# **Data and hypotheses**

Table 1 presents the list of the 25 countries that have graduated from the Bank since 1970. Six of these nations subsequently “de-graduated” or borrowed again. The goal of this section is to identify the factors that help explain whether and when a country graduates from the IBRD.

As noted above, discussion of graduation is not initiated until a country crosses the IBRD income threshold. We therefore limit our sample to only those nations whose income at the time exceeded the threshold level. As a result, our annual data results in an unbalanced sample, because not every country that exceeded the threshold in a given year exceeded it in all years. The panel is further unbalanced due to some missing data.

Graduation reflects the ability of a country to reach a certain level of development, institutional capacity, and access to capital markets. Since income is obviously a proxy for these factors—as reflected in the threshold trigger—wealthier nations should be more likely to graduate. The IBRD threshold is measured in current-dollar GNI per capita, so we take (the log of) the amount by which each country in the sample exceeds the threshold.

The criterion of “progress in developing key institutions of economic and social development” is not given an explicit and detailed definition within the graduation policy. There are references to “management capacity” and, more narrowly, to “economic management capacity” (Shihata 2000). A reasonably good proxy for this concept is the “quality of the bureaucracy” indicator from International Country Risk Guide (ICRG).<sup>3</sup> In the last 20 years, institutional accounts of economic development have broadened, as recognized in many World Bank reports (World Bank 2001; 2006). World Bank (2006) provides a three-way classification of institutions for development: Bureaucratic Capability, Provision of Public Services (including regulation of firms and resolution of disputes), and National Checks-andBalances Institutions. The ICRG provides two additional indicators – on adherence to the “rule of law,” and extent of “corruption in government” – that, along with “quality of the bureaucracy,” proxy reasonably well for this broadened view of institutions for development. Countries are rated on a 0-6 scale by ICRG on each of these three indicators, with higher values representing institutions more favorable to development. We take the sum of the three ICRG variables as a composite indicator of _Institutional Capacity_ .

Empirical studies provide evidence that countries with higher ratings on these and similar indicators are associated with higher levels of investment and growth (Acemoglu, Johnson, and Robinson 2001; Knack and Keefer 1995). Part of this statistical association may be due to reverse causation from strong economic performance to more positive assessments of institutional capability (for example, Glaeser, La Porta, Lopez-de-Silanes, and Shleifer 2004). This question is not

> 3 Similar indicators are available from the Economic Intelligence Unit (EIU) and other sources, but only the ICRG covers a large sample of countries going back to the early and mid-1980s. The World Bank’s Country Policy and Institutional Assessments (CPIA) include several relevant indicators, but beginning only in the late 1990s, and only for countries that have not graduated.  They therefore cannot be used for explaining differences between graduates and nongraduates.  Moreover, the CPIA ratings are publicly available only for IDA-eligible countries, and only from 2005 onward.

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