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Middle East and Central Asia > Yemen, Republic of

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Cover IMF Working Papers
How Does Conditional Aid (Not) Work?
Mr. Rodney Ramcharan
Does policy conditionality worsen domestic welfare, as governments are forced to attempt unpopular reforms resulting in damaging protests, or does conditionality help implement reforms that otherwise would have been impossible? This paper analyzes these questions. Using a game-theoretic framework, it argues that the impact of conditional aid on welfare is nonmonotonic. Sufficiently conditioned aid can enhance the signaling power of reform announcements, thereby deterring protest and enabling reform. In contrast, inadequately conditioned aid may induce a "weak" government to mistakenly attempt reform, resulting in protest and a worsening of domestic welfare relative to the status quo.
Keywords:
WP; economic reform; status quo; conditionality; policy reform; IFI involvement; reform announcement; weak government; participation constraint; Multilateral development institutions