– providing it conditional on using it to purchase goods and services from suppliers based – in the donor country has been estimated to increase costs by 5% to 30%, or even more for food (Jepma, 1991; Aryeetey et al., 2003; Clay et al., 2009). The OECD’s Development Assistance Committee (DAC) therefore issued a recommendation to its members in 2001 to untie aid to the Least Developed Countries (LDCs) to the largest extent possible, but exempting food aid, technical assistance, and aid channeled through NGOs instead of recipient governments<sup>2</sup> . Aid untying is monitored under the Millennium Development Goals, as one of many indicators under the 8th goal of developing a global partnership for development. Tying aid not only reduces its value to the recipient, but is considered to be inconsistent with the Paris Declaration principles of country ownership and alignment with country priorities and systems. The share of aid that is untied is thus included as one of the 12 Paris Declaration Indicators for improved aid effectiveness (OECD, 2011). Untied aid as a share of total aid from the DAC donors increased from roughly 55% before the recommendation was issued to 80% or more in recent years. Donors vary with respect to how much of their aid is untied, for aid that is covered by the recommendation and for exempted categories. Moreover, a given donor may vary with respect to how much of its aid is tied in different recipient countries. A donor’s share of the aid market in each of its recipients is one possible determinant of the extent of its aid tying.

There is a potential trade-off between untying aid and another objective in the Paris Declaration, namely reducing aid fragmentation. Recipient countries are faced with an increasing number of donors engaged in delivering development assistance. For instance, in 1960 a developing country received aid from less than two donors on average, while in 2006 the average number of donors per recipient had risen to more than twenty eight (Frot and Santiso, 2008). Several studies, including Acharya et al. (2006) and World Bank (2003, Ch. 7) argue that this proliferation of donors imposes high transaction costs on recipient governments, thereby reducing the value of aid. Anderson (2011) shows that fragmenting a donor’s aid across many recipients is associated with higher reported administrative costs by the donor. Knack and Rahman (2007) show that where aid is more fragmented among donors, the quality of government bureaucracy in the recipient country deteriorates more. They argue that when donors each have only a small share of the aid market, they tend to focus more narrowly on delivering successful projects, even at the risk of undermining government capacity by hiring away the most talented public managers. Kimura et al. (2007) claim that donor proliferation hinders economic growth, and Djankov et al. (2009) refine this argument, presenting evidence that donor fragmentation reduces economic growth in part through increased corruption.

Concerns over the transactions costs incurred by recipients in dealing with so many donors are reflected in the donor harmonization provisions of the Paris Declaration. Several harmonization indicators, with specific targets, are included in the Paris Declaration Monitoring framework (OECD, 2011), although these do not call specifically for donors to concentrate their aid on fewer countries. The Accra Agenda for Action, issued at the Third High Level Forum on Aid Effectiveness in September 2008, asserts that the “effectiveness

> 2Effective in 2009 the recommendation was extended to cover non-LDC HIPC countries.

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