The Causes and Effects of IO Conditionality

Abstract

International organizations often employ hard-powered incentives to induce specific policy reforms by national governments. According to the IMF, such “systems of conditionality are designed to promote national ownership of strong and effective policies”. Conditionality refers to a set of conditions attached to the granting of financial assistance or other types of benefits. Such benefits usually take the form of a loan, aid (including debt relief), or membership of an organization. The conditions are a sort of extrinsic incentive for a country to achieve certain goals deemed desirable by the designing country or organization. Over time, international organizations (most notably the EU, the WB, and the IMF) have shifted towards increasingly legalized and constraining conditionality schemes as contractual preconditions for IO accession, membership, association, financial bailouts, credit lines, etc. The attractiveness of conditionality as a tool to gain leverage over target countries’ policies (or, on the flip side of the same relation, as an assurance-creating device which allows the target country to receive the benefits it seeks) is such that all major countries or organizations active in international policies now design such programs. For example, over the past decade, an average of forty countries participated in IMF conditional debt relief programs. Similarly, the EU has created conditionality programs both for candidate members and countries targeted by the European Neighborhood Policy (ENP) but also more recently for existing Eurozone members in the context of bailout agreement. Nevertheless, the attractiveness of conditionality policies is not so clear to all. Among many positive and normative objections, for example, critics argue that IMF conditionality undermines domestic democratic institutions, sets unattainable standards of austerity, and leads to poverty especially among those already poor. They also point out that conditionality programs are unduly influenced by supplementary financiers in general and private financial institutions in particular, or by geopolitically (not economically) minded powerful countries. Alternatively, they are negotiated by domestic leaders, who thereby gain unwarranted leverage over domestic political and economic actors. Finally, quantitative evidence shows that IMF conditions are not only ignored because of post-colonial politics, but also actually reduce foreign direct investment in target countries. On the other hand, a number of scholars have found these criticisms exaggerated. Recent research shows that citizens’ economic interests do influence conditionality and stresses the fact that IMF programs act as screening devices that enable creditors to discriminate between “good” and “bad” debtor countries. Therefore, in this panel we are interested in the following research questions: (i) Do all such conditionality arrangements produce the desired effects? (ii) What are the scope conditions for the success or failure of such programs? (iii) If, at it seems, failure does sometimes occur, what are its causes and how is it addressed by the relevant parties? (iv) Furthermore, how does the design and effectiveness of conditionality schemes compare among different IOs?

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