Tied aid

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.

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 OECD is:

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 it was found that the motivations for tying aid were both economical and political. From the 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. 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:

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:

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