Principals, Agents and the Failings of Conditionality

Abstract

This article examines the eectiveness of policy conditionality by international and other aid donors. The subject is treated within a principal-agent framework and is based on evidence from a sample of 21 developing countries, mainly relating to experiences with World Bank structural adjustment programmes. The evidence provides strong support for the overall hypothesis that conditionality-applying donors (speci®cally the BWIs) are often unable to put in place a system of rewards and punishments sucient to overcome the frequent perceived con¯icts of interest between themselves and recipient governments. Diculties which donors experience in punishing non-implementation of policy stipulations are among the chief reasons for this result. In the event of serious donor±recipient disagreements, domestic politics usually dominates. The use of donor ®nancial leverage is not a substitute for weak domestic institutions or political will'. We also ®nd that the conditions necessary for conditionality to provide à technology of precommitment' are often not satis®ed. The BWIs and other donors should recognize that their main contribution to policy reform in developing countries has been through in¯uence on the contemporary intellectual climate, and persuasion of governments through regular contacts.

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