or inability to account for how funds were spent. We therefore expect coefficients to be positive for these two variables, in our use-of-country-systems regressions. We expect _Quality of Macro/Fiscal Policy_ to be associated with greater use of budget support and other programbased approaches, because they depend for their success on the ability to plan and determine budget priorities in a meaningful way (Foster and Leavy, 2001). As Mosley and Eeckhout (2000) assert: “A certain degree of macro stability is a precondition for any planning.” The CPIA indicators are produced annually by World Bank staff for aid allocation purposes, for approximately 135 developing countries. Assessments are on a 1 to 6 scale, including half-point increments. For example, a 3.5 rating would be assigned to a country meeting some of the criteria for a rating of 3 and some of the criteria for a rating of 4. We use the CPIA ratings from 2006, just prior to the 2007 calendar year covered by the SMPD.<sup>16</sup> In our sample both _PFM Quality_ and _Transparency_ range only from 2 to 4.5, with means of 3.4 and 2.9 respectively. The range for _Quality of Macro/Fiscal Policy_ (the simple average of two CPIA indicators) is 2.25 to 5, and the mean is 3.9.

Use of country systems is expected to be greater in countries with stronger “national development strategies” as assessed in World Bank (2007).17 These qualitative assessments were based on three criteria (OECD, 2008a):

- Existence of an authoritative country-wide development policy

- Realism of the development policy with clearly-identified priorities

- Well-costed policies that can be funded

No country in the 2008 SMPD sample received the top grade of A. Eight were graded B, 27 as C, 6 as D and 1 as E. Only low-income countries eligible for the World Bank’s IDA aid were graded, so 12 middle-income countries in the SMPD are missing data. We code _Strategy_ on a 1- 4 scale with B grades equal to 4 and E grades equal to 1.<sup>18</sup> We expect use of country systems to be greater in countries that have fulfilled donors’ requirements for debt relief eligibility under the HIPC initiative. Donors’ engagement with these countries has been unusually intensive, including technical assistance aimed at improving PFM systems and enabling donors and citizens to track public expenditures more effectively. The

> 16 The CPIA includes 12 other questions in addition to the ones we use, but most of them (e.g. policies for gender equality, environmental sustainability) are not relevant to this study.  Despite moderate to high inter-correlations among the CPIA variables, most of them do not produce significant results in our use-of-country-systems regressions, when substituted for the more theoretically-relevant variables we use.  The CPIA indicators we use are designed specifically to assess public sector systems for managing public funds including aid.  Other well-known “governance” indicators are designed to assess risks to foreign investors (e.g. the International Country Risk Guide) or protection of individual rights (e.g. Freedom House).

> 17 These assessments are not done by the same Bank staff responsible for the CPIA.

> 18 Testing dummy variables for each grade (and for the missing data countries) does not change any of the conclusions yielded from our use of the single cardinal indicator _Strategy_ .

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