Ties That Bind: Tied Aid and Economic Growth

Donors tie large amounts of foreign aid, forcing recipients to buy from donor countries. Scholars and the OECD have long argued that, by not permitting recipients to procure locally or to participate in internationally competitive bidding practices, tied aid creates inefficiencies that undermine economic growth. Furthermore, tied aid may be less effective than untied aid because it serves donor companies more than it targets recipient needs. Despite the academic, policy, and media attention on tied aid, there is little empirical study of whether it is worse for growth than untied aid. Using the latest econometric techniques to account for potential endogeneity, we present and analyze new data on tied aid covering 157 countries across the Global South (1990–2018). We find that tied aid is, indeed, associated with less growth than untied aid and suggest that donors interested in development should not tie aid. We conclude with directions for future research.