Tied aid: Difference between revisions

{{Short description|International transfer of resources with geographic limits on procurement and spending}}

[[Image:TiedAid.png|thumb|350px|right|Distributions of tied and untied aid worldwide in 2006<ref name="OECD2006" />]]

'''Tied aid''' is a kind of [[Aid|foreign aid]]. It must be spent on products and services provided by companies from the country providing the aid (the donor country) or in a group of specified countries.

A [[developed country]] provides a [[bilateralism|bilateral]] loan or grant to a [[developing country]], but mandates that the money be spent on goods or services produced in the selected country. Conversely, [[untied aid]] is a type of foreign aid with no geographical restrictions.

In 2006, the [[OECD|Organisation for Economic Co-operation and Development]] (OECD) estimated that 41.7 percent of [[Official development assistance|Official Development Assistance]] is untied aid.<ref name="OECD2006">OECD. (2006). ''2005 Development Co-operation Report''. Volume 7, No. 1. Paris: OECD. {{ISBN|92-64-03651-2}} Available for download: [http://www.oecd.org/document/35/0,2340,en_2649_201185_36052835_1_1_1_1,00.html OECD Journal on Development, Development Co-operation Report 2005]</ref>

==Definition==

The OECD's full definition of ''tied aid'' is:<ref>"Tied Aid Credits", [http://stats.oecd.org/glossary/detail.asp?ID=3089 OECD Glossary of Statistical Terms]</ref>

<blockquote>Tied aid credits are official or officially supported loans, credits,orassociated financing packages where the procurement of the goods or services involved is limited to the donor country or to a group of countries that does not include substantially all developing countries (or Central and Eastern European Countries (CEECs)/New Independent States (NIS) in transition).</blockquote>

==Motivations==

{{Further|Political corruption|Phantom aid}}

The OECD report ''The Tying of Aid'' written by Catrinus Jepma<ref name=":0" /> found that the motivations for tying aid were both economical and political. From an economic standpoint, the donor country aims to raise its exports by tying the aid to domestic companies. However, the study found minimal exports related to tied aid.{{Clarify|reason=vague|date=May 2016}} The report referred to an earlier study that examined the relationship between exports from nine representative European donors and thirty-two representative developing countries. That study found that exports connected to tied aid constituted about four percent of the total. ''The Tying of Aid'' thus concluded that political motivations were more important than economical. Historical relations, trade relationships, geopolitical interests, and cultural ties are all examples of the political motivations behind the tying of aid but, according to Jepma, they all boiled down to the same thing, "Although most donors give aid to quite a wide variety of recipients, the importance they attach to individual recipients differs: donors support countries with which they have or hope to have strong ties."

==Costs to aid recipients==

[[Image:Atrophy30.png|thumb|right|Value reduced by 30%]]

[[Image:Atrophy20.png|thumb|right|Value reduced by 20%]]

It is difficult to accurately estimate the related costs to the aid recipient for various reasons. For example, even if a donor ties its aid, it may be that the donor already has the most competitive prices. The donor may also havealimited ability to enforce aid ties in the recipient country, theoretically making ties ineffective. Even so, the OECD has made some general remarks on the costs:

{{Blockquote|text=Aid tying by OECD donor countries has important consequences for developing countries. Tying aid to specific commodities and services, or procurement in a specific country or region, can increase development project costs by as much as 20 to 30 percent.<ref name="TyingAid">

[http://www.oecd.org/LongAbstract/0,2546,en_2649_18108886_29412506_119699_1_1_1,00.html OECD ''The tying of Aid'']</ref>}}

If donors claim that 42 percent of bilateral aid is untied, one can assume that the remaining 58 is tied. In 2004, total bilateral aid amounted to US $79.5 billion.<ref name="OECD2006"/>InOECD's worst-case scenario, tying aid can reduce its value by as much as 30 percent. If that were true in all cases, it would translate toa reduction in value of US$13.9 billion for the recipients. If the value is reduced by 20 percent on average, it would equal a loss of US$9.2 billion.

{{clear}}

The tying of aid is a form of [[protectionism]]; however, the literature on this particular subject is limited. One of the major problems in untying aid is the [[prisoner's dilemma]]. Donors who want to abolish the practice will see their interests damaged if the other donors do not follow.<ref name=":0">Jepma, Catrinus J. (1991). ''The Tying of Aid''. Paris: OECD. Available for download: [http://www.oecd.org/findDocument/0,2350,en_2649_18108886_1_119699_1_1_1,00.html Untied Aid OECD Documents and Publications]</ref>

In 2001, the donor members of the [[Development Assistance Committee]] (DAC), an OECD subcommittee, agreed to virtually untie all aid to the [[Least developed countries|Least Developed Countries]]. That recommendation became effective on January 1, 2002. In addition, [[Australia]], [[Finland]], [[France]], [[Germany]], [[Ireland]], [[Japan]], the [[Netherlands]], [[Norway]], [[Portugal]], [[Sweden]], [[Switzerland]], and the [[United Kingdom]] have untied their aid beyond the recommendation's requirements.

Further progress on this particular issue is being implemented as part of the [[Paris Declaration on Aid Effectiveness]]. However, of the 12 indicators included, untying bilateral aid is the only item without a deadline.<ref>Paris Declaration on Aid Effectiveness. Indicator nr. 8. Available for download: [http://www.oecd.org/document/18/0,2340,en_2649_3236398_35401554_1_1_1_1,00.html The Paris Declaration]</ref>

Tied aid increases the total cost of the assistance. It tends to make donors focus more on their own countries' commercial advancement rather than the developing countries' needs. When recipient nations are required to spend aid on products from the donor nation, project costs can be raised by up to 30 percent.<ref>{{Cite web |url=http://www.cgdev.org/doc/CDI/2009/Aid_2009.pdf |title=CGD Background Paper: Aid Component by David Roodman |access-date=2010-08-24 |archive-date=2016-03-03 |archive-url=https://web.archive.org/web/20160303212921/http://www.cgdev.org/doc/CDI/2009/Aid_2009.pdf |url-status=dead }}</ref> Tied aid can create distortions in the market and impede the recipient country's ability to spend the aid it receives. There are growing concerns about the use of tied aid as well as efforts to analyze the quality of aid rather than the quantity. The [[Commitment to Development Index]], which measures the "development friendliness" of rich countries, actually penalizes donor governments for tied aid when calculating the index.

Others have argued that tying aid to donor-country products is common sense; it is a strategic use of aid to promote the donor country's business or exports. Tied aid improves donors' export performance and creates business for local companies and jobs. It also helps expose firms lacking international experience in the global market.<ref name="tiedaid">[https://archive.today/20130105111331/http://www3.interscience.wiley.com/journal/112138351/abstract?CRETRY=1&SRETRY=0], Tied Aid and Multi-Donor Budgetary Support, Journal of International Development, Vol 17. Issue 9</ref> It is further argued that tied aid, if well-designed and effectively managed, would not necessarily compromise the quality and effectiveness of aid (Aryeetey, 1995; Sowa 1997). However, this argument does not hold for all types of aid; in the case of program aid, for example, aid is tied to specific projects or policies and has limited commercial interest. Maximizing commercial benefits to the donor country rarely maximizes aid effectiveness to the recipient country. Thus, when aiming to maximize development, pursuing commercial benefits to the donor country may reduce aid effectiveness.

In the United Kingdom, the [[Department for International Development|Overseas Development Administration]] (ODA), was under the supervision of the [[Foreign Secretary]] and the [[Foreign, Commonwealth and Development Office]], which led, on at least one occasion, to allegations of a connection between granting aid and achieving either foreign policy goals or British companies winning export orders. A scandal erupted concerning the UK funding of a hydroelectric dam on the Pergau River in [[Malaysia]], near the Thai border. Building work began in 1991 with money from the UK foreign aid budget. Concurrently, the Malaysian government bought around £1 billion worth of arms from the UK. The suggested linkage of arms deals to aid became the subject of a UK government inquiry in March 1994. In November 1994, after an application for [[judicial review]] brought by the [[Global Justice Now|World Development Movement]], the [[High Court of Justice|High Court]] held that the then [[Secretary of State for Foreign and Commonwealth Affairs|Foreign Secretary]], [[Douglas Hurd]] had acted ''[[ultra vires]]'' (outside of his power and therefore illegally) by allocating £234 million towards the damn's funding because it was not of economic or humanitarian benefit to the Malaysian people [https://web.archive.org/web/20091015114133/http://www.tiscali.co.uk/reference/encyclopaedia/hutchinson/m0045540.html]. In 1997, the administration of the UK's aid budget was removed from the Foreign Secretary's remit with the establishment of the [[Department for International Development]] (DfID) which replaced the ODA.

Tied aid is now illegal in the UK by the [http://www.opsi.gov.uk/acts/acts2002/20020001.htm International Development Act], which came into effect June17, 2002, replacing the Overseas Development and Co-operation Act (1980).

* [https://web.archive.org/web/20060522092057/http://www.dfid.gov.uk/aboutdfid/organisation/organogram.pdf Organisational chart]

[[Category:International development]]