As outlined above, our strategy in testing this second relationship does not deal with concerns about endogeneity and omitted variables, and does not establish whether there is a causal link between PFM quality to fiscal performance.<sup>13</sup> This implies results merely indicate association and need to be interpreted with caution.

For both relationships – _Drivers of PFM performance_ and _Effects of PFM performance_ – we perform a number of robustness checks in order to test the validity of our results. For the first model (1a and b), we check for potential measurement error in our independent and dependent variables by using different sources to proxy for PFM quality, income, revenue, aid dependence, political stability, and regime type. For the second model, we use an alternative specification for education. Further checks include different lengths of lags (and no lags) and alternative aggregation techniques for PEFA, and we run our regressions by including and excluding middleincome countries. A summary of the main results of these robustness checks is presented in Annex 3.

# **4. Variable Descriptions and Data Sources**

Our sample includes the results of national-level PEFA assessments for 125 low- and middleincome countries over the period 2005 (when the PEFA was initiated) to 2013. Several countries were excluded in both explorations as too many indicators in their PEFA assessments were not rated, or other data limitations.<sup>14</sup> This resulted in an initial dataset of 120 countries in model 1a, 42 countries in model 1b, and 102 countries in model 2 (see Annex 5 for the list of countries).

## **4.1 Measures of PFM Quality**

To assess and compare the quality of PFM systems across countries and over time we considered two datasets including the World Bank’s Country Policy and Institutional Assessment (CPIA) indicator 13, and the set of indicators developed under the PEFA initiative.

CPIA-13 is one of 16 criteria established by the World Bank as part of an annual diagnostic tool that aims to capture the quality of a country’s policies and institutional arrangements. CPIA-13 measures the quality of budgetary and financial management on a six-point scale along three dimensions: (1) a comprehensive and credible budget, linked to policy priorities; (2) effective financial management systems to ensure that the budget is implemented in a controlled and predictable way; and (3) timely and accurate accounting and fiscal reporting, including audit.

> 13 Issues of endogeneity and omitted variables are addressed in Vlaicu et al. (2014) to examine a similar relationship (between the introduction of medium-term expenditure frameworks and fiscal performance) through instrumentalization and panel techniques, focused on comparing fiscal performance before and after the introduction of medium-term expenditure frameworks. A comparable approach cannot be applied here due to the structure of the data which lacks a ‘before-and-after’ dimension.

> 14 We excluded any countries missing more than 3 out of the 21 PEFA indicators used for our estimate of PFM quality including Lebanon, Macedonia, Nauru, and St. Pierre and Miquelon (See Annex 5 for the list of PEFA indicators).

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