It is increasingly recognised that ODA should not be seen as a leading source
for investment in environmentally sound and cleaner technologies, but rather
be used to address the fundamental determinants of development, which include
a sound policy environment, strong investment in human capital, well-functioning
institutions and governance systems and environmental sustainability (Killick,
1997; OECD, 1998a). This realisation has arisen partly from the policy view
among donors that aid should not go to sectors where the private sector can
take the lead role, and also from the mixed experience with development aid
programmes. The dominance of certain interests in donor governments led most
industrialised countries to promote economic and geo-political goals - e.g.,
contracts for their domestic firms, support for friendly political regimes -
that often ran contrary to the fundamental development objectives. This has
resulted in development aid and, in particular, to tied bilateral aid having
a very mixed record. Problems range from the controversies over major projects
such as big hydro-electricity projects, to the disappointments and failures
of some programmes to support the transfer of smaller-scale renewable energy.
ODA is still significant for the poorest developing countries, where it accounts
for up to 20% of gross domestic product (GDP), with external private flows accounting
for 3-4% on average (OECD, 1998b; see also Section 2.2.2
in Chapter 2 on ODA flows).
The extent to which aid is tied to being donor-country supplied reveals the persistence of the tendency for development to be subordinated to other goals. Accurate estimates of the extent to which aid is tied are difficult to come by because of the multitude of ways it can be hidden in mixed credit financing. The Organization for Economic Cooperation and Development (OECD) estimates that in 1996 tied aid accounted for around US$22 billion of a total of US$52 billion of official development assistance. Another estimate is that only half of the top 20 donor countries tie less than half their aid (Jain, 1996).
Tied aid started in part because of industry pressure in donor countries. In the 1970s and 1980s, the effects of an overly simplistic approach to development through industrialisation, and the harmful effect of self-serving economic and political motives in the donor nations became noticeable. Increased unemployment, white elephant projects, rural-urban migration, foreign debts and growing technological dependency brought into question the appropriateness of the technology being transferred to developing countries (Chambers, 1997):
Early beliefs of the 1950s and 1960s in linear and convergent development through stages of growth, in central planning, in unlimited growth, in industrialisation as the key to development, in the feasibility of a continuous improvement in levels of living for all- these have now been exposed as misconceived and, with the easy wisdom of hindsight, naive. Hundreds of millions of people are now worse off than twenty years ago.
In the 1990s, the apparent absence of sustained economic and social improvement in many recipient countries, the end of the Cold War as a motive for providing aid to friendly nations, and budgetary constraints in donor countries have led to increased questioning of the effectiveness of overseas development assistance and to a sharp decline in aid flows (Graham and O'Hanlon, 1997). Funding might have declined even further in some countries were it not for industry in donor countries arguing for subsidies for exports, to protect jobs and to match subsidies provided by other donor nations to their firms (Morrissey, 1992), although in other countries there is more general public support for aid, partly based on its effectiveness. Thus, while aid has always been tied to some extent, the proportion of tied aid may have lately increased in importance3 .
Tied aid is less likely to promote economic growth in recipient countries than untied aid. Empirical studies suggest that tied aid increases costs for the acquiring country anywhere from 10 to 50% (Morrissey, 1992). In principle tied aid is better than no aid, and could be a positive sum transaction; in practice it often ends up that neither side benefits. The importation of more expensive, capital intensive, and inappropriate technologies creates a dependency for maintenance and spare parts. In general, the technology being imported may be a low national priority for the recipient country.
The consequences of tied aid go beyond the distortion of technology choice. It inhibits the development of domestic capacity in selecting technology - technology choice becomes a matter of finding the biggest subsidy rather than the most appropriate technology. It can crowd out good technologies and viable business models. It also acts to prevent private financial institutions from becoming involved in supporting technology transfer and developing appropriate expertise, notably when tied aid finance is provided on greatly subsidised terms in order to [win/secure/procure exports. For example, there are few cases where aid finance has been useful in helping to mobilise private capital into technology transfer, or to support financial innovation and new forms of financing for technology transfer - most such work is being done by the multilateral development banks. The challenges of tied aid have been recognised by the donor community, and Development Assistance Committee (DAC) donors have made important efforts to limit tied aid on the grounds that it limits the effectiveness of aid. Specifically, the "OECD 1992 tied aid discipline" prohibits subsidised finance (e.g., to support manufacturing or power investment) to developing countries except the least developed countries or LDCs (OECD, 1998c). Nonetheless, there remains substantial scope for the abuse of tied aid. Transparency has been advocated as a way of reducing donor's use of tied aid, recipients' use of aid for short-term political and economic gains, and temptations to divert aid to private pockets (Lin See-Yan, 1997).
Increasingly, there is recognition that aid can be more effective and useful to development if it is focused less on core financing of specific projects and more on areas such as capacity-building, in providing incentives for direct investment (public or private) or in supporting the public private partnerships discussed later in this chapter (OECD, 1998a):
Support for the dissemination of technological know-how must concentrate on developing the necessary human, scientific, technological, organisational, institutional and resource capabilities to underpin the long-term application of new technologies.
Specifically, this can include supporting development of the right policy mix, direct support for investment in appropriate technologies, or support for project preparation and development. That is to say that such support should be provided in the abstract - in many cases it will be more effective if linked to specific projects or programmes. Also, it is recognised that adapting assistance to local needs requires establishing working relationships among the various external and domestic actors involved and that coordination under the leadership of the host country is key (OECD, 1998a)
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