Publication: World Bank Lending and the Quality of Economic Policy
Date
2014-06
ISSN
Published
2014-06
Author(s)
Smets, Lodewijk
Knack, Stephen
Abstract
This study investigates the impact of
World Bank development policy lending on the quality of
economic policy. It finds that the quality of policy
increases, but at a diminishing rate, with the cumulative
number of policy loans. Similar results hold for the
cumulative number of conditions attached to policy loans,
although quadratic specifications indicate that additional
conditions may even reduce the quality of policy beyond some
point. The paper measures the quality of economic policy
using the World Bank's Country Policy and Institutional
Assessments of macro, debt, fiscal and structural policies,
and considers only policy loans targeted at improvements in
those areas. Previous studies finding weaker effects of
policy lending on macro stability have failed to distinguish
loans primarily intended to improve economic policy from
other loans targeted at improvements in sector policies or
in public management. The paper also shows that investing in
economic policy does not "crowd out" policy
improvements in other areas such as public sector governance
or human development. The results are robust to using
alternative indicators of policy quality, and correcting for
endogeneity with system generalized methods of moments and
cross-sectional two-stage least squares. The more positive
results in the study relative to some previous studies based
on earlier loans are consistent with claims by the World
Bank that it has learned from its mistakes with traditional
adjustment lending.
Link to Data Set
Citation
“Smets, Lodewijk; Knack, Stephen. 2014. World Bank Lending and the Quality of Economic Policy. Policy Research Working Paper;No. 6924. © World Bank, Washington, DC. http://hdl.handle.net/10986/18754 License: CC BY 3.0 IGO.”
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