Donors have promised, and largely failed, to truly untie aid. International development spending continues not to go to those who need it the most. But an experiment in Afghanistan is showing that aid money spent locally is a highly effective way to create jobs.

As the Guardian has reported, tied aid remains a stubbornly persistent component of international assistance. According to the European Network on Debt and Development (Eurodad), a network of 54 NGOs from 19 countries, at least 20% of all bilateral aid remains formally tied.

But that number masks the larger amount of aid that is informally tied. Even when development agencies are free to spend their money wherever they want, they rarely spend it in the country that is being assisted. It is not spent in Liberia or Timor-Leste, but rather in international logistics hubs like Brindisi and Singapore.

In Afghanistan, donors have disbursed more than $36bn in aid over the last 10 years. But recent economic research, conducted by the Peace Dividend Trust on behalf of the British government, revealed that even when the aid was technically untied, only 37% of it entered the local economy. Most of the aid spending went elsewhere: to fly in foreign experts, or provide bottled water and building materials. The money might have been spent on Afghanistan, but it was not spent in Afghanistan.

Not surprisingly, the development technocrats and mandarins, whose salaries are paid out of these international aid budgets, have accepted this as merely a curious paradox of aid. Namely, those who give the money tend to benefit from it more than those whom it is supposed to help.

However, untied aid is now starting to reach the ground because of a new "Afghan First" policy implemented by donors in Kabul. They believe that Afghans who are in work are less likely to join the Taliban, and have decreed that aid procurement should use local labour and local goods to rebuild Afghanistan, whenever possible.

The idea heralds a conscious effort by the international community to "spend the development dollar twice". By channelling aid money through Afghan entrepreneurs, donors can double their impact: if $1m is spent on building a school, an additional $1m in profits and taxes can be left behind by using a local construction company. Most important, though, this approach moves jobs from Dubai to Kabul and Kandahar.

A job can be transformative, especially during a war. A single salary will feed a family, send a girl to school, and provide a mother with medical care. It will generate taxes, pay police wages, and build hope.

The World Bank estimates the unemployment rate in Afghanistan is 8%, but this does not account for the high levels of underemployment. For the most part, jobs in Afghanistan are seasonal, sporadic and unskilled. Creating jobs is difficult, and expensive. For example, the $3bn Aynak Valley copper mine (the biggest foreign investment in the country's history) is only expected to directly employ 4,500 Afghans. It will be a small drop in the sea of underemployed.

By contrast, the "Afghan First" approach to truly untie aid has supported far more jobs with far less money. In a job creation survey conducted by Peace Dividend Trust, $441m in aid contracts, ranging in size from $1,000 to $5m, created or sustained more than 118,000 new jobs. Untied aid spending, using local entrepreneurs, created jobs at a rate 170 greater than the money invested in the copper mine.

The jobs being created through donor procurement are the jobs that Afghans want and that Afghanistan needs. These are skilled jobs in a wide range of sectors, including manufacturing, solar panels, bottled water, fruit exporting, logistics and construction. At the same time, since a business must be registered before it can bid on an international tender, these contracts are generating millions in badly needed local taxes.

Donor contracts typically lead to businesses expanding their employee base by more than 300%, the majority of those jobs being skilled. For a typical aid contract spent locally, one month of employment is created or sustained for every $600 spent. Furthermore, the majority of businesses invest profits in both physical capital and training staff.

The concept of genuinely untying aid – to allow it to be spent locally and to create jobs – has spread to other development missions, most notably to Port au Prince. There, local officials are now talking about a "Haiti First" policy, and are pressuring aid agencies to spend their money in Haiti, not just on Haiti. The impact can be seen on the ground already, as local entrepreneurs are allowed to compete for international contracts, to create employment, to pay taxes, and to build a peaceful future.

• Scott Gilmore is the founder and CEO of Peace Dividend Trust, a social enterprise that champions entrepreneurs and builds markets in post-conflict economies