How ‘tied’ aid undermines development

We hear every year about the billions of dollars spent by rich countries to help improve the lives of poorer people around the developing world. Yet international aid remains unable to achieve its stated goals.

There is a range of reasons why international aid has produced such lacklustre results despite decades of attempts and trillions of dollars spent in the name of improving the lives of poor people. The inefficient use of incoming aid by leaders within the developing world is one problem. However, the manner in which international aid is delivered, including the conditionality that accompanies it, also shares much of the blame for the ineffectiveness of aid.

Major donor countries often give aid to countries they want to help, for a range of geostrategic or economic reasons, instead of those where the need is most dire. Donors will also usually ask recipient countries to undertake market-based economic reforms to achieve economic growth, although these reform measures bring the side effect of worsening inequality. Allocations made by the developed world to developing countries often do not translate into actual giving due to ‘tied aid’.

Developed countries struggle to allocate a mere one per cent of their annual GDP for international aid. These aid commitments are insignificant when viewed in the context of the history of colonial extractions from the so-called developing world, the prevailing unfair terms of international trade, and the outflow of resources from poorer countries to service their high public debts. Moreover, much of this aid comes with strings attached. So, a large proportion of it gets spent within developed countries themselves to procure goods or services needed to implement development interventions.

Untying aid can give recipient countries the freedom to procure goods and services from virtually any country, including their own local economies. Allowing developing countries greater say in using the money meant for their development is at risk of being wasted due to corruption. Yet, this risk does not justify taking purchasing decisions away from developing countries, especially since such leakages can be minimised through greater donor vigilance.

If adequately monitored, allowing developing countries to spend the funds allocated for their development creates opportunities to stimulate local businesses, generate local tax revenues, and help create a potential virtuous circle of economic growth.

Conversely, the Organisation for Economic Cooperation and Development (OECD) estimates that tied aid can increase the costs of a development project by as much as 15 to 30 per cent. Not only does tied aid costs more than untied aid, the goods and services provided by donor countries are often less well suited to local contexts and preferences.

Despite donor agreements on untying, tied aid continues to make up a significant share of bilateral aid. In 2001, some 22 industrialised countries, which are major international donors, agreed to begin untying their international aid. In 2016, more than 88% of total bilateral aid was said to be complying with the principles of untied aid. Yet, transparency remains limited, and the above-cited statistics do not evoke much confidence in actual adherence to commitments.

Even when international aid is reported as untied in principle, it can remain tied in practice. A range of informal barriers can prevent firms outside the donor country from competing to undertake development work. Canada, for instance, had reported 100% of its aid as being untied in 2014, whereas subsequent analysis revealed that 95% of aid contract spending by the Canadian government had gone to its own firms.

Paying lip service to untying aid is not enough. Perhaps entities like the OECD do not have enough leverage to pressure developed countries to genuinely untie the meagre amount of aid they allocate to the developing world. The OECD could instead revise its own aid classifications so that tied aid is discounted from the official aid reportedly being sent by donor countries to the rest of the developing world.

Published in The Express Tribune, July 20th, 2018.

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