Aid Conditionality

There was an increase in condition based lending in the 1980s based primarily on institutional reform and economic policies with strong neoliberal principles of market led development in developing countries. These economic conditions came to be known as the Washington Consensus. Recipient countries had to fulfill requirements such as structural adjustment programs (SAPS) which became a major feature to persuade countries which were defaulters of debt to their house in order. The multilateral agencies embodied the view that the debt crisis of any given country was caused by domestic, economic mismanagement. The basic components involved in the program were currency devaluation, tax and public spending cuts, and incentives to support export led growth. The content of conditionality evolved over time. The practice of adding conditions to loans given became central to the operations of the IMF, the World Bank and was later followed by other development agencies and governments of major industrial nations.

These economic conditions led to two developments. The donors began to believe that to make aid effective, sound economic management needs to be in place supported by a conducive, political environment. This also led to further political conditionalities in the 1990s focusing on good governance (bringing the state back in as a key agent of development). The principles of good governance were mainly to promote human rights, economic growth (market led economy), democracy, accountability of public finance, and to reduce corruption. Development is seen not only in the economic context of global capitalism but also in the political context. The role of the state is to provide an enabling environment for development by other agencies. The World Bank and the IMF, and also many bilateral ODA programs, require recipient countries to adhere to certain policies. Aid allocation from then onwards went to selected countries which had demonstrated a commitment to sound economic development policy and good governance and those who were credit worthy. This marginalized those countries which desperately needed help and support. In the later half of the 1990s, a further condition was added requiring countries to adopt propoor policies most notably requiring poverty reduction strategy papers (PRSPs), to which aid and debt relief were increasingly tied. These were based on participatory processes of consulting various local stakeholders, especially civil society, generating a sense of citizen ownership and acceptance of state initiated development, among the aid recipients. Forty nine countries had approved PRSPs as of 2007. An increasing amount of aid is given to restore democracy, especially by United States Agency for International Development (USAID), United Nations Development Program, and the EU estimated at reaching US$5 billion. It is very difficult to assess if democratization specifically benefits the performance of development aid. The good governance agenda requires civil society to have a sufficiently independent position with respect to the state. To attain this condition, donors will need to channel finance outside of government structures.

Neither the IMF nor the World Bank has been able to show connection between their own programs and improvements in economic policies. There is still a great deal of political influence on the process of aid allocation. There are programs that have failed or have taken longer to implement than originally planned. Some programs have been poorly implemented in the recipient countries. Donors have ignored failures in some countries and have pretended that conditions have been met when the reality is otherwise. The 1995 World Bank report highlights that generally adjustment lending has promoted good policies, but achieved weak program results. In most cases, the implementation of programs has failed due to internal political pressures within the country rather than the donor pressures. Donors also do not have much influence in bringing about political change.

Aid conditions were heavily criticized, for undermining the sovereignty of aid recipient countries and were regarded as interfering in economic decisions and policy making. Some donors believe that it gives them legitimate interest in the policies of recipient countries. Conditions were difficult to enforce too. Some critics also regarded them as coercive, because of the intrinsic imbalance in negotiating strength between rich donor agencies and poor recipient governments. Government performances change over time, as the present is not necessarily a good predictor of the future. Recipient governments have little incentive to accept unwanted policies if they can borrow from elsewhere or their economy is strong enough to manage without the loan or grant, while countries, which have not had adequate economic growth or have experienced instability, rely heavily on borrowing through grants and loans on lower interest rates than the markets. Also, noncompliance of conditions has been rarely punished; rather, governments have been able to negotiate new credit similar to those who have complied. There is usually a lot of pressure on donors to continue aid as there are always fears of damaging macroeconomic conditions within the country and affecting people at the grassroots. Most World Bank officials would accept that both economic and political conditions have not really worked; some bilateral donors have moved away from these conditions and want to maintain flexible conditions. Most donors are in search of alternative strategies, in selecting recipients as partners for aid allocation through mutually agreed programs and outcomes. It is difficult to imagine an equal partnership given the nature of intrinsic imbalance of power that exists between the donors and the recipient countries.