Projects versus Policy Reform

Abstract

This paper examines the interrelations between the World Bank's project (investment) loans and its policy reform (adjustment) loans. Since the late 1970s, adjustment loans have come to constitute about a quarter of annual World Bank lending. The paper proposes a framework, based on general equilibrium economics, for comparing and analyzing the two types of lending and develops methods for evaluating policy reform packages according to “project-like” criteria as a framework for disciplining thinking in assessing the net benefits and appropriate balances of the two types of lending. The paper observes that policy reform that reduces distortions in an economy also increases the social profitability of a range of projects; that projects that increase supply responsiveness in a particular sector strengthen the argument for reducing price distortions in that sector; and that policy reform packages should be considered “projects” with net return profiles and evaluated accordingly.