integrity of their financial systems; tailoring public sector reforms to meet the particular needs of conflict-affected states; or how to address deep-seated problems of systemic corruption in some countries.

Section 3. What Explains the Lack of Performance in Building State Capacity?

Successful development requires a proactive and effective state. Adequate institutions and a well-functioning government are necessary to ensure the functioning of markets, the rule of law, the maintenance of macroeconomic stability, and basic public services like education, clean water, etc. History has shown over and over again that development is not about getting government out of the way, but about getting government to do things in the right way.

The World Bank has progressively recognized these facts and, as we have seen, has recognized that countries need to improve their governance and build the capacity of the public sector to function well in all areas that are essential for progress and improvements in living standards. Yet, while its thinking has considerably evolved, results on the ground have been recognizably weak. We can therefore legitimately ask: Why is this the case? What could the Bank do to enhance its performance in assisting governments build state capacity and achieve better governance outcomes?

Our interpretation is largely structural, namely it is related to the way the Bank is organized. This concerns in particular (1) how its research is prioritized and used for decision-making, (2) how its leadership is able to achieve a consensus and voices are equally represented on the two sides of the debate on state roles, and (3) how incentives for its staff emphasize disbursement and short-term success and not capacity building and longer-term institutional sustainability.<sup>22</sup>

# _Know-how in Building a Developmental State_

The first reason for weak performance in state building may be that the development profession does not know enough about how to assist a developing country with a fragile (sometimes failing and post-conflict) state transform itself into a developmental state. History may not be useful for this purpose. Besley (2012) argues for instance that successful state formation in Western Europe and China is not replicable as these states are specific products of history: thousands of years of effective centralized empire management in the case of China, and avoiding the destructive 22 In ongoing follow-up work, we test our hypotheses with available quantitative information. Since project outcomes are significantly correlated with measures of project size, extent of project supervision, evaluation lags and early-warning indicators flagging problematic projects during implementation (as shown convincingly by authors such as Denizer Kaufman and Kraay 2012), we use a large database on projects and project ratings from 1977 to 2012, to analyze econometrically economic policy projects (6% of total projects); public sector and governance projects (also 6%) and technical assistance projects. If governance-focused projects matter, this would be seen in an interaction term between other project types and governance projects on the outcome of these other projects, i.e., the value of governance projects is to enhance the outcome of the rest of the project portfolio. This interaction could be the larger, the greater the quality of the governance project itself. In other words, governance projects allow improvements in the portfolio of other projects: less emphasis on social assistance and more emphasis on income generation, and governance projects should increase the capacity to absorb more foreign aid (if we take into account the dollar value of other projects and their interaction with governance projects in terms of outcomes).

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