Tied aid
Encyclopedia
Developed country
A developed country is a country that has a high level of development according to some criteria. Which criteria, and which countries are classified as being developed, is a contentious issue...
will provide a bilateral
Bilateralism
Bilateralism consists of the political, economic, or cultural relations between two sovereign states. For example, free trade agreements signed by two states are examples of bilateral treaties. It is in contrast to unilateralism or multilateralism, which refers to the conduct of diplomacy by a...
loan or grant to a developing country
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
, 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.
In 2006 the Organisation for Economic Co-operation and Development (OECD) estimated that 41.7 percent of Official Development Assistance
Official development assistance
Official development assistance is a term compiled by the Development Assistance Committee of the Organisation for Economic Co-operation and Development to measure aid. The DAC first compiled the term in 1969. It is widely used by academics and journalists as a convenient indicator of...
is untied.
Definition
The full definition of tied aid as defined by OECD is: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
The practice of tying aid has been known for almost 40 years. One of the first studies to address the problem was undertaken by United Nations Conference on Trade and Development secretary in the preparation for the Second UN Conference on Trade And Development, held in New DelhiNew Delhi
New Delhi is the capital city of India. It serves as the centre of the Government of India and the Government of the National Capital Territory of Delhi. New Delhi is situated within the metropolis of Delhi. It is one of the nine districts of Delhi Union Territory. The total area of the city is...
in 1968. The following year the final report of the Pearson Commission
Pearson Commission
The Royal Commission on Civil Liability and Compensation for Personal Injury, better known as the Pearson commission was a United Kingdom royal commission, established in 1973 under the chairmanship of Lord Pearson...
also condemned the practice because it reduces the overall value of aid.
Still, it was only in 1991 that 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 (chuck larry 1337)
Motivations for tying aid
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. The Tying of Aid thus concluded that the more important reason for the practice was political. Historical relations, trade relationships, geopolitical interests and cultural ties, all are 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 clearly differs: donors support countries with which they have, or hope to have, strong ties.
Costs to the recipients of aid
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
The tying of aid is a form of protectionismProtectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
; however, the literature on this particular subject is rather scanty. One of the major problems in the untying of aid is the prisoner's dilemma
Prisoner's dilemma
The prisoner’s dilemma is a canonical example of a game, analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so. It was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W...
. Those donors that want to abolish the practice will see their own interests damaged if the other donors do not follow.
In 2001, the donor members of the Development Assistance Committee
Development Assistance Committee
The Organisation for Economic Co-operation and Development's Development Assistance Committee is a forum for selected OECD member states to discuss issues surrounding aid, development and poverty reduction in developing countries...
(DAC), a subcommittee of the OECD, agreed to virtually untie all aid to the Least Developed Countries
Least Developed Countries
Least developed country is the name given to a country which, according to the United Nations, exhibits the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world...
. That Recommendation entered into effect on January 1, 2002. In addition, Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Finland
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
, Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
, Portugal
Portugal
Portugal , officially the Portuguese Republic is a country situated in southwestern Europe on the Iberian Peninsula. Portugal is the westernmost country of Europe, and is bordered by the Atlantic Ocean to the West and South and by Spain to the North and East. The Atlantic archipelagos of the...
, Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
and the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
have untied their aid beyond the requirements of the Recommendation.
Further progress on this particular issue is being implemented as part of the Paris Declaration on aid effectiveness. However, of the 12 indicators included, the untying of bilateral aid is the only item without a deadline for its competition.
Arguments for and against tied aid
Tied aid increases the cost of assistance and has the tendency of making donors focus more on the commercial advancement of their countries than what developing countries need. When recipient nations are required to spend aid on products from the donor nation, project costs can be raised by up to 30 percent. Tied aid can create distortions in the market and impede the recipient country's ability to spend the aid they receive. There are growing concerns about the use of tied aid and efforts to analyze the quality of aid given, rather than simply the quantity. The Commitment to Development IndexCommitment to Development Index
The Commitment to Development Index , published annually by the Center for Global Development, ranks the world’s richest countries on their dedication to policies that benefit the five billion people living in poorer nations. Rich and poor countries are linked in many ways; thus the Index looks...
, which measures the "development friendliness" of rich countries, actually penalizes donor governments for tied aid in the calculation of the index.
Others have argued that tying aid to donor-country products is common sense; it is a strategic use of aid to promote donor country’s business or exports. It is further argued that tied aid if well designed and effectively managed, would not necessarily compromise the quality as well as the effectiveness of aid (Aryeetey, 1995; Sowa 1997). However, this argument would hold particularly for programme aid, where aid is tied to a specific projects or policies and where there is little or no commercial interest. It must be emphasized however, that commercial interest and aid effectiveness are two different things and it would be difficult to pursue commercial interest without compromising aid effectiveness. Thus, the idea of maximizing development should be separated from the notion of pursuing commercial interest. Tied aid improves donors export performance, creates business for local companies and jobs. It also helps to expose firms, which have not had any international experience on the global market to do so.
Examples
In the UK, the Overseas Development Administration (ODA), was under the supervision of the Foreign Secretary and the Foreign and Commonwealth OfficeForeign and Commonwealth Office
The Foreign and Commonwealth Office, commonly called the Foreign Office or the FCO is a British government department responsible for promoting the interests of the United Kingdom overseas, created in 1968 by merging the Foreign Office and the Commonwealth Office.The head of the FCO is the...
, which led, on at least one occasion, to allegations of a connection between the granting of aid and the achievement of 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 from March 1994. In November 1994, after an application for Judicial Review
Judicial review
Judicial review is the doctrine under which legislative and executive actions are subject to review by the judiciary. Specific courts with judicial review power must annul the acts of the state when it finds them incompatible with a higher authority...
brought by the World Development Movement
World Development Movement
The World Development Movement is a membership organisation in the United Kingdom which campaigns on issues of global justice and development in the Global South....
, the High Court
High Court of Justice
The High Court of Justice is, together with the Court of Appeal and the Crown Court, one of the Senior Courts of England and Wales...
held that the then Foreign Secretary, Douglas Hurd
Douglas Hurd
Douglas Richard Hurd, Baron Hurd of Westwell, CH, CBE, PC , is a British Conservative politician and novelist, who served in the governments of Margaret Thatcher and John Major between 1979 and his retirement in 1995....
had acted ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
(outside of his power and therefore illegally) by allocating £234 million towards the funding of the dam, on the grounds that it was not of economic or humanitarian benefit to the Malaysian peoplehttp://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
Department for International Development
The Department For International Development is a United Kingdom government department with a Cabinet Minister in charge. It was separated from the Foreign and Commonwealth Office in 1997. The goal of the department is "to promote sustainable development and eliminate world poverty". The current...
(DfID) which replaced the ODA.
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).