Gradualism in Aid and Reforms

Parimal Kanti Bag () and Prabal Roy Chowdhury ()
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Parimal Kanti Bag: National University of Singapore
Prabal Roy Chowdhury: Indian Statistical Institute, Delhi

Discussion Papers from Indian Statistical Institute, Delhi

Abstract: This paper analyzes a dynamic framework involving strategic interactions between an international donor and a recipient government in a bid to review the efficacy of aid conditionality in ensuring governance reforms in LDCs. We find that irrespective of whether the donor can fully commit to the aid program or not, for maximal improvement in governance the aid should be disbursed in increments with each subsequent tranche being conditional on prior reforms, demonstrating aid gradualism. While the attraction of future aid incentivizes the decision makers to implement reforms, these reforms in turn also make aid diversion less feasible. Further, under full commitment, the optimal aid package may involve offering scope for interim aid diversion to the elites, so that long-term improvements in governance can entail tolerating some aid diversion in the short run. With only partial commitment (so that time consistency requires the donor to reconfigure aid in each round), it is shown that (a) interim aid diversion is no longer viable, and (b) both the aid and implemented reforms exhibit strong gradualism, or what is known as starting small and grow later principle in commitment models. Also, in this case the initial aid can help screen the recipient’s type, so that conditionality can possibly open the gates to selectivity

Keywords: Reforms; budget support; political elites; aid diversion; screening; transparency; governance; time consistency; commitment; gradualism; start small grow later (SSGL) principle (search for similar items in EconPapers)
JEL-codes: H8 O2 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2016-03
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