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Iraq Contracts And 'Tied Aid': America's Critics Also Favor Their Own Firms (International Herald Tribune)

July 13, 2004

Iraq contracts and 'tied aid' : America's critics also favor their own firms
By Nancy Birdsall and Todd Moss

This op-ed originally appeared in the International Herald Tribune on January 13, 2004.

WASHINGTON: Like Claude Raines in the movie "Casablanca," the Germans, Russians, Canadians and especially the French are "shocked, just shocked" that the United States is barring them from bidding on $18.6 billion in reconstruction contracts for Iraq.

The Europeans have threatened to take the matter to the World Trade Organization to see if the United States is violating international competition law; this may explain why Deputy Defense Secretary Paul Wolfowitz invoked "essential security interests" as justification. The Russians have declared that the ban undermines Iraqi sovereignty. German industrialists are complaining about the possible effect on their own economy. And commentators are aghast at the timing — isn't this the same country that is asking them to contribute more to Iraqi reconstruction and to forgive Iraqi debt?

All the fuss must seem rather strange to the more than four billion people in the developing world. After all, restricting overseas development contracts to domestic bidders — so called "tied aid" — has been standard practice in the aid world for the past 40 years. Advocates of improving aid effectiveness have long argued to eliminate the practice of tied aid — which, according to one economic study, reduces its value by 15 percent to 30 percent. Untying aid would allow poor countries to purchase the most efficient and cost-effective goods and services necessary for their development projects. That makes sense because the real point of aid is to help people escape from poverty. But old habits die hard.

The complaints over contracts for Iraq ring particularly hollow since the Canadians and French are among the worst offenders in tying their development aid. In fact, the current uproar highlights a problem endemic to most countries' foreign aid programs. According to the Organization for Economic Cooperation and Development, 69 percent of Canada's foreign aid is tied, and 50 percent of French aid is at least partially tied. The Germans restrict 16 percent of their aid contracts to German companies.

In Iraq, excluding some of the world's most experienced international companies denies the reconstruction effort least-cost solutions. And it invites mistakes like the one that Defense Department auditors found recently: that Halliburton overbilled the Pentagon (and U.S. taxpayers) by $61 million under its contract, awarded without competition, to supply fuel to Iraq. No wonder U.S. citizens believe that most development aid, less scrutinized than the billions destined for Iraq, is probably wasted.

One of the ironies of the U.S. war in Iraq is that it has revived America's enthusiasm for foreign aid. It would be equally unexpected if, in sticking it to the "Coalition of the Unwilling," we also exposed one of the worst habits that undermines the ability of foreign aid to deliver development results. And if that led to a change in aid practices, well, that would be shocking, just shocking!

Nancy Birdsall is president and Todd Moss is a research fellow at the Center for Global Development in Washington.