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Tuesday, April 15, 2003

The Ties that Bind

There are many conspiracy theories regarding the contracts for the "reconstruction" of Iraq, and the way in which some deals have been concluded so far have not dispelled the notions that the Bush Administration wished to exploit Iraq. The contracts that have been awarded so far, like the $4.8 million contract to Stevedoring Services to run the Iraqi port of Umm Qasr, are examples of tied aid--aid that is given conditional on the purchase of goods and services from the donor country. The US has announced $900 million of aid reconstruction, and all the primary contracts are going to American firms. This used to be uncontroversial, and foreign aid has often been used as a not-so-soft subsidy of home country businesses. When the British government complained about not getting in on the contracts, they were really complaining about their companies not getting share of US federal spending.

Politics aside, though, the British had a point. Tied aid is inefficient, like trade diversion--on average it raises the prices of goods and services purchased with aid money, and sometimes it results in purchases ill suited to local needs. It also keeps aid externally focused, rather than creating local capacity that will continue after aid flows cease. "Untying" aid, like a lowering of trade barriers, would improve both efficiency and overall outcomes. Some aid charities, notably Oxfam and Action Aid have recognised this, and have lobbied over many years for a change in policy. In 2000 a British government white paper announced that it was untying aid as of April 2001--the first major aid donor to do so. While the British complaint could be seen as mere lobbying, they do have some moral ground to stand on.

Empirically, though, it is too soon to say if untying aid, of itself, actually improves development outcomes--after all, aid officials from different countries are still dealing with those with whom they are familiar--an "evoked set", as discussed by Virginia Postrel. Few donors give aid without conditions, and donated funds will still have to be be duly processed and accounted for according to each countries procedures; compliance anc therefore be easier if aid recipients deal with those familiar with each donor's systems--home country suppliers, naturally. Whether aid is tied or not is also one of many variables that go in its success or failure, and it may be a negligible one at that. There have been many studies, not least at the World Bank, about the effectivness of aid, and it it clear that the present system is far from what the British call "best practice". Untying aid is an improvment, but without other changes (like recipient country "ownership" of and belief in an aid program) the impact may be marginal at best.

There are other concerns, like the process of tendering, that have caused some to complain about the way the present reconstruction has been handled. As far as the "US-only" nature of the contracts, American behaviour is similar to that of other OECD nations. The attitude is similar to that of trade negotiations. Few (like Britain) will move unilaterally, with all waiting for "concessions"--this despite an OECD recommendation that donors "untie their ODA [official development assistance] to the Least Developed Countries to the greatest extent possible". Similarly, the WTO does some relativly quiet work to liberalise government procurement, but that now looks more belaguered than the Doha round of global trade negotiations.

The complaints about American bias in Iraqi contracts are, therefore, really about free trade, a goal for which few countries, at least multilaterally, are ready to make real sacrifices. Untying aid, while small, is one such sacrifice. More important barriers, though, like agricultural subsidies, remain, with little sign of progress. Lets not lose focus.