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.