Sowing and Reaping: Institutional Quality and Project Outcomes in Developing Countries

Abstract

Much of the academic debate on the effectiveness of foreign aid is centered on the relationship between aid and growth. Different aid-growth studies find conflicting results: aid promotes growth everywhere; aid has a zero or negative impact on growth everywhere; or the effect of aid on growth depends on recipient-specific characteristics, such as the quality of institutions and policies. Although these studies fuel an interesting debate, cross-sectional macroeconomic studies cannot be the last word on the topic of aid effectiveness. In this paper, Dollar and Levin introduce microeconomic evidence on factors conducive to the success of aid-funded projects in developing countries. The authors use the success rate of World Bank-financed projects in the 1990s, as determined by the Operations Evaluation Department, as their dependent variable. Using instrumental variables estimation, the authors find that existence of high-quality institutions in a recipient country raises the probability that aid will be used effectively. There is also some evidence that geography matters, but location in Sub-Saharan Africa is a more robust indicator of lower project success rate than tropical climate. The authors proceed to disaggregate the success rate of World Bank projects by lending instrument type and by investment sector, finding that different institutions are more important for different types of projects. The finding of a strong relationship between institutional quality and project success serves to provide further support to the hypothesis that aid effectiveness is conditional on institutions and policies of the recipient country.

What is effective aid? How would donors allocate it?

“…23. Dollar and Levin (2005) also find that, all else being equal, World Bank projects in Africa have a lower success rate than elsewhere. Nonetheless, Gomanee, Girma and Morrissey (2005a) find that aid is significantly related to growth for a sub-sample of Sub-Saharan countries.…”

“…This is a result echoed at the microeconomic level in studies of World Bank project outcomes (Dollar and Levin 2005;see also OED 1999c;Wane 2004). In this regard, it is important to note that institutions change slowly, and so that regardless of the level and persistence of aid flows there are likely to be limits to rates of progress (Clemens, Kenny and Moss 2004).…”

Foreign Aid, Time Horizons, and Trade Policy

“…In response, a growing number of policy makers and scholars have asked whether there are conditions under which aid nonetheless has positive effects. A number of studies suggest that aid is more likely to be used in growth-enhancing ways when given to democracies rather than autocracies (e.g., Dollar & Levin, 2005;Isham, Kaufmann, & Pritchett, 1997;Kosack, 2003;Svensson, 1999). This begs the question, however, of whether aid should ever be given to autocracies, which still account for the majority of aid recipients.…”

Targeting, Accountability and Capture in Development Projects

“…Unsatisfactory ratings in projects where I do not find evidence of capture often are related to a lack of counterpart financing or inept—but not criminal—administration of the project such that the project fails to meet its development objectives. This table suggests that I am observing a phenomenon that the World Bank does not measure with its own ratings system (and that therefore is not analyzed in papers that use the World Bank's outcome ratings as their dependent variable (Kaufmann and Wang ; Isham, Kaufmann and Pritchett ; Dollar and Svensson ; Dollar and Levin ; Denizer, Kaufmann and Kraay, )).…”