This ODI Working Paper focuses the debate on the European Union’s (EU) new proposed policy approach to middle-income countries (MICs) – ‘differentiation’ – at the case study level, through an analysis of South Africa.

Shifting global patterns of wealth, poverty, trade, and geopolitical power are constructing new opportunities and challenges for development actors. The development landscape has always been characterised by change, but what is new is the role of MICs in development cooperation:

• as countries with development needs and the majority of the world’s poor people;
• as recipients of aid, loans and other concessional benefits;
• as important anchors for regional and global development;
• as donors; and
• as strategic partners for development or otherwise.

As a result of these shifts, some donors have changed their aid allocation models, concessional benefits and ways of working with MICs. The controversy around, and diverging perspectives on the debates on ‘aid in MICs’ indicate that many development actors are struggling to redefine and shape their work and relationships with MICs. It also indicates that the internal and external context shaping development actors has changed significantly and warrants a revision, if not a change, in policy approach.

The EU’s proposed approach of ‘differentiation’ could lead to cuts in grant-based bilateral aid to 17 upper-middle-income countries (UMICs) and two lower-middle-income countries (LMICs) from 2014. These countries will still be eligible for funds from thematic and regional programmes. However, this policy will fundamentally change the nature of the relationship by altering the volume of funds, modalities, and sectors, and – crucially – eliminating the EU and partner country joint development programme and the negotiations that accompany it.

South Africa is a key country in this debate. The European Commission initially proposed that the country should be exempted from the policy of differentiation. However, a majority of member states, through the Council of Ministers, are pushing for South Africa to be included in the policy and thereby to lose its grant-based bilateral aid budget. Meanwhile, the European Parliament has kept South Africa on the list of eligible countries.

This paper seeks to analyse and inform this debate. To date, some researchers have examined the aid in MICs debates at the theoretical level, focusing on EU aid, and some at the technical level. This paper aims to focus these debates at the case study level through analysis of South Africa. The methodology includes 37 interviews and two private roundtable discussions with key stakeholders in the Government of South Africa, the EU, other Development Assistance Committee (DAC) donors in the country, non-state actors and academics conducted in South Africa and Brussels between November 2012 and March 2013.