Skip to main content
Log in

Abstract

Donors tie large amounts of foreign aid, forcing recipients to buy from donor countries. Scholars and the OECD have long argued that, by not permitting recipients to procure locally or to participate in internationally competitive bidding practices, tied aid creates inefficiencies that undermine economic growth. Furthermore, tied aid may be less effective than untied aid because it serves donor companies more than it targets recipient needs. Despite the academic, policy, and media attention on tied aid, there is little empirical study of whether it is worse for growth than untied aid. Using the latest econometric techniques to account for potential endogeneity, we present and analyze new data on tied aid covering 157 countries across the Global South (1990–2018). We find that tied aid is, indeed, associated with less growth than untied aid and suggest that donors interested in development should not tie aid. We conclude with directions for future research.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Subscribe and save

Springer+ Basic
EUR 32.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or Ebook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. Dietrich (2016) similarly notes that simply characterizing aid as money that donors give to recipient governments does not reflect the complexity of aid. By “donors,” we refer to members of the 30 OECD Development Assistance Committee (DAC) members.

  2. Some of the increase may reflect improvements in reporting, but the sheer amount is staggering, especially given international commitments to end the practice of tied aid. See Carcelli (2020).

  3. For an analysis of the characteristics of Chinese aid, see Zeitz (2021), Dreher et al. (2022), and Swedlund (2017).

  4. See Barrett and Maxwell (2007). In addition, Svensson (2000) speculated that tied aid might avoid the moral hazard associated with aid in general.

  5. See Clay et al. (2009) and Koeberle et al. (2006) for a review.

  6. Although some suggest aid has an overall beneficial impact (Sachs 2006), others suggest a multitude of ways in which aid might do more harm than good (Easterly 2006; Ahmed 2012). More specifically on the impact of aid on economic growth, quantitative work has found that aid has no impact (Rajan and Subramanian 2008, Dreher and Langlotz 2020), has a negative effect (Griffin and Enos 1970), a positive effect (Dalgaard et al. 2004), or that the aid’s impact is conditional (Burnside and Dollar (2000) are an example of this very prolific stance). For more details on this last debate, see Clemens et al. (2012).

  7. See Knack and Smets (2013) for a list, as well as Honig (2018). For untied aid disbursed by Canada, see Arvin and Choudhry (1997).

  8. Much of the literature on tied aid proposes formal models of the aid’s welfare benefits (see Clay et al. (2009) for a review), as well as possible conflicts of interests concerning the type of aid between donors and recipients (Michael and Marrewijk 1998). An exception is Miquel-Florensa (2007), who found that, on average, tied aid failed to improve economic growth in a sample that ends in 1997. The present study extends the time series of Miquel-Florensa by 21 years and incorporates the latest approach to the endogeneity of aid using instrumental variables.

  9. See Humphreys and Scacco (2020) for a review.

  10. See Wright and Winters (2010) for a sweeping review.

  11. See The New York Times, “U.S. Jobs Shape Condoms’ Role in Foreign Aid,” October 29, 2006, as well as the recent debate around US military aid to Ukraine which overwhelmingly stays in the US (Washington Post 2023, 2024). From the perspective of companies in donor countries, tied aid offers the opportunity to sell a product to a recipient country without foreign competition (Hall 2011).

  12. See Clay et al. (2009) and Jepma (1991) for a review of estimations.

  13. Clay et al. (2009) and Koeberle et al. (2006) review the literature behind this argument.

  14. See Appendix Table A1 for summary statistics.

  15. The OECD includes an additional category for aid which is partially tied aid. In the case of partially tied aid, recipients are required to purchase the good or service from the donor or from a limited set of other countries. Because recipients are “restricted” in how they use the aid, this type of aid straddles the two categories of tied and untied aid, which is why we did not include it in either category. However, some have made the argument that partially tied aid could be categorized as tied aid (Clay et al. 2009, 5). Thus, we also conducted our main analyses using a measure that combines tied and partially tied aid and the results are robust with our main findings (Appendix Table A2).

  16. All dollar amounts are in 2018 constant US dollars.

  17. For a full breakdown of sectors and purpose codes see https://webfs.oecd.org/oda/DataCollection/Resources/DAC-CRS-CODES.xls. Appendix Figures A1 and A2 present the total amount of the main sectors for tied and untied aid.

  18. On this statistical approach, see Langlotz (2018) and Dreher and Langlotz (2020).

  19. Data on tied and untied aid are only reported as commitments. Ideally, we would have data on disbursements because the influence of aid on growth hypothesized here assumes disbursed aid. However, commitments are correlated with disbursements (r = 0.954), adding confidence that our inferences based on commitment data are valid.

  20. As a result, the data analysis began the first period after 1990–1993, namely 1994–1997.

  21. The source of the data and code is Clemens et al. (2012), updated by Minasyan (2016) and shared with us by Dreher.

  22. Including a variable measuring the baseline per capita income could induce Nickell bias in the models (Langlotz 2018). We therefore conducted the analysis without baseline income and the results were robust (Appendix Table A3).

  23. Only controls that vary over time are included in the tables due to the fixed effects in the model. Thus, some of the variables from the original Burnside and Dollar (2000) model drop out. Following Dreher and Langlotz, we exclude the control for policy due to missing data. However, including the control does not affect the main results (Appendix Table A4).

  24. In addition to the controls listed above, we conducted tests for the possible influence of trade and commercial ties with a measure of trade (as a percent of GDP) as well as the influence of strategic aid per capita (Girod 2015) and our findings remained robust (Appendix Tables A5 and A6).

  25. See Dreher and Langlotz (2020) for a critique of the Galiani et al. (2017) approach.

  26. Another approach for this analysis would be to expand the number of instruments and use a different instrument for tied and untied aid. This approach was used by Dietrich and Wright (2015) in African countries and instrumented inflation to check on the impact of economic aid and women in parliament to assess the impact of democracy aid. This is a useful approach, but the two instruments suffer from the same limitation of previous instruments of only varying over time rather than donor-recipient pairs which the Dreher and Langlotz (2020) instrument addresses. We hope future work will address this limitation and more instruments to the quality of that in Dreher and Langlotz will become available.

  27. In Appendix Figure A3, we graph the marginal plot effects of Models 1 and 2 in Table 1 to see the impact of the curvilinear relationship. As over 90% of the observations are under 3 (percent of GDP) for tied aid and at under 7 (in percent of GDP) for untied aid, we focus on those parts of the graph and can see that an increase in tied aid as a % of GDP is associated with decreases in growth whereas an increase in untied aid is associated with an increase in growth. For tied aid, recipients start recording increases in economic growth only once tied aid reaches 10 (percent of GDP) and it becomes statistically significant only past 18 (percent of GDP), and few observations pass this standard.

  28. Total aid might confound the association between tied or untied aid and growth. As a result, we controlled for total aid in a robustness check. The main results remained unchanged. See Appendix Table A7. Another way to test for the joint impact of various types of aid was to model our analysis as an interaction between total aid and tied/untied aid as a percentage of that total aid. In Appendix Table A8 and Figures A5 and A6, we again show that increases in tied aid as a percentage of total aid are associated with decreases in economic growth, and that increases in untied aid are associated with increases in economic growth.

  29. Untied aid has long been subject to the practice of de facto tying the aid. This is due to companies in the donor countries being more aware of requests for proposals and bidding policies than companies in recipient countries (Clay et al. 2009). The international agreements against tied aid may create incentives for higher levels of de facto tying. But the concurrent increase in transparency of contracting may create disincentives for de facto tying (OECD 2020d). In short, the degree of de facto tying is empirically ambiguous and not obviously correlated with time. But its presence to any degree creates a harder test for our hypothesis that there is a statistical difference between tied and untied aid.

  30. The literature sometimes counts as democratic countries scoring over 6 on polity2 and as authoritarian countries scoring under -6 (Marshall and Gurr 2020). However, because this strict coding restricts our sample to 26–35 observations for autocracies, we also divided the data at the midpoint between the -20 and 20 range of the polity2 score. We counted all countries scoring below 0 as autocracies and all countries scoring above 0 as democracies.

References

  • Ahmed, Faisal Z. 2012. The perils of unearned foreign income: Aid, remittances, and government survival. American Political Science Review 106 (01): 146–165.

    Article  Google Scholar 

  • Alesina, Alberto, and David Dollar. 2000. Who gives foreign aid to whom and why? Journal of Economic Growth 5: 33–63.

    Article  Google Scholar 

  • Arvin, B. Mak and Christopher F. Baum. 1997. “Tied and untied foreign aid: a theoretical and empirical analysis.” Keio Economic Studies, 34(2), 71-79.

  • Arvin, B. Mak., and Saud A. Choudhry. 1997. Untied aid and exports: Do untied aid disbursements create goodwill for donor exports? Canadian Journal of Development Studies/revue Canadienne D’études Du Développement 18 (1): 9–22.

    Article  Google Scholar 

  • Barrett, Christopher B., and Dan Maxwell. 2007. Food aid after fifty years: Recasting its role. Routledge.

    Book  Google Scholar 

  • Bermeo, Sarah Blodgett. 2017. Targeted development: Aid allocation in an increasingly connected world. International Organization 71 (4): 735–766.

    Article  Google Scholar 

  • Boone, Peter. 1996. Politics and the effectiveness of foreign aid. European Economic Review 40 (2): 289–329.

    Article  Google Scholar 

  • Brӓutigam, Deborah. 2011. Aid ‘with Chinese characteristics’: Chinese foreign aid and development finance meet the OECD-DAC aid regime. Journal of International Development 23 (5): 752–764.

    Article  Google Scholar 

  • Burnside, Craig, and David Dollar. 2000. Aid, policies, and growth. American Economic Review 90 (4): 847–868.

    Article  Google Scholar 

  • Carcelli, Shannon. 2020. Reconsidering bureaucratic capacity and treaty compliance. American Journal of Political Science, 68(1): 177-192.

  • Clay, Edward J., Matthew Geddes and Luisa Natali. 2009. “Untying aid: is it working? An evaluation of the implementation of the Paris Declaration and of the 2001 DAC Recommendation of Untying ODA to the LDCs.” Copenhagen: DIIS. http://www.oecd.org/development/evaluation/dcdndep/44375975.pdf . Accessed 14 June 2018.

  • Clemens, Michael, Steven Radelet, Rikhil Bhavnani, and Samuel Bazzi. 2012. Counting chickens when they hatch: Timing and the effects of aid on growth. Economic Journal 122 (561): 590–617.

    Article  Google Scholar 

  • Cournane, Seán., Declan Byrne, Deirdre O’Riordan, Niall Sheehy, and Bernard Silke. 2015. Pattern of investigation reflects risk profile in emergency medical admissions. Journal of Clinical Medicine 4 (5): 1113–1125.

    Article  Google Scholar 

  • Cournane, Sean, Declan Byrne, Richard Conway, Deirdre O’Riordan, and Bernard Silke. 2020. Air pollution and age: Do older persons suffer more? Environmental Disease 5 (2): 44.

    Article  Google Scholar 

  • Dalgaard, Carl-Johan., Henrik Hansen, and Finn Tarp. 2004. On the empirics of foreign aid and growth. The Economic Journal 114 (496): F191–F216.

    Article  Google Scholar 

  • Dietrich, Simone. 2016. Donor political economies and the pursuit of aid effectiveness. International Organization 70 (1): 65–102.

    Article  Google Scholar 

  • Dietrich, Simone, and Joseph Wright. 2015. Foreign aid allocation tactics and democratic change in Africa. The Journal of Politics 77 (1): 216–234.

    Article  Google Scholar 

  • Dreher, Axel, and Sarah Langlotz. 2020. Aid and growth: New evidence using an excludable instrument. Canadian Journal of Economics/revue Canadienne D’économique 53 (3): 1162–1198.

    Article  Google Scholar 

  • Dreher, Axel, Andreas Fuchs, Bradley Parks, Austin Strange, and Michael J. Tierney. 2022. Banking on Beijing: The aims and impacts of China’s overseas development program. Cambridge University Press.

    Book  Google Scholar 

  • Easterly, William. 2006. The white man’s burden: Why the West’s efforts to aid the rest have done so much ill and so little good. New York: Penguin Press.

    Google Scholar 

  • Eichenauer, Vera Z., and Bernhard Reinsberg. 2017. What determines earmarked funding to international development organizations? Evidence from the new multi-bi aid data. The Review of International Organizations 12: 171–197.

    Article  Google Scholar 

  • Ellmers, Bodo. 2011. “How to spend it. Smart procurement for more effective aid.” European Network on Debt and Development (Eurodad)https://eurodad.org/_les/pdf/4639-how-to-spend-it-smart-procurement-for-more-e_ective-aid-.pdf. Accessed 24 Sept 2015.

  • EURODAD (European Network on Debt and Development). 2011. Annual Report. https://d3n8a8pro7vhmx.cloudfront.net/eurodad/pages/495/attachments/original/1590580387/2011_annual_report.pdf?1590580387. Accessed 20 Apr 2024.

  • Findley, Michael G., Adam S. Harris, Helen V. Milner, and Daniel L. Nielson. 2017. Who controls foreign aid? Elite versus public perceptions of donor influence in aid-dependent Uganda. International Organization 71 (4): 633–663.

    Article  Google Scholar 

  • Galiani, Sebastian, Stephen Knack, Lixin Colin Xu, and Ben Zou. 2017. The effect of aid on growth: Evidence from a quasi-experiment. Journal of Economic Growth 22 (1): 1–33.

    Article  Google Scholar 

  • Girod, Desh. 2015. Explaining post-conflict reconstruction. Oxford University Press.

    Book  Google Scholar 

  • Griffin, Keith, and John Enos. 1970. Foreign assistance: Objectives and consequences. Economic Development and Cultural Change 18 (3): 313–327.

    Article  Google Scholar 

  • Hall, Steven. 2011. Managing tied aid competition: Domestic politics, credible threats, and the Helsinki disciplines. Review of International Political Economy 18 (5): 646–672.

    Article  Google Scholar 

  • Hausman, Jerry A., and William E. Taylor. 1981. A generalized specification test. Economics Letters 8 (3): 239–245.

    Article  Google Scholar 

  • Hausman, Jerry A. 1978. “Specification tests in econometrics.” Econometrica: Journal of the econometric society, pp.1251–1271.

  • Hendra, John. 1987. Only ‘fit to be tied’: A comparison of the Canadian tied aid policy with the tied aid policies of Sweden, Norway and Denmark. Canadian Journal of Development Studies/revue Canadienne D’ Études Du Développement 8 (2): 261–281.

    Article  Google Scholar 

  • Honig, Daniel. 2018. Navigation by judgment: Why and when top down management of foreign aid doesn’t work. Oxford University Press.

    Book  Google Scholar 

  • Humphreys, Macartan, and Alexandra Scacco. 2020. The aggregation challenge. World Development 127: 104806.

    Article  Google Scholar 

  • Jepma, Catrinus J. 1991. The tying of aid. Organization for Economic Cooperation and Development, Paris, France.

  • Kennard, Matt and Claire Provost. 2016. “How aid became big business.” Los Angeles Review of Books. https://lareviewofbooks.org/article/aid-became-big-business/, (accessed June 13, 2018).

  • Knack, Stephen, and Lodewijk Smets. 2013. Aid tying and donor fragmentation. World Development 44: 63–76.

    Article  Google Scholar 

  • Koeberle, Stefan, Zoran Stavreski and Jan Walliser. 2006. “Budget support as more effective aid?: Recent experiences and emerging lessons.” World Bank Publications. http://documents.worldbank.org/curated/en/495091468315852950/pdf359670Budget0Support01PUBLIC1.pdf, (accessed April 4, 2019).

  • La Chimia, Annamaria. 2013. Tied aid and development aid procurement in the framework of EU and WTO law: the imperative for change. Hart Publishing, Oxford and Portland, Oregon.

  • Langlotz, Sarah. 2018. “Conflict, income shocks, and foreign policy: macro- and micro-level evidence.” PhD Dissertation, University of Heidelberg, https://archiv.ub.uni-heidelberg.de/volltextserver/25665/1/PhD%20Thesis%20Sarah%20Langlotz%20PDFA.pdf.

  • Lynch, Scott M. 2000. Measurement and prediction of aging anxiety. Research on Aging 22 (5): 533–558.

    Article  Google Scholar 

  • Malik, Rabia, and Randall W. Stone. 2018. Corporate influence in world bank lending. The Journal of Politics 80 (1): 103–118.

    Article  Google Scholar 

  • Marshall, Monty G., and Ted R. Gurr. 2020. POLITY5. Political regime characteristics and transitions, 1800–2018. Dataset Users’ Manual. Center for Systemic Peace, https://www.systemicpeace.org/inscr/p5manualv2018.pdf.

  • McLean, Elena V. 2017. The politics of contract allocation in the World Bank. The Review of International Organizations 12 (2): 255–279.

    Article  Google Scholar 

  • Bueno De Mesquita, Bruce and Alastair Smith (2010) “Leader survival, revolutions, and the nature of government finance.” American Journal of Political Science 54(4): 936-950.

  • Michael, Michael S., and Charles Van Marrewijk. 1998. Tied to capital or untied foreign aid? Review of Development Economics 2 (1): 61–75.

    Article  Google Scholar 

  • Minasyan, Anna. 2016. Your development or mine? Effects of donor-recipient cultural differences on the aid-growth nexus. Journal of Comparative Economics 44: 309–325.

    Article  Google Scholar 

  • Miquel-Florensa, Josepa. 2007. “Aid effectiveness: a comparison of tied and untied aid.” York University Department of Economics, Working Paper Series. https://ideas.repec.org/p/yca/wpaper/2007_3.html. Accessed 13 June 2018.

  • Morrissey, Oliver. 1993. The mixing of aid and trade policies. The World Economy 16 (1): 69–84.

    Article  Google Scholar 

  • Mumford, Troy V., Michael A. Campion, and Frederick P. Morgeson. 2007. The leadership skills Strataplex: Leadership skill requirements across organizational levels. The Leadership Quarterly 18 (2): 154–166.

    Article  Google Scholar 

  • New York Times. 2006. “U.S. jobs shape condoms’ role in foreign aid“. http://www.nytimes.com/2006/10/29/world/americas/29iht-web.1029aid.3316862.html?r=0. Accessed 13 Jul 2017.

  • Nunn, Nathan, and Nancy Qian. 2014. U.S. food aid and civil conflict. American Economic Review 104 (6): 1630–1666.

    Article  Google Scholar 

  • OECD. 2020. Query wizard for international development statistics. https://stats.oecd.org/qwids/, (accessed July 25, 2020).

  • OECD. 2020b. Tied aid. https://www.oecd.org/dac/dac-glossary.htm#Tied_Aid, (accessed September 2, 2020).

  • OECD. 2020c .Untied aid. https://www.oecd.org/dac/dac-glossary.htm#Untied_Aid, (accessed September 2, 2020).

  • OECD. 2020d. Technical Guide to terms and data in the Creditor Reporting System (CRS) Aid Activities Database. http://www.oecd.org/dac/stats/crsguide.htm, (accessed September 2, 2020).

  • OECD. 2020e. Untied Aid. https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/untied-aid.htm , (accessed September 2, 2020).

  • Rahman, AKM Atiqur., and Nabil Ahmed. 2018. Does economic resilience enhance private investment? Evidence from panel data. Journal of Business and Policy Research 13 (1): 35–51.

    Article  Google Scholar 

  • Rajan, Raghuram G., and Arvind Subramanian. 2008. Aid and growth: What does the cross-country evidence really show? The Review of Economics and Statistics 90 (4): 643–665.

    Article  Google Scholar 

  • Roodman, David. 2015. A replication of “counting chickens when they hatch” (Economic Journal 2012). Public Finance Review 43: 282–286.

    Article  Google Scholar 

  • Sachs, Jeffrey. 2006. The end of poverty: Economic possibilities for our time. Penguin.

    Google Scholar 

  • Svensson, Jakob. 2000. When is foreign aid policy credible? Aid dependence and conditionality. Journal of Development Economics 61 (1): 61–84.

    Article  Google Scholar 

  • Swedlund, Haley J. 2017. Is China eroding the bargaining power of traditional donors in Africa? International Affairs 93 (2): 389–408.

    Article  Google Scholar 

  • Wagner, Don. 2003. Aid and trade—an empirical study. Journal of the Japanese and International Economies 17 (2): 153–173.

    Article  Google Scholar 

  • Washington Post. 2023. “Ukraine aid’s best-kept secret: most of the money stays in the U.S.A.,” https://www.washingtonpost.com/opinions/2023/11/29/ukraine-military-aid-american-economy-boost/ (accessed April 25, 2024)

  • Washington Post. 2024. “Here are the U.S. congressional districts benefiting from Ukraine aid,” https://www.washingtonpost.com/opinions/2024/04/18/ukraine-map-districts-weapons/ (accessed April 25, 2024)

  • World Bank. 2019. World development indicators 2019. https://databank.worldbank.org/source/world-development-indicators. Accessed 30 June 2022.

  • Wright, Joseph, and Matthew Winters. 2010. The politics of effective foreign aid. Annual Review of Political Science 13: 61–80.

    Article  Google Scholar 

  • Zeitz, Alexandra O. 2021. Emulate or differentiate? The Review of International Organizations 16 (2): 265–292.

    Article  Google Scholar 

Download references

Acknowledgements

I am grateful for the feedback from Simone Dietrich, Scott Guggenheim, Karin Kitchens, Lauren MacLean, Aila Matanock, Austin Strange, Daniel Tirone, Joe Wright, and participants in seminars at Georgetown and the University of Michigan, as well as at the 2019 annual meetings of the American Political Science Association and the International Political Economy Society and the 2021 International Studies Association. I would also like to thank Erum Haider and Megan Stewart for their research assistance. Additionally, I want to thank Desh Girod for the extensive help throughout the development of this project. All remaining errors are my own.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Paula Ganga.

Ethics declarations

Competing interests

The author declares no competing interests.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary Information

Below is the link to the electronic supplementary material.

Supplementary file1 (PDF 149 KB)

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ganga, P. Ties That Bind: Tied Aid and Economic Growth. St Comp Int Dev (2024). https://doi.org/10.1007/s12116-024-09432-4

Download citation

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1007/s12116-024-09432-4

Keywords

JEL Classification

Navigation