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This policy brief takes stock of the agreement by Eurozone countries in late June at the European summit. If this agreement survives (which is by no means certain) and is utilised, Eurozone governments will have opened the door to a flexible use of its bailout funds. In contrast to previous packages, such flexible use could involve direct recapitalisation of banks (bypassing sovereigns) or purchasing of government bonds in order to assist governments teetering on the edge of sovereign default. The primary concern of this paper, however, is that such use would be likely to close the door to cooperation between the Eurozone and the IMF in new rescue packages. (.)

This paper investigates whether World Bank conditionality is affected by the presence of "new" donors by using panel data for 54 African countries over the 1980 to 2013 period. Empirical results indicate that the World Bank delivers loans with significantly fewer conditions to recipient countries which are assisted by China. Less stringent conditionality is also observed in better off borrowers that are in addition funded by Kuwait and the United Arab Emirates, but this effect vanishes after the start of the new millennium. In contrast, World Bank conditionality is rarely affected by aid inflows from DAC donors, and when it is, conditionality is revised upwards. These findings suggest that new donors might be perceived as an attractive financial option to which the World Bank reacts by offering credits less restrictively in order to remain competitive in the loan-giving market.

This paper assesses the validity of the perception-based governance indicators used by the US Millennium Challenge Account (MCA) for aid allocation decisions. By conducting Explanatory and Confirmatory Factor Analysis of data from 1996 to 2009, we find that although the MCA purports to measure seven distinct dimensions of governance, only two discrete underlying dimensions, the "participatory dimension of governance" and the "overall quality of governance" can be identified. Our results also show that some of the doubts that have been raised concerning the validity of perception-based governance indicators are less warranted when the indicators are applied exclusively to developing countries.

The Paris declaration of 2005 on aid effectiveness is now part of the international consensus. It holds that increased use of budget support combined with decentralised aid administration will lead to transaction costs reductions (through better donor harmonisation of aid) and to enhanced local ownership (through better alignment of donor policies and practices with those of recipients). Both improvements are assumed to enhance aid effectiveness. This article argues that the partnership perspective, which underpins much of the official thinking about harmonisation and alignment, is not able to capture the divergent interests and strategies of the multitude of donors and recipients. A more realistic political economy perspective on the harmonisation and alignment agenda is therefore proposed. It assumes that: different actors do not have the same interests; staff incentives to work to improve harmonisation and alignment are often weak among both donor and recipient stakeholders; and information about stakeholder strategies, interests, budgets etc. is incomplete. It is demonstrated that analyses based on this alternative perspective could lead to markedly different conclusions from those contained in the generally accepted consensus. There is a strong need for further analyses to guide future policy decisions in this field using the political economy perspective.

This paper assesses how electoral outcomes in both presidential and legislative elections in Latin America have been affected by the adoption of economic policies that seek to improve macroeconomic stability and facilitate the functioning of markets. The database includes 17 Latin American countries for the period 1985-2002, and a total of 66 presidential and 81 legislative elections. The set of testable hypotheses is derived from a review of the literature and is structured around the hypothesis of economic voting. It is found that (i) the incumbent's party is rewarded for reductions in the rate of inflation and, to a lesser extent, for increases in the rate of growth; (ii) the more fragmented or ideologically polarized the party system, the higher the electoral rewards of reducing the inflation rate or raising the economic growth rate; (iii) voters care not only about economic outcomes, but also about some of the policies adopted: while the electorate seems blind to macroeconomic policies such as fiscal or exchange-rate policies, it is averse to pro-market policies, irrespective of their effects on growth or inflation; and (iv) the electorate is more tolerant of pro-market reforms when the incumbent's party has a more market-oriented ideology. These results suggest that reforming parties have paid a hefty price for the adoption of pro-market reforms, except when such reforms have been undertaken in conjunction with stabilization policies in high-inflation economies.

This working paper provides an analysis of the efforts by the European Union to support democracy building in developing countries. It focuses on the specific question of the legal obligations of, and limits for, the European Union in seeking to further democracy through its policies directed at developing countries. The core of the paper is an examination of the legal framework governing the Union's relations with developing countries and the possibilities for furthering democracy. The paper considers the European Union's determination of whether a third country complies, in legal terms, with its 'democratic obligations', and how it is able to control and sanction non-compliance. On the basis of these examinations the possibilities of furthering democracy and the rule of law in the Union's development cooperation legislation are analysed.