Tied Aid and Economic Development

• In Event: The Politics of Non-State Governance and Control in Fragile States

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 large scale, making tied aid an important area of interest for scholars and policy makers. Tied aid represents goods and services that donors outright supply, a form of extra-governmental service provision that might avoid local corruption and help development. Conversely, tied aid has long been criticized for serving donor companies more than serving the poor. Despite these opposing arguments, there is almost no statistical work of tied aid and development. We analyzed data from 152 developing countries between 1973 and 2013, and found that tied aid reduced levels of development more than untied aid, even after accounting for potential endogeneity. Tied aid also reduced compliance with aid agreements, further demonstrating tied aid's ineffectiveness. Donors interested in development should therefore exercise caution when partnering with the private sector.

Authors

• Paula Daniela Ganga, Columbia University

• Desha Girod, Georgetown University