Russia in 1998. These examples underscored the importance of underpinning market liberalization with regulatory and institutional strengthening. Furthermore, in the countries of the former Soviet Union, pernicious corruption subverted major reforrns. Today, improving governance is a major item on the reform agenda of many countries, including many MICs.

# **Policy Performance**

30. Policy performance across MICs varies widely as measured by the World Bank's annual Country Policy and Institutional Assessment (CPIA)<sup>5</sup> . The MICs seem to perform best in terms of their macroeconomic policies but there is substantial variation in policy performance across all policy categories. While policy performance improves on average with higher income-per-capita--GDP per capita for countries with CPIA scores in the 4-5 range was about twice that of those in the 1-2 range-examples of good and bad performers may be found in all IBRD income categories. For example, Tunisia earns a slightly higher overall CPIA score than Brazil, a country with more than twice its percapita income.

31. Countries with market-friendly policies such as openness to trade, disciplined monetary and fiscal policy, well-developed financial markets, a competitive environment, and transparency and accountability of public sector, achieve on average better long-run economic performance than others (Table 3). GDP growth tends to be higher in countries with sound structural policies and a better-managed public sector. Export growth and gross domestic investment in countries with CPIA scores of 4-5 outperform those in the 1-3 group in all four categories of policies. The availability of private capital flows is less clearly linked to CPIA scores, although countries in the 4-5 range receive more private capital flows per capita. Consistent with the CPIA, countries with high scores are more likely to receive a rating and gain a higher rating if selected.

32. There is room for improvement in the policy environment of all MICs. Performance is strongest in Economic Management where a majority of the countries achieve good scores in the 4-5 range and only about one-fifth of the countries receive unsatisfactory scores. Progress on Structural Policies is less consistent, with only a minority of countries achieving good ratings. Weaknesses in policy frameworks are most marked in Policies for Social Inclusion/Equity and Public Sector Management and Institutions. This underlines the need for institutional development in most MICs.

33. Even in MICs with more developed policy environments, there are still gaps to be filled. Chile, for example, the highest rated country according to the CPIA for 2000 receives only a modest score for its environmental policies. Uruguay, another well-rated country also receives only a modest score for its banking sector policies.

> **5** This measure rates 20 different components on a scale of 1-6 covering macroeconomic management, sectoral policies, equity, as well as issues of rule of law and corruption. These components are summarized under four broad policy areas: (a) Macroeconomic Management, (b) Structural Policies, (c) Policies for Social Inclusion/Equity, and (d) Public Sector Management and Institutions (Table 3).

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