contemporary outcomes, long after those formal institutions have disappeared (Bandyopadhyay & Green, 2016; Gennaioli & Rainer, 2007; Michalopoulos & Papaioannou, 2013; Dell & Olken, 2020; Dell et al., 2018; Dell, 2010; Lowes et al., 2017).<sup>5</sup> These persistent effects of history suggest that state capacity takes time to build because it involves not just physical or concrete investments in recruiting personnel, collecting taxes and enforcing compliance but because it needs norms to evolve within societies (World Bank, 2016c, 2017; Khemani, 2019).

Second, the paper provides an empirical test relevant to prior qualitative critiques of development aid (Bourguignon & Gunning, 2018; Andrews et al., 2013, 2017; World Bank, 2017). Critics argue that development agencies focus on building formal institutional capacity in the image of developed countries’ state institutions, which may result in developing countries “looking like a state” but lacking real state capabilities (Pritchett et al., 2013). The evidence we find can be regarded as consistent with this critique, although the project did try to go beyond transplanting formal institutions, and into areas of citizen oversight and accountability. In general, the paper contributes micro-empirical evidence to a large cross-country literature on aid effectiveness (Rajan & Subramanian, 2007, 2008; Bourguignon & Sundberg, 2007; Bourguignon & Platteau, 2015; Brautigam & Knack, 2004; Knack, 2001).

Third, the paper links to a growing body of evaluations (many of them randomized controlled trials, or RCTs) of policy interventions on how to build state capacity. For example, one study provides evidence on how to successfully recruit state personnel (Dal Bó et al., 2013) and another shows how technology can be used to better manage state finances and establish a “leakage-free” payment infrastructure (Muralidharan et al., 2016). Indeed, because of growing evaluations in this field, there is more evidence available to policymakers about what concrete policy actions to pursue than ever before (Banerjee & Duflo, 2012). The open questions pertain to the incentives of policymakers who have the power to take up such evidence and make policy choices and investments in state capacity on its basis (Hjort et al., 2019). This paper examines whether external development agencies can create these incentives through their projects, grants and loans. Our results of no difference in changes over time between project and non-project local government areas suggest that, at least in this context, the financing incentives provided by external partners did not add significant value beyond processes of change already enfolding in the country.

Fourth, the paper links to research on decentralization or the role of devolving powers to locally elected governments (Bardhan & Mookherjee, 2000, 2006, 2016; Faguet, 2003, 2014; Devarajan et al., 2009; Khemani, 2015). State building across many developing countries, especially those afflicted by conflict, has focused on locally elected leaders who may have information about and standing in their communities to develop trust and legitimacy (World Bank, 2011; Myerson, 2011). The project we evaluate in Tanzania is part of a large portfolio of lending and grant-making by international development partners to strengthen locally elected governments (Independent Evaluation Group, 2018). The results we find suggest that national governments are able to invest in building the local state even in the absence of international aid incentives and conditionalities,

> 5Tanzania was reclassified as a lower middle income country in 2020, but at the time of this work, it was classified as a low income country (Battaile, 2020).

5