Tied Aid and Development
Desha Girod, Georgetown University
Desha Girod on Tied aid and Development
ABSTRACT: Donors have long engaged the private sector by tying foreign aid, forcing recipients to buy from donor countries. But recently, donors have partnered with private money on a larger scale, making tied aid an important area of interest. Tied aid has long been criticized for serving donor companies more than the poor, but tied aid is subject to legal agreements that domestic courts can enforce. Tied aid may thus reduce the moral hazard of aid, thereby increasing compliance with aid agreements and development. Yet few have statistically compared the effects of tied and untied aid on development. In data from 136 developing countries between 1975 and 2014, tied aid reduced economic growth more than untied aid, even after accounting for potential endogeneity. Tied aid also reduced the likelihood of compliance, in contrast with the moral hazard argument. Donors interested in development should therefore exercise caution when partnering with the private sector.