World Bank Policy Lending and the Quality of Public-Sector Governance

In this study, we investigate the impact of World Bank development policy lending for public-sector governance (PSG) on the quality of public-sector management and institutions. We measure the latter using the World Bank's Country Policy and Institutional Assessments (CPIA) and consider only policy conditions targeted at improvements in those areas. Using a comprehensive country-year panel data set of aid-receiving countries, we find a significant concave effect of public-sector conditions on the quality of PSG. These findings are robust to the use of alternative measures of PSG and to lagging the variable of interest by 4 periods. Further evidence is provided by employing sample restrictions, adding more controls, and estimating a dynamic model with generalized method of moments (difference GMM). The optimal number of conditions estimated by our preferred GMM specification is 107, where the predicted policy score is about 0.96 points (1.33 SD) higher than with zero conditions. We show that conditions related to public financial management are more effective than those related to anticorruption or civil service and administrative reform, where progress requires changing the behavior of a larger set of deconcentrated actors. We also find evidence that the impact of PSG lending is larger in democracies than in nondemocracies. We conclude by describing some innovative ideas in the Bank's ambitious new public-sector management strategy that could improve effectiveness of its support for public-sector governance reform.