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Tied aid is foreign aid that must be spent in the country providing the aid (the donor country). A developed country will provide a bilateral loan or grant to a developing country, but mandate that the money be spent on goods or services produced in the donor country.
Aid is usually tied to the benefit of the donor at the expense of the recipient. Often business lobbies advocate this kind of aid because it provides them an indirect subsidy if the funds are spent on their products. Sometimes tied aid is even used to unload excess goods which would not otherwise be sold.
Tied aid does not help recipient countries as much as untied aid for two reasons. First, tied aid is less cost-effective because it does not allow the recipient to contract or buy from the lowest bidder. Second, the recipient is not able to buy local goods or hire local companies, which would be more beneficial for local economic development.
Examples
In the UK, the Overseas Development Administration (ODA), was under the supervision of the Foreign Secretary and the Foreign and Commonwealth Office, which led, on at least one occasion, to allegations of a connection between the granting of aid and the achievement of either foreign policy goals or British companies winning export orders. A scandal erupted concerning the UK funding of a hydroelectric dam on the Pergau River in Malaysia, near the Thai border. Building work began in 1991 with money from the UK foreign aid budget. Concurrently, the Malaysian government bought around £1 billion worth of arms from the UK. The suggested linkage of arms deals to aid became the subject of a UK government inquiry from March 1994. In November 1994, after an application for Judicial Review brought by the World Development Movement, the High Court held that the then Foreign Secretary, Douglas Hurd had acted ultra vires (outside of his power and therefore illegally) by allocating £234 million towards the funding of the dam, on the grounds that it was not of economic or humanitarian benefit to the Malaysian people. [http://www.tiscali.co.uk/reference/encyclopaedia/hutchinson/m0045540.html In 2002 the administration of the UK's aid budget was removed from the Foreign Secretary's remit with the establishment of the Department for International Development (DfID) which replaced the ODA.
Tied aid is now illegal in the UK by virtue of the International Development Act, which came into force on 17 June 2002, replacing the Overseas Development and Co-operation Act (1980).
It is alleged that other countries still continue to practise tied aid.
External links
"Tied aid"