9 - How policies and institutions affect project performance: microeconomic evidence on aid, policies and investment productivity

Summary

Introduction

Previous chapters have examined the conditions under which World Bank lending can positively affect economic growth and poverty alleviation. A key conclusion that emerges from these chapters, supported by macroeconomic evidence and country case studies, is that the policy and institutional frameworks are critical determinants of aggregate performance.

This chapter addresses the same set of issues at the microeconomic level: how do economic policies and national institutions affect investment productivity? We use data from a set of public and private investment projects financed by the World Bank to present evidence that both complements and extends the macroeconomic evidence from chapter 8. With a microeconomic unit of observation as the dependent variable – either a dichotomous investment project performance indicator or an economic rate of return (ERR) – these results on the determinants of project performance provide additional insights on how the policies and institutions that produce poor aggregate performance affect returns to investment at the microeconomic level.

Drawing from the in-depth empirical analysis of the productivity of investment projects financed by the World Bank, this chapter also sheds light on factors other than macroeconomic policies, including civil liberties. Assessing the importance of a participatory process and civil liberties for economic outcomes is important in the context of the debate about conditionality and aid, as it introduces an important dimension that can improve aid leverage without resorting solely to standard (‘imposed’) conditionality.