indicators. From this fact, the World Bank drew the conclusion that human development promotes income growth and income-poverty reduction. (Not all economists share this view.) The emphasis on poverty in the 1990s was not new but what was new was the articulation of a more complete strategy, combining growth with delivering social services (education, health and social protection) to the poor. In other words, it was the recognition that it was not growth alone that would do it—which was implicitly the view of the 1980s. This new formulation was enshrined in the 1990 World Development Report on Poverty, which included the first standardized global estimates of the prevalence of poverty, and by a shift in the institution’s emphasis. A decade later, the Bank took stock of the progress made with the 2000 World Development Report called Attacking Poverty, and the 2006 World Development Report analyzes the relationship between equity and development. Moving beyond the issue of poverty, it presents evidence on inequality of opportunity both within and between countries. It also demonstrates that inequalities are wasteful and inimical to sustainable development and poverty reduction, and makes the case for government investment in people, expanding access to justice, land, and infrastructure, and promoting fairness in markets.

# **Selectivity and Performance-Based Allocation**

The Bank’s interest in the quality of government began in the mid-1980s with a relatively narrow focus on the fiscal impact of unrestrained public sector wage bills. Over this period, structural adjustment programs, particularly in Africa, drove pay and employment reforms that sought to reduce wage bills, decompress wage ratios, downsize bloated civil services, and rationalize ministries and agencies. However, the short time horizon and supply-driven nature of adjustment lending were ill-suited to the goals of sustainable performance improvement in the public sector. In some cases, investment lending was also used to support institutional development. These efforts were hampered by the limited flexibility of the traditional project instrument. Bank support to the Africa Capacity Development Foundation, starting in 1991, attempted to bolster regional initiatives. Overall, these early efforts produced mixed results.

Evaluations of these initial actions stressed the importance of addressing the root causes of poor public sector performance—that is, poor governance. Independent and self-evaluations pointed to the political costs and long gestation period of bureaucratic reforms, as well as the need for better country knowledge and more flexible aid instruments to support institutional change (IEG 1999 and 2008). These reviews also pointed to governance or the exercise of public authority— not only institutional capacity or formal structures—as a key determinant of public sector performance. During this period, by clarifying the legal basis for its involvement in governance issues, the Bank set the stage for an expansion of support for institutional capacity building (Levy and Kpundeh 2004, Thomas 2007).

The evidence that project-specific aid is fungible across sectors, and that projects achieve much less development than previously thought, was overwhelming (Feyzioglu, Swaroop and Zhu 1998; Mu and van de Walle 2007). Fungibility means that a $100 million primary education project does not necessarily translate into a $100 million increase in primary education spending by the recipient country. If the government would have built the primary schools anyway, then the $100 million in aid effectively financed other parts of the government budget. In general, 16