Outcomes-Based Conditionality: Its Role and Optimal Design

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.The paper employs a principal-agent framework to analyze the role and design of outcomesbased conditionality in the presence of market frictions and domestic opposition. The results suggest that outcomes-based conditionality is a good option for the IMF when opposition to reforms is relatively weak and when the IMF loan is unsubsidized. The only role conditionality ends up playing in this case is that of an efficiency tool. The benefits of outcomes-based conditionality in the presence of strong opposition are less clear, and using this conditionality as an incentive tool would require that IMF financing be subsidized. JEL Classification Numbers: F33, D82

Read my lips: The role of information transmission in multilateral reform design

“…(2) actually derives from a more general objective function which is commonly used in the political economy literature applied to the IMF (e.g., Ivanova, 2006;Mayer and Mourmouras, 2008;Drazen, 2002). 15 We assume that the optimal program for the IMF differs from the program which maximizes a country's national output by a constant e, with e N 0, which captures the relevance of spillover effects.…”

“…None of these papers, however, has modeled the transmission of information in the specific context of a principalagent relationship (such as the one between a multilateral institution and recipient countries). 8 A principal-agent framework is employed by Khan and Sharma (2001) and Ivanova (2006) in order to analyze the role of outcome-based conditionality in improving ownership and, in this way, the implementation of reforms. However, they do not tackle the problem of information transmission.…”

Controlling the World Bank and IMF

“…The proliferation of staff papers on the issue since 2001 is illustrative of this movement (e.g. Boughton and Moumouas 2002, Cordella and Dell'Ariccia 2002, Boughton 2003, Khan and Sharma 2003, Ivanovna 2006. Although staff papers do not represent official Fund policy, they do provide a vital window into the internal dynamics through which institutional learning occurs in the IO.…”

Fungibility and the Choice of Aid Modalities The Red Herring Revisited

“…Yet another model that explicitly incorporates performance-or outcome-based conditionality in a principal-agent framework is Ivanova (2006), who -building on a model developed by Mayer and Mourmouras (2001) -finds that outcome-based conditionality may be a good option when the opposition by a self-interested lobby is relatively weak and where performance is relatively easily and unambiguously measurable. In comparison, the effectiveness of outcome-based conditionality in the presence of strong opposition by special interest groups is less clear, in particular if these groups extract significant rents and can offer the government a 'bribe' that outweighs the value of external financing (Ivanova 2006:20).…”