How Does Conditional Aid (Not) Work?

26 Pages Posted: 1 Feb 2006

See all articles by Rodney Ramcharan

Rodney Ramcharan

University of Southern California, Marshall School of Business

Date Written: November 2002


Does policy conditionality worsen domestic welfare, as governments are forced to attempt unpopular reforms resulting in damaging protests, or does conditionality help implement reforms that otherwise would have been impossible? This paper analyzes these questions. Using a game-theoretic framework, it argues that the impact of conditional aid on welfare is nonmonotonic. Sufficiently conditioned aid can enhance the signaling power of reform announcements, thereby deterring protest and enabling reform. In contrast, inadequately conditioned aid may induce a weak government to mistakenly attempt reform, resulting in protest and a worsening of domestic welfare relative to the status quo.

Keywords: conditionality, policy reform

JEL Classification: E61, F35

Suggested Citation

Ramcharan, Rodney, How Does Conditional Aid (Not) Work? (November 2002). IMF Working Paper, Vol. , pp. 1-26, 2002. Available at SSRN:

Rodney Ramcharan (Contact Author)

University of Southern California, Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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