Country selectivity: project-level evidence on need and effectiveness

Do country-level factors make a difference in whether a foreign aid project achieves its intended outcomes? If so, what country characteristics are most important? This study examines the project-level evidence regarding how the criteria considered in the allocation of foreign assistance translate into better development outcomes. I exploit a novel database of project ratings for more than 20,000 projects standardised across twelve different donors. I examine which country-level factors matter for project outcomes and produce evidence in support of the allocation criteria that are drivers of project success. Using a fixed effects model, I find that higher-income countries achieve better project outcome ratings, good governance and control of corruption are critical factors in project success, and democracy is not a key driver of project performance. While it is not clear that donors should favour higher-income countries based on these findings, my results suggest that donors could potentially improve their effectiveness by shifting their allocation of resources towards better-governed countries. These findings provide support for the World Bank and MCC performance-based allocation models, though slight tweaks should be considered.