Limits of Conditionality in Poverty Reduction Programs

IMF Working Papers, July 1, 2002

Source details

When donors and recipients have different preferences over budgetary allocations, conditionality helps the implementation of donor-financed poverty reduction programs.
If donors cannot perfectly monitor all recipients' actions, conditionality entails an inefficient allocation of resources.
Under conditions of imperfect monitoring, the optimal amount of conditionality varies (often not monotonically) with the recipients' degree of social commitment.
If recipients' preferences are not observable, conditionality can be used to prevent recipients with a weak commitment to poverty reduction from obtaining aid funds; this screening role may lead to further distortions in terms of resource allocation and to phenomena of "aid rationing."

Conditionality can improve alignment of donor-financed programs with donor objectives when preferences diverge between donors and recipients.
Limited monitoring capacity introduces inefficiencies that alter the welfare-maximizing design of conditionality; policymakers should account for monitoring constraints when designing conditionality regimes.
The relationship between recipients' social commitment and the optimal intensity of conditionality is complex and may be non-monotonic; one-size-fits-all conditionality intensities may be suboptimal.
Using conditionality as a screening device when recipients' preferences are unobservable can exclude poorly committed recipients but risks additional distortions and aid rationing; donors should weigh the trade-offs between screening benefits and allocation distortions.

Limits of Conditionality in Poverty Reduction Programs - WP/02/115
- Limits of Conditionality in Poverty Reduction Programs - WP/02/115 (Markdown version)
- Limits of Conditionality in Poverty Reduction Programs - WP/02/115 (PDF)