The united aid debate; Development choices: Opening up markets.

• Author: Lammersen, Frans

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...