On the Viability of Conditional Assistance Programs

Economic adjustment and reform programs, including those supported by international financial institutions (IFIs), must cope with informational asymmetries and special interest politics. This presents a particularly serious issue when IFIs make structural economic reforms a condition for providing economic assistance. This paper examines what conditions must be satisfied to make conditional assistance programs viable; that is, to ensure that the assistance-receiving government not only takes the assistance but also implements reforms, without compromising the country`s political stability and the IFI`s financial integrity. It is pointed out that tightly budgeted conditional assistance programs never bring about reforms, that the IFI`s cost of viable programs rises with the dependence of the government on domestic interest groups, and that unconditional assistance might be viable when conditional assistance is not