15 Donor Conditionality and Policy

My focus is on the use by aid donor agencies of conditionality to induce changes in economic policies and institutions. At the most general level, this throws light on whether it is feasible to use donor leverage to overcome weak institutions and anti-reformist governments – whether it is possible to use this as a device for prevailing over domestic political constraints on the adoption of better policies. If this appears to be asking too much, is it at least possible that donor leverage and money will tip the balance within governments between reformers and conservatives? Even failing that kind of decisive influence, conditionality may operate through a different channel: steering governments towards the acceptance of policy change in order to secure the ‘seal of approval’ of the International Monetary Fund (IMF), World Bank and others, and by that means to add to the credibility of their own policies. Can donors act as ‘agencies of external restraint’, adopting the role that Robert Bates argues in Chapter 1 of this volume is being played in some developing countries by private international investors? Can donors’ policy stipulations impinge decisively on domestic policy-making by offering a ‘technology of pre-commitment’? Although donors behave as if their conditionality is highly efficacious, it appears that they have not been able to achieve such results. At the same time, the general policy strategy they favour is proving quite efficacious around the world in raising economic performance, so the intention here is to explain this puzzle. In principle, the analysis applies to all policy conditionality – macroeconomic, sectoral and project-level – by multilateral and bilateral aid agencies alike. However, most available evidence relates to the ‘adjustment programmes’ of the Bretton Woods institutions (BWIs). We concentrate on the experiences of developing countries, conventionally