Tied aid is foreign aid that must be spent in 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.
A developed country, industrialized country, more developed country, or more economically developed country (MEDC), is a sovereign state that has a developed economy and advanced technological infrastructure relative to other less industrialized nations. Most commonly, the criteria for evaluating the degree of economic development are gross domestic product (GDP), gross national product (GNP), the per capita income, level of industrialization, amount of widespread infrastructure and general standard of living. Which criteria are to be used and which countries can be classified as being developed are subjects of debate.
Bilateralism is the conduct of political, economic, or cultural relations between two sovereign states. It is in contrast to unilateralism or multilateralism, which is activity by a single state or jointly by multiple states, respectively. When states recognize one another as sovereign states and agree to diplomatic relations, they create a bilateral relationship. States with bilateral ties will exchange diplomatic agents such as ambassadors to facilitate dialogues and cooperations.
A developing country is a country with a less developed industrial base and a low Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreement on which countries fit this category. A nation's GDP per capita compared with other nations can also be a reference point. In general, the United Nations accepts any country's claim of itself being "developing".
In 2006, the Organisation for Economic Co-operation and Development (OECD) estimated that 41.7 percent of Official Development Assistance is untied.
The full definition of tied aid as defined by OECDis:
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).
In the OECD report The Tying of Aid [ clarification needed ] 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 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: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 own exports. However, the study found that the exports related to tied aid were minimal.
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.
It is difficult to make a correct estimate on the related costs to the recipient for various reasons. One of these, is that even though a donor ties its aid, it might be that the donor has the most competitive prices in any case. Another factor is the ability a donor has to enforce the tying of aid in the recipient country. 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 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 US$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 US$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 US$9.2 billion.
The tying of aid is a form of protectionism; 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. 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 (DAC), a subcommittee of the OECD, agreed to virtually untie all aid to the Least Developed Countries. That Recommendation entered into effect on January 1, 2002. In addition, Australia, Finland, France, Germany, Ireland, Japan, the Netherlands, Norway, Portugal, Sweden, Switzerland and the United Kingdom 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 completion.
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 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 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.
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 from 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, on the grounds that 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 virtue of 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) is a United Kingdom government department responsible for administering overseas aid. The goal of the department is "to promote sustainable development and eliminate world poverty". DFID is headed by the United Kingdom's Secretary of State for International Development. The position has been held, since 24 July 2019, by Alok Sharma. In a 2010 report by the Development Assistance Committee (DAC), DFID 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.
Official development assistance (ODA) is a term coined by the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) to measure aid. The DAC first used the term in 1969. It is widely used as an indicator of international aid flow. It includes some 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 or development cooperation is financial aid given by governments and other agencies to support the economic, environmental, social, and political development of developing countries. It can be further defined as "aid expended in a manner that is anticipated to promote development, whether achieved through economic growth or other means". It is distinguished from humanitarian aid by focusing on alleviating poverty in the long term, rather than a short term response.
Aid effectiveness is the effectiveness of development aid in achieving economic or human development. Following the Cold War in the late 1990s, donor governments and aid agencies began to realize that their many different approaches and requirements for conditioning aid were imposing huge costs on developing countries and making aid less effective. They began working with each other, and with developing countries, to harmonize their work to improve its effect. Aid agencies are always looking for new ways to improve aid effectiveness, including conditionality, capacity building and support for improved governance.
In international relations, aid is – from the perspective of governments – a voluntary transfer of resources from one country to another.
Development geography is a branch of geography which refers to the standard of living and its quality of life of its human inhabitants. In this context, development is a process of change that affects people's lives. It may involve an improvement in the quality of life as perceived by the people undergoing change. However, development is not always a positive process. Gunder Frank commented on the global economic forces that lead to the development of underdevelopment. This is covered in his dependency theory.
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, 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.
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. The United Kingdom 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.
The Commitment to Development Index (CDI), 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 beyond standard comparisons of foreign aid flows. It measures "development-friendliness" of 27 of the world's richest countries, all member nations of the OECD's Development Assistance Committee. The CDI assesses national effort in seven policy areas: aid, trade, investment, migration, environment, security, and technology. It is considered to be a numerical targeting indicator for Goal 8 of the Millennium Development Goals. It shows that aid is about more than quantity - quality also matters - and that development policy is about more than aid. The Index penalizes countries that give with one hand, for instance through aid or investment, but take away with the other, through trade barriers or pollution.
United States foreign aid is aid given by the United States government to other governments. It does not include money from private charitable organizations based in the United States, or remittances sent between family members. There are two broad categories: military aid and economic assistance. The Congressional Research Service divides it into five categories: bilateral development aid,economic assistance, humanitarian aid, multilateral economic contribution, and military aid.
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) 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. It is led by three-year-term president of the board who is appointed by the President upon the recommendation of Foreign Minister.
AidData is a research and innovation lab located at the College of William & Mary that seeks to make development finance more transparent, accountable, and effective. The AidData website provides access to development finance activity records from most official aid donors. The AidData portal provides access to development finance activities from 1945 to the present from 95 donor agencies. In addition, the AidData program works on other projects that make it easier to access and analyze aid information, such as the World Bank Institute's Mapping for Results Initiative and the Development Loop application.
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.
Payment by Results (PbR) is a type of public policy instrument whereby payments are contingent on the independent verification of results. It is being actively promoted by a number of governments for more effective implementation of domestic policy.
Various high level forums on aid effectiveness were held throughout the progression of the aid effectiveness movement following the 2003 High Level Forum on Harmonization in Rome. It was at this forum where donor agencies agreed to better coordinate their aid activities with developing countries, as well as periodically discuss any concrete progress at different high level forums of aid effectiveness. These meetings served for the advancement towards better aid while they show how countries built towards better ways of doing business together through the results of their meetings.