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Forum for the Future of Aid

Southern Voices for Change in the International Aid System Project

The Forum on the Future of Aid is an online community dedicated to research and opinions about how the international aid system currently works and where it should go next

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Development Finance, Governance and Conditionality: Politics Matter

Author: Carlos Santiso, 2003

The recent financial crises in Indonesia in 1997-98 and Argentina in 2001-02 constitute critical junctures for multilateral development finance and the reform of the international financial architecture. They have engendered debates about the adequacy in current arrangements for crisis prevention and management. There have been calls for a redefinition of the role of international financial institutions (IFIs) in the global aid regime.
One important point concerns the uses of governance conditionality by the IFIs. The debate tends to focus on the quantitative dimensions of conditionality, however, less attention is paid to the manner in which conditionality is applied and the politics of governance reform.
The essay argues that using conditionality to induce governance reform is confronted with a fundamental paradox, as it tends to make improvements in governance both a condition and an objective of development finance. Ultimately, it is argued, for the IFIs to substantially improve governance in borrowing countries, they should recognise the political economy of institutional reform and explicitly address issues of power, politics and democracy.
The author arrives to two main conclusions regarding the difficult combination of governance and conditionality in development financing. One is related to the nature of policy advice. A second one is related to its insertion in democratic processes and the perverse effects of “reverse accountability.” A critical aspect of the reform of the international financial institutions resides in the need to rethink policy advice, both in terms of its contents and the manner in which it is applied, so as to restore the centrality of democratic processes.

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