Abstract
AbstractThis paper investigates the impact of World Bank policy lending on the quality of economic policy. A new econometric specification distinguishes among two effects that have been conflated hitherto: (i) marginal impacts of additional policy actions and (ii) the length of the policy engagement. Panel estimations on a revised data set indicate that development policy financing has a positive effect on the quality of economic policy. Results are robust to the use of different estimation techniques, sample restrictions, the inclusion of additional controls, omitted variable bias adjustment, a placebo test and a compound IV strategy. Next, the econometric work suggests that the quality of the engagement matters more than the sheer number of policy actions. We provide several arguments of why the process of engagement is key. Finally, there is evidence that longer engagements lead to lower policy impacts, which may be related to a change to more complex, second‐generation reforms. © 2020 John Wiley & Sons, Ltd.
Highlights
Sound economic and social policies are important if countries wish to prosper and achieve sustainable development
GDP per capita is associated with higher quality of government economic policy
In this study we investigate the impact of World Bank development policy operations on the quality of economic policy, covering the period 1998‐2015. (Note that purely sectoral operations, and the areas of public financial management, tax and governance are beyond the scope of this paper.) We have developed a new theoretical framework that provides clear criteria for interpretation of the estimated coefficients, and distinguishing clearly among three effects which have been conflated in previous work: (a) differing marginal impacts of additional policy actions within the current year; (b) the effect of the length of the policy engagement with client countries, and (c) changes over time in the marginal impact of policy actions
Summary
Sound economic and social policies are important if countries wish to prosper and achieve sustainable development. That is why many organizations are engaged in supporting policy reform processes in recipient countries, with international financial institutions such as the World Bank and the IMF playing a leading role. In 1980 the organization launched its first non‐ project lending instrument to support policy change in recipient countries, called structural adjustment lending (SAL). As a new lending instrument, SAL would support countries to improve policies to achieve development results. The policy‐based instrument provided budget finance upon completion of a program of policy reforms.. In the 1990s, the emphasis of SAL shifted towards protecting the poor from the adverse effects of the needed policy changes (Dreher, 2002)
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