How Does Conditional Aid (Not) Work?
Electronic Access:
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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.
Series:
Working Paper No. 2002/183
Subject:
Consumption Financial institutions Labor Multilateral development institutions Technology
English
Publication Date:
November 1, 2002
ISBN/ISSN:
9781451859324/1018-5941
Stock No:
WPIEA1832002
Pages:
26
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