Trade - world bank conditionality Flashcards
what is conditionality lending
practice of associating a set of policy reforms to receiving aid
- aid is linked to policy reform - certain conditions about performance/measures
why is aid conditionality hard?
is it ineffective
- difficult to measure reforms and implementation
- shocks undermine the effect
- hard to punish non-compliance
- what if the reform is implemented and doesnt have the desired effect
what is the Donor recipient preferences and conditionality model
- D & R negotiate
- offer and accept combination of (P) policy reform and aid (F)
- each have their own utility functions
- R = desires aid F
- D = desires policy reform P
what are the 2 different cases in D & R preferneces and conditionality model
- preferences aligned (both desire F and P)
- conflicting preferences (R does not desire P)
what happens when preferences align but tigher conditions are not feasible
do the donors punish
- unintentional slippage PD - P*
- R did not intend to underdeliver but it was not feasible - took the money because they needed the aid
- D not happy that PD is not met, they should have given FD instead = on lower utility curve than expected
- dont punish because would put them on lower utility curves
what is optimal strategy if D and R preferences are aligned
- tighter conditions can be harmful for both
- D get lower utility than expected
- R has reputation damaged - may want to achieve PD but cant
- best to discuss and agree what is feasible and what is not
what happens when R is unwilling to reform
- intentional slippage between Pr and Pd
- D knows that it is feasible for R to do more reforms - so sets PD
- R purposely does not fulfil because would decrease their utility, so achieves PR
- D does not punish because lower utility = makes them look bad like not succeeding
what is the utility curves when R is not willing to reform
- upward sloping utility
- more F needed for more P
- utility is maximised when P = 0
- south east
what is the utility curves when preferences align
- R and D have downward sloping utility curves
- less P for more F can be traded
- utility maximised when more P and more F
- north east
what is optimal strategy if D and R recipient unwilling to reform
- dont punish the lack of effort from R = because both will get lower utilities
- donor threat is not credible
- over longtime the conditionality can increase reforms
what happens when both R and D have conflicting preferences
- unstable equilibrium - have to bargain
- D will only give funding if more reform
- R does not want to reform
- donors might punish
what are the utility curves when both R and D have conflicting preferences
- R does not want to reform
- D is willing to punish - does not favour aid = more P needed for more F
- both upward sloping
- both opposite sides
- D = north west
- R = south east
according to graphs does conditionality matter in the end
no
- unless you can make a credible threat - they tighter conditions will not generate greater reforms
- if they are willing = dont need conditionality to reach agreement
- if they are unwilling = conditionality wont force them to comply
what is stats on if conditional lending is effective
- 60% of conditions fully implemented for SALS
- higher compliance is associated with improved growth and increased exports
- but compared to who what is the control
- Tanzania have reduced their tariffs rates
what is SALS
structural adjustment lending
- loans made by world bank to encourage reforms
