and policy framework created by tion countries formed the avant-garde of that supposmultilateral and bilateral cooperation is filled by the edly global process. activities of private enterprises(banks, investors, tradFar from ending, history resumed its disorderly ers, and so on). Most public policies are designed to course on September 11, 2001. At least for the USA, a promote specific behavior on the part of the private new global confrontation had begun that led to a new sector, above all trade and investment. In fact, some containment strategy, best expressed in the National private sector activities might rather harm than inSecurity Strategy of September 2002(White House crease the welfare of the partner countries. In any 2002). Although still advocating the double approach case, most transnational activities, be they private or of democratization and free markets, the war against public, affect different groups and segments of the terrorism weakened the commitment to democracy partner societies and economies differently, and will, in and human rights in both the rich democracies – in the particular, redistribute wealth and income not only bename of“homeland security” – and those countries tween but also within countries. Those effects usually whose authoritarian regimes were valuable allies(for lead to political conflicts that need further political example, Pakistan and Egypt). It also became clear that management at the national or international level. in many countries development was not following an International cooperation has been dominated in orderly transition to democracy. In many cases, socierecent decades by a set of mostly liberal economic ties remained stuck in constellations characterized as ideas, the so-called“Washington Consensus.” It has “feckless pluralism” or“dominant-power politics” called for fiscal and monetary discipline, a competitive (Carothers 2002) or, even worse, collapsed into violent exchange rate(usually involving a devaluation of the conflict and civil war. local currency), liberalization of trade and capital flows The latter added a new dimension to stability ex– in particular foreign direct investment(FDI) – tax report: military intervention for humanitarian reasons form, restructuring public expenditure(from consumpand to change regimes. The forced removal of dictation to investment in infrastructure, health care, and tors or elites blocking conflict resolution, development, education), deregulation, and privatization. After the and democratization complemented the traditional Asian crisis of the late 1990s and the disappointing toolset of non-violent democracy promotion and ecoperformance of Latin America the Washington Connomic cooperation. It led to the establishment of prosensus has been modified by adding and stressing intectorates in which rich democracies not only provided stitutional and social measures. assistance to correct the two core state functions of Traditionally, the EU has used several instruments to welfare and representation(for example, by financial promote stability, economic development, and democcooperation or election monitoring), but also to assure racy: aid, trade policy, and political dialogue. These the third function of security, thus severely limiting the tools made up the backbone of the big cooperation sovereignty of the occupied countries and returning to schemes such as the Lomé Convention and its succesa form of, albeit liberal, imperialism. However, with the sor programs(Cotonou) directed towards the ACP exception of France and Britain Europe has been a recountries, the Barcelona process directed towards the luctant interventionist. Its strength and influence rely Mediterranean, the Europe agreements, and the trade more on economic than on military power. and cooperation agreements with the ex-communist Which actors and policies are used to export stabilcountries of Central and Eastern Europe. ity by ensuring welfare, democracy, and security in the • Aid has been given in various ways, as technical aspoor partner countries? While democracy and security sistance or as financial cooperation(grants and are promoted largely by government policies, possibly credits). It can help partner countries to perform all complemented by some activities undertaken by civil state functions better by helping with improved society organizations and institutions, welfare is foseconomic and social policies or promoting democtered by a much larger range of interactions between racy. In some cases, the arms-length approach of rich and poor countries. Public policies include multithese traditional instruments seemed insufficient 7

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 8 when it became clear that local power structures stream of development economics and politics. They prevented sustainable successes. are the cornerstone of most grand schemes offered to • Trade preferences have been offered, though often poor countries, from the Lomé Convention of the excluding agriculture and other sensitive industries. 1970s and the General System of Preferences, to the • Political dialogue has been employed in an attempt Barcelona process and all agreements between the EU to change policies and political conditions in order and the ex-communist countries of Central and Eastern to make aid more effective. Donor coordination is Europe. It is central to the new US Security Strategy supposed to give that approach more leverage. In and figures high on the agenda of the American some severe conflict and post-conflict situations, the Greater Middle East initiative. Its theoretical basis is RiEU has gone even further and committed military cardo’s classical theory of international trade(trade beforces to protect endangered people and allow tween Portugal and England with the former specializother aid efforts to work. For a few European couning in wine and the latter in textiles), subsequently retries(first Greece, Portugal, and Spain, later the exfined. When making reference to that classical theory, communist countries of Central and Eastern policy-makers, the media, and so on, usually neglect Europe), the offer of EU membership has been the crucial conditions and consequences, such as the posmajor instrument to promote the transition towards sibility of specialization(for example, to revert to Ridemocracy and the market economy. cardo’s original example, extending wine production), More recent policy papers(Rasmussen 2003) do not go the failure to translate productivity growth into output far beyond the scope of these traditional policies and growth, with subsequent unemployment, and distribuapproaches. The recent Strategy Paper of the Commistive conflicts between and within countries. Unskilled sion on the European Neighbourhood Policy(ENP) inworkers in rich countries should oppose liberalization; troduces Action Plans as a new framework for coopthose in poor countries favor it(Reuveny and Li 2003: eration. These Plans should be based on common val579). Capital owners should react in the opposite way. ues and goals and set out programs to achieve them Current trade policy proves that policy-makers and that will be supported by the EU and monitored by vested interests do not trust their own ideology. Most joint bodies(for example, Association Councils). Howrich countries are protectionist and seldom offer marever, the concrete policy content of the ENP chiefly ket access without reciprocity, although trade theory boils down to trade liberalization(up to extending the recommends it. Virtually all successful development internal market) and aid, both embedded in political processes – for example, Western Europe, Japan, Kodialogue(EU 2004). rea, and Taiwan – have relied on selective protectionism and export promotion rather than free trade. The quest for free trade has almost always been the policy The EU’s inadequate toolbox for stability export of the most advanced rich hegemonic economies, such as the UK before 1930, the US after 1945, or the EU since the 1970s. Among the few exceptions have been The state of the EU’s neighborhood hardly testifies to some transition countries in Central and Eastern great EU success in exporting stability. Why have its Europe, notably Estonia, that have abolished trade tools been so ineffective? This section looks at the barriers unilaterally. seven most important instruments:(i) trade liberalizaTrade policy as a tool for exporting stability has two tion,(ii) foreign direct investment,(iii) migration,(iv) components: 1. offering(preferential) market access to aid,(v) political dialogue,(vi) enlargement, and(vii) partner countries which are to be stabilized. 2. requirprotectorates. The order is not coincidental: it reflects ing that the partner countries dismantle their own increasing depth of involvement with a partner countrade barriers. A variant of the second policy is to protry’s economic and political development. To some expose trade liberalization among several partner countent, the use of the stronger tools originated from the tries. The latter seems less self-serving as it offers more donor’s frustration with the ineffectiveness of weaker market opportunities to other poor, less competitive instruments. countries rather than to the advanced economy. Let us consider both policies more closely. 1. Giving market access is certainly a potentially good 1. Trade liberalization policy. It might be useless – and particularly painless for the donor – if it is limited to products a poor Free trade and trade liberalization allowing free trade partner country is unable to supply(for example, have been presented as a panacea by the liberal mainabolishing custom tariffs on airplanes from Africa).

Internationale Politikanalyse International Policy Analysis Unit Clearly, it helps in the short term only if competitive duties to special interests) and often feed corrupproduction in the partner country already exists that tion, it is also expected that liberalization will reduce can be expanded to meet the additional demand those opportunities and lead to leaner and cleaner created by the lowering of the EU’s trade barriers. In governance. However, tariff duties are less prone to the long term, it might provide an incentive to start bureaucratic and autocratic meddling than import production of the particular goods and services bequotes or licensing. The more democratic regimes cause of the better market access. Again, the viabilare, the less they tend to use licensing and the more ity of that investment depends to a large extent on liberal their trade policy tends to be(Martin 2004) a wide range of other factors. If these conditions of because in poor countries the abundant production “systemic competitiveness”(Esser et al. 1992) are factor of unskilled labor – who should also make up not in place, more market opportunities will be of the majority of the voters – should benefit from little value. Lowering tariffs in any case offers only freer trade(Reuveny and Li 2003). With declining diminishing returns because overall protection has inequality in the wake of trade liberalization, the fallen to very low levels during recent rounds of chances of democratization should increase(Boix global trade negotiation. Other measures could re2003: 142–143). There is also evidence that induce the prices of the poor countries’ exports in a creased international integration reduces corruption much simpler way, for example, devaluation of its in more open and integrated countries(Sandholtz national currency(on the other hand, appreciation and Gray 2003). of the national currency, possibly as a consequence In the end, the weak effects of trade liberalization can of increased exports, might reverse the impact of hardly be surprising. The overall welfare effects of free lower tariffs on the price within rich markets). trade are largely exaggerated, and in any case not 2. Trade liberalization on the part of poor partner equally distributed(Weisbrot and Baker 2002). The EU countries offers advantages to producers in the rich has been rather protectionist, and where market accountries of the EU and to consumers in the poor cess has been offered, poor countries could seldom countries. By the way, export subsidies like the noexploit the opportunity. The biggest beneficiaries have torious Common Agricultural Policy, which liberals probably been foreign investors able to take advantage love to hate, have the same effect. The justification of suitable locations and their trade preferences as for trade liberalization lies, however, in the preintra-company trade makes up a large and growing sumed increase in productivity and competitiveness. share of international trade. That desired outcome is expected to result from competitive pressures on the now exposed domestic producers and the lower costs of imported inputs. 2. Foreign direct investment Both effects might be mitigated or reversed when higher imports lead to a decline in the external Foreign direct investment(FDI) thus seems to provide a value of the local currency(that is, devaluation). way out of the impasse of underdevelopment when However, there is no substantial evidence of trade market access cannot be used because of the lack of liberalization leading to higher growth(Rodrik competitive domestic suppliers. Foreign investors bring 2001a). Another side effect is the reduction of govnot only capital – which local entrepreneurs could also ernment revenue from customs duties. Import duhave borrowed – but know-how regarding production ties make up a relatively high share of total tax techniques, quality, marketing, and management in revenue in many poor countries, particularly in the general. A number of international success stories are Arab world. Tighter budgets could lead to a decline based on attracting lots of foreign investment: Hong in public spending and of the supply of public Kong, Singapore, and more recently and closer to goods and services, which in turn could damage the home, Ireland, Hungary and other countries of Central competitiveness of local producers that rely on and Eastern Europe. Although a high level of FDI those inputs. In many cases trade liberalization has seems to be a sufficient condition of rapid growth, it is led to higher budget deficits and increasing debt by no means a necessary one. The effects of FDI on (Khattry 2003). More generally, getting the state successful development are often overestimated, parout of regulating trade might weaken its overall caticularly in poor countries(Kosack and Tobin 2003; pacity to manage economic and social development Nunnenkamp 2004). Japan, South Korea, and Taiwan, (Rodrik 2001a). for instance, largely forwent foreign investment during Because levies on trade are also a source of rents their catch-up development. (for example, by granting exemptions from import 9

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 10 And perhaps wisely so. FDI carries a hefty price tag Migration has ambiguous effects on the host counthat might well be higher than borrowing on the intry, too. Immigrant workers compete to some extent ternational financial markets, though less risky should with unskilled, often unemployed workers in the EU, an investment project fail to generate profits. Ireland though they often accept work European workers reproves this point, having relied on massive inflows of fuse to take on. Their contributions to social security FDI which it attracted by offering low corporate tax systems and taxes usually outweigh their demand for rates, a cheap and educated(English-speaking) workpublic goods and entitlements. Some economists, force, decent infrastructure, and a range of other busihowever, fear an overstretch of European social sysness-friendly policies. Part of that attraction has been tems due to migration motivated solely by a desire to achieved by using EU regional aid cleverly. When these benefit from the welfare state(Sinn 2000). Migration is investments started to produce at full capacity, Ireland often expected to alleviate the pressures on pension within a few years was transformed from one of the systems in Europe. As long as there are unemployed poorhouses of the EU into its second richest economy, Europeans that policy remains doubtful. In any case, a measured in GDP per capita. However, an increasing more liberal immigration policy seems highly unlikely share of value added in Ireland – that is, its gross dogiven the political opposition in most EU countries. mestic product – went to the foreign investors, reducMigration has also a political dimension when peoing the share of wages to the unusually low level of ple leave their home country because of general inse58%(the, also declining, EU average is about 78%) curity or political oppression. On the one hand, dissiand putting its gross national product – that is, the indents and members of the opposition who flee their come of Irish citizens – about 20% below its GDP. Irecountry make life easier for the ruling elite; on the land’s success thus remains above all the success of the other hand, they can continue to fight for reforms and tax-avoiding foreign investors at the expense of other regime change abroad. To some extent, they bring the countries’ and Ireland’s tax revenues and Irelands’ internal conflicts of their countries of origin to Europe. workers(Dauderstädt and Witte 2001). Nevertheless, Europe could also use these refugees to prepare and this strategy might be the best way out of poverty. promote change in the countries of origin, for examHowever, it will be difficult to replicate for large counple, employing them in radio stations or agencies that tries without an English-speaking workforce and govmonitor the political situation or promote change ernance structures that learn even more slowly than there. Policies of that type will be constrained by dipthe Irish, who needed almost 20 years after EU acceslomatic concerns when intergovernmental relations sion to start their economic miracle. In Africa, for inturn sour because of European support for the opposistance, investment has little impact on growth, with tion in exile. more capital leading to lower returns(Devarajan, Easterly, and Pack 2003). 4. Aid 3. Migration As some development economists have pointed out, migration could be a substitute for trade and capital flows which would boost global growth more than any other measure(Rodrik 2001b). Migrant workers in developed countries tend to have a higher income than in their countries of origin, though usually lower than the average income in their host countries. That income reflects a productivity which is much higher than the one they could achieve in their country of origin. Most migrant workers transfer part of their income to their home countries as remittances which sometimes make up a substantial share of the foreign exchange earnings of these countries. However, the countries of origin lose valuable, often relatively qualified and motivated human resources through migration. In some cases, this brain drain can hamper development. The EU is the biggest donor of official development assistance(ODA), if one includes both the bilateral aid of member states and the aid managed by the EU as a supranational body. Given the different priorities of bilateral aid and the lack of coordination, the image of the world’s biggest donor is exaggerated, however. The true priorities of EU spending are better illustrated by the fact that the EU spends 918 USD per head on European cows and only 8 USD per person on human beings in Africa(Wolf 2004). The assistance provided by the EU proper has been heavily criticized. Former British secretary of state for international development Clare Short called the Commission“the worst development agency in the world”(Santiso 2003: 4–5). Certainly, the abysmal record of the major recipients of both bilateral and multilateral European ODA, notably Africa, supports the negative assumption that aid will not bring about development.

Internationale Politikanalyse International Policy Analysis Unit That assessment is by no means new, going back to that may determine the survival of governments and liberal critics(Bauer 1981), and is corroborated by social peace in a partner country. When donors are inlarge-scale studies by major donor agencies(World terested in the fate of specific governments or political Bank 1998; 2001). The poorer countries are and the forces within partner countries, they have to take these lower their Human Development Index is, the less they effects into account. Thus, donors will be reluctant to benefit from aid(Kosack and Tobin 2003). In fact, aid force upon partners who are important for geopolitical might often do more harm than good. It also might or economic reasons policies that will undermine their benefit certain special interests in the donor countries power(Dauderstädt 1988). Often the policies sugwhich provide the goods and services the aid is spent gested by donors have unintended and unforeseen on more than the recipients. If it is financial aid in the consequences. The technocratic economic models used form of loans, it also increases the debt burden. Aid is by the IMF and the World Bank in particular often do also an additional source of rent income that feeds panot address the full and complex cultural, political, and tronage systems. In the end, the productive use of aid social reality of the partner countries(Thirkell-White depends largely on the cultural–political environment 2003). on the recipients’ side. It has a positive impact when As Fukuyama pointed out in a recent article(Fukuthe recipient government is truly committed to develyama 2004), donor conditionality in the spirit of the opment and has adopted appropriate policies(good Washington Consensus has often reduced state capacgovernance) which it can make work not only within ity in a detrimental way. Instead of limiting the scope its immediate reach but throughout the country. of state functions they have led to a reduction in the The international and European aid communities strength of state institutions. Trade liberalization has have basically accepted these criticisms and refocused often accelerated that process by squeezing public their assistance on good governance, democracy probudgets. The true challenge lies in the transfer of instimotion, and human rights. It has introduced conditutions, making public services and the judiciary work, tionality in order to force or provide incentives to partand committing elites to self-sustaining development. ner governments to adopt development-oriented poliDemocracy assistance is often seen as complementcies, fight corruption, and start or continue processes ing a policy dialogue that is supposed to lead to good of democratization. Unfortunately, the EU has been governance. Democracy is expected to provide a more particularly unsuccessful although it has increased its stable environment for economic policy and guarantee commitment to democracy assistance substantially important rights. There are, however, potential con(Santiso 2003). flicts between liberal values(minority rights, property rights) and democracy(will of the majority). In societies with deep cleavages(be they ethnic or economic), ma5. Policy dialogue joritarian rule will probably lead to oppression or massive redistribution. Corresponding fears on the part of Trade, private investment, and aid will accelerate the minorities will induce them to resist democratisation or development of partner countries only if their national to try to change the democratic regime(Boix 2003; governance is good. Donors have tried to improve Lijphart 2004). governance by means of a variety of instruments under Most of the countries of Wider Europe are deeply different labels, such as conditionality, policy dialogue, divided. Ruling elites(sometimes ethnically defined) and democracy promotion. The international financial control most of the wealth. Policy dialogue has to institutions – notably the International Monetary Fund tread carefully in such a minefield: on the one hand, if (IMF) and the World Bank – have led this approach by it cannot obtain or hang on to elite support for its proinsisting on a policy mix known as the“Washington posed reforms, it is bound to fail; on the other hand, Consensus.” The EU has followed this lead rather than elites will be unlikely to support measures that underdeveloping its own agenda. Lack of coordination has mine the sources of their power and wealth. undermined its leverage(Santiso 2003) although the end of the Cold War increased donor coordination (Boyce 2002). 6. Enlargement Policy dialogue has never been the technocratic exercise it was supposed to be. Since all policies reflect Compared to the weak record of the above discussed different values and interests and usually affect the disinstruments and policies, EU enlargement has been tribution of income and wealth, there is no single good relatively successful. In the 1980s, it stabilised the policy. The choice of policies is a deeply political one young democracies of Greece, Portugal, and Spain; in 11

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 12 the 1990s, it induced eight Central European transition low-income production dependent on transnational countries – and seems to be having a similar effect on production networks dominated by rich countries and the remaining ex-communist Balkan countries(certheir multinational enterprises. tainly Bulgaria, Romania, Croatia, Macedonia, probably Nonetheless, the attraction of EU membership, Albania and possibly Bosnia and Serbia, too) and Turhowever ill-conceived, has been sufficient to make the key – to adopt wide-ranging reforms that have turned candidate countries accept the reforms required by the (or will shortly turn) them into democratic market EU and partially to give up hard-won democratic soveconomies. The process is surprising from both standereignty in favour of a partial voice in the less democpoints. Originally, in 1989/1990, the EU was little inratic EU system of multi-level governance(Böröcz clined to accept the ex-communist countries as mem2000). Motivations – beyond the fog of historical ber states. It pursued enlargement reluctantly in the rhetoric – have been less clear. Economic integration face of a lack of popular support and driven by elite was already well advanced under the association reinterests and precipitate promises made by its politigime. Access to EU funds has been one incentive, alcians who lacked alternative options to offer the transithough not a very convincing one given their low eftion countries(Lippert 2000). On the side of the candifectiveness in other peripheral regions of the EU. Pardate countries, there was an enormous lack of knowlticipation in EU decision-making which affects neighedge regarding the true nature of the EU, its institubouring countries strongly is also a good reason. tions and policies. In the rush of the“return to Another reason often given is that preparing for accesEurope,” hardly anybody questioned the wisdom of sion requires policies that are desirable in any case but the accession strategy. Only hard-core liberals(Achten easier to sell to the public as part of the acquis . It re1996; Jamieson and Szamuely 1998; Belke and Hebler mains to be seen how electorates will react when 2002) and some cautious supporters of active develsome of the expected advantages do not materialise opmental strategies(Amsden 1994; Eatwell 1997; and the losers become more vocal(for example, in PoDauderstädt 1998) openly warned the ex-communist land). countries: the former from joining a sclerotic and overOn the EU side, the scepticism of the early years has regulated EU, the latter from too quickly surrendering to some extent returned. In the mid-1990s, after important policy options that had proved effective in granting all associated ex-communist countries the other countries which had succeeded in catching up, right to accession, the EU stopped to conclude further like the East Asian tiger economies. association agreements. By 2000, the EU had offered The dynamic interaction of domestic transition and new opportunities to the western Balkan countries and European integration has produced mixed results. DeTurkey, albeit with many reservations. After the bigmocracies became or remained relatively stable in spite bang enlargement, enthusiasm in favour of further of fragile party systems, widespread disgruntlement enlargements is even more muted. The losers(net conwith the way democracy worked, and, as a consetributors, finance ministries angry about tax competiquence, frequent changes of government(virtually no tion, and workers in declining industries) are complaingoverning party or coalition has been re-elected in ing more and more. A more rational enlargement polCentral and Eastern Europe since 1990). Market icy in the first place might have been more credible. economies were established, although the variety of Instead of discussing cultural or geographic“final” capitalism chosen had to be compatible with the EU’s borders, criteria could have been adopted that reacquis communautaire which was less liberal than, for flected more directly the true problems of the EU, such example, Estonia’s first choice, but possibly more libas minimum level of per capita income(say, 75% of eral than the preferences of many East Europeans sufthe EU average) and/or unemployment. Applying these fering from rising unemployment and inequality. Gencriteria would have delayed the present enlargement erally, growth has been underwhelming and unsteady, but offered incentives to all neighbours not only to renot least because of several debt and exchange crises form their polities and economies, but to push for (for example, in the Czech Republic and Hungary in growth and employment. the mid-1990s). The(relative) income level of 1989 Enlargement benefited from the – possibly irrational was regained very slowly – indeed, in some transition – preference for accession among the elites who ruled countries this has still not occurred. In many regards, the neighbouring countries. In other countries that though more pronounced in those transition countries powerful leverage was not in place. It is debatable that have not yet joined the EU, transition has led to whether a more generous and earlier offer of memberperipherisation(Müller 2002), that is, the transformaship to the Balkan countries and/or to republics of the tion of the ex-communist countries into locations of former Soviet Union might have prevented the con-

Internationale Politikanalyse International Policy Analysis Unit flicts and problems that have emerged there. Possibly, some of the more authoritarian and nationalistic elites would not have been tempted under any circumstances. Beyond Europe, accession was not an option. Table 5: The inadequate toolbox cent housing, English speakers, taxi drivers, bodyguards, and so on). Locals on local incomes lost purchasing power and became relatively poorer. Usage of labor and capital switched to serve the occupiers’ Instrument Trade liberalisation FDI Aid Migration Policy dialogue Enlargement Protectorate Security 0 0 0 0 0 + + Note : 0 means neutral,+ positive, – negative Impact on state functions Democracy Prosperity (+)(+) (+) liberal rights+ + formal/– material 0 0+ + formal/– material 0 + domestic/– EU+? – – EU attitude + others/– own + (+) – + – – 7. Protectorates needs. A shift back to export-oriented and selfsustaining development seems more and more illusive. In some conflict zones, where even genocide was to be The local currency became over-valued due to confeared, the EU(in cooperation with NATO and/or the tinuous inflows of capital and inflationary pressures UN) intervened and used force in order to protect hustemming from the occupiers’ demand overhang. The man lives and rights, to impose democracy, and to economy sucked in imports and had no competitive promote reconstruction and development. The ensuing exports to offer. protectorates in Bosnia, Kosovo, Afghanistan, and – In security terms, peace could largely be maintained. partially and temporarily – in Albania, Macedonia, and However, the EU is hard pressed to keep its occupation some African countries had mixed results. forces in place, let alone to build up capacities to interPolitically, the intervening powers remained the rulvene in more distant countries, possibly against local ers of last resort, cancelling laws made and decisions resistance. The Iraq experience has discouraged further taken by democratically elected domestic bodies if they experiments with imposing democracy by military opposed their goals and principles. The resulting remeans. gime has been called liberal imperialism or absolutism Table 5 is an attempt to summarize the findings: the by some observers(Knaus and Martin 2003; Schwarz instruments available in the EU’s toolbox are not very 2002). Maintaining a state apparatus composed of exeffective. Some of the more efficient ones(migration, patriates from rich countries has proved enormously enlargement), the EU will hardly be ready politically to expensive and cumbersome(Dauderstädt 2003). At the use on a larger scale(see last column). Regarding desame time, returning power, even on a low administramocracy, many instruments have mixed effects. They tive level, to the purportedly less criminal, rather techmight formally strengthen domestic institutions, rules, nocratic segments of the old elites regarded as mainly and/or rights, but shift material power to foreign acresponsible for the conflicts, oppression, and human tors. In the best case, these actors are multilateral rights violations has been hardly acceptable, but often agencies – notably the EU itself – which, however, exultimately unavoidable. hibit the usual democratic deficits of all institutions of Economically, the protectorates produced artificial global governance: they are barely subject to judicial or economies dependent on aid and the spending power parliamentary scrutiny, the executive power is correof the occupation forces and administration. A rentspondingly unaccountable and not transparent, and seeking economy of a special sort emerged(Ehrke voting weights reflect state power rather than people 2003). The prices of goods and services required by the power(are not proportionate to population size). occupiers rose dramatically, together with the incomes of those locals who could supply them(owners of de13

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 14 Options of a reluctant and helpless hegemon tinuing that policy. In the more widespread former case, Europe should strengthen the security apparatus of the partner governments but at the same time insist How can that record be improved? What other instruon respect for human rights. Except in extreme cases ments and policies might be more apt to bring stability of genocide or already violent conflicts and civil war, to the EU’s neighborhood? And are these other means Europe should not intervene militarily and not give likely to find the political will and necessary resources military assistance to one of the sides in a domestic within the EU? conflict. European policies aiming at strengthening the One should start with a note of caution. Stabilizing security of and within partner countries should focus other countries from abroad is never easy. In many on human security. A study group headed by Mary neighboring countries, the EU is facing a conundrum Kaldor has developed a number of criteria and objecof mutually reinforcing problems that have grown over tives, and assessed the capacities needed to achieve a long history and will not change easily in the short these goals(Glasius and Kaldor 2004). If military term. Interfering with local developments can do as means are used they must be closely coordinated with much harm as good. In any case, the EU will exert a civilian measures to stabilize the situation. strong influence on the development of its neighborThe monopoly of force is the defining core function hood not only by deliberate policies but by the interacof the state. Since for the management of many tion of markets and societies. To shape these relations threats there are few alternatives available to states, in a way that reduces risk and increases the chances of that function has to be maintained and protected exstability would be an important first step. cept in the above mentioned extreme cases. In particuThe EU is looking for policies to stabilize authoritarlar, there is little chance that democracy or prosperity ian rent economies and to transform them into peacewill evolve without security(see Table 2). Thus, security ful democratic market economies. In the short term, (or peace) should be the immediate priority, even at there might be a dilemma as that transition implies a the – transitional – expense of democracy or a market certain amount of destabilization. Regime changes seleconomy. However, Europe should insist on and assist dom occur without disruption. The post-communist in the liberal exercise of this state function. European transition was exceptional in this regard, but only in diplomacy should require that governments have civilsome Central European countries. Nation-building ian control over the military, and proper judicial and within the collapsed federations of the former Soviet parliamentary control over all security forces. Human Union and Yugoslavia was already troublesome and rights should be part and parcel of the rule of law. conflict-prone. In the Arab world and, to a lesser exEuropean aid can help to train state employees at all tent, in Africa, societies suffer from enormous tensions levels(from generals and ombudsmen to police offithat threaten to explode if they are released in an uncers) to adopt the appropriate measures. controlled way. Change should occur as rapidly as possible because it is driven by the emergence of threats, but also as slow as necessary. State failures have to be Democracy corrected without creating new and worse ones. Pragmatism should prevail over an ideology-driven inDemocratization should be a long-term goal rather sistence on ideal-type reforms such as elections and than an immediate concern of European stability exfree markets without adequate institutional and socieport. There are many ways to consolidate young detal foundations. mocracies and to support the improvement of defective democracies, ranging from diplomatic measures to democracy assistance(Carothers 1999; Burnell 2000; Security Diamond 1999; Youngs 2002). The institutions of more or less democratic states and those segments of Europe does not have to fear conventional threats to civil society that support democratization can be its territorial integrity. What threats there are come strengthened through advice, support in kind or from either lack of government control over hostile money, and links to like-minded partners elsewhere in groups within partner countries or deliberate encourthe world. Appropriate auxiliary activities include proagement of such groups by governments(for example, motion of the rule of law(cooperation with judiciaries state-sponsored terrorism). In the latter case, Europe and law enforcement agencies), and support for politican and should use both its hard and soft power to cal parties, election monitoring, independent media, discourage and deter those governments from local and regional government, and so on. All these continuing that policy. In the more widespread former

Internationale Politikanalyse International Policy Analysis Unit approaches are feasible and currently part of the EU’s However, the chances of democracies developing approach where partner countries are at least slowly and surviving are small if the basic societal and ecoopening up or already open. nomic conditions are missing. The probability of deThe promotion of democracy becomes more diffimocratization and/or the life expectancy of democracult the less a given regime is open and the more cies rises when distributional tensions are low because slowly it introduces liberal reforms. In the present either income and wealth are not extremely unequally global political climate, most regimes at least start off distributed or the assets are unspecific, that is, not easwith some reforms, often in the field of economic polily expropriated or highly taxed. Societies with a very icy. Foreign actors should use low-profile approaches unequal distribution of very specific assets like land or such as non-governmental organizations, local partcommodities are unlikely to become stable democraners, and indirect funding, and avoid premature insiscies(Boix 2002). Furthermore, legitimacy results not tence on human rights and elections in order to proonly from due process but also from favorable outmote more openness(Dalpino 2000). Approaches comes. Good governance, providing growth and social must be carefully adapted to the specific relationship justice, is the best way to stabilize democracies(Przerbetween authoritarian regimes and their societies, worski 2000). In the long run, rapid growth will lead to which might not always be ready for democracy modernization, urbanization, more education and in(Burnell 2004). Economic sanctions are ambiguous. Information, and eventually more participation, as the sofar as they lead to less growth, they undermine the East Asian countries(for example, Korea and Taiwan) long-term prospects of democracy and in the shorter have shown. term they are likely to harm the innocent majority; however, they also reduce the economic resources at the disposal of ruling elites, in particular drying up the Prosperity international sources of rent income from aid or commodities. But Europe will forgo the supply of comEconomic development is obviously a cornerstone of modities only in the rare instances they can be easily stability. Promoting it should be a central goal of all substituted, as in the case of“blood diamonds” from policies aiming at exporting stability. Europe, however, Africa. Boycotting Saudi Arabian oil is hardly a realistic seems hardly to be in a position to offer a model. Its option for promoting democracy there. A less radical own growth is weak, with the possible exception of measure could be to collect data on the international Ireland. A strongly growing European economy would revenues(like aid and royalties from commodities) of probably be the best help Europe could offer to its ruling elites and make them publicly accessible, above neighborhood: convergence within Europe was all to the citizens of the partner countries. Informed strongest when Western Europe grew rapidly in the citizens will probably demand a less selfish use of these 1950s and 1960s, with countries like Greece, Portugal, revenues. and even Poland catching up faster than during the Elections are rarely the beginning but rather the 1980s(Dauderstädt and Witte 2001). A booming EU endpoint of democratization. They should usually start economy would offer markets for goods, services, and at the local and regional levels where a structured publabor. Resistance to the adjustments required by the lic sphere exists, and issues and candidates are familiar. development of its poor neighbors would be much At the national level, they need more preparation: in weaker. Europe would be more ready and willing to the case of divided societies, credible constitutional use the most effective policies, such as more open safeguards against the oppression of minorities have to markets, a liberal immigration policy, and further enbe established; political parties have to be created, largement. with clear programmatic profiles and a sufficiently Since the mid-1970s, globalization and the ecoqualified cadre of politicians and experts to offer a nomic development of poor countries have destroyed realistic choice; the media should cover the campaign millions of jobs in agriculture and manufacturing in the in a way that allows voters to develop their views and developed world, mostly in the USA, but also in take an informed decision. The administrative process Europe. The losses have been concentrated in indusof voter and candidate(party) registration and election tries using lots of unskilled labor(for example, textiles, management and supervision must be transparent and apparel, leather goods) and those targeted by developaccountable. A doubtful election undermines the leing countries’ strategic industrial policies(for example, gitimacy of parliaments and governments elected in cars, electronics), but have occurred to some extent in this way. all industries because of lack of demand from poor countries in the wake of the debt crisis(Kucera and 15

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 16 Milberg 2003). Above all in the USA, these losses have Conclusion: the failing hegemon been compensated for by new jobs, mostly in services. Europe has been slower. The difference is probably Europe itself is a failing state, albeit one that has never due to a less expansionist macroeconomic policy that really worked in the first place. It continues to suffer has failed to translate productivity into output growth. from a democratic deficit, although it has strengthBetter macroeconomic management to ensure ened the role of the European Parliament in recent growth at home and to prevent debt crises in partner decades. It is fairly unlikely that the enlarged EU will countries(as in the Czech Republic and Hungary in the achieve more effective democratic governance, let mid-1990s) is a key policy with which to achieve prosalone get a federal government accountable to its citiperity. Such a policy should include the control of zens(Siedentop 2000; Boix 2004). Economically, it has speculative capital flows and overshooting exchange generally performed worse than benchmarks like the rates, which should be easier thanks to the euro. More EFTA countries(until they joined the EU in 1994) or the general, unfettered competition on deregulated global USA or Japan. This overall moderate performance currency markets undermines national accumulation hides a great diversity of different national performprocesses and forces peripheral countries to adopt ances which the EU has not really been able to use to higher interest rates as their citizens hold large shares spread best practices. Its best achievements are in seof their assets in foreign currencies(Herr 2004). Alcurity. The EU has prevented wars within Europe since though politically rather unrealistic, Europe could pro1945, with the exception of a few civil wars. However, vide a more growth-inducing environment for its the EU’s contribution to internal security has traditionneighborhood if it recreated a regional Brettonally been weak as home affairs have remained a preWoods-type system anchored by the euro. Europe rogative of the member states. should not avoid having trade deficits with neighborThese failures leave Europe ill placed to export staing countries and should tolerate a slight real underbility to its wider neighborhood. With regard to public valuation of their currencies. Commodity exporters will policies, it lacks the resources and the political will to have difficulty in achieving this without using a mix of pool its weak powers in order to achieve more leverimport duties and export subsidies to correct the image. With regard to markets, it clearly dominates the pact of the so-called“Dutch disease.” regional economies of Wider Europe. But it relies The partner countries also have to improve the strongly on the protection of traditional structures and meso-economic and structural conditions for growth. It producers. It neither easily gives up old industries that is not simply“free markets” that produce competitive are no longer competitive nor is very dynamic in develcompanies but a socio-political environment which reoping new industries. Jobs lost to migration, import duces risks and transaction and information costs, and competition, or relocation are too extensively replaced fosters trust. Aid can try to assist in developing instituby paid leisure(early retirement, unemployment benetional structures and building capacities but it has to fits) or jobs in the shadow economy rather than by contend with local power structures and mentalities new employment. While perhaps preventing social unthat are often deep rooted. Financial aid should rest this trend further undermines state finances and primarily support investment in education and health capacities. care. It should aim at raising the productivity of the In the end, it leaves few options for stability export. poor by improving their access to capital and land. InThe most powerful strategies – such as enlargement formal property titles should be formalized so they can and opening up Europe’s markets(particularly its labor be used as collateral(De Soto 2001). Agricultural land market) – will be neither politically acceptable nor ecoshould be redistributed to reduce inequality, which in nomically beneficial under current circumstances. The turn makes democratization easier(Boix 2003). creation of a growth-oriented regional currency system Europe could accelerate the slowly emerging legalialong Bretton-Woods lines to reduce competitive preszation, liberalization, and re-regulation of its markets sures on weak currencies is politically unlikely. That for drugs and prostitution. This would create new leaves the possibility that actors in neighboring counmarkets and jobs for suppliers from poor countries in tries will produce stability on their own, supported by the formal economy(as opposed to the shadow econsoft European incentives. However, why should those omy), reduce opportunities for organized crime, inin power be less conservative than the voting majoricrease tax revenues, and free police forces to deal with ties in the EU? In the short to medium term, they really dangerous threats. might benefit from a lack of reform rather than from a transition to a democratic market economy(Hellman 1998; Walder 2003). Actively undermining their power

Internationale Politikanalyse International Policy Analysis Unit will be diplomatically difficult and could produce even more instability, at least in the short term. The weak hegemon will be limited to its weak, soft powers of persuasion, dialogue, and small carrots and even smaller sticks. The resulting slow and gradual change might not partake in the glory of the revolutions Americans prefer, but might be sufficient as long as bigger threats do not enforce a radical reordering of priorities. Carothers Thomas(1999) Aiding Democracy Abroad: The Learning Curve , Washington(CEIP) Carothers, Thomas(2002) The End of the Transition Paradigm, Journal of Democracy 13(1): 5–21 Collier, Paul(1998) On the Economic Consequences of Civil War, http://www.worldbank.org/research/conflict/papers/ cw-consq.pdf Dalpino, Catharin E.(2000) Deferring Democracy. Promoting Openness in Authoritarian Regimes , Washington. Dauderstädt, Michael(1988) Policy Dialogue: The Unknowing Talk to the Unwilling, Law and State 37, 107–117 Bibliography Dauderstädt, Michael(1998) EU-Osterweiterung: Wirkungen, Erwartungen und Interessen in den Beitrittsländern, integration 21(3): 149–167 Achten, Peter(1996) Die Osterweiterung der Europäischen Union. Beitritts- und Erweiterungshindernisse im Spiegel ökonomischer Kritik , Lohmar Dauderstädt, Michael, and Lothar Witte(eds)(2001) Cohesive Growth in the Enlarging Euroland , Bonn: Friedrich Ebert Stiftung Amsden, Alice, et al.(1994) The Market Meets its Match. Restructuring the Economies of Eastern Europe , Cambridge/ London Dauderstädt, Michael, and Lothar Witte(eds)(2002) Work and Welfare in the Enlarging Euroland , Bonn: Friedrich Ebert Stiftung Artner, Annamária, and András Inotai(1997) Chances of Closing the Development Gap. A Statistical Approach, Institute for World Economics Working Papers Nr. 80, Budapest Barro, Robert J.(1997) Determinants of Economic Growth. A Cross-Country Empirical Study , Cambridge–London Dauderstädt, Michael(2003) Wenn Sicherheit unbezahlbar wird. Die schwierige Stabilisierung der ungleichen Welt, Internationale Politik und Gesellschaft (4): 11–38 Dauderstädt, Michael(2004a) Conflicting Distributive Interests in a Deepening and Widening Europe: A Challenge to the Emerging Europolity , Bonn, FES Bauer, Peter T.(1981) Equality, the Third World and Economic Delusion , London Dauderstädt, Michael(2004b) Das erweiterte Europa in einer bedrohlichen Welt, integration (1), 28–43 Belke, Ansgar, and Martin Hebler(2002) EU-Osterweiterung, Euro und Arbeitsmärkte , München-Wien Bertelsmann-Stiftung(2004) Bertelsmann Transformationsindex 2003, http://www.bertelsmann-transformationindex.de/11.0.html DeSoto, Hernando(2001) The Mystery of Capital , London Devarajan, Shantayanan, William R. Easterly, and Howard Pack(2003) Low Investment Is Not the Constraint on African Development, Economic Development and Cultural Change 51(3): 547–571 Bofinger, Peter(2003) The Stability and Growth Pact Neglects the Policy Mix between Fiscal and Monetary Policy, Intereconomics Review of European Economic Policy 1(2003): 4–7. Boix, Charles(2003) Democracy and Redistribution , Cambridge Boix, Charles, and Susan Carol Stokes(2003) Endogenous Democratisation, World Politics 55(4): 517–549 Diamond, Larry(1999) Developing Democracy toward Consolidation , Baltimore/London Diamond, Larry(2003) Can the Whole World become Democratic? Democracy, Development and Multilateral Policies , Irvine Dobbins, Michael, Dietrich Drüner, and Gerald Schneider (2004) Kopenhagener Konsequenzen: Gesetzgebung in der EU vor und nach der Erweiterung, in: Zeitschrift für Boix, Charles(2004) The Institutional Accommodation of an Parlamentsfragen 35(1): 51–68 Enlarged Europe , Bonn: FES Eatwell, John et al.(1997) Not“Just Another Accession.” The Böröcz, József(2000) The Fox and the Raven: The European Political Economy of EU Enlargement to the East , London Union and Hungary Renegotiate the Margins of“Europe,” Comparative Studies in Society and History 42: 847–875, Cambridge Ehrke Michael(2003) Von der Raubökonomie zur Rentenökonomie. Mafia, Bürokratie und internationales Mandat in Bosnien, in: Internationale Politik und Gesellschaft 2: Boyce, James K.(2002) Aid Conditionality as a Tool for 123–154 Peacebuilding: Opportunities and Constraints, in Jennifer Milliken(ed.), 1025–1048 Esser, Klaus et al.(1992) Systemische Wettbewerbsfähigkeit: Internationale Wettbewerbsfähigkeit der Unternehmen Burnell, Peter(ed.)(2000) Democracy Assistance – Internaund Anforderungen an die Politik , Berlin: DIE tional Co-operation for Democratization , London EU(2003a) Europäische Sicherheitsstrategie:“Ein sicheres Burnell, Peter(ed.)(2003) Democratization through the LookEuropa in einer besseren Welt”. Brussels. December, ing-Glass , Manchester http://www.auswaertiges-amt.de/www/de/infoservice/ Burnell, Peter(2004) How(Not) to Promote Democracy, Indownload/pdf/-friedenspolitik/ess.pdf ternationale Politik und Gesellschaft 3 EU(2003b) Commission of the EC“Wider Europe – Neighbourhood: A New Framework for Relations with our 17

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States Europäische Politik (10/2004) 18 Eastern and Southern Neighbours”, COM(2003) 104 final, Kosack, Stephen, and Jennifer Tobin(2003) Funding SelfBrussels, 11.3.2003. Sustaining Development: The Role of Aid, FDI and GovEU(2004) Commission of the EC“European Neighbourhood Policy: Strategy Paper” COM(2004) 373 final, Brussels 12.5.2004. ernment in Economic Success, Paper for presentation at the Leitner Political-Economy Seminar, December 8, 2003 (http://www.yale.edu/leitner/kosack_tobin.pdf) Flechtner, Stephanie, and Marika Lerch(2004) Mit Sicherheit in eine bessere Welt? Europas Strategiedebatte , FES Bonn Fukuyama, Francis(2004) The Imperative of State-Building, in: Journal of Democracy 14(2 April): 17–31 Funck Bernard, and Lodovici Pizzati(eds)(2003) European Integration, Regional Policy, and Growth , Washington (World Bank) Glasius, Marlies, and Mary Kaldor(2004) European Security Policy: Visions or Concepts, http://www.lse.ac.uk/Depts/global/StudyGroup/Vision.htm Hellman, Joel S.(1998) Winners Take All. The Politics of Partial Reform in Postcommunist Transitions, in: World Politics 50(January): 203–234 Hegre, Havard, Tanja Ellingsen, Scott Gates, and Nils Petter Gleditsch(2001), Toward a Democratic Civil Peace? Democracy, Political Change, and Civil War, 1816–1992, in: American Political Science Review 95(1)(March 2001): 33–48 Herr, Hansjörg(2004) Deregulierung, Globalisierung und Deflation, in: prokla 134(1): 15–40 Inglehart, Ronald(1997) Modernization and Postmodernization. Cultural, Economic, and Political Change in 43 Societies , Princeton Jamieson, Bill, and Helen Szamuely(1998) Coming Home or Poisoned Chalice , London Jensen, Nathan M.(2003) Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment, in: International Organization 57 (3): 587–616 Lijphart, Arend(2004) Constitutional Design for Divided Societies, in: Journal of Democracy 14(2)(April): 96–109 Lippert, Barbara(2000) EU-Osterweiterung als doppelte Reifeprüfung, in: Barbara Lippert(ed.) Osterweiterung der Europäischen Union – die doppelte Reifeprüfung , Bonn Lipset, Seymour Martin(1959) Social Requisites of Democracy: Economic Development and Political Legitimacy, in: American Political Science Review 53: 69–105 Lipset, Seymour Martin(1960) Political Man , New York Khattry, Barsha(2003) Trade Liberalization and the Fiscal Squeeze: Implications for Public Investment, in Development and Change 34(3): 401–424 Kitschelt, Herbert(2004) Origins of International Terrorism in the Middle East, in: Internationale Politik und Gesellschaft 1: 159–188 Knaus, Gerald, and Felix Martin(2003) Travails of the European Raj, in: Journal of D emocracy 14(3)(July): 60–74 Kucera, David, and William Milberg(2003) Deindustrialization and Changes in Manufacturing Trade: Factor Content Calculations for 1978–1995, in: Review of World Economics 139(4): 601–624 Martin, Christian W(2004) Demokratie, Autokratie und die regulative Gestaltung der Aussenwirtschaftsbeziehungen in einem Entwicklungsland; in: Politische Vierteljahresschrift 45(1): 32–54 Merkel, Wolfgang(1999) Defekte Demokratien, in: Wolfgang Merkel and Andreas Busch(ed.) Demokratie in Ost und West. Für Klaus von Beyme , Frankfurt Merkel, Wolfgang, and Mirko Krück(2003) Soziale Gerechtigkeit und Demokratie: Auf der Suche nach dem Zusammenhang , Bonn/FES Milliken, Jennifer(ed.)(2002) State Failure, Collapse and Reconstruction, in: Development und Change 33(5)(November) Müller, Katharina(2002) Transformation als Peripherisierung in: Berliner Debatte Initial 13(3): 17–26 Nunnenkamp, Peter(2004) Wachstumseffekte von Direktinvestitionen in Entwicklungsländern: Warum hohe Erwartungen häufig enttäuscht werden, in: Die Weltwirtschaft (1): 99–118 Ottaway, Marina, Thomas Carothers(eds)(2000) Funding Virtue: Civil Society Aid and Democracy Promotion , Washington(CEIP) Przerworski, Adam et al..(2000) Democracy and Development. Political Institutions and Well-Being in the World, 1950–1990 , Cambridge Putnam, Robert et al.,(1993) Making Democracy Work: Civic Traditions in Modern Italy , Princeton Rasmussen, Poul Nyrup(2003)“Europe and a New Global Order. Bridging the Global Divides”, PES Mai, www.pes.org/upload/Publications/ 74ENPES%20Rasmussen_28_05_2003.pdf Reuveny, Rafael, and Quang Li(2003) Economic Openness, Democracy, and Income Inequality. An Empirical Analysis, in: Comparative Political Studies 36(5)(June): 575–601 Rodrik, Dani(2001a) The Global Governance of Trade As If Development Really Mattered , New York: UNDP Rodrik, Dani(2001b) Comments at the Conference on“Immigration Policy and the Welfare State,” Trieste, June 23, http://ksghome.harvard.edu/~.drodrik.academic.ksg/Comm ents%20on%20Immigration%20Conference.doc Sandholtz, Wayne, and Mark M. Gray(2003) International Integration and National Corruption, in: International Organization 57(Fall): 761–800 Koenig-Archibugi, Mathias(2004) Explaining Government Preferences for Institutional Change in EU Foreign and Security Policy, in: International Organization 58(1): 137–174 Santiso, Carlos(2003) Sisyphus in the Castle: Improving European Union Strategies for Democracy Promotion and Governance Conditionality, in The European Journal of DeKosack, Stephen(2003) Effective Aid: How Democracy Alvelopment Research 15(1)(June): 1–28 lows Development Aid to Improve Quality of Life, in: World Development (January): 1–22 Sapir, André(2004) An Agenda for a Growing Europe – The Sapir Report , Oxford

Internationale Politikanalyse International Policy Analysis Unit Schwarz, Axel(2002) Rückkehr zum Absolutismus – Machtstrukturen in UNMIK’s Kosovo, in: Südosteuropa – Zeitschrift für Gegenwartsforschung 51(10–12): 527–542 Siedentop, Larry(2000) Democracy in Europe , London Sinn, Hans-Werner(2000): EU Enlargement and the Future of the Welfare State , München: Center for Economic Studies Spanger, Hans-Joachim, and Jonas Wolff(2004) Why Promote Democratisation? Reflections on the Instrumental Value of Democracy, Paper presented to the Conference “A European Profile in Democracy Assistance”, July 5–6, 2004, The Hague Tarschys, Daniel(2003) Reinventing Cohesion. The Future of European Structural Policy , Stockholm: SIEPS Thirkell-White, Ben(2003) The IMF, Good Governance and Middle-Income Countries, in: The European Journal of Development Research 15(1)(June): 99–125 Walder, Andrew G.(2003) Elite Opportunity in Transitional Economies, in: American Sociological Review 68(December): 899–916 Weisbrot, Mark, and Dean Baker(2002) The Relative Impact of Trade Liberalization on Developing Countries, Center for Economic Policy Research, Washington, June 12, 2002, http://www.cepr.net/relative_impact_of_trade_liberal.htm The White House(2002) The National Security Strategy of the United States of America, Washington DC (http://www.whitehouse.gov/nsc/nss.html), Wolf, Martin(2004) We Cannot Ignore Failing States, in Financial Times (June 8) World Bank(1998) Assessing Aid. What Works, What Doesn’t, and Why , Washington DC World Bank(2001) Aid and Reform in Africa , Washington DC Youngs, Richard(2002) The European Union and the Promotion of Democracy. Europe’s Mediterranean and Asian Policies, Oxford 19

Michael Dauderstädt Exporting Stability to a Wider Europe: From a Flawed Union to Failing States T he European Union(EU) is today in the process of digesting its“bigbang” enlargement, a period of slow growth after the introduction of the euro, and the cumbersome process of obtaining agreement on a Constitution that still faces a number of crucial obstacles, including referenda in several rather Eurosceptical member states. On top of all that, the enlarged Union must redefine its relations with the world after the end of the Cold War and after September 11. In this connection, it has agreed upon its first official security strategy The EU’s intention is to be a source of stability in a world full of – partially – new threats(terrorism, failing states, diseases, crime, drugs). In particular, it wants to export stability to its neighborhood, the“Wider Europe”. This paper analyses first the supply side of stability export: What are the resources and interests of the enlarged EU? On the demand side, we look at the political economy of the neighboring countries and try to identify the causes of their instability and the origins of the threats emanating from these often failing states. In the final section, we evaluate the instruments and policies at the EU’s disposal in light of the problems they have to solve. To summarize our central finding: The present policies of the EU are barely appropriate to accomplish the chosen mission of stability export. In many cases, strong interests on the EU side prevent the implementation of helpful policies and, in some cases, even lead to harmful ones.