Book Description

A few political economy variables can successfully predict the outcome of an adjustment loan 75 percent of the time. To select promising candidates for adjustment, the World Bank must do a better job of understanding which environments are promising for reform and which are not. Being more selective may mean smaller volumes of lending.In the 1980s development assistance shifted largely from financing investments (such as roads and dams) to promoting policy reform. This change came because of a growing awareness that developing countries were held back more by poor policies than by a lack of finance for investment.After nearly 20 years' experience with policy-based or conditional lending, there have now been many studies of adjustment lending, most of which take a case-study approach. Many conclude that policy-based lending works if countries have decided on their own to reform.Dollar and Svensson examine a database of 220 World Bank-supported reform programs to identify why adjustment programs succeed or fail.They find that a few political economy variables can successfully predict the outcome of an adjustment loan 75 percent of the time. Variables under the World Bank's control-resources devoted to preparation and supervision or number of conditions-have no relationship with an adjustment program's success or failure.What development agencies must do, then, is select promising candidates for adjustment support. When the candidate is a poor selection, devoting more administrative resources or imposing more conditions will not increase the likelihood of successful reform.To improve its success rate with adjustment lending, the World Bank must become more selective and do a better job of understanding which environments are promising for reform and which are not. That is likely to lead to fewer adjustment loans, unless there is a significant change in the number of promising reformers. To become more effective at supporting policy reform, the agency must be willing to accept that this may lead to smaller volumes of lending.This paper - a product of the Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to examine aid effectiveness. The study was funded by the Bank's Research Support Budget under the research project Economic Policies and the Effect of Foreign Aid (RPO 681-70).