Distributions of tied and untied aid worldwide in 2006
Tied aid is a kind of foreign aid. It must be spent on products & services provided by companies that are from the country providing the aid (the donor country) or in a group of selected countries.
A developed country will provide a bilateral loan or grant to a developing country, 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.
The full definition of tied aid as defined by OECD[2] is:
Tied aid credits are official or officially supported Loans, credits, or Associated 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).
In the OECD report The Tying of Aid[3] it was found that the motivations for tying aid were both economical and political. From an economic point of view, the donor country aims to raise its exports by tying the aid to companies in the donor country. However, the study found minimal exports related to tied aid.[clarification needed] It referred to an earlier study that looked at the relationship between exports from nine representative European donors and 32 representative developing countries. That study found that exports connected to tied aid 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 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 the recipients of aid
Value reduced by 30%Value reduced by 20%
It is difficult to make a correct estimate on the related costs to the 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 have a limited 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:
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.[3]
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.[1] 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 US$13.9 billion reduced value of aid for the recipients. If the value on average is reduced by 20 percent, it would equal US$9.2 billion.
The problems of untying aid
The tying of aid is a form of protectionism; however, the literature on this particular subject is limited. One of the major problems in the untying of 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.[4]
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 completion.[5]
Arguments for and against tied aid
Tied aid increases the total cost of the assistance. It tends to make donors focus more on the commercial advancement of their own countries rather than the needs of developing countries. When recipient nations are required to spend aid on products from the donor nation, project costs can be raised by up to 30 percent.[6] 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 rather than the quantity. The Commitment to Development Index, 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 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.[7] 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.
Examples
In the UK, the Overseas Development Administration (ODA), was under the supervision of the Foreign Secretary and the Foreign and Commonwealth Office, 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 in March 1994. In November 1994, after an application for Judicial Review brought by the World Development Movement, the High Court held that the then Foreign Secretary, Douglas Hurd had acted ultra vires (outside of his power and therefore illegally) by allocating £234 million towards the funding of the dam because it was not of economic or humanitarian benefit to the Malaysian people . 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 International Development Act, which came into force on 17 June 2002, replacing the Overseas Development and Co-operation Act (1980)yA.
The Department for International Development (DFID) was a department of HM Government responsible for administering foreign aid from 1997 to 2020. The goal of the department was "to promote sustainable development and eliminate world poverty". DFID was headed by the United Kingdom's Secretary of State for International Development. The position was last held by Anne-Marie Trevelyan, who assumed office on 13 February 2020 and served until the department was dissolved on 2 September 2020. In a 2010 report by the Development Assistance Committee, the department was described as "an international development leader in times of global crisis". The UK aid logo is often used to publicly acknowledge DFID's development programmes are funded by UK taxpayers.
An aid agency, also known as development charity, is an organization dedicated to distributing aid. Many professional aid organisations exist, both within government, between governments as multilateral donors and as private voluntary organizations or non-governmental organisations. The International Committee of the Red Cross is the world's second oldest humanitarian organisation and is unique in being mandated by international treaty to uphold the Geneva Conventions. The Sovereign Order of Malta, established in 1099 as the Order of St. John of Jerusalem, has an unbroken tradition of over 900 years of hospitaller activities, continuing to this day. Even in its modern guise under international law, it was recognized at the Congress of Verona of 1822, and since 1834 headquartered in Palazzo Malta in Rome, decades before the Red Cross.
Official development assistance (ODA) is a category used by the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) to measure foreign aid. The DAC first adopted the concept in 1969. It is widely used as an indicator of international aid flow. It refers to material resources given by the governments of richer countries to promote the economic development of poorer countries and the welfare of their people. The donor government agency may disburse such resources to the government of the recipient country or through other organizations. Most ODA is in the form of grants, but some is measured as the concessional value in soft (low-interest) loans.
In political economy and international relations, conditionality is the use of conditions attached to the provision of benefits such as a loan, debt relief or bilateral aid. These conditions are typically imposed by international financial institutions or regional organizations and are intended to improve economic conditions within the recipient country.
Development aid is a type of foreign/international/overseas aid given by governments and other agencies to support the economic, environmental, social, and political development of developing countries. Closely related concepts include: developmental aid, development assistance, official development assistance, development policy, development cooperation and technical assistance. It is distinguished from humanitarian aid by aiming at a sustained improvement in the conditions in a developing country, rather than short-term relief. Development aid is thus widely seen as a major way to meet Sustainable Development Goal 1 for the developing nations.
Aid effectiveness is the degree of success or failure of international aid. Concern with aid effectiveness might be at a high level of generality, or it might be more detailed.
In international relations, aid is – from the perspective of governments – a voluntary transfer of resources from one country to another.
An export credit agency or investment insurance agency is a private or quasi-governmental institution that acts as an intermediary between national governments and exporters to issue export insurance solutions and guarantees for financing. The financing can take the form of credits or credit insurance and guarantees or both, depending on the mandate the ECA has been given by its government. ECAs can also offer credit or cover on their own account. This does not differ from normal banking activities. Some agencies are government-sponsored, others private, and others a combination of the two.
The Federal Ministry for Economic Cooperation and Development, abbreviated BMZ, is a cabinet-level ministry of the Federal Republic of Germany. Its main office is at the former German Chancellery in Bonn with a second major office at the Europahaus in Berlin.
Japan emerged as one of the largest foreign aid donors in the world during the 1980s.
Nepal relies heavily on foreign aid, and donors coordinate development aid policy through the Nepal Development Forum, whose members include donor countries, international financial institutions, and inter-governmental organizations. Japan is Nepal's largest bilateral aid donor, and the World Bank and Asian Development Bank are the largest multilateral donors. Donors have been reported as losing confidence in Nepal as a result of political interference and corruption in poverty relief efforts as well as the country's apparently poor capacity to utilize aid. According to World Bank figures, official development assistance increased from US$8.2 million in 1960 to US$369 million in 2003 and then fell to US$177 million in 2004. According to Nepal's Ministry of Finance, total foreign aid committed in fiscal year (FY) 2003 was US$555 million, with 63.3 percent in grants and 36.7 percent in loans. In FY2004, total foreign aid committed was US$320 million, of which 37.7 percent was grants and 62.3 percent, loans. In June 2004, active World Bank credits totaled US$302 million, with the greatest portions allocated to the financial sector and to energy and mining. By the end of 2012, the outstanding World Bank IDA loan totaled $ 1.48 billion.
The Organisation for Economic Co-operation and Development's (OECD) Development Assistance Committee (DAC) is a forum to discuss issues surrounding aid, development and poverty reduction in developing countries. It describes itself as being the "venue and voice" of the world's major donor countries.
Untied aid is assistance given to developing countries which can be used to purchase goods and services in virtually all countries. It is contrasted with tied aid which stipulates that goods and services bought with it can only be purchased from the donor country or from a limited selection of countries.
United States foreign aid, also known as US foreign assistance consists of a variety of tangible and intangible forms of assistance the United States gives to other countries. Foreign aid is used to support American national security and commercial interests and can also be distributed for humanitarian reasons. Aid is financed from US taxpayers and other revenue sources that Congress appropriates annually through the United States budget process. It is dispersed through "over 20 U.S. government agencies that manage foreign assistance programs," although about half of all economic assistance is channeled through the United States Agency for International Development (USAID).
The Korea International Cooperation Agency was established in 1991 by the Ministry of Foreign Affairs of South Korea as a governmental organization for Official Development Assistance (ODA). KOICA's goal is to enhance the effectiveness of South Korea's grant aid programs for developing countries by implementing the government's grant aid and technical cooperation programs. KOICA is led by three-year-term president of the board who is appointed by the President upon the recommendation of Foreign Minister.
The DAC Network on Development Evaluation is a subsidiary body of the Development Assistance Committee (DAC). Its purpose is to increase the effectiveness of international development programmes by supporting robust, informed and independent evaluation.
Chinese foreign aid may be considered as both governmental (official) and private development aid and humanitarian aid originating from the People’s Republic of China.
Irish Aid is the Government of Ireland's official international development aid programme. Irish Aid is managed by the Development Co-Operation and Africa Division (DCAD) of the Department of Foreign Affairs (DFA). According to the OECD, Ireland’s total ODA increased in 2022, mostly due to higher in-donor refugee costs and higher contributions to international organisations. ODA represented 0.64% of gross national income (GNI). The Irish Aid programme is an integral part of Ireland's foreign policy.
Four high level forums on aid effectiveness were held between 2003 and 2011 as part of a "continuous effort towards modernising, deepening and broadening development co-operation and the delivery of aid" coordinated through the OECD. They took place at Rome (2003), Paris (2005), Accra (2008) and Busan (2011).
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