Conditionality Definition

What Is Conditionality?

Conditionality is a simple English word that refers to the quality of being dependent on certain specified conditions. It can be applied to any situation in which a situation, event, or process is contingent upon some condition being met. In finance and economics, it often refers to the conditions attached to the provision of benefits, loans, debt relief, or foreign aid by the provider to the recipient.

Conditionality on loans to a sovereign government is usually associated with those loans required for restructuring or to help a country regain positive economic momentum. Payments of public benefits, such as welfare payments, are also often conditional on the recipients meeting certain conditions.

Understanding Conditionality

Conditionality applies in two main contexts in economic terms: to international aid and finance and to public benefit payments to citizens. In both cases, funds are given or loaned on the condition that the recipient complies with preset conditions meant to influence their behavior, improve outcomes, and increase the chance that the aid will achieve its ultimate intended goal.

In international finance, conditionality is often applied to bailout loans and debt relief offered to developing nations. While the recipient of such funds is usually a sovereign country, the type of lender (or relief provider) can differ. It might be another country, a group of countries (such as the Paris Club group of creditor nations), or an international organization such as the International Monetary Fund (IMF) or World Bank (WB). Disbursements of the loans or aid are usually made in installments, with later installments being provided dependent on the progress the country has made with achieving the conditionality attached to the funding.

The principal motivation behind this sort of conditionality is that the recipient country has some sort of economic trouble requiring the loan, debt relief, or aid. In order to prevent the existing situation from continuing or deteriorating and potentially requiring more funding later, conditions are attached that are designed to improve the underlying situation in the country, so that the funds are used effectively and the country moves on to a self-sustaining economic path.

In the case of IMF conditionality, the group notes specifically that when a country borrows from it, “its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid from the international community.”

In public welfare and other types of domestic transfer payments, conditionality refers to analogous conditions that are placed on welfare or other benefit recipients that are tied to ongoing eligibility. Failure to comply may result in loss of eligibility or even recoupment of benefits.

For example, unemployment benefits may be conditional upon ongoing job search requirements or welfare payments may be conditional on regular drug testing. Compulsory school attendance, the use of preventive health services, or participation in job training programs may also be included.

Such conditions are intended to alleviate or prevent the factors that may be contributing to the need for the aid in the first place, which has a dual benefit of increasing the likelihood that the recipient will reach economic self-sufficiency sooner and in doing so reduce the burden their need for benefits places on public funds.

In both cases, conditionality is a means to prevent possible moral hazard problems that might otherwise arise if aid were to be given without any conditions. The recipient of unconditional aid, whether a foreign government or a welfare enrollee, might simply be enabled to continue in the behaviors that led them into trouble in the first place. For example, a country mired in out-of-control debt that receives unconditional debt relief might simply continue its profligate fiscal policies. By specifically forbidding certain behaviors and policies and requiring others, conditionality seeks to improve, rather than enable, the underlying problems that lead to negative economic outcomes.

Types of Conditionality

Conditions can range widely and cover both purely economic issues (for example, fiscal deficit reductions or targets of other economic indicators, such as inflation) to broader issues, such as reducing corruption (an important factor for improving economic efficiency but not easily quantifiable) and even human rights or other politically motivated conditions. The donor organization may also require that the funds be allocated toward a specific project or to targeted outcomes rather than usage being left to the discretion of the recipient.

Criticism of Conditionality

Conditionality, even that purely based on economic factors, can be controversial. For example, funding to debt-crisis countries in the late 2000s usually had conditions of fiscal austerity attached. While these may have been necessary from a debt-sustainability perspective, some observers allege that they also undermined the ability of the affected economies to grow themselves out of the recessions associated with the crisis.

Conditionality applied to the public benefit or aid programs is sometimes criticized as overly paternalistic and an undue burden on the autonomy or human rights of the recipients. Requiring people to receive drug testing is one of the requirements most frequently objected to by opponents of conditionality as violating the basic bodily integrity of benefit recipients.