How Should Donors Give Foreign Aid? A Theoretical Comparison of Aid Modalities

Conditionality, and the extent to which it should be associated with development aid, has been a major concern within the donor community over the past decades. Practitioners argue in favour of associating budget support (BS) with some level of conditionality. A scientific analysis by Cordella and Dell'Ariccia confirms this view. The aim of this article is to qualify the circumstances under which conditionality is an effective complement to BS. To do this, we develop a theoretical model based on Cordella and Dell'Ariccia. We show that the optimal use of conditionality depends on the recipient's developmental preferences, the productivity of the inputs and the level of aid compared with the recipient's budget: when these parameters are relatively high, conditionality should be enforced. Otherwise, the optimal aid allocation is such that all the aid is given through unconditional BS. We conclude that conditionality does not always improve aid effectiveness.