Tied aidW is foreign aidW that must be spent in the country providing the aid (the donor country) or in a group of selected countries. A developed countryW will provide a bilateralW loan or grant to a developing countryW, but mandate that the money be spent on goods or services produced in the selected country. From this it follows that untied aid has no geographical limitations.
Definition[edit | edit source]
The OECD defines Tied aid in this way:
Tied aid credits are official or officially supported Loans, credits or Associated Financing packages where procurement of the goods or services involved is limited to the donor country or to a group of countries which does not include substantially all developing countries (or Central and Eastern European Countries (CEECs)/New Independent States (NIS) in transition).
Early Criticism[edit | edit source]
The Pearson commission of 1969 condemned the practice because it reduces the overall value of aid.
In 1991 the OECD undertook a study to look at the practice as a whole. It introduced the subject by saying that the arguments for the tying of aid were related to the marginalization of its effects, which in turn was because no complete study of the phenomenon existed. The problem of making such a study was because the donors could not agree on a useful model to quantify the issue. The OECD report aimed at filling this gap (Jempa 1991).
Motivations for tying aid[edit | edit source]
In the OECD report The Tying of Aid it was found that the motivations for tying aid were both economical and political. From the economic point of view, the donor country aims to raise its own exports. However, the study found that the exports related to tied aid were minimal. It referred to an earlier study that looked at the relation between exports from nine representative European donors and 32 representative developing countries. That study found that exports connected to tied aid only constituted about 4 percent of the total.
According to Jempa, 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 clearly differs: donors support countries with which they have, or hope to have, strong ties.
Costs to the recipients of aid[edit | edit source]
The OECD has made some general remarks on the costs:
Aid tying by OECD donor countries has important consequences for developing countries. Tying aid to specific commodities and services, or to procurement in a specific country or region, can increase development project costs by as much as 20 to 30 per cent.
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 USD 79.5 billion. In the worst case scenario of OECD, the tying of aid can reduce its value by as much as 30 percent. If that was true in all cases, that translates into a USD 13.9 billion reduced value of aid for the recipients. If the value on an average only is reduced by 20 percent, it would equal USD 9.2 billion.
The problems of untying aid[edit | edit source]
The tying of aid is a form of protectionismW. One of the major problems in the untying of aid is the donor dilemma. Those donors that want to abolish the practice will see their own interests damaged if the other donors do not follow.
Further progress on this particular issue is being implemented as part of the Paris Declaration on aid effectivenessW. However, of the 12 indicators included, the untying of bilateral aid is the only item without a deadline for its competition.
Examples[edit | edit source]
Tied aid is now illegal in the UK by virtue of the International Development Act, which came into force on 17 June 2002, replacing the Overseas Development and Co-operation Act (1980).
Notes[edit | edit source]
- "Tied Aid Credits", OECD Glossary of Statistical Terms
- OECD The tying of Aid 
- Jepma, Catrinus J. (1991). The Tying of Aid. Paris: OECD. Available for download: Untied Aid OECD Documents and Publications
- Paris Declaration on Aid Effectiveness. Indicator nr. 8. Available for download: The Paris Declaration