How Does Conditional Aid (Not) Work?

November 1, 2002

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Format: Chicago

Rodney Ramcharan. How Does Conditional Aid (Not) Work?, (USA: International Monetary Fund, 2002) accessed November 9, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Does policy conditionality worsen domestic welfare, as governments are forced to attempt unpopular reforms resulting in damaging protests, or does conditionality help implement reforms that otherwise would have been impossible? This paper analyzes these questions. Using a game-theoretic framework, it argues that the impact of conditional aid on welfare is nonmonotonic. Sufficiently conditioned aid can enhance the signaling power of reform announcements, thereby deterring protest and enabling reform. In contrast, inadequately conditioned aid may induce a "weak" government to mistakenly attempt reform, resulting in protest and a worsening of domestic welfare relative to the status quo.

Subject: Consumption, Financial institutions, Labor, Multilateral development institutions, Technology

Keywords: Conditionality, Economic reform, IFI involvement, Multilateral development institutions, Participation constraint, Policy reform, Reform announcement, Status quo, Weak government, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/183
Stock No:

WPIEA1832002
ISBN:

9781451859324
ISSN:

1018-5941

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