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Policy BriefOrganisation for Economic Co-operation and Development Policy BriefOrganisation for Economic Co-operation and Development

Policy BriefOrganisation for Economic Co-operation and Development - PDF document

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Policy BriefOrganisation for Economic Co-operation and Development - PPT Presentation

July 2001 Untying Aid to the Least Developed Countries As at 1 May 2001 the list of countries classified as least developed is 2 Policy BriefUntying Aid to the Least Developed Countries What is offi ID: 452440

July 2001 Untying Aid the

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Policy BriefOrganisation for Economic Co-operation and Development© OECD 2001 July 2001 Untying Aid to the Least Developed Countries As at 1 May 2001, the list of countries classified as least developed is: 2 Policy BriefUntying Aid to the Least Developed Countries What is official development aid andhow much isuntied?Donors assist developing coun-tries in their economic develop-ment, especially in implementingpoverty reduction strategies atthe country level which are nowthe foundation for both bilateraland multilateral development co-operation. When official donoragencies give assistance with agrant element of at least 25%,this aid is classified as OfficialDevelopment Assistance (ODA).In 2000, DAC Members gave US$53 billion in ODA to developingcountries approximately two-thirds was given bilaterally, theremainder was disbursed throughmultilateral development banks,such as the World Bank. Bilat-eral aid can either be tied oruntied. Total bilateral aid to theleast developed countries standsat around $8 billion (some 17%of total bilateral aid); about halfof this is tied.Why do donors tietheir aid?The reasons for keeping aid tiedto the purchase of goods and ser-vices in the donor country are ofboth an economic and politicalnature. From a macroeconomicperspective, aid is a financial out-flow from the donor country.Governments concerned withtheir balance of payments maywish to offset these outflows byseeking to increase exportsthrough aid tying. At the enter-prise level, some firms in donorcountries may see tied aid as away to help them win contractsfor exports to aid recipients such tying of aid implies a subsidyto enterprises in donor countries.From a political perspective, somedonor governments have arguedthat tying aid strengthens publicand business support for the aideffort. Untying aid, in turn, couldthen negatively influence alreadysqueezed aid budgets. Further-more, development assistanceextends beyond a mere economicexchange. It is seen as an expres-sion of donors values and willing-ness to cooperate on a personallevel with the citizens of develop-ing countries. To emphasise theselinks, many donors want their aidefforts to be clearly visible. Tyingaid to the purchase of goods andservices of the donor country canprovide such visibility.What are the benefits of untied Proponents of untied aid empha-sise that it is a more efficient wayto deliver development assis-tance. It has been estimated thattied aid raises the cost of manygoods and services by between 15to 30%. Further, tied aidincreases the administrative bur-dens on both recipients anddonors, and also tends to favourprojects that require capital inten-sive imports or donor-based tech-nical expertise rather than smallerand more poverty-focused pro-grammes. This bias could lead tothe provision of goods, technol-ogy and advice that do not con-form to the priorities andspecifications of the recipientcountry. In short, tied aid may beconstrued as a costly way of sub-sidising jobs in donor countries a form of protectionism that runscounter to the overall OECDcommitment to open markets.According to OECD Secretary-General Donald Johnston in hisspeech to the 1999 WTO SeattleConference: ”Untying aid, byrestoring choice to impoverishedrecipient countries would increasethe value of aid, remove a distor-tion to world commerce andenhance the dignity of the aid pro-cess that has been sullied by themercantilist attitudes of some in thedeveloped world.”What do stakeholders think?The practice of tying aid nowappears out of line with the newthinking on development co-operation, as set out in the 1996DAC strategy Shaping the 21Century: The Contribution ofDevelopment Co-operation. Thisstrategy commits donors toworking in partnership withdeveloping countries towardsinternationally agreed develop-ment goals. Aid untying figuresprominently in major interna- 1. The grant element is the difference between the face value and the present value of a loan calculated at a rate of discount of 10%. 3 Policy BriefUntying Aid to the Least Developed Countries tional conferences on develop-ment issues:In the UNCTAD X Plan ofAction, developing countriesidentified the issue of untyingaid as a key test of the coherenceand credibility of donorspolicies towards them.The DAC agreement was wel-comed as a major deliverableby the Third United NationsConference on the least devel-oped countries in May of thisyear;Preparations for the UnitedNations Financing for Develop-ment Conference in March2002 emphasise the contribu-tion of untied aid to greater aideffectiveness.Tying practices are seen asincompatible with effective part-nerships. Liberalising aid pro-curement is a tangible steptowards increased involvement ofdeveloping countries in theselection, design and implemen-tation of aid programmes andprojects.The business community has alsoexpressed its interest for untyingaid in a multilateral frameworkwith credible provisions for trans-parency and monitoring. Compet-itive firms will benefit more fromaccess to a combined pool ofuntied aid than from reservedaccess to more limited nationaltied aid funds. Moreover, untyingin a multilateral context will alignthe aid business with the freetrade principles of the WTOAgreement on Government Pro-curement. As such, it will consti-tute an important step towardscreating a level playing field forprocurement. The Non-Govern-mental Organisation (NGO) com-munity has long been an activeadvocate for aid untying. In fact, acoalition of over 900 NGOs basedin Europe has urged the EuropeanCommission to abolish tied aidprogrammes. What are donors currently doing?One cannot say that all tied aid isbad and that all untied aid isgood. But, in light of the argu-ments in favour of untied aid,many donors have been increas-ing over time the relative impor-tance of untied aid in theirprogrammes.Despite this positive trend duringthe 1990s, the growing share ofuntied aid in total bilateral aid hasleveled off since 1997. This is dueto the fact that some large donorsgave important amounts of tiedtechnical assistance in 1998 and1999. Four categories of donorsare identified in the table belowon the basis of their ratio ofuntied aid to total bilateral ODAcommitments to developingcountries. Bilateral ODA commitments to developing countries1990199119921993199419951996199719981999(US $ billion)UntiedTotal 4 Policy BriefUntying Aid to the Least Developed Countries Early attempts at untying aidAs far back as 1969, a firstattempt did not reach agreementon untying bilateral aid. The con-clusion of the discussions wasreflected in the DAC Communi- as follows: "For the firsttime, a large majority of Mem-bers declared themselves pre-pared to adhere to an agreementto untie their bilateral financialdevelopment loans. Other Mem-bers were not in a position tocommit themselves on the prin-ciple or on the urgency of such ascheme. While they were pre-pared to participate in furtherdiscussions concerning the estab-lishment of such an agreement,they stressed that any suchscheme should take into accounttheir special circumstances andtheir aid composition." A second attempt was made in1974, when 10 donors joined ina Memorandum of Understand-ing for the reciprocal untyingtheir bilateral developmentloans. But the agreement neverbecame fully operational as theoil crises diverted attention tomore pressing issues.The 1998 mandate to untie aid to the least developed countriesHaving reached agreement in1992 on a set of disciplines toguide the use of tied aid, theattention of the DAC subse-quently returned to exploringways to liberalise aid procure-ment. Following a detailedinvestigation of options and tar-gets for a possible initiative, theDACs 1998 High Level Meetingmandated work on a Recom-mendation to untie aid to theleast developed countries. Theinitiative was targeted to thiscategory of countries because oftheir relatively greater depen-dence on aid. Since the leastdeveloped countries face the great-est challenges in achieving the Mil-lenium Development Goals, theycan ill afford to bear the additionalcosts and inefficiencies associatedwith tied aid. The 2001 DAC Recommendation tountie aid to theleast developed countriesAfter intensive discussions, theDAC at its High Level Meeting inMay 2001 reached agreement ona Recommendation to untie ODAto the least developed countries.The objectives of the Recommen-dation are to:untie ODA to the leastdeveloped countries to thegreatest extent possible;promote and ensure ade-quate ODA flows, in partic-ular to the least developedcountries;Average Untied Aid Ratio* 1995–1999Over 90% 50%-90%25%-50%Under 25%No dataJapanSwedenSwitzerlandNorwayPortugalNetherlandsGermanyFinlandDenmarkCanadaItalyAustraliaUnited KingdomFrance Austriaa.Recently, the United Kingdom has announced that it will untie all its bilateral aid, which will bring it into the group of leading untied aid donors together with Japan,Sweden and Switzerland.Untied bilateral ODA as percentage of total bilateral ODASource: OECDBelgiumSpainUnited StatesGreeceIrelandLuxembourgNew Zealand 5 Policy BriefUntying Aid to the Least Developed Countries achieve balanced effortsamong DAC Members inuntying aid.The Recommendation also recog-nises that reinforcing partnercountry responsibility for pro-curement and the ability of theprivate sector to compete for aidfunded contracts are required inorder for the Recommendation todeliver its full benefits.CoverageBy 1 January 2002, ODA to theleast developed countries will beuntied in the following areas:balance of payments and struc-tural adjustment support; debtforgiveness; sector and multi-sector programmes assistance;investment project aid; importand commodity support; com-mercial services contracts, andODA to NGOs for procurementrelated activities. In addition, theRecommendation acknowledgesthat different approaches arerequired for different categoriesof ODA and that actions toimplement the Recommendationmight vary between donors interms of coverage and timing.Simply put, there are some activi-ties (notably technical co-opera-tion and food aid) where it isrecognised that untying wouldpose more delicate problems forsome donors than for others.TheRecommendation thereforestrikes a balance between main-taining a sense of nationalinvolvement in donor countriesdevelopment co-operation poli-cies alongside the objective toprocure more goods and servicesin partner countries. Thus, withrespect to technical co-operationand food aid, donors can opt tokeep their aid programmes tied.Overall, it is expected thatapproximately US$5.5 billion orabout 70% of all bilateral ODA tothe least developed countries willbe untied as of January 2002.Effort-sharingPromoting a reasonable balanceamong Members in their effortsto implement the untying initia-tive is an integral part of the Rec-ommendation. The issue ofbalanced effort-sharing arisesfrom the interplay of two factors the coverage of the Recommen-dation and the variations in vol-ume, structure and geographicalorientations of different aidprogrammes. As a result, theimplementation of the Recom-mendation will produce impor-tant differences betweenindividual donors both in theamount of aid that is covered bythe Recommendation and theoverall volume and share of aidthat is untied. Therefore, theRecommendation acknowledgesthat achieving a balance in effort-sharing is a legitimate andimportant concern for govern-ments, parliaments and the pub-lic at large. In that respect,Members have agreed to under-take their best endeavours toidentify and implement supple-mentary actions to promoteeffort-sharing and to regularlyreview progress towards morebalanced sharing oftheir effortstowards the least developedcountries. Furthermore, theyexpressed their intention thattheir aid to the least developedcountries will not decline overtime as a result of the implemen-tation of the Recommendation.Transparency and monitoringThe Recommendation sets outstrong transparency, implemen-tation and review procedures toprovide and maintain a levelplaying field, monitor compli-ance with the Recommendationand assess its effectiveness. Forinstance, prior to the opening ofthe bidding period donors willnotify the OECD Secretariat ofuntied aid offers covered by theRecommendation. Subse-quently, the notification will bemade publicly available toinform companies in donor andrecipient countries to the possi-bilities to bid for the contract. Ingeneral, bidding will take placeaccording to the 1986 DACGood Procurement Practices forODA, which give guidance oneffective and competitive pro-curement. Donors will alsoinform the Secretariat aboutthecompany that has beenawarded the contract. In addi-tion, an electronic informationexchange system will allowMembers to ask each other foradditional information or toclarify ambiguities. 6 Policy BriefUntying Aid to the Least Developed Countries Implementing the RecommendationThe Recommendation becomesoperational on 1 January 2002.Major efforts are now underwayto get in place for this and to putits provisions into practice. Bythe beginning of next year, Mem-bers will have to make whateveradjustments are necessary totheir policies and practices tountie agreed categories of aid.Equally, the OECD Secretariatwill have to put monitoring andreview provisions into opera-tion, including the creation of anelectronic bulletin board toadvertise untied aid offers.Beyond these immediate tasks,implementation will requiremuch work in other areas tocheck that the Recommendationis meeting its objectives. Thiswill include, for example:work to strengthen procure-ment capacities in developingcountries so that they cantake greater responsibility forthis;work to improve the com-pleteness and comparabil-ity of Members' reportingon tied and untied aid;implementing the effort-sharing provisions of theRecommendation to improvethe balance among Mem-bers in respect of theirefforts towards the leastdeveloped countries willalso be a major task.For further informationMore information about theRecommendation can be obtainedfrom Frans Lammersen (email: frans.lammersen@oecd.orgtel: (33-1) 45 24 89 88). FRANCEOECD Headquarters2, rue André-Pascal75775 PARIS Cedex 16Tel.: 33 (0) 1 45 24 81 81Fax: 33 (0) 1 45 24 19 50E-mail: sales@oecd.orgInternet: www.oecd.orgGERMANYOECD BERLIN CentreAlbrechtstrasse 9/10D-10117 BERLINTel.: (49-30) 2888353Fax: (49-30) 28883545E-mail: berlin.contact@oecd.orgInternet: www.oecd.org/deutschlandJAPANOECD TOKYO CentreLandic Akasaka Bldg2-3-4 Akasaka, Minato-Ku TOKYO 107Tel.: (81-3) 3586 2016Fax: (81-3) 3584 7929 E-mail: center@oecdtokyo.orgInternet: www.oecdtokyo.orgMEXICOOECD MEXICO CentreAv. Presidente Mazaryk 526Colonia: PolancoC.P. 11560Mexico, D.FTel.: (00.52.5) 281 3810Fax: (00.52.5) 280 0480E-mail: mexico.contact@oecd.orgInternet: www.rtn.net.mx/ocdeUNITED STATESOECD WASHINGTON Center2001 L Street N.W., Suite 650WASHINGTON D.C. 20036-4922Tel.: (1-202) 785 6323Fax: (1-202) 785 0350 E-mail: washington.contact@oecd.orgInternet: www.oecdwash.orgToll free: (1-800) 456 6323For further readingShaping the 21 Century: The Contribution of Development Co-operationDAC Recommendation on Untying Official Development Assistance to the Least Developed CountriesMay 2001 www.oecd.org/dac/htm/Untie.htm OECD publications can be securely purchased from the OECD Online Bookshopwww.oecd.org/bookshop The OECD Policy Briefs are available on the OECD’s Internet site www.oecd.org/publications/Pol_brief/Where to contact us? The OECD Policy Briefs are prepared by the Public Affairs Division,Public Affairs and Communications DirectorateThey are published under the responsibility of the Secretary-General.7 Policy BriefUntying Aid to the Least Developed Countries 81447 2 Policy Brief What is official development aid andhow much isuntied?Donors assist developing coun-tries in their economic develop-ment, especially in implementingpoverty reduction strategies atthe country level which are nowthe foundation for both bilateraland multilateral development co-operation. When official donoragencies give assistance with agrant element of at least 25%,this aid is classified as OfficialDevelopment Assistance (ODA).In 2000, DAC Members gave US$53 billion in ODA to developingcountries approximately two-thirds was given bilaterally, theremainder was disbursed throughmultilateral development banks,such as the World Bank. Bilat-eral aid can either be tied oruntied. Total bilateral aid to theleast developed countries standsat around $8 billion (some 17%of total bilateral aid); about halfof this is tied.Why do donors tietheir aid?The reasons for keeping aid tiedto the purchase of goods and ser-vices in the donor country are ofboth an economic and politicalnature. From a macroeconomicperspective, aid is a financial out-flow from the donor country.Governments concerned withtheir balance of payments maywish to offset these outflows byseeking to increase exportsthrough aid tying. At the enter-prise level, some firms in donorcountries may see tied aid as away to help them win contractsfor exports to aid recipients such tying of aid implies a subsidyto enterprises in donor countries.From a political perspective, somedonor governments have arguedthat tying aid strengthens publicand business support for the aideffort. Untying aid, in turn, couldthen negatively influence alreadysqueezed aid budgets. Further-more, development assistanceextends beyond a mere economicexchange. It is seen as an expres-sion of donors values and willing-ness to cooperate on a personallevel with the citizens of develop-ing countries. To emphasise theselinks, many donors want their aidefforts to be clearly visible. Tyingaid to the purchase of goods andservices of the donor country canprovide such visibility.What are the benefits of untied Proponents of untied aid empha-sise that it is a more efficient wayto deliver development assis-tance. It has been estimated thattied aid raises the cost of manygoods and services by between 15to 30%. Further, tied aidincreases the administrative bur-dens on both recipients anddonors, and also tends to favourprojects that require capital inten-sive imports or donor-based tech-nical expertise rather than smallerand more poverty-focused pro-grammes. This bias could lead tothe provision of goods, technol-ogy and advice that do not con-form to the priorities andspecifications of the recipientcountry. In short, tied aid may beconstrued as a costly way of sub-sidising jobs in donor countries a form of protectionism that runscounter to the overall OECDcommitment to open markets.According to OECD Secretary-General Donald Johnston in hisspeech to the 1999 WTO SeattleConference: ”Untying aid, byrestoring choice to impoverishedrecipient countries would increasethe value of aid, remove a distor-tion to world commerce andenhance the dignity of the aid pro-cess that has been sullied by themercantilist attitudes of some in thedeveloped world.”What do stakeholders think?The practice of tying aid nowappears out of line with the newthinking on development co-operation, as set out in the 1996DAC strategy Shaping the 21Century: The Contribution ofDevelopment Co-operation. Thisstrategy commits donors toworking in partnership withdeveloping countries towardsinternationally agreed develop-ment goals. Aid untying figuresprominently in major interna- 1. The grant element is the difference between the face value and the present value of a loan calculated at a rate of discount of 10%. PB-Untying.fm Page 4 Wednesday, July 25, 2001 3:53 PM *The disciplines were primarily negotiated in the OECD under the auspices of the Participants to the OECD Arrangement onOfficially Supported Export Credits. 4 Policy BriefUntying Aid to the Least Developed Countries Early attempts at untying aidAs far back as 1969, a firstattempt did not reach agreementon untying bilateral aid. The con-clusion of the discussions wasreflected in the DAC Communi-qué as follows: "For the firsttime, a large majority of Mem-bers declared themselves pre-pared to adhere to an agreementto untie their bilateral financialdevelopment loans. Other Mem-bers were not in a position tocommit themselves on the prin-ciple or on the urgency of such ascheme. While they were pre-pared to participate in furtherdiscussions concerning the estab-lishment of such an agreement,they stressed that any suchscheme should take into accounttheir special circumstances andtheir aid composition." A second attempt was made in1974, when 10 donors joined ina Memorandum of Understand-ing for the reciprocal untyingtheir bilateral developmentloans. But the agreement neverbecame fully operational as theoil crises diverted attention tomore pressing issues.The 1998 mandate to untie aid to the least developed countriesHaving reached agreement in1992 on a set of disciplines toguide the use of tied aid PB-Untying.fm Page 4 Wednesday, February 20, 2002 11:07 AM *The disciplines were primarily negotiated in the OECD under the auspices of the Participants to the OECD Arrangement onOfficially Supported Export Credits.Average Untied Aid Ratio* 1995–1999 4 Policy BriefUntying Aid to the Least Developed Countries Early attempts at untying aidAs far back as 1969, a firstattempt did not reach agreementon untying bilateral aid. The con-clusion of the discussions wasreflected in the DAC Communi-qué as follows: "For the firsttime, a large majority of Mem-bers declared themselves pre-pared to adhere to an agreementto untie their bilateral financialdevelopment loans. Other Mem-bers were not in a position tocommit themselves on the prin-ciple or on the urgency of such ascheme. While they were pre-pared to participate in furtherdiscussions concerning the estab-lishment of such an agreement,they stressed that any suchscheme should take into accounttheir special circumstances andtheir aid composition." A second attempt was made in1974, when 10 donors joined ina Memorandum of Understand-ing for the reciprocal untyingtheir bilateral developmentloans. But the agreement neverbecame fully operational as theoil crises diverted attention tomore pressing issues.The 1998 mandate to untie aid to the least developed countriesHaving reached agreement in1992 on a set of disciplines toguide the use of tied aid, the