reporting countries, non-concessionary loans from multilateral development banks were sometimes but not always included in the survey (World Bank 2010). We also cannot entirely rule out the possibility that some donors interpreted the SMPD definitions more liberally than others. The 2008 survey guarded against this by substantially strengthening the definitions, guidance, and survey process, based on experiences from the 2006 first-round survey, and by minimizing donor discretion to the extent practicable. These changes did improve the comparability of data reported by donors and by recipients (OECD, 2008; 2007). Nevertheless, donors were able in some cases to exercise their own judgment—for example, in defining whether their aid in particular countries constituted ―support to a program-based approach‖—and this discretion could affect their ratings on some indicators (World Bank 2010).

The performance of donors on the alignment and harmonization indicators in the SMPD can be influenced systematically by characteristics of the countries they aid (Knack and Eubank 2009). It is likely that all donors may rely less on country systems plagued by corruption or other weaknesses. For example, the SMPD records that in DR Congo, donors collectively channeled 0% of aid through the recipient’s country public financial management (PFM) systems, compared with 79% of aid in Morocco. Donor performance on the unadjusted ―use of country systems‖ indicator could be driven substantially by differences in risk in their country portfolios, rather than differences in how they operate within any given recipient country. Penalizing donors for bypassing country systems without adjusting for recipient country mix therefore penalizes them for operating in risky environments—which in effect means double-counting the policy selectivity indicator.

For this reason, to generate our measures of donor performance, we adjust the SMPD indicators for the characteristics of the countries in which donors are operating. The ―use of country systems‖ and other indicators are measured at the donor-recipient level, so we can control for differences in their country portfolios using recipient fixed effects. Specifically, we regress use of PFM systems (and other SMPD indicators) on a full set of recipient and donor dummies. For these variables, our donor performance indicators are therefore the coefficient estimates on the donor dummies, which capture the donors’ underlying propensity to use country systems.

Table 1 shows how variation in the SMPD indicators is determined jointly by donor and recipient characteristics. Each indicator is regressed on, alternatively, (1) a full set of donor dummy variables, (2) a full set of recipient dummies, and (3) both sets together. Recipient characteristics in some cases matter more than donor characteristics. Recipient dummies alone explain 28 percent of the variation in use of PFM systems, compared to only 21 percent for donor dummies. Adjusting for recipient effects as described above will make little difference in the measured performance of donors, if the recipient and donor dummies are uncorrelated—in other words, if donors do not differ significantly in the degree to which they aid ―good‖ or ―bad‖ recipients in the survey. However, for some indicators—such as use of PFM systems—the dummies in column 1 of Table 1 do explain some of the same variation in the data as the dummies in column 2, as shown by the fact that the R-squared coefficient in column (3) is much less than the sum of the R-squares in columns 1 and 2. It is these indicators for which the adjustment procedure is likely to have a larger impact on donor rankings. On use of PFM systems, the adjustment makes little or no difference in the ranking of many donors: for example, Ireland and the Inter-American Development Bank still rank first and second, and the World Bank climbs only from seventh place to sixth. But the IMF vaults from 16<sup>th</sup> to 5<sup>th</sup> , and Greece from 26<sup>th</sup> to 14<sup>th</sup> . In the other direction, Denmark drops from 3<sup>rd</sup> to 8<sup>th</sup> ; Norway from 6<sup>th</sup> to 12<sup>th</sup> , Finland from 9<sup>th</sup> to 17<sup>th</sup> , and Canada from 10<sup>th</sup> to 20<sup>th</sup> .

Using this adjustment procedure, we construct an ―alignment with country systems‖ sub-index of aid quality from the SMPD indicators along five dimensions: (1) use of country public financial management (PFM) systems, (2) use of country procurement systems, (3) avoidance of parallel 9