17 We find an improvement in the political risk score during all episodes of poverty change covered by the _Poverty Dynamics_ study.'<sup>2</sup> In Ethiopia (1989-95) the improvement followed largely from reduced risk of internal and external conflict following peace agreements with Eritrea. Better overall governance (as captured by the corruption, law and order, democratic accountability and bureaucratic quality indices), as well as greater government stability and reduced risk of internal conflicts drove progress in institutional quality in Ghana (1992-98) and Uganda (1992-97). Increased government stability was responsible for the change in Madagascar. And in Zimbabwe (1991-96) the improvement followed from reduced risk of an external conflict, a result of the end of the Cold War and the peace process in neighboring Mozambique.

Plotting the changes in the average annual political risk scores of the survey years of our countries against annual changes in the observed poverty incidence (Figure 3) suggests that improvements in political stability and governance are generally associated with reductions in poverty, though experiences vary across countries."<sup>3</sup> In eight out of the eleven episodes these improvements were accompanied by poverty reduction. In one episode we observe almost no change in poverty (Madagascar) and in two other cases (Nigeria and Zimbabwe) poverty increased. In Nigeria the recorded improvement in the institutional environment was marginal (3.3 points) and was in all likelihood swamped by the adverse effects of the macroeconomic deterioration in the 1991-96 period. The other exception, Zimbabwe, is more of a puzzle. The macroeconomic balances also improved during this episode of poverty increase, so where did things go wrong? The answer to this cannot be provided here, but the very high initial inequality in Zimbabwe was a particularly serious challenge for growth and poverty reduction during the decade. We discuss the Zimbabwe episode of poverty increase in further detail below.

political risk score below 49.9 indicating very high risk; a score between 50 and 59.9 high risk; 60 to 69.9 moderate risk; 70 to 79.9 low risk; and 80 or more very low risk. Similarly, a score of 49.9 percent or below on an individual risk component, would imply that the cornponent can be considered as very high risk, a score in 50 to 59.9 percent range as high risk, and so on. For a detailed description of the ICRG rating system we refer to htto://www.icrzonline.comnicrgMethods.asp.

12 In all, eleven episodes of institutional change were examined. Political risk scores for our survey periods were not available for Mauritania and C6te d'Ivoire and we only retained one episode for Madagascar (1993-1999) and Zambia (1993-1998) given the short time span in between their second and third survey rounds.

**_'3_** Using two year averages of the survey year and the year prior to the survey year to account for lags in the effect of institutional change on poverty does not change the results. Our findings are also robust to the use of a subset of the political risk indicator focusing on indicators of political stability (government stability,