The Evolution of Aid Conditionality A Review of the Literature of the Last Twenty Years

Summary

The EBA Working Paper Series constitutes shorter overviews, surveys, mappings and analyses that have been undertaken to bring about discussion and advance knowledge of a particular topic. Working Papers are not subject to any formal approval process by the Expert Group. Just as in the EBA reports, authors are solely responsible for the content, conclusions and recommendations.

This study presents a review of the academic literature on aid conditionality and its evolution, with a particular focus on the last twenty years. The first part looks at the nature, forms and objectives of conditionality, the second examines the implementation of conditionality, and the last examines the effectiveness of conditionality.

Conditionality has long been understood as the counterpart of financial assistance, with the donor assuming that its aid will be more effective for development if it is granted in a favourable economic and political environment. Aid conditionality is thus thought to be a tool to encourage the adoption of macroeconomic policy reforms, but also to defend democratic values and promote peace. It can also pursue objectives that are less directly linked to the development of recipient countries. For example, conditionality can be used to pursue goals beneficial to the international community, such as encouraging recipients to reduce their CO2 emissions, or to those of the donor and the defence of its interests, particularly economic and geopolitical.

What does the recent literature tell us about the implementation of conditions? Macroeconomic conditionality has evolved in response to criticisms of it, namely towards more flexibility, fewer loan conditions, and an attempt to replace traditional conditionality (aid based on the promise of reforms) with results-based conditionality (aid based on results achieved by recipients). The literature shows that this attempt, promising in principle, is seldom used today because it is difficult to implement. As for political conditionality, it appears that its effective application is partly subject to the geopolitical interests of the main donors, which undermines its credibility. Finally, climate conditionality, a new form of policy conditionality, is very rarely used in reality.

One of the key developments in the application of aid conditionality is the arrival of new donors, some of which, such as China, are becoming major lenders. With assistance modalities that are very different from the traditional OECD DAC donors, these new donors are thus practicing alternative forms of conditionality. This new offer of assistance makes it more difficult to apply conditions to traditional donor assistance, as the incentives to accept these conditions are weaker in the presence of (seemingly) less conditioned assistance. However, the literature on the conditions of Chinese aid shows that the promise of unconditional aid is far from being fulfilled, and that the arrival of new donors like China is often accompanied by a new form of conditionality rather than the disappearance of traditional conditionality.

Finally, the recent literature shows that conditionality, whether macroeconomic or political, is struggling to prove its effectiveness. In the economic sphere, the effectiveness of conditionality in actually getting recipients to adopt structural reforms is thought to be rather negative. In the political sphere, conclusions of the literature are ambiguous, both because of the difficulty of measuring precisely what is conditionality and because of the diversity of situations. Competition from new donors has reduced the effectiveness of policy conditionality, while climate conditionality remains unstudied because of its weak application.