Following Kraay (2014), we use predicted disbursements on loans by official creditors from the World Bank’s Debtor Reporting System (DRS) as an instrument for changes in public investment. Official creditors include both multilateral institutions like the World Bank and African Development Bank, and bilateral creditors including sovereign governments like China, Japan, and the United States. This does not include official aid flows. The DRS provides comprehensive coverage of all individual external public and publicly guaranteed loans from all creditors and for all countries that borrow from the World Bank. It tracks the original amount of the loan, loan commitments, terms, disbursements, and repayments of all external loans. The data is confidential. The original amount of the loan as well as disbursements are recorded in the original denomination currency. Loans are generally tied to multi-year spending projects with disbursements linked to the stages of project implementation. See annex B for a discussion of the process of cleaning the data and some of its properties.

The key variable we need from the loan-level data are disbursement rates over the life of a loan defined as the amount dispersed in each year since the loan agreement as a ratio to the original loan amount. Figure 2 shows the average rate of disbursement over 1970-2021 based on the year in which the disbursement occurred. In the year of the loan, about 15 percent of the loan is disbursed to the debtor on average.<sup>9</sup> This rate of disbursement declines over the life of the loan to 11 percent in the year after the loan is agreed. After five years about half the loan amount is disbursed. There is a difference in the rate of disbursement between multilateral and bilateral lenders. Multilateral lenders tend to disburse loans more evenly over several years, with disbursements averaging about 10 percent per year for the first five years of a loan. Bilateral lenders tend to disburse more upfront with less disbursed in later years. These rates of disbursement are below those found in Kraay (2014) despite only updating the data with an additional decade.

Average disbursement rates are then used to estimate predicted disbursements which is the instrumental variable. Predicted disbursements are calculated as in Kraay (2014) as the original loan amount multiplied by the average rate of disbursement over time across all other loans issued by the same creditor during the same decade and in the same region as the debtor. Regions are based on the World Bank’s classification of region (for example, South Asia and Sub-Saharan Africa). For loans from regional multilateral organizations, that only loan to specific regions, the predicted disbursement is applied only to the creditor and decade. These loan-level predicted disbursements are then aggregated to the country-year

> 9 Disbursement rates have changed somewhat over the last half century. In the 1970s, average disbursements in the year of the loan agreement were 17 percent, and within five years was about two-thirds of the total loan. This dropped to less than 10 percent of the loan disburse in the year of the loan in the 1990s and about one-third within five years. By 2010-21, disbursements in the first year had increased back to 17 percent, as in earlier decades, with about half the loan disbursed within five years.

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