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How Does Conditional Aid (Not) Work?

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  • Rodney Ramcharan

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/183.

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Length: 26
Date of creation: 01 Nov 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/183

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Related research

Keywords: Conditionality; policy conditional lending; subsidy; economic adjustment; structural adjustment; adjustment program; price subsidy; structural aid conditionality;

References

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  1. James M. Boughton & Alex Mourmouras, 2002. "Is Policy Ownership An Operational Concept?," IMF Working Papers 02/72, International Monetary Fund.
  2. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  3. Alessandra Casella & Barry Eichengreen, 1994. "Can Foreign Aid Accelerate Stabilization?," NBER Working Papers 4694, National Bureau of Economic Research, Inc.
  4. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  5. Drazen, Allan, 2002. "Conditionality and Ownership in IMF Lending: A Political Economy Approach," CEPR Discussion Papers 3562, C.E.P.R. Discussion Papers.
  6. Rodney Ramcharan, 2003. "Reputation, Debt, and Policy Conditionality," IMF Working Papers 03/192, International Monetary Fund.
  7. Robert J Barro & Jong-Wha Lee, 2003. "IMF Programs: Who Is Chosen and What Are the Effects?," Departmental Working Papers 2003-09, The Australian National University, Arndt-Corden Department of Economics.
  8. Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
  9. International Monetary Fund, 1998. "Do IMF-Supported Programs Work? a Survey of the Cross-Country Empirical Evidence," IMF Working Papers 98/169, International Monetary Fund.
  10. Paul Collier & Jan Willem Gunning, 1999. "The IMF`s role in structural adjustment," Economics Series Working Papers WPS/1999-18, University of Oxford, Department of Economics.
  11. repec:fth:oxesaf:99-18 is not listed on IDEAS
  12. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, vol. 83(3), pages 598-607, June.
  13. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  14. Giulio Federico, 2001. "Samaritans, Rotten Kids and Policy Conditionality," CSAE Working Paper Series 2001-16, Centre for the Study of African Economies, University of Oxford.
  15. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  16. Giulio Federico, 2001. "Samaritans, Rotten Kids and Policy Conditionality," Economics Series Working Papers WPS/2001-16, University of Oxford, Department of Economics.
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Cited by:
  1. Mariarosaria Agostino, 2004. "Conditionality, Commitment and Investment Response in LDCs," Economics Working Papers 2004-10, School of Economics and Management, University of Aarhus.
  2. Rodney Ramcharan, 2003. "Reputation, Debt, and Policy Conditionality," IMF Working Papers 03/192, International Monetary Fund.

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