Tied aid is a form of foreign aid where the donor country mandates that the aid money must be spent on goods or services produced in the donor country or a selected group of countries (OECD, 2006).
Key Facts
- Definition: Tied aid is a type of foreign aid where the donor country mandates that the aid money must be spent on goods or services produced in the donor country or a selected group of countries.
- Motivations: The motivations for tying aid are both economical and political. Economically, the donor country aims to raise its exports by tying the aid to companies in the donor country. Politically, historical relations, trade relationships, geopolitical interests, and cultural ties play a role in the tying of aid.
- Costs to recipients: Tied aid can increase development project costs by as much as 20 to 30 percent. This is because tying aid to specific commodities or services, or procurement in a specific country or region, limits the recipient’s ability to seek the most competitive prices.
- Progress on untying aid: Efforts have been made to untie aid, particularly to the Least Developed Countries. However, progress on untying bilateral aid is still ongoing, and it is the only item without a deadline for completion in the Paris Declaration on Aid Effectiveness.
- Arguments for and against tied aid: Critics argue that tied aid increases the total cost of assistance, focuses more on the commercial advancement of donor countries, and creates market distortions for recipients. On the other hand, proponents argue that tying aid promotes the donor country’s business or exports, improves export performance, and creates business opportunities and jobs.
Motivations
The motivations for tying aid are both economical and political. Economically, the donor country aims to raise its exports by tying the aid to companies in the donor country (OECD, 2006). Politically, historical relations, trade relationships, geopolitical interests, and cultural ties play a role in the tying of aid (Jepma, 1991).
Costs to Recipients
Tied aid can increase development project costs by as much as 20 to 30 percent (OECD, 2006). This is because tying aid to specific commodities or services, or procurement in a specific country or region, limits the recipient’s ability to seek the most competitive prices.
Progress on Untying Aid
Efforts have been made to untie aid, particularly to the Least Developed Countries. In 2001, the donor members of the Development Assistance Committee (DAC) agreed to virtually untie all aid to the Least Developed Countries. However, progress on untying bilateral aid is still ongoing, and it is the only item without a deadline for completion in the Paris Declaration on Aid Effectiveness (2005).
Arguments for and Against Tied Aid
Critics argue that tied aid increases the total cost of assistance, focuses more on the commercial advancement of donor countries, and creates market distortions for recipients. On the other hand, proponents argue that tying aid promotes the donor country’s business or exports, improves export performance, and creates business opportunities and jobs.
References
- OECD. (2006). 2005 Development Co-operation Report. Volume 7, No. 1. Paris: OECD.
- Paris Declaration on Aid Effectiveness. (2005). Indicator nr. 8.
- Jepma, C. J. (1991). The Tying of Aid. Paris: OECD.
FAQs
What is tied aid?
Tied aid is a form of foreign aid where the donor country mandates that the aid money must be spent on goods or services produced in the donor country or a selected group of countries.
What are the motivations for tying aid?
The motivations for tying aid are both economical and political. Economically, the donor country aims to raise its exports by tying the aid to companies in the donor country. Politically, historical relations, trade relationships, geopolitical interests, and cultural ties play a role in the tying of aid.
What are the costs of tied aid to recipients?
Tied aid can increase development project costs by as much as 20 to 30 percent. This is because tying aid to specific commodities or services, or procurement in a specific country or region, limits the recipient’s ability to seek the most competitive prices.
What progress has been made on untying aid?
Efforts have been made to untie aid, particularly to the Least Developed Countries. In 2001, the donor members of the Development Assistance Committee (DAC) agreed to virtually untie all aid to the Least Developed Countries. However, progress on untying bilateral aid is still ongoing, and it is the only item without a deadline for completion in the Paris Declaration on Aid Effectiveness.
What are the arguments for and against tied aid?
Critics argue that tied aid increases the total cost of assistance, focuses more on the commercial advancement of donor countries, and creates market distortions for recipients. On the other hand, proponents argue that tying aid promotes the donor country’s business or exports, improves export performance, and creates business opportunities and jobs.
Is tied aid still practiced today?
Yes, tied aid is still practiced today, although there has been some progress in untying aid, particularly to the Least Developed Countries.
What are some examples of tied aid?
Examples of tied aid include:
- A donor country providing a loan to a recipient country, but requiring that the money be spent on goods or services from the donor country.
- A donor country providing a grant to a recipient country for the construction of a hospital, but requiring that the construction contract be awarded to a company from the donor country.
What are the alternatives to tied aid?
Alternatives to tied aid include:
- Untied aid: Aid that is not tied to the purchase of goods or services from the donor country or a selected group of countries.
- Multilateral aid: Aid that is provided through international organizations, such as the World Bank or the United Nations.
- Non-governmental aid: Aid that is provided by non-governmental organizations, such as charities or foundations.