Untie Aid: Tied Aid is Not Cost-effective and Undermines Capacity-building

Foreign aid is considered “tied” when it comes with conditions that the goods and services funded must come from suppliers in the donor country. For example, 75 percent of U.S. food aid must be shipped on U.S.-flagged vessels, a requirement written into the 1936 Merchant Marine Act.¹ And under the 1961 Foreign Assistance Act, virtually all commodities purchased with U.S. food aid resources must come from the United States.²

During the 2007-2008 period of skyrocketing food prices, more than a billion people in the world were hungry. Food aid was indispensable to mitigate their suffering—yet tens of millions who needed the aid went without. Haylor Ayako, a farmer in Ethiopia, doesn’t know about tied aid—what he knows is that in the midst of the spike in food prices, seven of his grandchildren died of hunger in the six months before U.S. food aid reached his village from North Dakota.³ If it were not tied, much more U.S. food aid could be purchased closer to where it is needed and would arrive sooner, saving countless lives as a result.

Tied aid is simply inefficient. A U.N. study of bilateral aid to sub-Saharan Africa found that tying reduces the value of the aid by 25-40 percent.⁴ Value is lost anytime a higher-cost supplier is chosen when others could do the job more efficiently but are legally prohibited from competing for contracts. The good news is that donors are reducing the proportion of aid that is tied. In the early 1980s, tied aid accounted for 70 percent of all bilateral aid from the major donor countries; in 2006 it was less than 20 percent.⁵ The United Kingdom and Norway have untied 100 percent of their bilateral aid.⁶ The United States has been making progress but not as quickly as other major donors. The United States still ties more than half of its bilateral aid, according to analysis by the Organization of Economic Cooperation Development.⁷

The United States has policy options that will improve the efficiency of its aid. For example, more than half the value of U.S. food aid is lost due to tying, most of it eaten up by shipping costs.⁸ Many other countries have switched to giving food aid in cash rather than in commodities. They have made the decision that making their food aid as effective as possible is more important than channeling business to domestic suppliers.

When food aid is provided in cash, it allows recipients to source food locally or regionally and at a much lower cost. In addition, cash assistance enables recipients to purchase food from producers in areas of the country with surpluses to distribute in areas of scarcity. This, in turn, helps strengthen local and regional agricultural sectors and markets, and it can increase incomes for smallholder farmers and poor rural communities.

Local or regional purchase also gives countries the flexibility to choose the most culturally appropriate foods available. U.S. food aid sometimes falls short in this regard: countries whose staple diet is rice may get shipments of sorghum or wheat from the United States because those are the current surplus commodities, whereas rice might be available in nearby countries or in other parts of the country experiencing the hunger emergency.

A small amount of U.S. food aid is in fact provided in cash for local and regional purchase. The 2008 farm bill included a provision to use $25 million as a pilot project for local and regional purchase. But this is only about 1 percent of the U.S. food aid budget,⁹ far less than what is needed to demonstrably improve the efficiency of food aid.

So far, efforts at more substantive reform have been defeated by U.S. agribusiness and shipping interests who spend millions of dollars on lobbying to protect the advantage they get from tied food aid. Industry lobbyists don’t dispute that food aid can reach its destinations in more efficient ways than shipping on U.S.-flagged vessels. Instead, they argue that food aid provides jobs to U.S. workers (13,127, according to an industry analysis)¹⁰ and maintains the U.S.-flagged shipping fleet, which, in their view, is “constantly in danger of erosion by foreign-flag vessels.”¹¹ A different study by a team of Cornell University researchers used data from every USAID food aid shipment in 2006, finding that in fact, most of the vessels were owned by U.S subsidiaries of foreign corporations.¹²

The United States provides more food aid than any other country. All but a fraction is purchased in the United States, rather than closer to where the food is needed, costing precious time during hunger emergencies.

Beyond supply questions, another problem with current U.S. food aid is that the commodities sent often aren’t the foods most effective in fighting malnutrition. In 2008, World Health Organization (WHO) experts agreed that animal-source foods such as dairy products are the most effective choice for treating moderately malnourished children.¹³ Severely malnourished children get Plumpy’nut and other super-fortified nutritional pastes.¹⁴ “In contrast to severe acute malnutrition,” write Andre Briend and Zita Prinzo of the WHO, “management of moderate malnutrition has remained virtually unchanged over the last 30 years.”¹⁵ Cereal-based foods do not provide the nutrients that malnourished children need, yet these are the foods the United States primarily provides. Médecins Sans Frontières/Doctors Without Borders estimated in 2008 that it would cost $4.3 billion (3.5 billion euros) annually to treat moderate malnutrition worldwide according to the new standards set by WHO.¹⁶ Providing more animal-source foods and fewer cereals will raise the costs of food aid sourced in the United States. The higher costs, combined with the Obama administration’s new emphasis on child nutrition, only add to the reasons that the United States should untie its aid.

Tying foreign assistance also undermines efforts to build capacity in recipient countries. As discussed in Chapter 2, capacity-building is critical to ensuring that the gains achieved with aid are sustainable. Using contractors from the donor country to provide services and implement development programs, rather than hiring local workers, passes up an opportunity to provide people not only with jobs, but with very desirable jobs in the local economic context. Hiring locally not only reduces unemployment but also improves workers’ skills, provides businesses with money to reinvest in their growth, and keeps more money in the country, circulating through the economy rather than going overseas.

In 2010, USAID unveiled a procurement reform strategy focused on broadening the base of USAID’s partner organizations in the United States and in developing countries, reducing the size of USAID awards and setting specific targets for building local capacity and driving resources into local institutions. The plan outlines clear, quantifiable targets within a five-year time frame. Procurement reform, while not the most exciting concept, is critical to the success of Feed the Future and other major initiatives, including the United State’s five-year strategy to accelerate progress towards the MDGs.

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