argue that improvements in policy (as measured by the CPIA) can result merely from a government implementing a set of prior actions that were already planned or underway before any discussion of a DPL began. However, prior actions tend to include “de jure” reforms - such as passing a law or creating a new office - that would rarely be significant enough to warrant an increase in a CPIA rating. Prior actions are usually designed to represent a signal of commitment, or “first installment” in a larger package of reforms supported by a DPL. The majority of completed DPLs are rated by the Bank’s Independent Evaluation Group (IEG) as being successful in attaining their objectives, and a loan that accomplishes nothing more than the implementation of its prior actions does not necessarily receive a favorable rating.<sup>10</sup> Our 2SLS and GMM tests correct for the possibility that countries receiving DPLs might tend to be the same ones that would have reformed most successfully even in the absence of a loan.

Following Easterly (2005), our key variable of interest is the cumulative number of policy loans. That is, we focus on repeated lending to the same country, since we believe supporting policy change is a multistage and long term process. However, unlike Easterly (2005), who included all development policy loans in his analyses of macroeconomic policy distortions, we consider only the subset of loans that support policy reforms in the areas – measured by CPIA clusters A and B. As table 1 shows, these loans which henceforth we will call “market reform loans” – comprise less than sixty percent of the Bank’s total development policy lending portfolio. Figure 3 indicates that market reform loans are not evenly distributed across countries. Ghana tops the list with a total of 17 loans. Among the countries that have received at least one market reform loan, the median number of cumulative loans is four.

As an alternative to the cumulative number of DPLs, we also consider the number of cumulative loan conditions (or “prior actions”).<sup>11</sup> Again, we count only the conditions related to the content of CPIA clusters A and B. Figure 4 shows the distribution of the number of cumulative conditions by country. Argentina is clearly an outlying observation, with a total of 336 market reform conditions, mostly from the World Bank’s involvement in Argentina’s large-scale economic reforms during the 1990s and early 2000s (see, e.g., Bambaci et al., 2002). We test the effect of conditions on policy reform both with and without this outlier in the sample.

# _3.2. Model specifications_

Econometrically, we estimate the following equation:

> 10As an additional test we dropped from the sample all DPLs that were rated moderately unsatisfactory, unsatisfactory or highly unsatisfactory. The results from regressing the base model on this data turn out more favorably, but are not included due to space considerations.

> 11Prior actions are the critical policy conditions that the borrowing goverment agrees to take for loan tranches to be released. Arguably, some loan conditions may have a larger impact on policy quality than others. Disaggregating conditions by type is beyond the scope of this study, but is an interesting issue for future research.

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