Essays in Aid for Policy Reform

Date: 17 March 2014

Venue: University of Antwerp, Stadscampus, Promotiezaal Grauwzusters - Lang Sint-Annastraat 7 - 2000 Antwerp

PhD candidate: Lodewijk Smets

Principal investigator: Em. prof. dr. Robrecht Renard

Co-principal investigator: Prof. dr. Bruno De Borger

Short description: PhD defence Lodewijk Smets - Faculty of Applied Economics

Abstract: The continued instability and deep economic crisis that are currently affecting the Mediterranean vividly illustrate the need for sound economic policies and institutions in order to achieve prosperity. Indeed, several studies have demonstrated the positive effects of public policies on growth and development (Barro, 1991; Knack en Keefer, 1995; Burnside en Dollar, 2000). In this dissertation I investigate whether and how aid donors can influence the policies developing countries adopt. To set up the analysis, the first essay presents a framework for understanding why governments choose inefficient policies and what external agents can do to influence policy choice. Political institutions, (ideological) convictions and technical assistance all matter. Next, I discuss the limits and opportunities for 'outsiders' – like the World Bank, the EU, the IMF, ... to support policy reform processes. I argue that external agents should look beyond traditional contracts, consider more carefully the beliefs policy makers hold, be prudent in supporting changes in political institutions and offer technical advice that is based on credible assumptions.

In the other three essays I examine the policy-reform support provided by a specific donor agency, i.e., the World Bank. In the second essay I investigate the interaction between political ideology and the staff incentive system present in the World Bank. Theoretical, quantitative and qualitative evidence shows that governments with a left-wing party orientation receive better designed programs and do better at implementing economic reforms. In essay three and four I shift from `the micro' to `the macro' and econometrically investigate the effectiveness of World Bank lending in increasing the quality of policy. In contrast to what is commonly believed, I show that the World Bank does succeed in supporting economic reforms. On the other hand, essay four indicates that the World Bank has only limited impact in improving the quality of public sector governance.