Will EU development agenda deliver on inclusive growth?

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The EU's new strategy for the developing world should be good news for the microfinance sector as is fosters the kind of sustainable growth that the EU is looking for, writes Christoph Pausch, executive secretary of the European Microfinance Platform.

Christoph Pausch is executive secretary of the European Microfinance Platform, a network of more than 130 organisations and individuals active in the area of microfinance. He contributed this commentary in exclusivity for EurActiv.

"This month the European Commission launched its new ‘agenda for change’ development strategy. Besides the enhanced focus on human rights and democratisation, a prominent take home for policy analysts will be the further streamlining of activities towards fewer practice areas and geographical regions - directing resources to where the EU can have the most impact.

Given microfinance’s strong record under the EU's development funding schemes with African, Caribbean and Pacific (ACP) states, this should be good news for the sector.

Indeed, EU development funding and microfinance have a limited but important history in the EU's relations with ACP states.  The Cotonou Partnership between the EU and ACP countries, implemented by the European Investment Bank (EIB), supports financial sector development in ACP countries, including microfinance. The partnership has, for example, helped companies to set up microfinance banks or networks of banks – including in rural areas, which are more risky for the private sector. In 2010, the programme also helped establish the first pan-African local-currency debt fund.

The programme’s actions have been particularly important in tying over activities during the financial crisis, when private investment has been waning.

Yet the Cotonou partnership represents only a small proportion of EU development funding, of which microfinance is one element. How will the new agenda support these activities?

So far it is difficult to predict how individual instruments will be affected. The priorities of the agenda – increased private sector cooperation and a focus on inclusive growth (including ‘access to business and financial services’) – are certainly compatible with an enhanced role for microfinance. Its real benefit over state-led initiatives is its capacity to stimulate economic activity at all levels of society – working with SMEs to kindle business activity as well with the very poorest individuals; providing subsidence over times of hardship and the opportunity to climb the economic ladder.

However, the agenda also points to the continued prominence of state-led interventions, with the EU using development funds a carrot for government implementation of the ‘right’ policies.

Amidst the support for democracy and good governance that the agenda prioritises, the European Microfinance Platform would like to see continued and enhanced focus on economic participation from the bottom of the pyramid.

The agenda can deliver on its aspirations for inclusive growth through improved attention to financial inclusion and microfinance infrastructure, especially in rural areas. Microfinance might seem less obvious in a time of revolution but it actually has the ingredients for the kind of sustainable growth that the EU is looking for."

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