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    Development Choices: Opening Up Markets


    © International Trade Centre, International Trade Forum - Issue 4/2001

    The Untied Aid Debate - Forum presents an analysis of the ongoing debate on tied and untied aid through contributions from principal participants. The opinions expressed in these articles are those of the Organisation for Economic Co-operation and Development and ActionAid.

    Untying aid to the least developed countries (LDCs) of the world has been an objective at the Organisation for Economic Co-operation and Development (OECD) for many years. Now a breakthrough has been made which could see the world's poorest countries being able to spend more of their bilateral aid funds according to market demands, rather than those of donor governments.

    Approximately US$5.5 billion, or about 70% of all bilateral Official Development Assistance (ODA) to the least developed countries, will be untied as of January 2002. This is a significant breakthrough in one of the longest (and arguably most divisive) debates the OECD has seen over the years. It means that from next year, poor countries that receive bilateral aid will be free to purchase most goods and services from third countries and not be tied to making purchases from the donor country.

    Distorting procurement

    This begs the question, why tie aid in the first place? There may be several reasons. For a start, aid is a financial outflow from donor countries, which governments counter by getting recipients to put in export orders, for instance. But a more important reason appears to be the commercial advantages that businesses (and governments) in donor countries can gain by connecting contracts to procurement conditions. This protectionism of course distorts prices, often raising the cost of many goods and services by between 15% to 30%.

    On the other hand, some governments have pointed out that tying aid strengthens public and business support for the development effort. And, they argue, development assistance extends beyond a mere economic exchange, with tying aid sometimes seen as a way of communicating donors' cultural and ethical values, and as a sign of its willingness to cooperate closely with the people in developing countries.

    Echoes of protectionism, quip opponents, who see tying aid as a constraint on choice and freedom in the global marketplace. Tied aid tends to favour capital investment or high-value technical expertise over smaller and more poverty-focused programmes suited to the recipient. It is a costly way of subsidizing jobs in richer donor countries.

    Streamlining assistance

    Untying aid is a more efficient way to deliver assistance, allowing recipients to spend their money on another supplier, and not necessarily from the donor country. This would lead to savings by removing those price distortions, while relieving some of the administrative burdens on both recipients and donors. And different donor programmes would be easier to coordinate too, since there would be less to protect.

    Developing countries have pressed for untying aid for some time now. And recently, in the UNCTAD X Plan of Action, they identified the issue of untying as a key test of the coherence and credibility of donors' policies towards them. Many OECD countries have long been in favour of untying more aid as well, with attempts to reach agreement going as far back as 1969. Most member countries of the organization's Development Assistance Committee (DAC) have gradually come round to a consensus that now sees tying as incompatible with involving developing countries in the selection, design and implementation of aid programmes and projects, for instance. They recognize that competitive firms have to be able to bid for contracts in a manner that is consistent with the free trade principles of the World Trade Organization, in particular its Agreement on Government Procurement.

    Civil society will also be pleased with recent progress. A coalition of over 900 non-governmental organizations (NGOs) based in Europe has urged the European Commission to abolish the tied aid programmes both under the responsibility of the Commission and those of individual European Union member states.

    2002: Untied aid for LDCs

    So what does the new OECD Recom-mendation to free up aid actually do? By 1January 2002, ODA to the least developed countries will be untied in the following areas: balance of payments and structural adjustment support; debt forgiveness; sector and multi-sector programme assistance; investment project aid; import and commodity support; commercial services contracts and ODA to NGOs for procurement-related activities.

    The eight-page DAC Recommendation accepts that different approaches will be required for different categories of ODA. It strikes a balance between maintaining a sense of national involvement in donor countries' development cooperation policies, alongside the objective to procure on the basis of open international competition. With respect to technical cooperation and food aid, donors can opt to keep their aid programmes tied. Had this not been agreed, food-aid programmes and possibly the untying process may have been jeopardized. But these categories represent only a quarter of all bilateral ODA to the least developed countries, the rest being untied.

    It is already clear there will be important differences between individual donors both in the amount of aid that is covered by the Recommendation and the overall volumes and shares of aid that are untied. Effort-sharing is the key word, and DAC members intend to ensure that their aid to the least developed countries will not decline as a result of untying.

    Transparency, implementation and review procedures are central to the Recommendation being respected. Prior to the opening of any bidding, donors will notify the OECD of untied aid offers covered by the Recommendation. The notification will be made public. After bidding, donors will inform the OECD of the company that has been awarded the contract.

    ODA has been declining from OECD countries, with most of them falling well short of the United Nations' recommended target of 0.7% of gross national product. Untying aid will not reverse that trend, but at least it will help to improve the effectiveness of aid.

    Frans Lammersen is Principal Administrator in the Development Cooperation Directorate of OECD.

    This article is reprinted from the OECD Observer no. 228, September 2001.

    Additional reading

    DAC Recommendation on Untying Official Development Assistance to the Least Developed Countries, May 2001, available from http://www.oecd.org//dachtm/untie.htm

    OECD Policy Brief, Untying Aid to the Least Developed Countries, July 2001, available from http://www.oecd.org/publications/Pol_brief/2001/2001-05.pdf

    Shaping the 21st Century: The Contribution of Development Cooperation, May 1996, available from http://www.oecd.org//dac/htm/stc.htm