ABSTRACT
In this paper, we propose a game theoretic approach to deal with the problem of implementing the efficient allocation of aid and reform through policy conditionality. We show that optimality can only be attained by a conditional scheme that takes into account the characteristics of both donor and recipient. Moreover, the levels of aid and reform induced by such a mechanism are, under certain conditions, compatible with the goals of the recipient government. This result reconciles ownership with a specific form of conditionality.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1. Dreher (Citation2009) and Bird (Citation2008) survey theoretical arguments in favor and against policy conditionality. Empirical studies of conditionality include Beazer and Woo (Citation2016), Devarajan, Dollar, and Holmgren (Citation2001), Dreher (Citation2009), Kentikelenis, Stubbs, and King (Citation2016), Killick (Citation1997), Mosley, Harrigan, and Toye (Citation1995) and Stubbs et al. (Citation2020), among others. Some reasons for the failure of conditionality are: (i) aid donations respond to commercial interests of donors (Alesina and Dollar Citation2000; Kanbur Citation2000); (ii) the low opportunity costs of committed funds due to the budget-pressure problem (Svensson Citation2003); (iii) aid donations are fungible and imperfectly monitored (Cordella and Dell’Ariccia Citation2002); (iv) it is difficult to enforce the conditions if such conditions put debt repayment at risk (Ramcharan Citation2003); or, (v) a long relationship between borrower and the IMF positively influences the donor’s desire to disburse funds (Marchesi and Sabani Citation2007).
3. For a meta study on the effectiveness of aid, see Doucouliagos and Paldam (Citation2009). Gupta, Schena, and Yousefi (Citation2020) analyze IMF conditions during the period 1992–2016, and find that structural conditionality is the one that obtains lasting benefits.
4. “The World Bank’s Country Policy and Institutional Assessment (CPIA) assess the conduciveness of a country’s policy and institutional framework to poverty reduction, sustainable growth, and the effective use of development assistance”.
5. Subscripts denote partial derivatives.
6. This implies, by Schwarz’ theorem, the symmetry of second derivatives, i.e., 
.
7. There could be other reasons why recipients do not comply with the conditions. Arpac, Bird, and Mandilaras (Citation2008), Bird (Citation2008), or Bird (Citation1998) identify political and institutional factors that affect the implementation of conditionality.
9. See Griffith-Jones and Rodriguez (Citation1992), for a description of the characteristics of cross conditionality in Argentina, Chile, Costa Rica, Jamaica, Mexico and Tanzania.
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Funding
This work was supported by the Ministerio de Economía y Competitividad (Spain) [ECO2016-75631-P].
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