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Political ideology, quality at entry and the success of economic reform programs

Abstract

This study investigates how government ideology matters for the success of World Bank economic policy loans, which typically support market-liberalizing reforms. A simple model predicts that World Bank staff will invest more effort in designing an economic policy loan when faced with a left-wing government. Empirically, estimates from a Heckman selection model show that the quality at entry of an economic policy loan is significantly higher for governments with a left-wing party orientation. This result is robust to changes in the sample, alternative measures of ideology, different estimation techniques and the inclusion of additional control variables. Next, robust findings from estimating a recursive triangular system of equations indicate that leftist governments comply more fully with loan agreements. Results also suggest that World Bank resources are more productive—in terms of reform success—in the design of policy operations than in their supervision. Anecdotal evidence from several country cases is consistent with the finding that left-wing governments receive higher quality loans.

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Notes

  1. 1.

    Interviews were conducted in August 2011 at the World Bank Headquarters in Washington D.C.

  2. 2.

    A number of interesting studies in this respect are Wittman (1983), Alesina (1988), Glazer and Grofman (1989), Alesina and Cukierman (1990), Roemer (1997, 1999) and Terai (2006). Both Drazen (2000) and Persson and Tabellini (2000) provide an extensive overview on the political economy of economic reform.

  3. 3.

    A partial listing includes Beck (1982), Bjørnskov (2005, 2008), Bortolotti and Pinotti (2008), Dutt and Mitra (2005, 2006), Frey and Schneider (1978), Hibbs (1977), Pitlik (2007), and Potrafke (2010).

  4. 4.

    Policy decisions are not influenced solely by ideology, of course; staying in office and other considerations also matter. See for example Persson and Tabellini (2000).

  5. 5.

    According to the theory of cognitive dissonance, a person who behaves in a way contrary to his beliefs is motivated by resulting discomfort or anxiety to reduce this “cognitive dissonance,” e.g., by changing his beliefs. Cognitive dissonance theory has been widely applied in social science research. For applications in the field of economics, see among others Akerlof and Dickens (1982) and Gilad et al. (1987). Hirschman (1965) and James and Gutkind (1985) have applied it to claim that the coercive nature of conditional aid hinders reform.

  6. 6.

    For multi-tranche operations a Tranche Release Document is prepared on the basis of which the decision is taken to release subsequent tranches.

  7. 7.

    A DPL task team leader interviewed for this study suggested that matching World Bank staff with governments might not be random; for example, more capable staff members might be assigned to work with more ‘difficult’ governments. On the other hand, to the extent higher-quality staff have more leverage in choosing their assignments, they might opt to work with less difficult governments, where their advice is more welcome. Data limitations prevent us from measuring staff quality. Denizer et al. (2011) control for the impact of task leader fixed effects on project success, but our sample of policy loans is too small to implement this approach.

  8. 8.

    In our model we assume a positive mapping from effort to program quality, which in turn positively affects the expected returns of a loan. However, it is conceivable that World Bank effort might reduce quality at entry—by, e.g., ignoring local conditions—as to accomodate to unfriendly governments. Yet, the cases presented in Section 5 do not seem consistent with this hypothesis and rather indicate a positive mapping between effort and program quality. Furthermore, the effort put in does not merely serve to design a program the recipient government will agree to, but also Bank management and the Board of Directors, who demand at least some minimum expected returns.

  9. 9.

    The salary incentive can be generalized to non-pecuniary sources of utility, such as the utility World Bank staff receive from continued policy dialogue with high-level government officials. Arguably, the policy dialogue with a left-wing government would be damaged more by a failed policy reform program, so staff have an added incentive to design a higher-quality loan.

  10. 10.

    This assumption holds if \(u(s) + \delta \cdot u(S) - \psi (1)>0\).

  11. 11.

    A case in point is post-apartheid South Africa, where the COSATU-backed ANC government for a long time disagreed with the World Bank’s lending proposals.

  12. 12.

    The Country Policy and Institutional Assessments (CPIA) are subjective ratings of 16 indicators updated annually by World Bank staff, and used for allocating IDA loans.

  13. 13.

    We have also included party orientation as a selection variable, yet it did not turn out to influence receipt of DPL.

  14. 14.

    The IEG uses the Bank’s Implementation Completion and Results Reports (ICRs) as a starting point to evaluate the different stages of a reform program. The validity of the IEG measures might be questioned (see, e.g., Dreher et al. 2010). However, Kilby (2000, pp. 239–247), Dollar and Svensson (2000, pp. 897–899) and Denizer et al. (2011, pp. 7–10) persuasively defend the IEG ratings as valid measures of program success. They provide the following arguments (among others): (i) the IEG is independent of the Bank’s senior management; (ii) the outcome variables are highly correlated with improvements in observed economic performance; (iii) IEG ratings do not significantly differ from the more in-depth and detailed “Project Performance Audit Reports.” Unfortunately, the latter ratings are available only for a very limited sample of DPLs. While there surely is still remaining measurement error, there is no reason to believe the IEG ratings are biased, particularly with respect to government ideology. The latter view is supported by interviews of experienced IEG staff members. Nevertheless, to control for a potential political bias of World Bank ratings, we have included the overall CPIA rating in one of the robustness tests. That is, if IEG staff are biased then regular Bank staff—who generate the CPIA ratings—should produce similar biases.

  15. 15.

    The Database of Political Institutions was constructed in 2001 and initially covered 177 countries for the period 1975–1995. The database is periodically updated: the most recent version dating to 2010 contains information from 1975 through 2009.

  16. 16.

    Following Dreher and Sturm (2012), we consider the G-7 as a country group. The variable reflects the average G-7 vote by weighing each G-7 countries’ vote with its quota in the IMF.

  17. 17.

    Given that our sample contains a limited number of countries and a limited number of observations per country, we have opted to include regional fixed effects instead of country fixed effects.

  18. 18.

    The model’s predictions mainly apply to quality at entry and not to the other stages of the reform process. Extending the model to those other stages is beyond the scope of this paper but may be an interesting area for further research.

  19. 19.

    For the triangular model to be fully recursive, we assume a diagonal variance covariance matrix \(\Sigma \). It is conceivable that this assumption is violated as an omitted variable may simultaneously affect the left-hand side variables. However, a likelihood ratio test of uncorrelated errors yields a \(\chi ^2\) statistic of 2.87 with corresponding p-value of 0.4123. Triangular systems also assume a certain ordering of endogenous variabes in a sense that the ith equation may contain endogenous variables whose position is lower than i (Lahiri and Schmidt 1978). As the World Bank formulates monitoring and evaluation arrangements in the preparation stage of the program, they signal their supervision intentions before the start of the program. Next, part of the supervision effort includes an evaluative review to identify problems during implementation and recommendations to resolve them. For these reasons we include Bank supervision on the right hand side of the second (compliance) equation. On the other hand, it is standard operating procedure to supervise loan agreements irrespective of the extent of borrower compliance. However, Dollar and Svensson (2000) assume that exogenous shocks that reduce the probability of compliance also influence the allocation of World Bank resources (for supervision). As such they claim that donor variables are endogenous to DPL success. Malesa and Silarszky (2005) statistically test this reasoning but fail to find any evidence that supervision costs (and other donor variables) are endogenous to the probability of success. They explain this by the fact that resources for supervision are budgeted in advance. That is why we have opted to exclude compliance from the first equation.

  20. 20.

    See Besley and Case (2003) for a detailed literature review on how political factors affect (economic) policy choice.

  21. 21.

    Dreher et al. (2009a) find that market-liberalizing policy reforms are inversely related to the chief executive’s time in office.

  22. 22.

    Additionally, we have tested our model by including a set of dummies reflecting the sectoral target of policy loans and find that results change very little. Regression results are not tabulated but are available upon request.

  23. 23.

    However, an omitted variable such as staff capacity may well affect quality at entry and supervision in the same way. Yet, it is not uncommon in World Bank practice to have various staff teams working on the different stages of one DPL.

  24. 24.

    The authors identify three conditions for such a policy switch to occur: firstly, the desirability of the policy switch should be considerable and relatively rare. Second, policy reversals are more prone to occur when voters are uncertain about the government’s preferences. Finally, the outcomes of the policies under consideration take place in the future. However, Cowen and Sutter (1998) have shown that similar policy reversals also hold under less stringent conditions.

  25. 25.

    The results of the model with time fixed effects are line with the base model, but are not included due to space considerations.

  26. 26.

    In three other cases, interviews suggested that ideology was less salient. The four cases discussed, and the 7 selected in total, are not necessarily representative of all DPLs. A form of “convenience sampling” was employed, in which the authors selected task team leaders who were judged most likely to respond favorably to interview requests. Whether representative or not, the cases are illustrative of the main arguments and intuition behind the model.

  27. 27.

    Note that at that time FRELIMO already discarded its radical Marxist-Leninist ideology—-yet still situated firmly on the left—which allowed the World Bank the opportunity to discuss market reforms. In terms of the model, it was no longer the case that \((B-C)<\underline {U}_{Moz}\).

  28. 28.

    During the interviews a team task manager mentioned that attitude change was also crucial in successfully supporting the economic reform programs in Vietnam.

  29. 29.

    Within the MMD there were outspoken differences concerning the impact of market reforms. President Levy Mwanawasa opposed privatization arguing that market policies “had brought untold suffering to the workers” while his Finance Minister Emmanuel Kasonde maintained that it was inevitable to redress the situation where state-owned enterprises continue to depend on the state for subventions. Following these differences over privatization, Emmanuel Kasonde was relieved of his ministerial position by the Mwanawasa Government (World Bank 2004).

  30. 30.

    In terms of the model: a government with low reservation utility for accepting the reform program.

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Acknowledgements

We would like to thank the DPL team task leaders for making time available for the interviews, Peter Moll, Adam Wagstaff and Bruno De Borger for valuable comments, the editor of this journal and two anonymous referees for useful comments and suggestions, Vincenzo Verardi for helpful conversations, Christian Bjørnskov for sharing his data and Tim De Vaan and René Vandendries for providing insight in the IEG ratings. The authors are solely responsible for any remaining errors. Lodewijk Smets is also indebted to the Institute of Development Policy and Management (IOB) for providing a research grant.

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Correspondence to Lodewijk Smets.

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Appendix

Appendix

Table 4 Triangular system, reduced sample
Table 5 Triangular system, expanded sample
Table 6 Triangular system, index of ideology
Table 7 Triangular system, 3-point categorical variable
Table 8 Triangular system, binary LHS variables
Table 9 Triangular system, additional covariates

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Smets, L., Knack, S. & Molenaers, N. Political ideology, quality at entry and the success of economic reform programs. Rev Int Organ 8, 447–476 (2013) doi:10.1007/s11558-013-9164-2

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Keywords

  • Development policy lending
  • World Bank
  • Political ideology
  • Heckman selection model
  • Triangular system of equations

JEL Classification

  • C24
  • C30
  • O16
  • O19