DP3562 Conditionality and Ownership in IMF Lending: A Political Economy Approach

Author(s): Allan Drazen

Publication Date: September 2002

Keyword(s): IMF , foreign aid , conditionality , ownership

JEL(s): F34 , F35

Programme Areas: International Macroeconomics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP3562.asp

The relation between IMF conditionality and country ownership of assistance programs is considered from a political economy perspective, focusing on the question of why conditionality is needed if it is in a country’s best interests to undertake the reform program. It is argued that heterogeneity of interests must form the basis of any discussion of conditionality and ownership. The Paper stresses a conflict between a reformist government and domestic interest groups that oppose reform, leading to a distinction between government and country ownership of a program. A model of lending and policy reform is presented that illustrates the effects of unconditional and conditional assistance first without and then with political constraints. It is shown that conditionality can play a key role even when the Fund and authorities agree on the goals of an assistance program.