prior growth and fiscal shocks (Table A3.1, columns 8-11), and with countries included in the HIPC initiative. We find no association with fiscal shocks, and the findings for growth shocks differ substantially depending on the time period used (four year versus five year lags). We suggest therefore that this issue should be revisited. We find a significant and strong negative association with the HIPC category; however, in this regard, the direction of causation may rather be the reverse, i.e. having poor PFM systems may have contributed to a country becoming highly indebted. The possible more specific effects of the HIPC process on improvements in PFM systems – typically an important condition for passing the decision point – are not tested for here.

With regards to the three political variables, we find a significant positive impact of political stability, a very weak relationship (in magnitude and significance) of the regime type, and for the presence of programmatic parties a relationship with weak statistical significance, but potentially substantial impact. The positive impact of stability is consistent with expectations and in line with earlier findings by de Renzio et al. (2011) (using a different measure). As noted in section 4.2, we check the influence of stability using two alternative specifications: the rating by the Failed States Index (Foreign Policy) and inclusion in the World Bank’s list of fragile states. As shown in Table A3.1, including in the World Bank’s list of fragile states shows a relationship with lower statistical significance. More curiously, using the Failed States Index shows no relationship. Keeping in mind that earlier findings also showed a relationship, our interpretation is that political stability appears to be fairly robust, but it should be kept in mind that results vary depending on which countries are considered more or less stable, and this involves judgment in particular for countries at risk of instability rather than manifestly instable or experiencing conflict. Also, as noted in World Bank 2012, some post-conflict countries though still rated as ‘fragile’ have been able to make significant progress on PFM reforms; and the range of ‘fragile’ or low stability states includes countries with varying other characteristics, such as income levels.

A shift in the regime type rating from the lowest score of 0 to the highest score of 10 (i.e. from fully authoritarian to fully democratic) would increase the average PEFA score by only 0.32 points on the 1-4 PEFA scale.<sup>41</sup> A growing literature documents that a variety of development outcomes do not correlate with the regime type. The assumed reason for this is that there are high levels of variation among (more) democratic as well as among (more) authoritarian regimes – with some cases in each group performing well and others badly.

As noted in section 4.2, we explore in addition whether the regime has an impact particularly on the external scrutiny and audit (dimension 6 of PEFA), which could be stronger than that for PFM systems overall. In particular, the external audit function and follow-up by the legislature may be more developed in countries with more democratic regimes, both because parliament can be expected to play a more independent role and because democratic governments can be presumed to enable an independent and effective external oversight body. However, we do not find a statistically significant relationship using either Freedom House or Polity IV data as a

> columns 4 and 5).  We also checked whether aid dependency is a factor for low income countries where aid dependency may be a more important driver of PFM reform. But the coefficient remained insignificant in regressions run separately for these countries.

> 41 The results hold similar when using Polity IV instead of Freedom House (see Table A3.1, column 3) – both have small magnitudes of around 0.03.

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