The Political Economy of Aid Conditionality

Abstract

Studies of Western development assistance conclude that aid is effective only when recipients have good governance, measured as pro-investment policies, democratic institutions, and political stability, or when recipients lack strategic importance to donors. Underlying the theoretical frameworks in these studies is a common mechanism: compliance with conditions on aid agreements, which, in turn, depends on recipient incentives to comply. With the exception of donors’ emphasis on the quality of governance in the early 2000s, donors generally overlook recipient incentives to comply with aid agreements and thus fail to capitalize on opportunities for aid effectiveness suggested by the academic studies. A paucity of data has limited direct analysis of compliance with conditions, but studies have relied on their own data collection or have leveraged data from the World Bank to assess determinants of compliance with conditions. Importantly, these studies of compliance support the findings from the aid-effectiveness literature, indicating that the initial incentives to comply with aid agreements are the driving force in agreement compliance and therefore aid effectiveness. Based on these findings, future research on compliance with conditions on aid is encouraged, beginning with study of the direct influence of compliance on economic development. In addition, future research should analyze whether certain types of aid influence compliance with Western aid agreements, including tied aid and aid from non-Western donors. The implication for policy is that donors should enthusiastically support recipients who face incentives to comply because compliance drives aid effectiveness. When recipients lack such incentives, donors should try to change the underlying incentive structure of recipients rather than adding conditions on aid.

Costly Signals?

“…Studies of foreign aid outcomes examine its effects on development, human rights, democracy, conflict, and a variety of other matters (see, for example, Apodaca 2017; Dasandi and Erez 2017;Findley 2018;Girod 2018;Yiew and Lau 2018). With respect to democracy in particular, most analyses conclude that general foreign aid does not promote democracy (e.g., Knack 2004), but more targeted and focused democracy aid is another matter.…”

“…based on preferred conditions recipient states must meet. Donor states may require regimes to follow certain guidelines or meet outlined standards (Girod 2018), or they may demand that recipient regimes change the structures of their government, economy, and/or policies in order to create sufficient institutional capability to achieve donor goals for the aid, which is known as structural adjustment agreements. When recipient states do not comply with conditions, the donor state is then forced with the decision to cut off aid.…”

“…In general, most studies conclude that conditionality does not typically work (Crawford 1997;Girod 2018;Montinola 2010;Temple 2010). Prior to the collapse of the Soviet Union, donor states may have outlined aid conditions, but they were frequently ignored (Bermeo 2016;Dunning 2004).…”

How International Actors Help Enforce Domestic Deals

“…After the Cold War, the United States and its allies provided significant conditional incentives and were more willing to pressure states and engage in their affairs to promote peace and democracy, producing Goldilocks conditions in many cases (e.g., Feste 2003, Lebovic & Voeten 2009. Since the turn of the century, a shift away from a Goldilocks condition has emerged in many states: The attacks of September 11, 2001, for instance, focused these international actors on backing supportive partners in the War on Terror (Girod 2019), and other aid providers such as China often do not condition assistance on compliance with domestic bargains (Girod 2018). A Goldilocks condition therefore is less likely in certain eras-and also for certain partners in the current era.…”

Why Some Persistent Problems Persist

“… 2 See, for example, Byman (2006), Padró-i-Miquel and Yared (2012), Biddle (2017), Biddle, MacDonald, and Baker (2017), Ladwig (2016, 2017), Berman and Lake (2019), Girod (2018), and Nicholson (2018). …”