Conditionality Increases Domestic Support for Reforms

Conditionality Increases Domestic Support for Reforms

Olav Stokke, Norwegian Institute of International Affairs, 1995, Aid and Political Conditionality, ed. Olav Stokke, p. 12

Another interpretation, which does not necessarily contradict the first, is that, in the absence of the Cold War, some major Western governments needed a new justification vis-à-vis their own electorate for continuing to give aid to the South. The promotion of values cherished in their own societies, in combination with other aspects included in the concept of good government (‘good governance’), emerged as the answer [Lancaster, 1993a]. This explanation may, if correct, also explain why there are different brands of political conditionality at work and why the emphasis of different donors varies.
CONDITIONALITY ONLY WAY TO PUSH POLITICAL REFORMS AND HUMAN RIGHTS IN SOME COUNTRIES

Olav Stokke, Norwegian Institute of International Affairs, 1995, Aid and Political Conditionality, ed. Olav Stokke, p. 30

This stance is argued in the development literature. It is strongly held by Peter P. Waller [1993] arguing that reforms in the political domain (human rights, democracy) that run counter to the interest of elites can be pushed through only by outside advanced intervention (aid conditionality would suffice vis-à-vis poor countries, in more advanced countries only trade and economic relations offer a leverage).
CONDITIONALITY CAN HELP GOVERNMENTS SELL REFORMS DOMESTICALLY

Stefan G. Koeberle, World Bank, 2003, The World Bank Research Observer, Fall, Vol. 18, no. 2, pp. 249-273, p. 253

Yet several country studies have found that conditionality has been useful, with reformers welcoming it and using the associated external commitments to push through reforms – especially when conditionality focuses on a few important measures to which governments were already committed. For instance, government officials in Ghana and Uganda welcomed conditionality that helped them identify, implement, and cement reforms (Devarajan and others 2001). Kenya, Tanzania, and Zambia offer less effective examples of the positive role of adjustment lending in supporting reforms (Burnside and Dollar 1997). But in other countries commitments to reform have been delayed, were not carried out, or were implemented by subsequently reversed.
CONDITIONALITY VITAL TO PUBLIC ACCEPTANCE OF THE AID

James J. Boughton & Alex Mourmouras, IMF, 2004, The IMF and its Critics: reform of global financial architecture, eds. D. Vines & C. Gilbert, p. 234-5

A practical implication of the political contribution approach is that the limitations of unconditional aid to unrepresentative governments can be alleviated through conditionality aimed at reducing distortions. Similarly to the models discussed above, the gains from external assistance can be represented by a contract curve representing the locus of tangencies of the indifference curves of the donor and the recipient – that is, the combinations of transfers to the favored group and the aggregate tax rate in the aid recipient country that leave each player on the same level of welfare. For given donor and recipient objective functions, the location of the equilibrium point on the contract curve after conditional allocations depends on the nature of the strategic interaction, whether it wastes resources, the relative bargaining powers or threats points of two parties, etc. Conditionality prevents a collapse of aid when recipients governments are not sufficiently representative, reduces the distortionary tax rate and achieves constrained Pareto optimal allocations. If the donor has substantial bargaining power, aid is also accompanied by a reduction in the transfers to favored groups. In the opposite case, transfers, to favored groups may actually increase.

John Healey & Tony Killick, Senior Research Associates-Overseas Development Institute, 2000, Foreign Aid and Development: lessons learnt and directions for the future, ed. F. Tarp, p. 244

The pursuit of relationships of “partnership” based on mutual commitment and ownership should be pursued preferably between all the agencies and not just bilaterally. The ultimate objective must be consensus among them on a single strategy for the country. There need to be institutional mechanisms though which such exchanges of views can be focused nationally (of course involving high-level political and societal involvement). While local ownership of PR policies and programs is the key, the use of conditionality may be effective where there are pockets of domestic commitment in a more generally unsympathetic environment and where donor leverage can tip the balance among domestic policy makers in favor of reformists.
CONDITIONALITY EMPIRICALLY INEFFECTIVE AT “BUYING” REFORMS

DFID, 2005, {Britain’s Department for International Development], Partnerships for poverty reduction: rethinking conditionality, March, [http://www.dfid.gov.uk/pubs/files/conditionality.pdf], p.6

In many cases, either donors or developing countries have not kept to the conditions that they signed up to. Developing countries sometimes agreed conditions in areas of reform even though they were unconvinced of the case for change. Unsurprisingly, countries have largely ignored conditions set in such circumstances, or the reforms pursued have not been sustained. Put simply, conditionality which attempts to ‘buy’ reform from an unwilling partner has rarely worked.

Christopher L. Gilbert et al., Finance Professor Vrije University, 2000, The World Bank: Structure and Policies, eds. C. Gilbert & D. Vines, p. 60

Opponents of conditionality often frame their objections in a principal-agent framework in which the Bank is the principal and the borrowing government is the agent. It is arguable that this exaggerates the monolithic nature of many governments and that, instead, policy is often the outcome of competing pressures within government which contains both advocates and opponents of reform. In that case, there is no inevitable clash of interests between principal and agent, and the role of conditionality is to “tip the balance” towards the reformers, or even to strengthen government in adopting policies which are acknowledged as necessary but which are difficult to sell to an uniformed public.
AID CONDITIONALITY HAS BEEN EFFECTIVE AT PROMOTING REFORMS

Oliver Morrissey, University of Nottingham, 2004, The World Economy, Vol. 27, February, p. 155

Oliver Morrissey, University of Nottingham, 2004, The World Economy, Vol. 27, February, p. 156-7

Both observations taken together imply that cross-country regressions are biased against finding that aid is effective (as defined), i.e. there are good reasons to expect that the estimated coefficient on the aid term would be insignificant. Nevertheless, on balance, recent studies find consistent evidence that aid is effective, conditional on controlling for other influences on growth (of which policy is one, but only one, and not necessarily the most important). The two core papers that capture the two sides of the current debate are Burnside and Dollar (2000) and Hansen and Tarp (2001). These studies are directly comparable and focus on the interaction between aid and policy: they use essentially the same data for the same sample, with mostly the same explanatory variables. The major differences are the treatment of outliers and the method of estimation used (and these clearly affect the results). Results from these and other empirical studies (Gomanee et_al., 2002; and Dalgaard et al., 2002) are summarised in Morrissey (2002) to illustrate a number of general issues in the aid-growth empirical literature:

(i) Burnside and Dollar (2000) find that aid is only effective in countries with good policies. Hansen and Tarp (2001) and others find, on the contrary, that aid is effective independent of policy.

(ii) Coefficient estimates are sensitive to specification and sample, i.e. estimated values vary, but the same variables tend to be significant. In other words, there is considerable agreement across the studies regarding the factors associated with growth.

(iii) Policy variables tend to be significant. In particular, openness tends to be positively associated with growth, whereas inflation and budget deficits or government consumption spending tend to be negatively associated. It is not, however, evident that these should be combined into one index and interacted with aid, as Burnside and Dollar (2000) do. Indeed, it is not at all clear from these studies how aid and policy indicators interact.

(iv) When included, an ‘aid-squared’ term tends to be negative and significant, typically interpreted as diminishing returns to aid. However, it is possible that this is picking up an effect of the volatility of aid flows. More unstable countries experience more volatility of aid inflows and this is associated with a poor growth performance (see Lensink and Morrissey, 2000).

(v) Institutional and socio-political variables are clearly important in determining growth performance. Such variables could reasonably be expected to be related to policy and the way in which aid is used.