PRINCIPALS, AGENTS AND THE FAILINGS OF CONDITIONALITY

Abstract

This article examines the effectiveness of policy conditionality by international and other aid donors. The subject is treated within a principal-agent framework and is based on evidence from a sample of 21 developing countries, mainly relating to experiences with World Bank structural adjustment programmes. The evidence provides strong support for the overall hypothesis that conditionality-applying donors (specifically the BWIs) are often unable to put in place a system of rewards and punishments sufficient to overcome the frequent perceived conflicts of interest between themselves and recipient governments. Difficulties which donors experience in punishing non-implementation of policy stipulations are among the chief reasons for this result. In the event of serious donor–recipient disagreements, domestic politics usually dominates. The use of donor financial leverage is not a substitute for weak domestic institutions or ‘political will’. We also find that the conditions necessary for conditionality to provide a ‘technology of precommitment’ are often not satisfied. The BWIs and other donors should recognize that their main contribution to policy reform in developing countries has been through influence on the contemporary intellectual climate, and persuasion of governments through regular contacts. © 1997 by John Wiley & Sons, Ltd.