when a donor provides aid for investment in a sector, much of it is passed through as investment in other sectors, as non-investment public spending, or as a reduction in tax revenues.

Starting in the late 1980s, the idea of selectivity began to take shape. In 1998 the Bank published _Assessing Aid: What Works, What Doesn’t, and Why_ , which turned out to be influential, arguing that foreign aid would have a greater impact on poverty reduction if it were focused on poor countries with stronger economic institutions and policies.<sup>8</sup> A second major advance has been the recognition that successful development assistance requires a conducive political economy in the recipient country. The failure of many structural adjustment programs in the 1980s, whether because of flawed design or poor implementation, underlined the country ownership of reforms. Empirical evidence suggested strongly that conditions on loans—that is, promises of future reforms—were far less reliable as guides to the borrower’s reform commitment than past actions. As a result, the extensive use of conditionality fell out of favor with development thinkers. New studies provided evidence that aid was highly fungible: foreign aid to one sector often had the effect of financing investments in another sector on the margin, because the recipient government could redeploy its own resources from the first sector to the second, undermining the intent of the donor. For development assistance to make a positive contribution, therefore, it was necessary that the broader public expenditure program be consistent with development aims. It no longer sufficed to ensure that a single project was well designed and implemented.

The question of the appropriate or reasonable basis for allocating scarce concessional aid resources has been raised at each IDA replenishment negotiation (Denizer, Dethier and Gelb 2011). The Bank’s approach has evolved considerably over time. Initially the allocation of IDA funds was needs-based—with needs proxied by income per capita and population in 1960. To counter the politicization of aid during the Cold War, IDA first introduced selectivity to intercountry allocations in its allocation system. At the end of the Cold War, during its 12<sup>th</sup> replenishment negotiations, IDA took the conscious political decision to give more prominence to governance ratings.

Today the performance-based allocation system uses Country Performance Ratings (CPR) based on the Country Policy and Institutional Assessment (CPIA)—which is an annual assessment of policies and institutions by IDA and IBRD country teams along 16 criteria grouped into four clusters. The cluster that measure governance accounts for 68 percent of the weight and the other three clusters—macro management, structural policies, and social policies—have a weight of 24 percent of the total; and an assessment of portfolio performance also enters into the formula with a weight of 8 percent.<sup>9</sup> IDA attempts to balance needs and performance with a complex formula.<sup>10</sup> However there are also exceptional allocations for post-conflict countries, debt sustainability, regional projects, arrears clearance, and re-engaging countries. In conclusion,

> 8 There is a vast empirical literature on this topic, with no clear conclusions (for reviews, see Dethier 2008b or Arndt, Jones and Tarp 2009).  Some researchers have challenged the robustness of these results (Hansen and Tarp 2001, Easterly and Levine 2003, and Rajan and Subramanian 2008).  Some studies tend to find a beneficial effect of aid, differing primarily on how much the beneficial results depend on the environment, especially over a longer period (Minoiu and Reddy, 2009). Case-study evidence seems more consistent with the _Assessing Aid_ argument. Empirical work based on cross-country data remains work in progress (Temple 2010; Arndt, Jones and Tarp 2011). 9  The weight of the portfolio implementation experience was increased at the time of IDA12 in recognition of its relevance to the aim of allocating IDA funds where they may be expected to be used most effectively.

> 10 The Country Performance Rating is raised to its 5th power and multiplied with population and GDP per capita raised to a negative power (-0.125) to direct more IDA resources to its poorer members out of equity considerations.

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