quality of policy, covering the period 1995-2008. Following Easterly (2005), we focus on repeated lending since we believe supporting policy reform is a multistage and long term process (see, e.g., Pritchett and de Weijer, 2010). Our dependent variable is not a final outcome measure such as economic growth or FDI, but rather policy quality. In this choice, we are guided by Roodman (2007), who argues that development aid is probably only a weak signal in the noisy and limited data available on economic growth in developing countries. Rather than testing directly for effects on growth, we test for whether World Bank country teams achieve their objective in designing DPLs of improving the quality of development policies. In this respect our study is related to Boockmann and Dreher (2003) and Kilby (2005), who both investigate the impact of World Bank lending on the policies – – economic freedom and deregulation respectively developing countries select.

# **3. Data and Methodology**

# _3.1. Dependent variable and variables of interest_

In this study we analyze the association of World Bank lending with the quality of economic policy. In contrast with most of the existing literature on policy lending, our dependent variable is not a final outcome measure but rather the quality of economic management, as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) ratings. The CPIA assessments are subjective ratings of 16 policy indicators, grouped into 4 “clusters”, updated annually by World Bank staff.<sup>7</sup> Possible scores on each indicator range from one to six, including half-point increments (e.g. 3.5). For this analysis, our main dependent variable is the simple average of CPIA clusters A and B, which broadly reflects the so-called “Washington Consensus” neo-liberal policy prescriptions (Williamson, 1994). Cluster A covers macroeconomic and debt policy, while cluster B addresses structural policies, including trade, financial sector policies, and regulation of private enterprise.<sup>8</sup> Table A.1 indicates that the mean score of this CPIA-based policy quality indicator in our sample is 3.61, with a standard deviation of 0.73.

The CPIA is arguably the most appropriate policy measure, because its content reflects the views of World Bank management and staff regarding what policies are most conducive to poverty reduction and the effective use of aid resources. Admittedly, there are prominent skeptics of the development efficacy of neo-liberal policy prescriptions (see, e.g., Rodrik, 2006). The CPIA criteria may be seen as representing only one particular view on what constitutes sound economic policy, and the policy prescriptions reflected in these ratings may not necessarily lead to the desired outcomes of growth and poverty reduction. Regardless of any perceived deficiencies in the CPIA’s content, it is the most relevant available cross-country indicator of the policies World Bank country teams are attempting to achieve when they design DPLs.

> 7See OPCS (2009) for a detailed description of the 16 indicators and the assessment procedure used to generate them.

> 8The CPIA overall goes well beyond the Washington Consensus, as cluster C address human development and social and environmental policies, and cluster D covers public sector governance and institutions. 6