On the Viability of Conditional Assistance Programs
30 Pages Posted: 3 Mar 2006
Date Written: June 2005
Abstract
Economic adjustment and reform programs, including those supported by international financial institutions (IFIs), must cope with informational asymmetries and special interest politics. This presents a particularly serious issue when IFIs make structural economic reforms a condition for providing economic assistance. This paper examines what conditions must be satisfied to make conditional assistance programs viable; that is, to ensure that the assistance-receiving government not only takes the assistance but also implements reforms, without compromising the country`s political stability and the IFI`s financial integrity. It is pointed out that tightly budgeted conditional assistance programs never bring about reforms, that the IFI`s cost of viable programs rises with the dependence of the government on domestic interest groups, and that unconditional assistance might be viable when conditional assistance is not.
Keywords: IMF, economic reforms, conditionality, viability, incentive compatibility
JEL Classification: E61, F33, F34
Suggested Citation: Suggested Citation
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