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How Does Conditional Aid (Not) Work?

Author/Editor: Ramcharan, Rodney
Authorized for Distribution: November 1, 2002
Electronic Access: Free Full Text (PDF file size is 759KB)
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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.
 
Series: Working Paper No. 02/183
Subject(s): Conditionality | Fiscal reforms | Financial assistance
Author's keyword(s): Conditionality | policy reform
 
English  
    Published:   November 1, 2002        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA1832002   Pages:   26
    Price:   US$15.00
       
     
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