Development policy lending, conditionality and ownership: A political economy model

Is the World Bank’s Development Policy Lending likely to enhance ownership and have greater effectiveness than structural adjustment? We specify a dynamic common agency model in which a government committed to reform faces domestic opposition from interest groups. The dynamic specification, which is original in the context of policy reforms supported by the International Financial Institutions (IFIs), is essential to allow the strength of special interest groups to arise endogenously during the reform process. We show that conditionality could alter the country’s political equilibrium and that the design of conditionality could have an impact on the effectiveness of conditionality by reducing domestic opposition to the reform programme. However, depending on country-specific circumstances, conditional assistance could lead to lower social welfare. Thus, for conditionality not to be inconsistent with ownership, its design must be appropriate to the country circumstances and directly affect the domestic political constraint. Unless the IFIs are prepared to design the content of conditionality according to recipient countries’ special characteristics, conditionality is likely to remain inconsistent with ownership.