The 4th High-Level Forum on Aid Effectiveness that will be held in Busan, South Korea in late November will look at the controversial “tied aid” requirements, where donors insist aid is spent on goods and services provided by companies based in their own countries. The European Network on Debt and Development has report that $20-$25 billion of aid is given in this form and fails to improve developing countries’ economies, reduces the purchasing power of aid distributors, and increases the risk of unsuitable aid programs.
By Gideon Rabinowitz
In late November the international aid community will gather in Busan, South Korea, to agree an action plan to improve the impact of the $120-$150bn in annual global aid flows. Negotiations on this action plan are well underway.
Experienced aid-watchers will not be surprised that "tied aid" – requirements by some donors that aid be spent on goods and services provided by companies based in their own countries – is among the most controversial issues being discussed in advance of the 4th high-level forum on aid effectiveness (HLF4).
Negotiations on this issue highlight what is at stake for poor people at HLF4, and show how the challenging global economic climate may place a ceiling on the reform commitments donors will make. They also raise questions about whether efforts to take discussions on aid effectiveness beyond the OECD donors for the first time – to include the likes of China and India – will backfire by providing OECD donors with an excuse to scale back their reform ambitions.
As recently highlighted by the European network on debt and development, the $20-$25bn of aid that remains formally tied fails to maximise the contribution of aid to developing country economies, reduces the purchasing power of aid by an estimated 15-40%, and heightens the risk of unsuitable programmes being delivered.
In response to demands from developing country governments and in an effort to quicken the slow pace of action on tied aid – a recent survey by the OECD found that little progress has been made on this issue since 2005 – the OECD has proposed that at HLF4 its members commit to eradicating the use of tied aid by 2015.
This is not a proposal that OECD donors seem to be in a mood to accept. A number have made it clear that such a commitment would be a hard political sell, probably because of the economic benefits this form of aid provides to their fragile economies. Some have gone as far as saying that such actions will reduce public support for aid in their countries and therefore lead to reduced aid flows overall.
Some have also hinted at frustration in being pressured to eliminate tied aid while emerging economies such as China and India continue to use tied aid in their fast growing development programmes (currently worth an estimated $30bn). This dynamic has grown as the OECD actively encourages engagement with emerging economies in these negotiations for the first time.
A number of prominent donors who have been among the most active in untying aid have stayed noticeably silent in these discussions, preferring to focus their efforts on improving transparency and the reporting of results to donor taxpayers and aid recipients. This is perhaps the most prominent theme which donors are focused on before HLF4.
The negotiations on tied aid therefore highlight a number of factors that threaten to weaken outcomes from HLF4 and efforts to reform the effectiveness of aid.
First, it seems the challenging global economic climate may be limiting the reform ambitions of donors in areas that determine who benefits from aid flows. Tied aid has provided a way for donors to deliver aid in ways that also support their own economies - a benefit that the economic climate is bringing into sharper focus. Although donors are increasingly calling for better results to be achieved from aid, their aid practices are all too often shaped by self-interest and not what is required to maximise results for the world's poorest people. If HLF4 is to deliver on its ambitions, then donors must put this self-interest aside and focus increasingly on how aid can truly deliver better development outcomes.
Second, although the objective of widening aid effectiveness discussions to include donors beyond the OECD is an important one and recognises changing global dynamics, it may be encouraging OECD donors to weaken their reform ambitions as these new donors are expected to make different and in some ways less ambitious reform commitments. Such a stance fails to reflect the fact that OECD donors have long-standing commitments on aid effectiveness that have not been met and the need for these donors to set an example for new donors, who will face few incentives to act if OECD donors are not prepared to take their own aid responsibilities seriously.
In the midst of these dynamics, the voice of aid recipients is still struggling to be heard. It must be this voice that guides the aid system beyond self-interest and geopolitical wrangling at HLF4 towards more effective aid in supporting the world's poorest people to create better lives for themselves.