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The costs of favoritism: Do international politics affect World Bank project quality?

Axel Dreher (Georg-August University Göttingen, KOF, CESifo)

James R. Vreeland (Yale University)

Eric Werker (Harvard Business School)

IPES 2008, November 14/15

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Outline World Bank (WB) lending for political reasons? The effect of favouritism on WB project quality

Data, Method, and Results Yet to be done…

Conclusions

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“It is true that during the Cold War years aid was politically motivated. Now however aid is being delivered to countries most in need, and to those who show they are determined to use it well.” (World Bank, FAQ, www.worldbank.org)

Frey and Schneider (JDE 1986), Andersen, Hansen and Markussen (JDS 2006), Dreher, Sturm, Vreeland (JDE 2009)

Do political considerations play a part in who the Bank lends to?

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Proxies for political proximity US grants, military aid, voting in line with the US in the UN General Assembly,

former colonial status But: highly correlated over time; could equally well affect project evaluation Other variables might determine political proximity and project quality alike

Temporary membership in United Nations Security Council (UNSC) 5 permanent members with veto power 10 elected members (2 year term limits) Election to the UNSC largely idiosyncratic (Dreher and Vreeland 2007)

– Election to the UNSC is not related to variables that also affect the World Bank’s decision to lend

Kuziemko and Werker, JPE (2006)– “We find that a country’s US aid increases by 54 percent

and its UN aid by 7 percent when it rotates onto the council.“ Countries which are temporary UNSC members at project initiation are no

members at project evaluation UNSC membership as our preferred proxy

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World Bank projects and UNSC membership

0.0

0.5

1.0

1.5

2.0

2.5

avg=1.29

std=1.95

avg=2.13

std=2.93

avg=1.28 avg=1.30

std=1.96 std=1.93

avg=2.15 avg=2.10

std=2.96 std=2.92

avg=2.06 avg=2.19

std=2.75 std=3.11

n=176 n=181

Non-

n=5333 n=357

member Member

Total sample

avg=1.29

std=1.95

n=5333

Non-member

1st.yearmember

2nd yearmember

Over time

n=2638 n=183 n=2695 n=174

Non-member

Member Non-member

Member

During the cold war After the cold war

Source: Dreher, Sturm, Vreeland (JDE, 2009)

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Data on World Bank project quality World Bank’s Operations Evaluation Department, as used in Kilby

(JDE 2000): Discrete performance measure generated by World Bank project

managers and evaluators In some cases, expected economic rate of return is calculated

2605 projects from 116 countries First (last) project approved in 1958 (1988) First (last) project ends in 1963 (1991) Average (longest) project takes 6 (22) years. 77 percent of the projects are rated as satisfactory (33 as

unsatisfactory) In 38 percent of the country years, at least one project is rated as

unsatisfactory

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UNSC membership and the existence of unsatisfactory projects

0.1

.2.3

.4.5

UNSC

member non-member

Significant at 1 percent level

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Selection of control variables We follow Dollar and Svensson (EJ 2000)

time in office and squared term, ethnic fractionalization and squared term, instability, democracy

Additional variables GDP per capita, population, inequality, terms of trade shocks,

inflation, budget surplus, project size, number of projects in a particular country and year

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Unsatisfactory projects, Probit, 1958-1988  (1) (2) (3) (4)Ethnic fractionalization -0.017 -0.016 -0.019 -0.021

(2.16)** (2.12)** (2.19)** (2.48)**Ethnic fractionalization, squared 0.000 0.000 0.000 0.000

(3.02)*** (2.94)*** (3.05)*** (3.16)***UNSC membership 0.249

(1.97)**(log) US grants 0.082

(4.07)***UNGA voting -1.581

(4.10)***Observations 1033 1033 857 999Number of countries 88 88 88 87log likelihood -675.12 -673.01 -561.26 -644.23Pseudo R2 0.02 0.02 0.04 0.03

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Tests for robustness and yet to be done… Different dependent variables:

Share of satisfactory projects Mean rate of return

Method of estimation: Country fixed effects/ conditional fixed effects Logit

More control variables: corruption, geography Account for selection in WB projects Project level analysis

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Conclusions Previous studies showed that World Bank gives projects for political

reasons These political favors come at a cost:

temporary UNSC membership increases the probability that unsatisfactory projects exist by ten percentage points