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The Future of Lome´: Europe’s Role

in African Growth

Paul Collier, Patrick Guillaumont, Sylviane Guillaumont and Jan WillemGunning

1. INTRODUCTION

T RADE and aid relations between the European Union and the ACPdeveloping countries are governed by the Lome´ Treaty. This treaty entitles

the ACP countries (former European colonies, mostly in Africa) both to EU aidand to trade preferences. ACP exports enjoy preferential access to the Europeanmarket, mostly in the form of lower tariffs (subject to very restrictive rules oforigin). These preferences apply in particular to traditional African exports suchas tropical agricultural products. Since 1975 when the first Lome´ treaty wassigned the ACP countries have, in spite of this preferential treatment, lost marketshares for their traditional exports while there has been little growth in non-traditional exports. A notable feature of the trade preferences is that they are(since 1975) not reciprocal: ACP countries are under no obligation to open theirmarkets to European exports. The value of tariff preferences has been eroded astariffs have been lowered for non-ACP countries. European aid programmes forACP countries have moved beyond project aid to support for structuraladjustment programmes (SAPs); as a result the conditionality of EU aid hasbecome more prominent.1

The current phase of the treaty expires in the year 2000 and a discussion hasstarted on its successor. This takes place against the background of considerabledisillusion with the efficacy of aid transfers and unreciprocated ‘special anddifferential’ trade preferences (Grilli, 1993). So far it has tended to be polarisedbetween those, notably African governments, who wish to preserve the statusquo, and critics questioning whether Lome´ should have a future at all. In this

ß Blackwell Publishers Ltd 1997, 108 Cowley Road, Oxford OX4 1JF, UKand 350 Main Street, Malden, MA 02148, USA. 285

PAUL COLLIER is from CSAE, Oxford University. PATRICK GUILLAUMONT andSYLVIANE GUILLAUMONT are from CERDI, University of Auvergne. JAN WILLEMGUNNING is from the Free University, Amsterdam. The authors are grateful for the commentsof two anonymous referees on an earlier draft of the paper.1 An excellent account of the EU’s trade and aid relations with ACP countries is given by Grilli(1993).

paperwe arguethat Europecanoffer threethings to Africa: aid, marketaccessandinstitutions.To date,it hasofferedonly thefirst two. Wepresentproposalsonhow thepresentaid andtraderelationshipsofferedundertheLome treatycanbetransformed.In additionwe will suggestthat Europecanhelp African countriesby institutional innovationswhich reversethe marginalisation which Africa hasbeenexperiencing.

Thestructureof thepaperis asfollows. In Section2 we presenta typology interms of prerequisitesfor growth. We classify countriesaccordingto whetherthey currently satisfy these prerequisitesand show that those which do, aminority, are in fact currently growing satisfactorily.In Section3 we draw theimplicationsof Section2 for the future of Lome. We discussconditionality aspresentlypractisedand proposehow this can be replacedby the three-prongedapproachof performance-basedaid,reciprocalmarketaccess,andparticipationinEuropeaninstitutions.Finally, we arguethat theseandotherproposalsshouldbeoptionson a ‘menu’ from which African countriescan choose.That is, we areproposingLome‘a la carte’.Differentiationamongcountrieswill betheoutcomefrom self-selectionamongthis menu.

2. PROSPECTSFOR GROWTH: A TYPOLOGY OF COUNTRIES

Thevastmajority of ACPcountriesareAfrican. Africa is, of course,notaverymeaningful aggregate.We need some way of relating differencesin Africanperformance to differencesin African circumstances.This is not an easytaskbecausepoliciesareintrinsically difficult to aggregate.A recentattempt(WorldBank, 1994) built inevitably precariouscompositescoreson macroeconomicpolicy andrelatedthesescoresto performance.Suchan approachtendsto be sofragile that it is not convincing.Confiningourselvesto the low incomecountries(below $1,000per capita),the approachtakenhereis to filter the setof Africancountriesthrougha seriesof threeconditionswhich might bewidely acceptedasnecessaryfor growth: a minimal degreeof social stability, a minimal degreeofmacroeconomicstability anda minimal degreeof allocativeefficiency.We thenlook at the performanceof thosecountrieswhich survivethesethreefilters. Theidea is that thesethree filters form a policy hierarchy:without a minimum ofsocial stability there is little point worrying about macroeconomicstability.Similarly, evenwith adequatesocialorder,if thereis macroeconomicchaosthereis little point in worrying aboutallocativeefficiency. This divides the Africanpopulation into four categories.At the bottom is the population in countriesinvolved in civil war, an extremeform of social instability. At the next stageisthe populationliving in countrieswherethe governmenthassuppliedpeacebuthas not achievedminimal macroeconomicstability. At the third stageis thepopulation living under governments which are supplying peace and

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macroeconomic stability but in which resourceallocationpoliciesareliable to behighly inefficient. Finally, there is the population in countries in which thegovernmentis supplyingpeace,macroeconomicstability andminimally adequateresourceallocationpolicies.

While thedefinition of ‘ideal’ policiesis, of course,controversial,this sectionis basedon the premisethat it is possibleto get a broad consensuson whatconstitutesunambiguously dysfunctionaleconomicenvironments.Themostbasicfeatureof the ‘minimum adequateenvironment’,without which economicpolicychangeis likely to be futile, is peace,andthis is the first of our filters.

a. Economieswithout Peace

The extent of violence in a society is a continuum, as is its scale oforganisation.However,asdemonstratedby citiessuchasNewYork, it is possiblefor a high level of unorganisedviolence to co-exist with a high level ofprosperity:suchviolenceis evidentlynot a severeimpediment.By contrast,theprolongedcivil wars which haveoccurredin Africa havecausedan enormouslossin output.Collier (1996)estimatesthat civil war reducesgrowth by 2.2 percentper annum,so that the prolongedcivil wars in Mozambique,Ethiopia andUgandahavereducedincomesby around30 percent.Further,civil warstendtoleavea legacyof aweakenedstatein contrastto internationalwars.Herbst(1990)arguespersuasivelythata reasonwhy African statestendto beweakis that theyhavenot facedexternalthreats.

Becausecivil warsareinformal theyareusuallynot discreteepisodessuchasinternationalwars and so their definition is to an extent arbitrary. Singer andSmall(1994)provideprecise,quantitativecriteria,onwhich theyidentify all civilwars from 1816. However, their listing doesnot extendbeyond1992. In theabsenceof a currentobjectiveclassification,in the spirit of this paperwe onlyclassifycountriesasbeingengagedin civil war wherethe evidenceis suchthattherewould be widespreadconsensusand wherethe effectscan reasonablybeexpectedto include severeimpedimentsto economic growth. Currently sixAfrican countries fall into this category:Angola, Burundi, Liberia, Rwanda,Somaliaand Sudan.It is not in fact possibleto tell whether this group is inaggregatein economicdeclinebecausefor half of them thereare no NationalAccountsdata.For the remainingcountriesper capitaGDPfell by four per centp.a. in 1990–94.The populationof thesesix countriesis 61 million, so thataround12 percentof thepopulationof Africa is living in countriesin which thegovernmenthasfailed to supplya minimal adequatelevel of socialorder.

b. Economieswithout a MinimumAdequateMacroeconomicEnvironment

The next filter concernsthe macroeconomicenvironment.Again this is a

THE FUTURE OF LOME: EUROPE’SROLE IN AFRICAN GROWTH 287


continuumandsoit is intrinsically arbitrarywherea line is drawn.Herewe useaclassificationbasedpartly on inflation in the threeyearperiod1992–4.We useaboundaryat which inflation policy is not deemedto beevenminimally adequateat an inflation rateabove25 per cent.This is supplementedby a scoringsystemdevelopedby World Bank country economists(Bhattasaliand Ray, 1995).Forthe criteria to be genuinely minimal, most low income developingcountriesshouldsatisfy it. Among non-AfricanIDA-receiving countries85 per centmeetthe criterion.

Thefollowing African countrieswhich satisfytheconditionof peacecurrentlyfail to meet the requirementof macroeconomicstability: Comoros,EquatorialGuinea,Ghana,Madagascar,Malawi, Mozambique,Niger, Nigeria, SaoTomeandPrincipe,Tanzania,Togo,Zaire andZambia.This groupcovers240millionpeople,which is 46 percentof thepopulationof Sub-Saharan Africa. ExcludingZairefor whichnoNationalAccountsdataareavailableafter1992(in whichyearincomefell by 10 per cent),per capitaincomefell by 1.2 per centp.a. for thisgroupin recentyears.

Hence,justoverhalf of thepopulationof Africa liveseitherin acountrywhichis simply unsafeor is subjectto severemacroeconomicinstability (or both). Inthis half of Africa we do not needdeepexplanationsin termsof economicpolicyas to why growth is low, we needanalysisof the causesof civil war and thereasons why governments are not supplying a minimum adequatemacroeconomicenvironment.

c. Economieswithouta MinimumAdequateResourceAllocationEnvironment

For the countrieswith minimum adequateenvironmentsin terms of socialorderandmacroeconomicpolicy we now considerthe policy environmentwithrespectto resourceallocation.It is immenselydifficult to get goodquantitativemeasuresof the efficacy of resourceallocation policies. The only resourceallocationindicatorwhich is asreadily measurableasthe major macroeconomicindicatorssuch as inflation is the premium on the parallel market for foreignexchange,which can be interpretedas a proxy for trade and exchangeraterestrictions.EasterlyandLevine(1995)showthat theparallelmarketpremiumissignificant and important in explaining slow growth overall in Africa andvariationsbetweencountries.However,this is only oneof manyareasin whichpolicy can affect the allocation of resourcesand hencegrowth. We take fivepolicy areaswhich concernresourceallocation:tradeandexchangeratesystems;the financial sector;factorandproductmarkets;parastatals;andthecompositionof public expenditure. Again we utilise a scoringsystemusedby World Bankcountry economists in which each policy area is evaluated according toreasonablyprecisecriteria (BhattasaliandRay, 1995).Eachpolicy is classifiedaccordingto whetherit meetsa minimum threshold.We classify countriesas



havingminimumadequateresourceallocationpoliciesif eachof thefive policiesis abovethis threshold.

Thecountrieswhich fail to survivethis filter, andsoarecategorisedashavingachievedminimum adequatesocial and macroeconomicorder but inadequateresourceallocationpoliciesarethe following: Cameroon,Chad,Congo,Eritrea,Guinea, Kenya, Lesotho and Zimbabwe. These countries have a combinedpopulationof 69 million, or 12 percentof thepopulationof Africa. Treatingthisgroupas a single aggregateeconomy,and summingits GDP (at constant1987dollars: from African EconomicIndicators, Table 2.1) the growth rate for percapita GDP in 1992–94 was ÿ2.8 per cent. Hence, this population wasexperiencing rapidly declining incomes.

d. Countrieswith a MinimumAdequateEnvironment

The abovefilters leavea groupof low-incomecountrieswhosegovernmentsare currently supplyingat least modestlevels of social order, macroeconomicorder and resourceallocation. In combinationtheseyield what we will term aminimumadequateenvironment. The countrieswhich currently have such anenvironmentare Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, Ethiopia,Gambia,GuineaBissau,Mali, Mauritania,SenegalandUganda.Betweenthemthesecountriesaccountfor 23 percentof the populationof Sub-Saharan Africa.For thesecountriesit is highly pertinentto determinewhetherthe provisionof aminimumadequateeconomicenvironmentachieveswhatmight bethoughtof asminimumadequategrowth.Sinceour classificationof theeconomicenvironmentis basedondataasof 1996,aswetakelongerperiodsoverwhich to assessgrowthperformance moreandmorecountriesdropout becausetheyhaveonly adoptedaminimumadequateeconomicenvironmentrecently.Themostrecentmembersofthegrouparethe five countrieswhich aremembersof theFrancZone.Until thedevaluationof the CFA franc in early 1994 thesecountrieshad inadequateresourceallocationenvironmentsbecauseof the over-valuationof the currency.Outputchangesduring1994might reflect only transientresponses.During 1995theaverageGDPgrowthof this groupwas6.2 percent(Table1) or 3.2 percenton a per capitabasis(Table2).

While thisis notaparticularlyhighgrowthrateby thecurrentstandardsof someotherdevelopingcountries,it shouldberecalledthat this groupis definednot byparticularly growth-friendly policies but only by the avoidanceof manifestlygrowth-hostilepolicies.It suggeststhatthecriteriawhichhavebeenusedto definethis group indeed justify the term ‘adequate’ in that the growth which theenvironmentappearsto be generatingdoesappearto enablegrowth rateswhichpermitpercapitaincomesto risereasonablyrapidly. This should,to anextentbequalified, sinceduring 1995 the term of tradefor most of thesecountrieswereimprovingandthis would havetemporarilyraisedtheir growth rates.



e. Summarisingthe MinimumAdequateEnvironmentFilters

To summarise, the African population can be grouped into the fiveenvironmentsset out in Table 2. This table has implications for the focus ofconcernaboutcurrentAfrican economicperformance.First, it suggeststhat themajor problem in Africa is not that performance has been poor even wheneconomicpolicies have beenreformed.Recall that our criteria for the policyenvironmenthavedeliberatelybeenminimalist.Many of thecountrieswhich arein this final categoryhavepolicieswhich by no stretchof the imaginationcouldbe describedas growth-friendly. For example,Ethiopia hasyet to get in placeevenelementarypropertyrights: it is not yet possibleto purchaselandon whichto build a factory,andthe financial systemis rudimentary,sinceuntil 1995therewasa monopolystatecommercialbank. Indeed,noneof the countriesactuallyrate high acrossthe boardon macroeconomicand resourceallocationpolicies.

TABLE 11995Growth Ratesfor African Countrieswith a Minimum AdequateEconomicEnvironment

Country Weight Growth Rate

Benin 0.0548 4.5Burkina Faso 0.0668 4.2CapeVerde 0.0120 4.8Coted’Ivoire 0.2414 4.8Ethiopia 0.1686 8.0Gambia 0.0131 ÿ4.1Guinea-Bissau 0.0087 4.2Mali 0.0673 6.0Mauritania 0.0368 4.6Senegal 0.1395 4.8Uganda 0.1439 9.5

All 1.000 6.2

Sources: Growth rates: World Economic Outlook data base, IMF. GDP weights derived from AfricanDevelopmentIndicators, 1996,World Bank.

TABLE 2The Populationof Sub-SaharanAfrica in Five Environments

Environment Population Performance:Share Per Capita GDP Growth

Inadequatesocialorder 12% ÿ4.0%1990–4Inadequatemacropolicies 46% ÿ1.3%1992–4Inadequateresourceallocation 12% ÿ2.8%1992–4Minimal adequateenvironment 23% +3.2%in 1995Already middle income 8% n/a

Source: Growth ratesfrom African Development Indicators1994–95, andcountryNationalAccounts.



Despitethis, theeconomiesin whichaminimumadequateeconomicenvironmenthasbeencreatedareperformingratherwell. A growth rateof 6.2 percentis notremarkable,and it is worth efforts to raise it, but were it replicatedacrossthecontinent there would be a mood of confidencerather than crisis. The tableidentifies as the problemsthe threegroupswhich lack different featuresof theminimumadequateeconomicenvironment.Eachof thesegroupsfacesdecliningincomes.

Themostsevereproblemin termsof humansufferingis probablythewar-tornsocieties,characterising12 per cent of the African population. Recentwork(Collier andHoeffler, 1996)showsthat unlike internationalwars,the dangerofcivil warsis stronglypersistent:countrieswhich havehada recentcivil war aremuch more prone to further conflict. However, they also find that the mostcommonexplanationfor African civil wars,ethnicdivisions,is not correct.Usingan index of ethno-linguisticfractionalisationfirst usedby Mauro (1995), theyfind that highly fractionalisedsocietiesare no more prone to civil war thanhomogeneousones.It is countrieswith middle levelsof fractionalisation,suchasoccursif a populationis divided into two similarly sizedethnic groups,whichmost endangerspeace. Hence, the high degree of fractionalisation whichcharacterisesmanyAfrican countriesneednot be war-inducing.

Therearetwo groups,totalling just over half the populationof Africa, whichare currently experiencingdecline and where that decline can reasonablybeattributed directly to economicpolicies: those without a minimum adequatemacroeconomic environmentand thosewithout a minimum adequateresourceallocationenvironment.Within this half of the populationthe major problemisevidentlychronicmacroeconomicinstability ratherthanpoorresourceallocation.An amazing46 per cent of the populationis subjectto governmentswhich arefailing to provide a basic macroeconomicenvironmentsuitable for growth.Indeed,oncewe removethe war societiesandthe middle-incomecountries,thepopulationis fairly equally divided betweenthoseinhabiting areasof minimalmacroeconomic stability and those in unstableenvironments.Since half thepopulationhasminimally adequatemacroeconomicpoliciesthis is a hopefulsignfor the other half: adequatemacroeconomicpolicies are not rare, they arecommon,but not nearlyuniversalastheyarenow in otherlow incomecountries.Turning from macroeconomicinstability to the lesser problem of resourcemisallocation, the messageis even more hopeful. In that part of low incomeAfrica in which thereis an adequatemacroeconomicenvironment,two thirds ofthe populationnow hasminimally adequateresourceallocationpolicies.The 12per centof the populationwhich lives undergovernmentswhich fail to providethis are in exceptionalconditions.

Hence,a favourableinterpretationof Table2 is that the two policy transitionswhich betweenthem would transformthe environmentfor half the populationfrom decline to growth are already normal in Africa. If half the securelow



income population can have macroeconomicstability why cannot this beextended to the other half? If two thirds of the secure, low income,macroeconomically stable population can have adequateresourceallocationpolicies,why not theotherthird?However,thecentralmessageof thetableis thatat presentonly a quarterof the low-incomepopulationhasan evenminimallyadequateenvironment.Of courseit is importantto pressaheadto raisegrowthratesin the minimally reformedeconomiesto the doubledigit levels of whichtheseeconomiesshouldbecapable.However,it is moreimportant,andin a sensefar easier,to deliver a minimalist environmentto thosewho currently lack eventhat. Although we know that it is feasiblefor developingeconomiesto growmuch more rapidly than the rates currently being achievedby thoseAfricancountrieswith a minimum adequateeconomicenvironment,controversysetsinpreciselyat the point of moving from this environmentto a growth-enhancingenvironment.Specifically, disputesarise between ‘developmentalstate’ and‘level playingfield’ approaches.While this debateis importantandinteresting,itshould not be allowed to obscurethat there is consensuson the far moreimportanttaskof providing a minimum adequateeconomicenvironmentfor themajority of the African populationwhich currently lacks it.

3. IMPLICATIONS FOR THE FUTURE OF LOME

In theprevioussectionwe havearguedthat lessthana third of Africa lives incountrieswith evenaminimumadequateeconomicenvironmentandthatrisk is amajor deterrentto growth. In effect we are suggestingnecessaryand sufficientconditionsfor rapid growth.Thenecessaryconditions,which arenot satisfiedinmost of the continent,are the provision of a minimum adequateenvironment.Wherethis is in placeit seemscurrentlyto be capableof deliveringrespectable,though not spectaculargrowth rates. However, even the countries with thisenvironmentsuffer from high risk. In order to raise investmentto the levelsconsistentwith rapid andsustainedgrowth, it will be necessaryto reducetheserisks. We now considerhow the EuropeanUnion can induce rapid growth byassistingboth in the transitionto the minimum adequateenvironmentandin thereduction of risk. As noted in Section 1, the EuropeanUnion has threeinstrumentsfor assisting: through aid, through market access,and throughparticipation in institutions. In principle, each of theseinstrumentsmight beeffective in the three transitions necessaryto attain a minimum adequateenvironment,andin the reductionof risk. We considerthemin turn.

a. Aid

We now considerthecontributionwhich aid canmaketo the first of the three



transitions,namelythat from civil war to peace.Unfortunately,the effect of aidon social cohesionis ambiguous.While it is possiblethat by increasingtheresourcesavailable to the governmentit enablesthe governmentto satisfyoppositiongroupswhich would otherwiseresort to violence,it is also possiblethattheextraresourcesenablethegovernmentto increaseits military expenditure(Azam,1995).Similarly, while aid may increasethe incentivefor a governmentto reach a settlement, it may also reduce the need for a government todemocratise(BatesandCollier, 1995).Collier andHoeffler (1996),quantify theeffect of incomefrom naturalresourceson the risk of civil war, an effect whichmight simulatethatof aid.Theyfind that therelationshipis non-monotonic,onlyreducingthe risk of war when the endowmentis large.The implication is thatwhile in anyparticularsituationaid might havea cleareffect, thereis no generalpresumptionthat it canbe usedto inducea transitionto peace.

Now considerthe role of aid in promoting macroeconomicstability. Sincecommodity price instability is largely due to natural conditions and thefunctioning of the world economyit is an illusion to think that instability canbe easily reduced.The failure of internationalcommodity price stabilisationefforts is vivid testimonyto this fact. The EuropeanUnion alreadyhasa policyinstrumentby which aid cancompensatefor negativeshocks,namelyStabex.Inpracticemuchof the instability generatedby shocksarisesfrom themishandlingof positive shocks(Collier and Gunning, forthcoming). However, even withrespectto negativeshocksStabexcurrently fails to achieveits objective.Thedelaysin disbursementare so long that Stabexflows are actually pro-cyclical(Hermannet al., 1990).This hasarisenbecauseStabexhascometo be usedformultiple donor objectives.In order for Stabexto contributeto macroeconomicstability, disbursementsevidentlyneedto bepromptandthis necessarilyimpliesthat theyshouldnot besubjectto complexconditions.However,thereis a deeperproblemin usingStabexto reducethe impact of negativeshocksfor thereis atrade-offbetweenstabilisingtheincomeof thecountryandstabilisingtheincomeof exporters,both of which are ostensibleobjectivesof Stabex.When worldpricesarelow, exportersarepartly compensatedby a fall in the relativeprice ofnon-tradable goods,but this would beoffsetby Stabexinflows. Hence,thesameinstrumentwhich compensatesincomeat the nationallevel accentuatesthe lossof incomefor exportersthemselves.Thus,while Stabexascurrentlyoperatedisseriouslyflawed, it is not easily remedied.

A further meansby which aid is usedto promotemacroeconomicstability isthroughconditionality.However,aswith theuseof aid in thetransitionto peace,it is a two-edgedsword.Theprovisionof aid in returnfor soundmacroeconomicpoliciesclearly providessomeincentivefor governmentsto adoptthem,thoughthe fact that 46 per cent of the African population is currently living in aninadequatemacroeconomicenvironmentsuggeststhat this incentiveis not verypowerful. However, offsetting this favourable(though possibly weak) effect,



conditionalitymayactuallycontributeto instability.This is becauseif aconditionis not met, in principle aid is cut off, creatingmacroeconomiccrisis. Thereareseveralexamplesof crisesbeing inducedin this way, for example,Ugandain1992.

Now consider the contribution which aid can make to the transition tominimum adequate resource allocation policies. This is the contributionenvisagedfor structural adjustmentlending. Implicit in this use of aid is adifference between donor and recipient objectives: apparently the recipientgovernmentis not willing to adoptpolicies considereddesirableby the donorwithout being induced to do so. The main objection to the use of aid asinducementfor policy reform is that in this casethe governmentreceivesaid exante, on thebasisof thepromiseof a policy change.Thegovernmentthenhasanincentiveto minimise implementationof the agreedadjustmentprogrammeandto reverse the policy changesonce the temporary aid runs out. This hascontributed to the familiar phenomenon of policy reversal which hascumulatively reducedthe credibility of all African reform programmesand sounderminedinvestment.

Sincethegovernmentis placedin thepositionof ‘selling’ reformsto donors,ithasaninterestin maximisingthe‘price’ of reform.That is, for a givenamountofaid it will attempt to do as little reform as possible, by exaggeratingthedifficulties of adoptingthe reformsandindeedby periodicallyreversingthemorintroducingnew policy distortionswhich cansubsequentlybe ‘sold’.

In responseto this, donorshave increasinglyadopted‘short-leash’policies.That is, they havespecifiedthe implementationof reformsin increasingdetailboth as to contentand timetable,linking disbursementof funds to eachstepofimplementation. Tranchesare releasedon the basis of this highly detailedspecification of performance,monitoredover very shortperiods.At presentthisapproach frequently encountersa credibility problem because the entireprogrammeaid flow is conditionedon eachstepof reform. Hence,the donorsperiodically face the choiceof interruptingthe aid flow becauseof someminorinfringement of the promised reform programmeor of waiving the agreedconditions.The former option risks plunging the country into macroeconomicturmoil becauseof trivial slippages,while thelatterunderminesdonorcredibility.

Onesolutionto this dilemmais for the ‘pricing’ of reformsto be takento itslogical conclusionso that each detail of the reform programmeentitles thecountryto a specifiedamountof aid. Theproblemwith suchanapproachis thatdonorsbecomeinvolved in thedetailsof governmentto an inappropriatedegree,therebyweakening‘ownership’of economicpolicy by thegovernment.Indeed,ifthe governmenthas ‘sold’ policies to donors, the ownershipof policy quiteclearly belongsto the donors.If the government’sactionsarespecifiedin detailfor shortperiodsit cannotfeel responsiblefor thedecisionswhich it takes.Hence,theattemptby donorsto ‘purchase’reformspiecemealhasparadoxicallybeento



placegovernmentsin thepositionof slowingtheimplementationof reformandofmakingthe privatesectorsuspiciousof governmentintentions.

The perceivedfailure of short-leashlending, in particular its inconsistencywith governmentownershipof policy change,hasincreasedpressurefor greaterselectivity betweencountriesin aid disbursements.Thereare two quite distinctrationalesfor selectivity. The rationale for confining aid (other than that forhumanitarian purposes) to governmentswhich are providing a MinimumAdequateEconomicEnvironmentcansimply be thatwithout anadequatepolicyenvironmentaid is liable to beunproductive.Hence,simply to avoidwastethereis a casefor selectivity:aid wouldberestrictedto thosepoorcountriesin which itcould beuseful.In its extremeform this rationalewould takea far moremodestview of whataidcanachievethanimplied by theconditionalityapproach.Insteadof regardinggovernmenteconomicpolicy as highly malleablein responsetodonorwishes,in thelimit policiesmightbeseenasbeinginvariantwith respecttodonor preferences.Donors would simply support those governmentswhichhappenedto providean adequatepolicy environment.

The secondrationalefor greaterselectivity is that, redesigned,conditionalitycould providea moreeffective incentivefor policy change.The redesignwouldbethataid disbursementswould bebaseduponperformance ratherthanpromisesand that performancewould be measuredby periodic broadassessmentsratherthanby continuous‘short-leash’monitoring.This is the ‘inducement’useof aid,but now conductedex post rather than ex ante. Since the paymentwould beconditional upon performancerather than promises,this form of inducementwould not leadto time inconsistency.It may thereforeprovemoreeffectivethanex anteconditionality.

Specifically, donorswould announceat the beginningof a period outcome-contingentaid to bedisbursedat theendof thatperiod.Therecipientgovernmentwould thereforeknow how muchaid it would receiveif, duringtheperiod,it wassuccessfulin somepre-definedsense.One way of linking aid to performancemightbeto basecriteriauponacontinent-wideaverage.Forexample,thecountrywould receivea ‘normal’ amountof aid if it achievedat least the Africa-wideaverageon eachof a rangeof indicators.Below this,aid would graduallydeclineto zeroasa function of the shortfall of performancecomparedto the average.

The ‘normal’ amount of aid would be determinedwith referenceto thecountry’s per capita income:a poorercountry qualifying for more aid. Donorsmight usea variety of indicatorsof performancesuchas the rate of growth ofGDP,thechangein literacy,thechangein child mortality andeventhechangeintheprotectionof civil rights.In eachof thesecasesthedonorwouldatsomestageneedto determinehow aid would berelatedto the indicatorsandsodecideupontrade-offsbetweenthem.

Performanceabovethenormmight be rewardedwith additionalaid, in whichcasethe governmentwould havean incentive to perform better than average.



Alternatively,donorscanchooseto beprescriptiveonly aboutpoorperformance,therebyattemptingto reconcilethe attainmentof their own preferenceswith theownershipof policy by the government.2

An obviousobjectionto the useof quantitativeperformance measuresfor aidallocationis that performanceis not fully underthe control of the government.For example,a country may perform poorly in termsof GDP growth over theperiodunderreview simply asa resultof a negativecommodityprice shock.Tosomeextent this can be correctedfor: elsewherewe have usedcross-countryregressionsto correct growth performance for country characteristicssuch asland-lockednessand for termsof tradechanges(Collier et al., 1997).However,thescopefor suchadjustmentsis limited, particularlyfor performanceindicatorswhich arenot widely available,suchaschangesin povertymeasuresover time.Hencean elementof judgementin the interpretationof performanceindicatorswill be unavoidable.

b. Market Access

From the very beginning the relations betweenEurope and Africa haveinvolved preferentialaccessto the Europeanmarket(Grilli, 1993).Initially thiswas reciprocal, free trade arrangementsbetweencolonial powers and theircoloniesbeingextendedto tradebetweentheACPcountriesandEurope.ThefirstLome treaty (in 1975) droppedthe reciprocity. From thereonACP countriescontinuedto havepreferentialaccessto theEuropeanmarketbut did not havetoreciprocateby lifting traderestrictionson imports from Europe.

The preferentialaccessto Europeanmarketswasbestfor commoditieswhichwere the traditional exportsof ACP countriessuchas bananasand sugar.Formanufactures, subjectto quotalimits, ACP countriesbenefitedfrom protectionvis-a-vis East Asian competition. For temperateagricultural produce whichcompeteddirectly with Europe,accesswasmuchmorerestricted.

This patternof preferenceswould havetendedto perpetuatea concentrationofAfrican exports on traditional products.Over the past twenty years Africanexports have remained very heavily concentrated upon a few primarycommodities.Until very recently this bias in Europeantradepolicy could not,however,accountfor this persistenceof concentrationbecausethe economicpoliciespursuedby African governmentswerestronglyanti-exportorientedandso preventeddiversification. Only in the last few years have some Africancountriessufficiently reducedthis anti-exportbiasfor a new rangeof exportstobecomefeasible.Hence,it is only now that marketaccessissueshavebecomeimportantin constitutinga binding constraint.

We proposethat marketaccessbe alteredin Lome V in two respects.First,

2 We developthis argumentfurther in (Collier et al., 1997).



marketaccessshouldbe improvedfor the non-traditionalAfrican exports.Thestrategies for improvement would differ as between agriculture andmanufactures. For agriculture the recent tariffication of quotasoften at veryhigh levels of tariffs, affords plenty of scope for ACP preference.Formanufacturestariffs are now so low as to be largely irrelevant, so that tariffpreferenceis no longerof consequence.Indeed,the level of preferenceis now solow that in many instancesimportersfind the administrativecostsof benefitingfrom the preference to exceed its value. However, non-tariff barriers tomanufacturesremain important. This is despite the Uruguay Round havingnegotiatedthe gradual tariffication of non-tariff barriers.The most importantremainingrestrictionis now not quotasthemselvesbut thethreatof anti-dumpingactions.The legal frameworkfor anti-dumpingactionsis sufficiently generouslyphrasedthat thepotentialscopeof suchactionsis very wide. Indeed,this wastheprice exactedby developedcountriesfor the concessionof tariffication. TheEuropeanUnion alreadyrestricts the use that its memberscan make of anti-dumpingsuits.First, no membergovernmentcanbring a suit againstthefirms ofany other membergovernment.Secondly,and more pertinently, this has nowbeenextendedbeyondUnion membership.Icelandhasbeengrantedthe sameprivilegeasUnion membersin thatanti-dumpingsuitscannotbebroughtagainstIcelandicfirms by EU members.

Anti-dumping suits are much more important than their current frequencywould imply. Becausethey can be mountedrelatively easily, they constituteathreatto firms in developingcountriescontemplatingexportingandthis threatisnow recognisedas ‘contingentprotection’.The existenceof this threatis muchmore important as a disincentive to manufacturing in newly emergingmanufacturingcentres,suchas it is hopedthat Africa may becomein the nextdecade,thanin the establishedcentresof EastAsia. This is becauseestablishedfirms already have diversified markets often including a reasonablysizeddomesticmarket.For example,a Korean firm subjectto an EU anti-dumpingactioncouldcontinueto sell in North Americaandexpandits salesin Korea.Bycontrast,a newmanufacturingoperationin Ghanawhich wasselling into Europeasits mostimportantinitial marketmight havemanyfeweroptionsif this marketaccesswassuddenlyinterrupted.Thus,weproposethatunderLomeV theparties(the EU and the ACP countries)would undertaketo refrain from anti-dumpingactions.SinceLome V cannotbind the partiesbeyondthe periodof the treaty,thisundertakingwouldautomaticallybetime-limitedandsotheconsequencesforEuropeanfirms would not be dramatic. The extent to which the concessionconferredsomethingof real valueto Africa without exposingEuropeanfirms tounrestrictedcompetitionwould dependuponhow rulesof origin werespecified.Very generousrules of origin would induce a relocationof assemblyactivityfrom EastAsia to ACP countries,benefitingEastAsia rather than Africa andexposingEuropeanfirms to EastAsian competition.Highly restrictiverules of



origin would preventmanufacturingtakingplacein Africa at all sincemanypartsof productswouldhaveto beimporteddueto thesmallscaleandrangeof Africanmanufacturing.Hence,the concessionon refraining from anti-dumpingneedbefar lessdramaticthanit mightat first appear:it wouldbelimited bothby timeandby rules of origin. It would, however,substantiallyimprove the incentivesformanufacturingin Africa ratherthanEastAsia in one importantrespect,namelyrisk.

Surveyevidenceof actual and potential investorsinto Africa showsthat atpresent the main perceived constraint is the high level of risk of Africaninvestment. This is consistentwith cross-sectionanalyseswhich find thatinvestmentis correlatedwith country risk-ratings(IFC, 1995). Further, recentwork suggeststhattherisk ratingsthemselvesareundulyharshfor Africa relativeto the underlyingobjectivecharacteristics (Haqueet al., 1997).Thus,Africa iscurrently suffering from a poor reputation which discouragesforeign directinvestment (and possibly also domestic investment). Because contingentprotection is now an important risk factor for exportersof manufacturesindevelopingcountries,the grantingof an anti-dumpingrestraintto Africa wouldgive it a risk advantageover EastAsia which would at leastqualitativelyoffsetthis differentially high risk. This advantagemight well inducefirms to incur thecostsof gatheringinformationon the prospectsfor investmentin Africa. Surveyevidenceshowsthatat presentthevastmajority of firms looking for adevelopingcountry location do not eveninclude Africa on their short list andhenceneverincur these costs. Until firms gather such information their decisions areinevitably going to be unresponsiveto changesin African domesticpolicies.

We proposethat traderelationsbe returnedto their original reciprocalbasis.This could take the form of a North-Southfree trade area,as in the caseofNAFTA (Collier and Gunning,1995).The preferentialaccessto the Europeanmarket (including the protection against anti-dumping suits) would then becontingentuponAfrican tradeliberalisation.The reasonfor this proposalis notthat it would benefitEurope,althoughtherewould besomemodestbenefits,butthat it would benefitAfrica. During thepastdecademostAfrican countrieshavesubstantiallyliberalised their trade policy usually in the context of structuraladjustmentprogrammes.Thesetrade liberalisationshave sufferedfrom policyreversal.Oyejideetal. (1997)showthatof tenAfrican countrieswhichundertooktrade liberalisationsthere were reversalsin sevenof them. In someof thesecountriesthere was indeeda seriesof reversals,liberalisationepisodesbeingseparatedby periods in which trade controls were reintroducedor tightened.Sinceimport controlsareequivalentto a tax on exports,this patternof behaviourconstitutedan unpredictableset of incentivesfor the export sector.Becauseofthis high incidenceof reversal,firms were probablyreluctantto invest in newexportingventuresand this may accountfor the low export supply responseinAfrica during the structuraladjustmentperiod.



African governmentshavethus liberalisedwith only limited credibility. Thislow level of credibility hasbeenexacerbatedby the tendencyof donorsto ‘buy’trade liberalisation,so that it is not ‘owned’ by the government,as discussedearlier. Under the proposedarrangementtrade liberalisationwould be crediblebecausethe proposaloffers a ‘lock-in mechanism’.If a governmentwere torestoretraderestrictionsit would therebylosethevaluableaccessto theEuropeanmarket.Thisuseof reciprocityasarestraintmechanismonpolicy reversalis afterall how European countries themselves achieved intra-European tradeliberalisation. The massivechangein the political balanceof power in favourof liberal trade which would be achieved by reciprocity can be seen byconsideringthe ability of a Minister of Tradeto resistpressurefrom a domesticlobby seekinga return to protection.Reciprocity would give the minister thestrongargumentthatsucha returnwould incur a penaltyof lossof marketaccesssothatotherfirms would suffer.Indeed,this wasa majorreasonfor theMexicangovernmentwishingto join NAFTA. Thegovernmenttherebyhopedto lock in itseconomicreformsandtheefficacyof this strategyhasbeendemonstratedby thefact that despite the financial crisis a subsequentMexican governmenthasmaintainedliberal trade.

While in principle such an arrangementcould apply to an individual ACPcountry,in practicetherearetoo manycountriesfor individual negotiationsto berealistic. We thereforeproposethat the North-Southfree trade area involvesregionalgroupingsof ACP countries.In this case,membershipof sucha groupwould involve both free accessto the marketsof other membercountriesandprivilegedaccessto the Europeanmarket.For sucha regionalgroupto functioneffectively its membershipshouldbe small. Thereare,however,alreadymanysuchregionalgroupingsin Africa. The challengehasbeento makeany of theseregionalcooperationinstitutionseffective.This challengehasalreadybeentakenup by theEuropeanUnion throughtheCross-BorderInitiative (CBI). By linkingthe CBI to reciprocity with Europe,intra-Africa regionalcooperationwould bemademuchmoreeffective.Thesameincentivewhich would policeAfrican freetradewith Europewould police intra-African free trade.For example,in 1994despitemembershipof the PTA and donor conditionality on trade policy, thegovernmentof Kenyabannedmaizeimportsfrom Uganda.However,hadKenyanmanufacturersbeenat risk of forfeiting accessto Europeanmarkets,therewouldhavebeenasufficientlypowerfuldomesticlobbywithin Kenyato havepreventedthe impositionof this traderestriction,or to havegot it rapidly reversed.

The limited credibility of unilateraltradeliberalisationproducesexpectationswhich are self-fulfilling, notably a collapsein private investment,which is asevereproblemin thereformingAfrican economies.Governmentsthereforeneedall the lock-in devices which they can get: conditionality, WTO, MIGA,reciprocalagreementswith the North alongthe lines of NAFTA (Collier, 1995).At presenttheselock-in devicesarefailing. Conditionality is largely ineffective



becausein practiceaid flows havenot beenrelatedto performance(BurnsideandDollar, 1996; and Boone,1996). The GATT/WTO has not beenusedto bindtariffs by African governmentsother thanSouthAfrica andZimbabwe.Further,the major mechanismby which African governmentswould re-imposetradebarriers,foreign exchangerationing, is actually permittedundercurrent WTOrules.ReformingAfrican governmentsneeda rule changewhich would imposethe same penalties for this meansof reversing liberalisation as for others.Although African governmentshavebeeninterestedby the NAFTA model theyhavemisinterpretedits significance,seeingit asa continentalagreementratherthanasa North-Southagreement.Hence,they havefocusedon the chimeraof aPan-AfricanCommonMarket ratherthanon forging links with the EU.

c. Institutional Innovation

Oneof the importantrespectsin which theEuropeanUnion hasa comparativeadvantageoverbothnationaldonorsandtheIFIs is its capacityto generatesupra-national institutions. Above we have already proposedone such innovation,namely, the creationof reciprocal free trade areasbetweenEuropeand ACPregional groupings.However, the principle of creatinginstitutions with whichAfrican governmentscanchooseto becomeassociatedis muchmoregeneralthanthis.

ForcountrieswhichhavepeacebutaninadequatemacroeconomicenvironmentEuropehasan importantpotentialrole in facilitating the transition.For example,in the area of monetary policy ACP countries could be offered associatemembershipof theemergingEuropeanmonetaryinstitutionalarrangements. TheFrancZonefor manyyearsprovideda mechanismthroughwhich someAfricangovernmentscould achieve a degree of macroeconomicstability throughcooperationwith France.The prospectsfor EMU provide an opportunity for asimilararrangementfor all ACPcountrieswith EuropereplacingFrance.Therulesof suchacurrencyzoneneednotbeidenticalto thoseof theFrancZone.SincetheEU member countries have already established‘convergencecriteria’ formembershipof a currency area,at one end of a range of options, the samecriteria could be applied to ACP countriesseekingassociatestatus.However,weakerformsof monetaryassociationmight alsobenegotiated.An ACP countrymight, for example,retain its own currencybut adopta fixed, adjustableparity,guaranteedby the EuropeanMonetary Institution subject to the governmentmeetingbudgetarycriteria.Theconvertibility guaranteeitself might covereitherall transactionsor excludecapitaltransactions.Hence,therewould bea spectrumof monetaryintegrationwith EuropealongwhichACPgovernmentsmightchooseto positionthemselves.Evidently,full associationinto theEuro-zonewouldcarrythe strictestrules of fiscal behaviour,while more limited forms of associationwould havecorrespondinglyweakerfiscal requirements.



Somecountrieswould find oneof theseoptionsattractive,otherswould not.Theapproachwould be thatACP governmentswould havetheright to apply forEuro-Zoneassociation.An analogywould be the right of EuropeanEconomicAreacountriesto signup for EU economicpolicieseventhoughtheydo not haverights to participate in the designof those policies. An exampleof an ACPgovernmentwhich indeed chose to relinquish its national currency after adisastrousrecordof macroeconomicinstability is EquatorialGuinea,whichchoseto join theFrancZone.Themoveto a Euro-Zonewould permitmuchlargerACPeconomiesto join.

The loss of the exchangerate as a policy instrumentwhich full associationwould imply would imposesomecostswhich would vary country by country.Thosecountrieshighly exposedto externalshocksand with limited degreesofinternalprice flexibility might find it moreadvantageousto maintainadjustablenational currencies,possibly combinedwith weaker fiscal criteria. However,especiallyin thoseACP countrieswith severemacroeconomicinstability, therearevery few institutionalpricerigidities,partly becausetheformal economyis sosmall. In Zaire and Nigeria, which are the important instancesof a failure toprovidea minimum adequatelevel of macroeconomicstability, thepay-off fromre-establishing monetary stability might well outweigh the costs of reducedrelativeprice flexibility.

For countrieswhich havepeaceandanadequatemacroeconomicenvironmentbut which havevery poor resourceallocationpolicies, the scopefor EuropeanUnion interventionthroughinstitution-building is more limited. At present,themain reasonwhy countries fail to provide an adequateresourceallocationenvironmentis becauseof poor parastatalperformanceor poor compositionofpublic expenditure.To the extent that poor resourceallocation is due to traderestrictionsthe institutional innovationof reciprocalfree tradediscussedabovewould, however,contributeto a betterpolicy environment.

We now turn to thosecountrieswhich have alreadyachievedan adequatepolicy environment.For this group the EU has much potential to improveperformance throughinstitutionalinnovationsby reducingthelevel of risk facinginvestors.The EuropeanUnion is in the processof harmonisingaspectsofEuropeancommerciallaw and of harmonisingstandardsfor many professionsincluding proceduresfor professional accreditation.

The environmentfacedby economicagentsis unstablenot only becauseofchangesin macroeconomicpoliciesbut alsobecausethe judicial systemandtheway in which it is appliedoften changes.New economicpolicies, or eventheadoption of new judicial systems,can only have a very limited effect oninvestmentunlessthey are perceivedasstable.This makesit importantfor theinternationalcommunityto searchfor mechanismswhich reinforcethe stabilityof policies and rules.One mechanismis the provision by the EuropeanUnionof arbitrators.A secondis that the simultaneousadoption of proceduresby



severalstatessupportedby externalaid and technicalassistanceis more likelyto be stable than unilateral adoption. Individual states face pressurefromvarious socio-economicgroupsand lobbies,which is reducedif the rules aresupra-national.

In much of Africa commercial law has atrophied so that many moderndevelopmentsare simply not covered.The task of piecemealupdatingof thelegal frameworkis sometimesa very considerableone,often preciselyin thosecountries in which the legislative processis least able to undertakeit. TheEuropeanUnion could assistin the processof bringing African legal systemsinto line with modern practices.There is indeed a very long tradition ofattaining a satisfactorylegal code by meansof importing and incorporatingpartsof other codes.For example,in the middle ageswhen Europeexpandedinto Slavic and Islamic areas,new settlementsfrequently adoptedthe legalchartersof existing towns.The new townstherebydrasticallyreducedthe costsof establishinga setof commerciallaw without in any way infringing their ownindependence of action (Bartlett, 1994). Bringing African and Europeancommerciallaws moreclosely into line might reducethe costsof entry for newinvestors.At the sametime it would reducethe cost to African governmentsofupdatingcommerciallaw to modernconditions.Currently Franceis supportingattemptsof Franc Zone membercountriesto harmonisecommercial law andinsuranceregulations,partly by settingup regional courtsof appealunder theOHADA Treaty.The specificEuropeanUnion role would be partly the fundingof training and technicalassistance,and partly the coordinationof reformsoflegal systems.Regionalintegrationwithin Africa would be facilitated by someconvergence of commercial laws and the European Union already hasexperiencein the processof the harmonisationand reconciliation of legalsystemswith very different roots.

In severalcritical professionssuchasaccounting,African countrieshavebeenunable to reproducethe self-regulationwhich has characterisedenforcementproceduresin the EuropeanUnion. Becauseof this gradualweakeningof self-regulation,standardsof conducthavebeeneroded.Tirole (1992)showshow theincentiveto avoidopportunisticbehaviouris dependentuponthepossessionof a‘good’ reputationwhich it thenpaysto maintain.Wherea professionon averagehasgood conduct,new entrantsto the professioninherit the reputationof thegroup and therefore have an incentive to behavewell. However, once theprofessionhas lost this reputation for honestconduct, new entrantsbecometarnished by group behaviour: the expectation is that they may behaveopportunistically, andso if indeedthey do so, they arenot destroyingthe assetof agoodreputation.Badbehaviouris thuspersistentbecauseit is not in anyone’sindividual interest to recreatethe public good of a good reputation for theprofessional group. African countrieswill find it difficult to break out of thisproblem, but the establishmentof the accreditationproceduresof European



professional groupsmay offer a way out of this trap. In effect, sub-groupsofAfrican professionalswould be able to signal that they were different and soceaseto be tarnishedby theconductof othermembersof theprofession.Onceasub-groupwas clearly identifiable as lessopportunistic,usersof the professionwould shift demand to that group thereby providing an incentive for itsexpansion.The role of the EuropeanUnion in facilitating sucha developmentwouldbepartly financialandpartlycoordination.Financewouldberequiredbothfor the training of African professionalsto the standardsadoptedby Europeanprofessional associations,and for the subsequentsupervisionsconductedby theassociationsto ensure that their membersare maintaining these standards.Coordination would involve the EuropeanUnion offering the possibility ofaccreditation of African professionalsto anAfrican government,andtheEU andthe African governmentthen jointly encouragingtheir professionalassociationsto link up to undertakethenecessarytrainingandsupervision.As partof this theAfrican government,as a major user of professionalservices,would set atimetablefor its own conversionto usingaccreditedprofessionals.For example,at the end of this period the governmentwould for its own auditing useonlyaccreditedauditors.

Taking into accountthe monetaryfragmentationof Africa, the exchangerateinstability of many African countries, and the fact that investors associateinstability perceivedin any one country with the continentas a whole, thereprobablyis considerablescopefor Europe-Africacooperationin this area.Thiscould involve themonetaryarrangementsdiscussedpreviously,but alsoregionaljudicial institutions such as arbitration commissionsand regional guaranteeagenciesfor internationalinvestments.

4. CONCLUSION

Because African performance is widely recognised as having beenunsatisfactory, there is a strongcasefor designingLome V to be substantiallydifferent from Lome IV. In practice, Lome IV was characterisedby non-reciprocatedtradeconcessionsand programmeaid disbursedon the criteria ofdetailedex ante conditionality. We have proposedfive innovations. The firstwas to makeaid performance-basedwith performanceassessedin broadratherthan detailedterms.Secondly,we havesuggestedthat the actual operationofStabexis in needof modification to makeit moreconsistentwith its objectives(the specific proposalsfor which are the subjectof a separatestudy). Thirdly,we haveproposedthat the EuropeanUnion shouldoffer reciprocalregionalfreetrade agreements to ACP countries. An important component of thisarrangement would be that the partnerswould agreeto refrain from bringinganti-dumping suits against each other for the period covered by Lome V.



Fourthly, ACP countries would be enabled to participate in Europeaninstitutional arrangements.This might take the form of various types ofassociationwith the Euro-Zone, of accreditation of professionalsin ACPcountrieson the basisof EuropeanUnion standards,and of the revision andupdatingof ACP commerciallaws.

Finally, we proposea menuapproach.The Lome tradition is one which inprincipleoffers thesamepackageof aid andtraderelationsto all ACP countries.This insufficiently recognisesthe diversity of thesecountries.ACP countriesdiffer bothasto their needsandasto the preferencesof their governments,bothof which change.This canonly be accommodated by a menuapproach.That is,the EuropeanUnion andthe ACP countrieswould negotiatea rangeof options,eachof which would consistof benefitsandobligations.TheLome treatywouldthen in fact describethe menu consistingof theseoptions. The menu wouldinclude the optionswe haveproposed:performance-basedaid, reciprocaltradeagreementsand participationin supra-national institutions.In addition, it couldinclude the statusquo (that is, aid plus tradepreferences),possiblyan aid-onlyoption, and optionsunderwhich ACP countrieswould undertaketo go beyondminimumrequirementsin, say,environmentalpoliciesor theprotectionof humanrights. Once the EuropeanUnion and the ACP governmentshave agreedtheoptions,eachcountrywouldbefreeto choosewhich, if any,optionit would take.An important advantageof the menu approachis that it would avoid donorstaking decisionson which combinationof aid and trade is appropriatefor aparticularcountry.

Twenty yearsago the governmentsof the ACP countrieswere much morehomogeneousin termsof needsandpreferencesthantheyaretoday.Theideaof a‘Lome a la carte’ takesthis explicitly into account.Overthepasttwentyyears,insomecountriespolicy hasdeteriorated,whereasin others,governmentshavenowcreatedthedomesticpre-conditionsfor rapidgrowthandneedexternalassistancein innovativeformsto transformthesefrom necessaryto sufficientconditionsfortake-off. The menuapproachallows thesegovernmentsto self-select.It is forgovernmentsto self-selectinto appropriateexternalassistanceon the basisoftheir ambitionsratherthan for the EuropeanUnion to pre-selecton the basisofstructuralcharacteristics.

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