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Donors As Paper Tigers. Why Aid With Strings Attached Won't Work

There are strong signs that the structural adjustment programmes of IFIs (International Financial Institutions such as IMF and World Bank) often fail to bring economic improvements to aid-receiving countries. This is a paradox, because the approach to economic policies they embody has improved economic performance in other countries around the globe. It makes sense, then, to ask whether the IFIs' heavy reliance on conditionality has proved an effective lever for better policies. Research-based evidence suggests otherwise.

Investigations into aid effectiveness were conducted by researchers from the Overseas Development Institute in London, who focused on hard-core conditionality, i.e. promises of actions made only at the insistence of the donor. The work was based on the experiences of a sample of 21 developing countries at the receiving end of World Bank structural adjustment programmes. Data on IMF lending and regional studies of South-East Asia and Latin America were also analysed. Among a wide range of other observations, the ODI studies conclude that:

The objectives and interests of donor agencies and recipient governments rarely coincide. They differ in historical and institutional background, the constituencies they must satisfy, internal management priorities and preferred time-scales. National resentment of donor "interference" can lead to general suspicion of externally-urged policy changes and when differences lead to resentment, donor pressures to reform policy usually take second place to domestic politics and perceived "ownership" of programmes emerges as an important determinant of implementation. In countries which showed new vigour in implementing reforms, the key was a change in the local political situation. Incentives offered by the IFIs are not enough to clinch implementation, with penalties not greatly feared.

Moreover, ODI's evidence provided no support for the proposition that agreeing an IFI programme raises the credibility of a government's policies. It appears that investors' assessments of the risks of policy reversal are based on their own judgements about the domestic political scene. It also appears that conditionality only occasionally tips the balance of power in favour of pro-reformers within government. Prospects of making conditionality more effective are poor. The IFIs have difficulty in applying sanctions to their own shareholders who fail to implement agreed policies, and multiple donor objectives get in the way of consistent action. The potentially destabilising effects of withdrawal of expected finance adds to reluctance to penalise defaulters. Can policy suggestions be gleaned from these insights?

A new model of donor-recipient relationships is urged, based upon four principles or pre-requisites, viz:

an ownership principle requiring that donors take their own rhetoric on this theme more seriously, and desist from using financial levers to obtain policy vows which borrowing governments do not believe in
a principle of selectivity, requiring that programme aid be limited to governments that have decided for themselves to introduce policy improvements
"support" refers to conventional financial support for adjustment programmes, extended to improved contingency financing and debt relief for reforming governments, and to technical assistance (also unshackled from conditionality) for governments requesting it to raise their own policy capabilities
a "dialogue" pre-requisite means donors must redirect their efforts towards exerting influence, and to maximise the number of channels through which non-coercive influence might be expressed and applied.

Source(s):
1. Principals, agents and the failings of conditionality, Journal of International Development, 9(4), T. Killick (1997)
2. Aid and the Political-Economy of Policy Change (provisional title), London, Routledge. T. Killick (in press, 1998)

Funded by: Department for International Development, UK (1994-1997)

id21 Research Highlight: 1997-Dec-03

Further Information:
T. Killick
Overseas Development Institute
Portland House
Stag Place
London SW1E 5DP
UK

Tel: +44 (0)171 393 1657
Fax: +44 (0)171 393 1699
Contact the contributor: t.killick@odi.org.uk

Overseas Development Institute, UK

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