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restrictive trade regime (1) to a fairly open one (4) increases the average ERR by about 7 percentage points. A difference in the fiscal deficit (as a share of GDP) of eight percentage points--for example, between 2 and 10 percent of GDP--yields an ERR difference of almost 3 percentage points. A large difference in the index of distortion of tradable yields a difference in ERRs of about 3 percentage points. A dummy variable for a positive vs. negative real interest rate yields a difference of 1.3-2.4 percentage points in ERRs (significant in only the first specification of the pair).

As expected, policies distortions are not the only factors that significantly affect the productivity of projects. Across specifications, both the capital/labor intensity and the degree of complexity of the project significantly affect ERRs in the expected direction, while the terms of trade changes variable does not have a substantial impact.<sup>16</sup>

# B. Specifications with multiple policy variables.

If different economic policies have an independent contribution to investment productivity, the overall impact of policy distortions would have been underestimated in these single-policy specifications. We thus introduce a number of policy variables simultaneously into a multivariate specification; this can also suggest which policy indices dominate in their impact on ERRs.

These results are presented in table 3. With the exception of the real interest rate dummy, policy indices do have a significant independent (and possibly additive) effect. For example, in estimations including the capital/labor ratio and GDP growth as independent variables, a one hundred percentage point reduction in the black market premia coupled with a relatively substantial opening up in the trade regime (e.g., from 1 to 3 or from 2 to 4) can be translated into an improvement in ERRs of 9 percentage points, holding other factors constant. These estimated magnitudes are not altered when country fixed effects are included in the specification (column 2). The combination of fiscal deficit and trade variables (columns 3 and 4) also suggest significant and independent effects, although the implied effects of the changes in the policy parameters are not as large a combined impact on ERRs of about 5-6 percentage points for substantial policy changes is indicated by this combination. 17 16 Nor does average years of education of the labor force, measured by the _World Development Report 1991_ data (see appendix 2) or by the total years of education series developed by Barro and Lee (1993). But a sample selection bias may be at play, since Bank/lFC projects in countries with lower skill levels may tend to compensate by allocating additional World Bank staff and extemal consultants in sectoral analysis (World Bank 1995) and in project design and supervision. 17 Specifications including country fixed effects are estimated only where policy indices vary from year to year, which is the case with the black market premia, the trade openness variables, and the fiscal deficit variable but not with the distortion in the price of tradables (one observation per country). Other specifications were estimated as well to test whether year-effects or structural breaks between time periods were apparent (not presented here). Year dummies, as well as segmenting the sample according to different time periods were tried. No significant difference in the behavior of the policy variables was apparent.