and only one that is either not discernible or inexistent, then it carries a value of 0.75 for that year.

Table 1 below summarizes these correlates or right-hand-side variables that are explored in relation to their effect on the quality of PFM systems. For our cross-country analysis (to answer the first question of the Introduction), we use a five-year average of the same variables, lagged by 1 year prior to the most recent PEFA score for each respective country.<sup>27</sup> In the firstdifferences analysis (to answer the Introduction’s second question), we take the average annual percent change between the earliest and latest observation of the variables of interest (according to the dates of PEFA assessments).

||**Table 1. Summary of Potential Fact**<br>|**ors Related to PF**<br>|**MQuality**<br>|
|---|---|---|---|
|**Variable**|**Theory/Hypothesis**|**Data Source**|**Variable Description**|
|**Income Per**<br>**Capita**|**Economic level, trends, and r**<br>Is widely associated with institutional quality,<br>of which PFM is a component (Bluhm and<br>Szirmai 2012, Acemoglu 2008). In the case of<br>PFM, likely channels of interaction include<br>resources and citizen demand for results<br>which in turn requires PFMquality.|**esource depende**<br>World Bank WDI|**ncy**<br>Annual GDP per capita, PPP in<br>natural log (five year average,<br>lagged by one year)|
|**Growth Rate**|Higher rates of recent growth are expected to<br>facilitate institutional improvement|World Bank WDI|Annual percentage growth rate<br>of GDP (five year average,<br>lagged byoneyear)|
|**Resource**<br>**Dependency**|Countries in which natural resources are<br>more dominant in the economy are expected<br>to have worse PFM systems (Andrews 2010;<br>|Baunsgaard, et.<br>al. (2012)|Dummy variable for countries<br>that rely heavily on oil/mineral<br>revenue (>20% of total<br>|
||Auty2000)||revenue)|
||<br>**Population chara**<br>|**cteristics**||
|**Population**|High returns-to-scale of investments in PFM<br>associated with population size|World Bank WDI|Natural log of total population<br>(five year average, lagged by<br>oneyear)|
|**Small Island**<br>**Developing**<br>**States**|Similar to population, but focusing on the<br>specific group of countries where<br>government effectiveness tends to be high<br>li PFMliSi 41|United Nations<sup>28</sup>|Dummy variables for countries<br>that are classified as small<br>island developing states|
||reatve toquaty (see ecton .)|||
||**Sources of rev**|**enue**||
|**Tax revenue**|Greater tax based revenue is expected to<br>lead to better PFM through stronger citizen<br>demand for better services and greater<br>accountability (Moore 2004, Prichard and<br>Leonard 2010)|IMF FAD Tax<br>Policy Database|Tax revenue as a percentage of<br>GDP|
|**Aid**|Countries receiving more aid may invest<br>more in improving PFM systems in order to<br>continue or access more aid (Therkildsen<br>2000);but conversely,there are also|World Bank WDI|Official Development Assistance<br>(ODA) as a share of gross<br>national income (%)|

27 This differs from previous work by de Renzio et al. 2011 which calculates the average over 2002-06 for all countries, while the year of the first assessment is not the same for all of the countries being compared (this runs from 2005 through 2010. The model proposed here ensures the same lag structure between PFM quality and country characteristics across countries, with country characteristics (which are slow to change) leading PFM quality (which may change more quickly).

28 See United Nations SIDS listing here: (http://www.un.org/special-rep/ohrlls/sid/list.htm) 19