Policy Conditionality

Abstract

If policy makers in developing countries pursue "bad" economic policies, policy conditionality may provide financial leverage which induces them not to choose these policies. When is such policy conditionality beneficial? We point out that whether conditionality has a beneficial short run impact depends critically on the political economy explanations of the particular "bad" economic policy in question. We also argue that conditionality can only have a long-run impact if there is a tendency for reforms to "persist" and discuss alternative explanations for policy persistence.

Keywords: Policy Conditionality, Transfers, Policy Persistence, Political Economy

JEL Classification: C7, H1