Donors, no one needs tied aid

A lady commented pithily on Twitter the other day in what might have been an amused or accusatory tone: “Aid as politics is obvious. What next, then, for #Rwanda? Aid is not a gift, it’s a tool.” She was reacting to a commentary on this column with a clever twist to the commentary’s title, ‘Aid is not a gift, it’s a tool’ (The New Times, May 2, 2013). Perhaps she was being witty or cynical, but she seemed to miss the point. As a tool, aid is neither good nor bad. It depends on which political or ideological hand wields it, and to what extent as a means to an end. Rwanda is notable in Africa for its efficient use of aid with the positive impact on development and economic growth. However, aid, as offered by the donor countries and their institutions, is hardly given gratis as a present; it serves the donor’s strategic interests. The fact that donor countries, as much as the recipient countries, have their interests, is already water under the bridge. It is indisputable that aid, political or otherwise, will be with us for a while. Of more concern is how to make aid more effective. In November 2011, the Fourth High-Level Forum on Aid Effectiveness was held in Busan, South Korea. The international summit, in which Rwanda was strongly represented, sought to review progress on donor pledges made a decade earlier to put an end to “tied aid”. Tied aid is the linking of foreign aid to obligations forcing aid recipients to pay Western consultants and administrative costs, or buy from donor country companies. This means that the money to developing countries shows only on the books and may never leave the donor countries. A report from the European Network on Debt and Development (Eurodad) released just before the Busan summit noted how donor countries had reneged on their promises, with at least 20% of all bilateral aid being formally tied. The Eurodad researchers also found that two-thirds of formally untied aid contracts went to firms from rich donor countries. Firms in developing countries were being edged out by powerful transnational companies and complex procurement systems. The World Bank, for instance, among other big development banks, according to the report, systematically opt for international competitive bidding increasing the chances that large firms from donor countries to win contracts. Half the contract value of World Bank-funded projects in the decade in question went to companies from donor countries. Donors have often argued that they cannot purchase local services because of corruption, inefficiency, and important financial risks posed by doing business in developing countries. This is true enough, if we take the many cases of reported kickbacks and donor funds lining individuals’ pockets. But, regarding procurement, the Eurodad research did not find any relationship between the cases where donors chose to buy locally and the quality of countries’ public financial systems. What is important to note is that tied aid is expensive with potentially more severe value losses, such as missed opportunities for strengthening local markets, gaining local expertise, respecting local preferences and providing a sense of ownership in the recipient countries. The 2011 international summit on aid effectiveness was important in that the Busan Partnership for Effective Development Co-operation recognized this fact and the agreement signed by ministers of developed and developing countries, among other stakeholders. The agreement was based on five principles: to encourage local ownership; alignment of developing programmes around a country’s development strategy; harmonization of practices to reduce transaction costs; avoidance of fragmented efforts; and, creation of results frameworks. What remains is to see how successful the Busan agreement will be. The tweeting lady may be aware of this, but as Rwanda shows, aside from the donor countries’ often disputed political considerations to withdraw support, aid effectiveness is possible where the will exists backed by relevant structures, and where the law is enforced to curb corruption. Other than that, it behooves all to play their role in the agreement. Otherwise, there is no reason not to believe that tied aid will continues to persist. Twitter: @gituram