EU to shake-up development aid

By Andrew Walker BBC economics correspondent

European foreign ministers are being urged to shake up the way aid is given to developing countries.

At a meeting in Brussels, they are discussing plans to end the practice of tying development aid - requiring aid to be spent on goods or services supplied by the donor country.

The proposal comes from the European Commission, and is supported by development lobby groups.

Little value for tied money

Aid tying is a widespread practice among donor countries.

Should the contractor building a better water supply come from the donor country?

But it is also widely condemned by economists and lobby groups. The most striking problem is that it reduces value for money.

Companies in the donor country are shielded from foreign competition. They can charge higher prices.

Aid tying has been described by the Organisation for Economic Cooperation and Development as a subsidy to businesses in the donor countries.

World Bank research suggests that the practice reduces the effective value of aid by 25%.

Poverty reduction

In addition the practice is thought to distort the allocation of aid. It encourages donors to focus on projects that provide commercial opportunities rather than those that are most effective at reducing poverty.

Some countries, however, say that tying maintains jobs in the donor countries and so increases public support for aid.

Britain has already stopped tying its development support.

Competing over aid

Now the Commission wants the whole European Union to follow the lead, although many of them are likely to be reluctant.

Export industry lobbies are often keen on tied aid and will be reluctant to see it go.

Britain has made a formal legal complaint that the aid practices of Italy and Denmark violate European competition rules.

In addition all the rich countries agreed to untie aid for the very poorest more than a year ago. The development lobby group Actionaid says that implementation of that agreement has been too slow.