The Poverty Reduction Strategy and institutional quality : the missing link? : to what extent has the adoption of the Poverty Reduction Strategy been associated with higher levels of institutional quality in participati

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The Poverty Reduction Strategy and

Institutional Quality – The Missing Link?

To what extent has the adoption of the Poverty Reduction Strategy been associated with higher levels of institutional quality in participating countries?

Master Thesis

Political Science: Political Economy

Author: Emma Davis (11245174) Supervisor: Dr Sijeong Lim Second Reader: Dr Lukas Linzi

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Abstract

This research paper empirically investigates whether the Poverty Reduction Strategy (PRS) has been associated with higher levels of government effectiveness, rule of law, regulatory quality, and lower levels of corruption over the period 2000-2016. Following the arguments

of New Institutional Economics, the paper recognises high-quality institutions to be the fundamental stepping stone for low-income countries looking to achieve long-term economic

and social development. The paper argues that a focus on institutions has thus far been the ‘missing link’ in PRS research, due high-quality institutions being critical not only for economic

development but also for the overall implementation of the PRS. Utilising panel data from eighty-nine countries, the paper employs linear regression analysis to explore this relationship. Factors influencing a countries decision to participate in the PRS as well as factors known to influence institutional quality are controlled for. The paper finds a positive

relationship between adoption of the PRS and regulatory quality, but not for the remaining measures of institutional quality. A number of potential reasons for these limited results are provided, including: the absence of ownership of the strategy by participating countries; the

failure to implement policies established in the PRSP; and the dataset not covering a sufficient amount of time to capture changes in institutional quality. The paper concludes by

arguing that future research should delve deeper into exploring the mechanisms through which improvements in institutional quality are achieved, as this is critical for long-term

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Index

CPIA – Country Policy and Institutional Assessment EDD - Economic Development Document

GDP – Gross Domestic Product GNI - Gross National Income

HIPC – Heavily Indebted Poor Countries IFIs - International Financial Institutions

I-PRSP – Interim Poverty Reduction Strategy Paper IMF - International Monetary Fund

MDGs - Millennium Development Goals NGO – Non-Governmental Organisation NYC - New York Consensus

PRS - Poverty Reduction Strategy

PRSPs - Poverty Reduction Strategy Papers PWC – Post-Washington Consensus SAPs - Structural Adjustment Programmes SDPs - Sustainable Development Goals SME – Small and Medium Enterprise SOE – State-Owned Enterprise WC - Washington Consensus

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Chapter 1 - Introduction

In order to achieve multidimensional and sustainable poverty reduction, countries must first acquire high-quality institutions, effective governance, and the appropriate regulatory structures underpinning markets (Sumner 2006: 1404). Low-income countries are often characterized by low-quality institutions, working as barriers to economic development and poverty reduction efforts (Todaro & Smith 2013). It is therefore of critical importance to determine the mechanisms through which improvements in institutional quality can be achieved, an issue at the core of contemporary debates about growth and development (Rodrik & Subramanian 2003).

This research paper will empirically investigate whether the Poverty Reduction Strategy (PRS) was successful in reaching higher levels of institutional quality in participating countries, throughout its sixteen-year life-span. The PRS was the mechanism through which

development policy was formed in most of low-income countries, in tandem with the World Bank and International Monetary Fund (IMF) – referred to as the International Financial Institutions (IFIs) throughout the remainder of this paper. So far, in assessing the

development outcomes of the PRS, its impact on institutional quality has been overlooked. This paper argues that high-quality institutions are the fundamental stepping stone for countries looking to achieve long-term economic and social development. Therefore,

development programmes should make building high-quality institutions their primary focus, with poverty reduction and economic growth following as a result.

The remainder of this introductory chapter will be structured as follows: a clear a definition of institutional quality and a description of how this is operationalized in the research will be given; then some background on the PRS is provided, including a description of how it emerged and where it stands today; next, the research question will be outlined and the motivation behind this investigation elaborated on; finally, the structure of the research paper will be laid out.

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Before assessing the impact of the PRS on institutional quality, a clear definition of institutions is required. Todaro & Smith (2013: 92) provide a comprehensive definition, arguing that institutions can be social, political, legal, or economic, and can include, but are not limited to: “forms of governance; contract law; civic freedoms; property rights; land tenure systems; labour market relationships; the distribution of financial assets; educational structures; and laws of taxation”.

While this broad definition is beneficial in that it covers the numerous different aspects of institutions, for the sake of this research paper, I require a more precise and quantifiable measure, that can be employed both across countries and periods of time. For this purpose, I use the World Bank Governance Indicators (WGIs), which report aggregate and individual governance indicators for over two-hundred countries and territories over the period 1996– 2016 (World Bank 2018). The indicators cover six dimensions of governance and institutions, and I will focus on the four defined below:

(1) Government Effectiveness: “Captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the

government's commitment to such policies” (World Bank 2018).

(2) Control of Corruption: “Captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests” (World Bank 2018).

(3) Regulatory Quality: “Captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development” (World Bank 2018).

(4) Rule of Law: “Captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract

enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence” (World Bank 2018).

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Throughout the remainder of this paper, when the term ‘institutional quality’ is employed, it refers to the four specific aspects of governance and institutions outlined above. In Chapter 4, further explanation and justification regarding the use of these indicators will be provided. This chapter will now move on to discussing the Poverty Reduction Strategy.

1.2. Poverty Reduction Strategy

The PRS was first introduced in 1999, and until 2016, it was the primary framework through which economic and social policy was crafted and managed in the majority of low and lower-middle income countries, with sixty-seven countries participating in the program (IMF 2016; Marshall & Walters 2011; Morrison & Singer 2007).

1.2.1. The Emergence of the PRS

To fully comprehend the context in which the PRS emerged, it is important to understand the previous development programs implemented in low-income countries by the IFIs.

In the 1980’s, the IMF extended its reach to provide broad-based support for low-income countries in the form of conditional lending (Stiglitz 2002: 19). The conditions for additional lending were established through the IFI sponsored Structural Adjustment Programs (SAPs). In order to gain access to funding, low-income countries were required to adopt a range of policies specified by the IMF (Stiglitz 2002). The exact policies varied by country and covered a broad range of policy areas, however, the SAPs tended to be homogenous in their

macroeconomic policies, with the focus being placed on trade and capital account liberalisation, monetary and fiscal discipline, and privatisation (Peet 2009). Following the implementation of these policies, many countries experienced disappointing results (Malaluan & Guttal 2003: 6). The SAPs often resulted in slow economic growth, greater economic instability, rising inequality, widening unemployment, and higher levels of poverty (Malaluan & Guttal 2003: 6; McKinley 2008: 93; Stiglitz 2002: 54). Specifically, the insistence on a tight monetary policy led to high interest rates that prevented job creation, and the absence of social safety nets preceding trade liberalisation meant that the newly unemployed were then forced into poverty (Stiglitz 2002: 19). In the longer term, low-income countries

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failed to attract private capital, and remained deeply dependent on the IFIs to finance their balance-of-payments needs (Gottschalk 2005: 415).

Following these poor results, it was widely recognised that low-income countries needed alternative policies to adequately deal with macroeconomic volatility (Gottschalk 2005: 420). Development discourse began to transform, and the PRS was introduced by the IFIs in 1999 (Gottschalk 2005: 420). Stiglitz (2002: 50) has argued that its introduction was recognition of developing countries needing a voice in their own development strategies, a systematic shift in the ideology of the IFIs.

1.2.2. Principles of the PRS

The aim of the PRS was to promote broad-based growth and reduce poverty in participating countries, as well as provide a framework for the increased provision of financial support from the IFIs (IMF 2016). The programme required participating countries to produce a Poverty Reduction Strategy Paper (PRSP) (Morrison & Singer 2007), which was a national planning framework aimed at guiding the country’s "macroeconomic, structural and social policies and programmes over a three-year or longer horizon" (IMF 2016).

The two core principles of the PRS were that it had to be nationally-owned and based on broad-based participatory processes (Barbone & Sharkey 2006: 9). Transferring authorship of these policy documents to participating governments, an innovation of the new approach, was introduced as a means of creating this sense of ‘national ownership’ (Lazarus 2008: 1206). Participation of civil society alongside government and donors was also introduced, in both the production and implementation of the PRS (Lazarus 2008: 1206). Additional

characteristics of the PRS were that it should be partnership-oriented; result-oriented; pro-poor; recognize the multidimensional nature of poverty; and based on a long-term

perspective (Eggen & Bezemer 2008). 1.2.3. The PRS Today

In 2014, the World Bank delinked its concessional financing support to low-income countries from the PRS, and in 2015, the IMF adopted a more flexible and streamlined PRS policy for its engagement with low-income countries, meaning that preparation of PRSPs were no longer

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required (IMF 2016). Development strategies are now documented through an Economic Development Document (EDD). Despite this, PRSPs remain relevant in that they are routinely used to form the development strategies in the EDD (IMF 2016). Also, the few countries that remain under the Heavily Indebted Poor Countries (HIPC) Initiative will continue to be subject to the original PRS documentation procedures (IMF 2016).

So, despite the movement away from the PRS by the IFIs, research on its development outcomes are still vital. The reasoning behind this is that: it was the prominent development programme in low-income countries for sixteen years; it continues to be applicable for HIPCs; and PRSPs are still being used to form policy in EDDs. Additionally, systematic evaluations of the effectiveness of development programmes can be used to inform the future policies of the IFIs. Taking a direction not explored by the existing PRS research, this paper will analyse the effects of the PRS on institutional quality in recipient countries, discussed in further detail in the subsequent section.

1.3. The Research Question

To what extent has the adoption of the Poverty Reduction Strategy been associated with higher levels of institutional quality in participating countries?

While research on the broader relationship between institutional quality and economic development is expanse, this will be the first paper to empirically explore the impact of the PRS on institutional quality. The aim is to delve deeper into this relationship by exploring a mechanism through which higher levels of institutional quality can be achieved.

Previous research acknowledges that development programmes achieve superior results in countries with higher levels of institutional quality (Barbone & Sharkey 2006: 2; Booth 2003). This paper adds a slightly different argument: that development programs should first work to create higher levels of institutional quality, as this is the critical stepping stone towards long-term economic development.

One reason for the lack of research on the relationship between specific development

programmes and institutional quality is because improvements in this area often take time to materialize (North 1990; Rodrik & Subramanian 2003). A PRSP typically covered a three to

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five-year time-frame; however, once a country adopted a PRSP, they ordinarily remained in the programme – submitting second and third PRSPs. The sixteen-year time-period of PRSP submission, from 2000 to 2016, therefore provides us with a sufficient opportunity to explore changes in the quality of institutions.

1.4. Structure of the Research Paper

The remainder of this research paper will be structured as follows: Chapter 2 will provide an overview and analysis of the existing literature with respect to the PRS; Chapter 3 will detail the theoretical background, arguments, and hypothesis driving this research paper;

additionally, Box 1 in Chapter 3 will provide policy examples from the PRSP of Bangladesh, with the purpose of conveying to the reader exactly how the WGIs are translated into specific targets and policy proposals; Chapter 4 then provides a detailed description of the research design and methodology employed, and any variables used in the empirical analysis are theoretically justified; in Chapter 5, the results of the empirical analysis are reported and interpreted; finally, Chapter 6 outlines the main conclusions of the paper and suggests avenues for future research.

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Chapter 2 - Review of the Existing Literature

The relationship between institutional quality and the PRS has not previously been

researched; therefore, the purpose of this literature review will be to examine PRS literature in a broader context. The chapter begins with a brief description of the research strategy and the exclusion criteria. The review itself will then be split into two sections. Firstly, nine pieces of research focused on examining the policy content of PRSPs will be reviewed. Three themes are identified to be prominent in the content analysis research, and the pieces of literature are grouped accordingly, these are: macroeconomic policy; alignment to development paradigms; and ownership and participation. The second part of the review then undertakes a more detailed analysis of three pieces of research, which are all focused on empirically exploring the relationship between the PRS and desired development outcomes.

2.1. Research Strategy

The investigation into PRS literature began using Google Scholar, key terms such as “PRSP” “Poverty Reduction Strategy” “IMF” and “World Bank” were searched for, providing 11,100 results. A great deal of empirical research on the PRS is limited to country-specific analysis (Gould & Ojanen 2003), and it was decided that these would be excluded from the review, with cross-national research being more relevant for the purposes of this research paper. The review focuses specifically on journal articles written between 2000 and 2016 – the time-period of the PRS. Any articles that were merely theoretical and did not undertake any empirical analysis, as well as literature that focused more broadly on the IFIs and not specifically on the PRS, were excluded. After applying these exclusion criteria, the results were narrowed down to twenty-three pieces of literature. A closer inspection of the literature led to eleven being excluded, with twelve pieces of research determined to be most relevant for this review. Nine focus on analysing the policy content of the PRSPs, and three focus on exploring the development outcomes of the PRS.

2.2. The Policy Content of PRSPs

A large body of the cross-national empirical research on PRSPs is dedicated to systematically exploring the variation in their policy content (Fukuda-Parr 2010; Fraser 2005; Mouelhi &

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Ruckart 2007; Malaluan & Guttal 2003; Stewart & Wang 2003; Sumner 2006). These can be split into three distinct themes: firstly, the literature focused on analysing the

macroeconomic policies in PRSPs; secondly, the research on participation and ownership in the PRS; and lastly, the PRSPs alignment to different development paradigms. The idea behind separating the literature review into these three themes is for ease of reading, however it must be noted that these themes are not distinct and many of the research papers are interdisciplinary.

2.2.1. PRSPs and Macroeconomic Policy

The first theme explored in this section of the review is focused on PRSPs and their macroeconomic policy content, with two pieces of literature being reviewed. Firstly, Gottschalk (2005) examines the fiscal and monetary policies present in fifteen PRSPs, with the aim of assessing whether they held the necessary ability to deal with external shocks and address macroeconomic volatility. The paper begins by comparing the growth targets set out in PRSPs with the actual growth performance of countries, finding that targets were often set well above the average growth rate. Investment rates required to achieve these targets were also found to be well above average, but at the same time, no clear additional sources were identified in the documents to support the necessary higher investment (Gottschalk 2005: 425). He also finds little attention paid to economic fluctuations arising from external shocks, which are a common feature of low-income countries and have major effects on poverty and growth (Gottschalk 2005: 425). In terms of monetary policy, nearly all PRSPs were found to be narrowly focused on price stability, despite these countries already having low levels of inflation (Gottschalk 2005: 430). He proposes widening the monetary focus to encompass growth and employment objectives and increasing the instruments available for the effective control of liquidity (Gottschalk 2005: 430). He observes a commitment to fiscal prudence in the majority of PRSPs and argues that a conflict exists between the focus on a budgetary balance and a development strategy that aims to support growth and combat poverty (Gottschalk 2005: 431). Overall, he is critical of the PRS’s ability to deliver sustainable economic growth and poverty reduction and argues that there should be a move towards

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avoidance of excessively tight inflation and fiscal targets, more room for counter-cyclical policy, and the adoption of permanent safety nets (Gottschalk 2005: 419).

In a closely related piece of research, McKinley (2008) analyses the economic policies prevalent in PRSPs, and judges their success based on their impact on growth and poverty reduction. His understanding of the impact of these policies is based on previous research rather than conducting an empirical investigation himself. He explores issues standing in the way of successful development for PRS adopting countries such as small a government bias, a lack of public investment, a focus on tight monetary policy, and a push for financial

deregulation and privatisation despite disappointing results (McKinley 2008: 99). He argues that a “glaring inconsistency” exists, and that the focus on social policies in PRSPs is

inadequate to counterbalance the detrimental effects of neoliberal economic policies (McKinley 2008: 94). He then assesses whether there had been an increase in participatory processes in the realm of economic policy making, finding it to be severely limited (McKinley 2008: 95). He finishes by arguing that an inherent conflict exists between the idea of national ownership in the PRS and lender conditionality’s (McKinley 2008: 95). He gives three principal reasons for the lack of country ownership, which are: the prevalence of a one size fits all approach; the lack of alternative economic policies; and the absence of broad-based participatory processes (McKinley 2008: 94).

The findings of these two pieces of research indicate a severe lack of variation in

macroeconomic policy between countries, which leads to the next section of the review – the concepts of participation and ownership in the PRS.

2.2.2. PRSPs, Participation, and Ownership

A second strand of literature empirically analyses the concepts of participation and national ownership in the PRS. It was argued that the PRS was distinct from its predecessors due to it being developed in a ‘participatory’ way, defined by Morrison & Singer (2007:722) as “based on some sort of consultative process by which the government solicited input from various societal groups and incorporated these into policies”. However, during its sixteen-year life-span, the PRS was widely criticised by academics and civil society groups for not facilitating broad-based or meaningful participation, and therefore not generating genuine country

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ownership (Booth 2003; Dijkstra 2011; McGee et al. 2002; Morrison & Singer 2007). This strand of literature claims that the concepts of participation and ownership were simply window dressing (Malaluan & Guttal 2003), and that they were undermined by donor’s insistence on specific economic policies (Morrison & Singer 2007).

Stewart & Wang (2003: 8) examine thirty PRSPs to determine whether participation in the policy formation process succeeded in generating national ownership. As well as focusing on the ‘process’ of participation, and assessing the inclusion of actors, they also review the outcome of these consultations, assessing whether they have affected the policy content of the documents. In terms of process, they find that key stakeholders such as trade unions, parliamentarians, women, rural actors, and marginalised groups, were often insufficiently represented or excluded altogether (Stewart & Wang 2003: 14). Also, in HIPCs, because debt relief was dependent on the production of the PRSP, the process was often rushed, turning out to be detrimental to the quality of participatory processes (Stewart & Wang 2003: 14). In the second part of their analysis, closely linked to the literature in the first section of this review, they analyse whether the participatory processes had any impact on the policy outcomes in the PRSP. They find that the main achievement of participatory processes was to broaden the scope and improve the quality of poverty diagnostics, but that they had limited impact on the wider content of PRSPs (Stewart & Wang 2003: 16). They compare the

macroeconomic and structural reform policies in their sample of PRSPs to a list of “basic reform programmes” found in the SAPs (Stewart & Wang 2003: 19). They find striking similarities, with universal emphasis placed on privatisation, deregulation of the financial sector, and the elimination of exchange rate controls (Stewart & Wang 2003: 22). Based on these findings, they conclude that the PRS achieved little in terms of national ownership, and therefore failed to empower low-income countries (Stewart & Wang 2003: 26). They

acknowledge however, that their assessment may be premature, in that the PRS had only been running for three years at the time of writing (Stewart & Wang 2003: 28).

In an analysis of fifty PRSPs, Barbone & Sharkey (2006: 2) aim to determine which factors facilitated the development of accountability and participatory governance mechanisms in adopting countries. They find that ownership of the PRS was dependent on how countries

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balanced the tension between country ownership on the one hand and perceptions of internationally-driven prescriptions on the other (Barbone & Sharkey 2006: 2). In terms of participation, they find that the PRS enabled more public discussion and stakeholder involvement in decision-making, but that this positive outcome was limited to countries where the PRS reinforced existing trends and strengthened institutions already prone to open discussion of policy choices (Barbone & Sharkey 2006: 2). Additionally, corroborating the work of Stewart & Wang (2003), their positive findings were confined to policy formation, with the actual impact of participation on policy outcomes found to be limited (Barbone & Sharkey 2006). To further participatory processes, they stress the need for development partners to incorporate existing representative processes and institutions into the PRS (Barbone & Sharkey 2006: 28).

Dijkstra (2011) undertakes a more detailed examination of the PRS in three countries: Bolivia; Honduras; and Nicaragua. She finds that the PRS fell far short of expectations with respect to the objectives of country ownership and participation (Dijkstra 2011: 120). For all three countries, the creation of the PRSPs were found to be a donor driven process (Dijkstra 2011: 120). Supporting the arguments of Barbone & Sharkey (2006) and Stewart & Wang (2003), she finds that although consultation with civil society groups took place, they rarely had an impact on actual policy outcomes (Dijkstra 2011: 120). Also, participatory processes were present only in a limited range of policy areas, with both governments and donors expressing little interest in broadening the agenda to include macroeconomic policy (Dijkstra 2011: 120). Based on this, she labels participation a “cosmetic process”, driven by donors rather than national governments, and argues that it had very little impact on the resulting PRSP (Dijkstra 2011: 120).

Lastly, in a systematic cross-national study of the PRS in seven sub-Saharan African countries, Booth’s (2003: 131) findings are slightly more optimistic. Although overall, he finds that the PRS did not generate full national ownership, he argues that it brought “limited but

important gains in all cases”, including creating new spaces for domestic policy dialogue (Elkins Feeny & Prentice 2018). He observes that benefits from the PRS arose in different ways across countries, these included: improving participatory policy-making and

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accountability in Malawi; helping to establish the allocation of budgetary funds in Mali; and deepening the analysis of poverty diagnostics in Mozambique (Elkins Feeny & Prentice 2018). However, he finds that, similarly to Stewart & Wang (2003), participating countries took a narrow view of civil society and marginalized groups were often excluded from consultations (Booth 2003: 154). Like Barbone & Sharkey (2006) he stresses the importance of

institutionalisation of the PRS in existing political systems, arguing that this is critical for generating genuine national ownership (Booth 2003: 156). He argues that the PRS has the potential to achieve effective poverty reduction, but that reforms are vital for this to happen (Booth 2003: 156). Like Stewart & Wang (2003), he acknowledges that his assessment may be premature, in that it was only based on a three-year time-period.

2.2.3. Development Paradigms

In the later years of the PRS, a strand of research appeared with the aim of analysing the PRSPs and their alignment to specific development paradigms. Images 1, 2, and 3 in the Appendix are intended to provide a clear overview of the policies associated with each of these development paradigms: the Washington Consensus (WC), the Post-Washington Consensus (PWC), and the New York Consensus (NYC). Although each of the three pieces of literature varies somewhat in their exact methodology regarding paradigm alignment, they are largely in line with these criteria.

Despite Fukanda-Parr’s (2010) research not explicitly referring to development paradigms, it is included in this section of the review due to being highly linked with this body of research. The focus of her research paper is PRSPs alignment to the eight Millennium Development Goals (MDGs), displayed by Image 4 in the Appendix. Her analysis focuses on twenty-two second generation PRSPs, with her central aim being to determine why international progress towards achievement of the MDGs in 2015 was lacking (Fukanda-Parr 2010). She finds a high degree of commitment to the MDGs, with universal emphasis being placed on income

poverty reduction, and social investment in education, health, and water (Fukanda-Parr 2010: 26). However, other targets concerned with the empowerment and inclusion of the most vulnerable tended to be absent from the sample of documents, particularly gender violence and women’s political representation (Fukanda-Parr 2010: 26). Based on these findings she

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makes the argument that country ownership of the broad MDGs is not driving the lack of progress, but rather the selective implementation of priorities (Fukanda-Parr 2010: 33). The article finishes by arguing that a ninth MDG should be added – to reduce inequality within and between countries (Fukanda-Parr 2010: 34).

Sumner (2006) completed the largest study to date in terms of PRSP alignment to

development paradigms, investigating 450 policies in fifty PRSPs. He examines whether a set of WC policies are present in the PRSPs, to determine whether there had been a paradigm shift to a PWC (Sumner 2006: 1407). His research is closely related to the two themes previously discussed in this review, with his aim being to examine the economic policies in the sample of PRSPs and determine whether participating countries had a voice in their content (Sumner 2006: 1401). He finds a high alignment to the WC among the documents, with policies such as strict monetary policy, fiscal prudence, and privatisation being rarely absent (Sumner 2006: 1407). His analysis does however reveal a subtle shift in policy, with FDI deregulation and capital account liberalisation being observed substantially less, with a third of the PRSPs not including these (Sumner 2006: 1408). He then undertakes further investigation to uncover whether this signifies a true change in policy orientation or is due to the sample countries already being highly liberalised (Sumner 2006: 1408). Focusing on twenty African HIPC countries, he finds that these countries already have moderately low trade tariffs, but that they are varied in terms of their levels of capital account liberalisation (Sumner 2006: 1410). He acknowledges that the proxy measures used in his analysis are highly contentious measures of international liberalisation and argues that his conclusions should therefore be seen as a “crude, tentative, overall approximate rather than anything precise” (Sumner 2006: 1408). Additionally, Elkins & Feeny (2014) are critical of his initial methodology regarding paradigm alignment, arguing that it fails to identify policies from alternate paradigms.

The final piece of literature in this section of the review is completed by Elkins & Feeny (2014), who analyse eighty-one PRSPs for fifty-eight countries over the period 2000–2008. Their aim is to evaluate the alignment of policies in the sample of PRSPs with the three dominant development paradigms outlined previously. At the time of writing, they find the

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NYC, forged around the MDGs, to be the main driving force behind the policy content of PRSPs, with the WC also continuing to play a significant role (Elkins & Feeny 2014). Specific policies prevalent in the PRSPs were found to be: increased expenditure on capital

infrastructure; safe drinking water; and support for HIV prevention programmes (Elkins & Feeny 2014: 228). Similarly to Fukanda-Parr (2010), they find women’s issues to be systematically under-represented, specifically women’s representation in parliament, and legislation for women’s entitlement to land (Elkins & Feeny 2014: 228). They stress that future research needs to explore whether an alignment to a specific development paradigm translates into tangible improvements in poverty reduction, the focus of Elkins, Feeny & Prentice (2018) in the next section of this review.

2.3. PRSPs and Development Outcomes

Despite being the main mechanism for development policy in low-income countries for sixteen years, cross-national research exploring the actual impact of the PRS is relatively limited (Sumner 2006: 1401). Empirical research has tended to focus on the themes outlined in the first section of this review or be limited to country-specific analysis. The second part of this literature review provides a comprehensive analysis of the three pieces of research that have been completed on the relationship between the PRS and specific development

outcomes (Eggen & Bezemer 2008; Elkins Feeny & Prentice 2018; Marshall & Walters 2011). This research paper explores the relationship between the PRS and institutional quality and completing a more in-depth analysis of these research papers will assist the later choice of methodology.

Scope and Focus

Marshall & Walters (2011) assess whether the PRS was associated with better outcomes for poverty levels, per capita income, and inequality, over the period 1996-2007. A series of quantitative methods are employed to explore this, including econometric evaluations. Their research utilises two panel datasets, of twenty-nine adopting countries and thirty-four non-adopting countries. The focus of Eggen & Bezemer’s (2008) research differs, with their aim being to assess the impact of the PRS on the achievement on the MDGs. They compare the pre-PRS and post-PRS MDG progress for a sample of fifty-nine countries between 1990 and

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2005. Their specific research question is “Do MDG indicators improve when countries adopt a PRSP, controlling for other variables?”, and they perform panel regressions of PRSP

participation on MDG Progress to investigate this. Ekins, Feeny & Prentice (2018) also explore the impact of PRSP adoption on poverty and wellbeing outcomes associated with the MDGs for the period 1999–2014. They use regression analysis to investigate this relationship, utilising data from 123 countries. Their methodology differs slightly to Eggen & Bezemer’s (2008), in that they compare the MDG progress of a treatment group of PRS adopters against a control group of non-adopters.

The Dependent Variable

Marshall & Walters (2011: 18) employ the poverty rate as their dependent variable – using data from both a national and dollar a day dataset. The research focused on MDG outcomes use specific indicators of the MDGs as their dependent variable, operationalized in different ways. Elkins Feeny & Prentice (2018) use one indicator per goal to assess progress on seven of the eight MDGs, shown in table 1.

Table 1: Elkins Feeny & Prentice (2018) Dependent Variables

Eggen & Bezemer (2008), only explore the impact of PRSP adoption on three of the MDGs. For their dependent variable, they use three different indicators relating to each goal; resulting in nine dependent variables and separate models in total. For the purposes of clarity, the dependent variables and corresponding MDGs are displayed in Table 2 below.

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MDG1: Reduce Child Mortality MDG2: Universal Primary Education MDG3: Promote Gender Equality

Under Five Mortality Rate School Enrolment rate Girls/Boy Ratio in Schools Infant mortality rate School Completion Rate Women/Men Employment

Ratio in Agriculture Measles Immunization rate Youth Literacy rate Women’s Literacy rate

Independent Variables

All three research papers use a dummy variable for membership of the PRS as their main independent variable, taking the value of one for the years following the submission of an Interim PRSP (I-PRSP). To distinguish whether the change in poverty came from income growth or a distributional effect, Marshall & Walters (2011) also employ the annual changes in the Gini Coefficient and Gross Domestic Product (GDP) per capita in their models. Elkins, Feeny & Prentice (2018) account for heterogeneity among PRSPs, characterizing them in terms of their alignment to the development paradigms discussed in the previous section of this review. Eggen & Bezemer (2008) consider the speed of the PRS process and the quality of the policies and indicators, to determine whether these mediate the relationship between the PRS and MDG progress.

Time Effect

Marshall & Walters (2011) employ a two-year time lag to account for the fact that the effects of the PRS take time to materialize. As well as lagging the treatment effect of PRS adoption by three years, Elkins, Feeny & Prentice (2018) explore the short and long-term effect of PRS adoption by creating a time dummy variable turned on for the years that the PRSP had been in effect for five years or more.

Control Factors

As well as time-varying factors, Elkins, Feeny & Prentice (2018) control for GDP per capita, the level of governance, and health expenditure as a percentage of GDP. Similarly, Eggen &

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Bezemer (2008) control for GDP per capita, health expenditure as a percentage of GDP, average life expectancy, the birth rate, and the pupil/ teacher ratio.

Findings

On balance, this strand of literature provides moderate support for a positive relationship existing between PRS adoption and desired development outcomes. Marshall & Walters (2011) find a positive correlation between the PRS and poverty reduction; however, they find that this occurred through the channel of income growth, and that the PRS failed to positively influence levels of inequality within countries. Also, their findings are largely confined to the dollar-a-day data set, with the national data providing less support for this positive

relationship. They conclude by arguing that their findings work to undermine the claims of the IFIs that the PRS aimed for widely balanced and pro-poor growth (Marshall & Walters 2011). Eggen & Bezemer (2008) also encounter mixed results; they find that the PRS was effective in implementing defined policies such as immunisation and school enrolment, but not for broader measures of MDG achievement, such as mortality, literacy, and gender equality. They also find that the PRS became more effective over time, and that more

participatory, focused, and better proposed policy actions enhanced the effectiveness of the PRS in achieving the MDGs (Eggen & Bezemer 2008). Elkins, Feeny & Prentice (2018) find that PRS adopting countries achieved greater reductions than the control group of countries in the following areas: headcount poverty reduction; infant mortality reduction; primary school enrolments; and gender parity, but not for their remaining indicators. They also find that PRSPs with a higher alignment to the NYC experienced significantly better progress on some indicators, and therefore argue that the NYC had a positive conditioning effect on poverty reduction (Elkins, Feeny & Prentice 2018).

Limitations and further research

Data availability appeared to be a common issue in the three pieces of research. Marshall & Walters (2011) acknowledge that both their national and dollar-a-day poverty datasets suffered from small sample sizes and lacked consistency - with only twenty-nine of the sixty-eight adopting countries possessing sufficient data to be included in the regressions. They also recognise that the lack of data is likely to be a proxy for institutional quality. They were

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unable to overcome this self-selection bias in their study, meaning that the treatment group may have “over-represented countries who are better equipped to devise and implement poverty reduction policies”, and leading to systematic overstating of PRS performance (Marshall & Walters 2011: 26). Due to data limitations, Eggen & Bezemer (2008) were only able to research progression on three of the eight MDGs, and they recognise that their assessment of PRS-MDG success may be premature (Eggen & Bezemer 2008). Also, both Marshall & Walters (2011) and Elkins, Feeny & Prentice (2018) acknowledge that their studies do not establish causal connections between adoption, policy choices, and outcomes, and highlight this as an area for future research.

Finally, a drawback applying to all three pieces of research is that an assumption is made about adoption of the PRS equating to actual implementation of the strategy and policies (Marshall & Walters 2011). There is no way of confirming whether the policies laid out in the PRSPs have in fact been implemented without completing in-depth country analysis. We must therefore be wary of this when forming conclusions based on cross-national research. 2.4. Placing this Research Paper

This research paper adds to the existing literature by being the first to empirically examine the impact of the PRS on institutional quality. So far, a focus on institutions has been the critical missing link in this body of research, as they are the stepping stone for low-income countries looking to achieve sustainable development. The three research papers previously discussed all focused on short-term measures of development, but this paper argues that development programmes can only be successful in the long-term with high-quality institutions firstly in place. Evaluations on the impact of development programmes on

economic growth must shift their focus to the longer-term institutional structures underlying the market and society (North 1990: 98). Previous research has only found limited support for a positive relationship existing between the PRS and the desired development outcomes (Eggen & Bezemer 2008; Marshall & Walters 2011; Elkins, Feeny & Prentice 2018). One reason for these limited positive findings may be due to a variation in institutional quality levels existing within countries. An investigation into the effect of the PRS on institutional

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quality should therefore be completed, as a higher quality of institutions is associated with these other desired development outcomes.

The second way in which institutions have been the ‘missing link’ in PRS research relates to the concepts of participation and ownership. A considerable amount of the literature focused on analysing these concepts in the PRS takes a very critical stance, arguing that participatory processes often excluded important stakeholders, were limited on the policy issues they covered, and failed to influence actual policy outcomes (Booth 2003; 2005; Dijkstra 2011; McGee et al. 2002; Morrison & Singer 2007). Building on the arguments of Lazarus (2008) and Morrison & Singer (2007: 722), this paper argues that without high-quality institutions firstly in place, the notions of participation and country ownership present in the PRS could not be put into practice. For effective consultation to occur, institutions need to be set up to allow individuals and representatives of civil society groups to debate, decide on and monitor projects (Morrison & Singer 2007: 722). This argument is elaborated on further in Chapter 3, which outlines the theoretical framework and hypotheses.

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Chapter 3 - Theoretical Framework and Arguments

The aim of Chapter 3 is to outline the papers theoretical arguments and hypotheses. The chapter will begin with a discussion of New Institutional Economics - the central theory underlying this research paper, followed by a review of the different theories regarding the PRS. The main arguments will be outlined, and then each WGI and corresponding hypothesis will be discussed in turn, with the purpose of clarifying both how the WGI has an impact on development, and how it relates to the PRS. The Chapter will conclude with an example of Bangladesh’s 2005 PRSP, demonstrating how each of the WGIs translates into actual policy proposals.

3.1. New Institutional Economics

This research paper is driven by the notion that central to the achievement of long-term economic and social development – the primary goal of the PRS - is the strengthening of economic institutions and governance structures (Malaluan & Guttal 2003: 14). The central theory underlying the following arguments and hypotheses is New Institutional Economics, which stresses the role of institutions in generating economic growth and alleviating poverty, through reducing transaction costs, and correcting market imperfections (Adejumob 2006: 3).

Two proponents of New Institutional Economics Theory were North (1990) and Williamson (2000), who described institutions as the “prevailing rules of the game” in society. They work to: condition development; determine the direction of economic change; and shape political, economic, and social interaction (Alonso & Garcimartín 2013: 1; North 1990: 97). The role of institutions in the economy is extensive and varied: the rule of law and constraints on elites encourage better quality public goods; property rights spur private investment; and political institutions effect civil societies’ ability to organise and act effectively (North 1990: 98; Todaro & Smith 2013: 90). Estevez-Abe, Iverson & Soskice (2001) highlight the important role that institutions play in supporting the welfare regime in an economy; Cassimon et al. (2010) find that institutions determine whether financial integration has a positive or negative effect

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on economic development; and Kuttner (1984) argues that they can be used to offset an inherently unequal market process.

The relationship between institutional quality and economic development has been extensively explored over the past few decades, and a multitude of empirical studies have confirmed that a positive relationship exists (Alonso & Garcimartín 2013; Acemoglu et al. 2002; Rodrik 2000; Rodrik & Subramanian 2003; Rodrik, Subramanian & Trebbi 2002). Rodrik & Subramanian (2003) in particular, find that the quality of institutions overrides everything else in determining a country’s income levels. In 1998, Rodrik investigated the cause of declining economic growth in several Sub-Saharan African countries and found that weak domestic institutions were a central factor in their inability to withstand macroeconomic shocks.

Institutions of high-quality should therefore provide a framework not only for the design of development programmes, but also for “the enhancement of the capacity of the poor to deal positively with and improve their material conditions” (Adejumobi 2006: 4). It is paramount that in setting out a plan for poverty reduction and economic development, a country should in tandem be aiming to strengthen and improve its institutions and quality of its governance (Cassimon et al. 2010).

The broad notion of institutional quality is translated into specific policy goals in the PRSP through the notion of ‘good governance’ (IMF 2005). This is a broad notion, covering the areas of: anti-corruption; decentralization; public administration and judicial reform; strengthening accountability and participation; and public expenditure management (IMF 2005: 162). The next section will elaborate further on the connection between the PRS and institutions.

3.2. The PRS and Institutions – The Missing Link

As argued by Adejumobi (2006: 7), there exists a strong nexus between institutions, governance, and poverty. A country's existing institutional structure and political system provide constraints and possibilities in terms of realistic development outcomes (Booth 2003: 137).

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The central aim of the PRS was to achieve broad-based development and multidimensional poverty reduction in participating countries. However, effective implementation of the PRS was dependent upon the quality of institutions within countries (Barbone & Sharkey 2006: 4). PRS’s that were not embedded within the institutions of the country concerned were unlikely to have been effective in achieving poverty reduction (Booth 2003: 137).

Previous investigations into whether a relationship existed between the PRS and positive development outcomes only found limited support (Eggen & Bezemer 2008; Elkins, Feeny & Prentice 2018; Marshall & Walters 2011). This paper argues that the quality of institutions is likely to have been a mediating factor in whether poverty reduction has been achieved (Sumner 2006: 1404). Particularly, Marshall & Walters (2011) find that the PRS has been successful in generating economic growth but not for redistributing wealth. Empirical research has found that institutional quality can influence the corresponding levels of inequality and economic development in countries (Alonso & Garcimartín 2013: 6). Development programmes can therefore only be successful in the long-term with high-quality institutions firstly in place, and evaluations of development programmes must also assess their impact on the longer-term institutional structures underlying the market and society (North, 1990: 98). This paper argues that improvements in institutional quality should be treated as an end in themselves, as they are the first stepping stone towards long-term economic development, and issues of power decentralisation; rule of law; and adequate delivery of social services, are all key elements in the reduction of poverty (Adejumobi 2006: 7).

Also, since institutions have been found to be strong determinants of economic development and growth (Rodrick & Subramanian 2003), separate policy areas laid out in PRSPs cannot be evaluated without taking institutions into account. The effects of fiscal policy; monetary policy; exchange rate policy; and structural reforms, are all affected by the institutions underlying them, and the quality of the government enacting such policies (Rodrick & Subramanian 2003).

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3.3. Participation, Ownership, and Institutions – The Missing Link

As well as the empirical research discussed in the first section of the literature review, there exists a body of research dedicated to theoretically analysing the concepts of participation and ownership in the PRS.

A strand of this literature understood the PRS to be a “technology of social control” in which the IFIs sought to secure more intimate supervision of recipient countries (Fraser 2005: 317). In this view, the PRS provided a context within which the IFIs could govern at a distance (Lie 2015) and enforce on these countries liberal systems of political and economic management (Fraser 2005: 317). These theorists argue that a logic of coercion existed in the concepts of participation and ownership, which were used as a policy instrument to serve the IFIs own interests (Kamruzzaman 2009: 69). Lie (2015) argues that the relationship between donor and recipient countries was purposefully framed as a partnership, and that new governance mechanisms were created under the promise of greater freedoms, but that at the same time the conditions under which these freedoms could be exercised were restricted. Similarly, Craig & Porter (2004: 389) argue that the IFIs used the concepts of participation and

ownership to pursue a liberal project, and to establish the “hegemony of a slightly modified neoliberal development model”. So, despite the seemingly progressive elements of

ownership and participation in the PRS, this theoretical perspective views them as an effort to legitimise the hegemony of the IFIs over participating countries (Kamruzzaman 2009). This research paper puts forward a more nuanced understanding of participation and ownership in the PRS, arguing that whether these concepts could be utilised effectively in participating countries was dependent upon the prevailing institutions. Following the arguments of Lazarus (2008: 1208), who interprets participatory processes to be “arenas of interaction”, the outcome of these processes was dependent on the distribution of power between the different stakeholders. Critical for determining these power relations, and therefore who influenced PRS outcomes, were the prevailing political and institutional conditions in participating countries (Lazarus 2008: 1208). Fundamental to facilitating effective and broad-based participation, are the state’s policies on governance; rule of law; respect for human rights; freedom of expression; and corruption (Barbone & Sharkey 2006:

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10). Participation in the PRS could therefore be used to serve the interests of any group of stakeholders (Lazarus 2008), and institutions of high-quality could work not only to ensure the participation of the poor in decisions that affect them, but also to facilitate their influence on outcomes (Adejumobi 2006: 4).

Participation in the PRS therefore only reached its full potential when it was institutionalised within the recipient countries political systems (Lazarus 2008: 1213), as this led to

improvements in the legitimacy of public decisions, as well as increasing the redistributive nature of government allocations (Morrison & Singer 2007: 722). In turn, participation: built country ownership of the PRS; increased the transparency of the policy formulation process; made it more representative of various stakeholder interests; and ultimately, made the strategy more sustainable (Morrison & Singer 2007: 722). A focus on institutions has

therefore been the missing link in the existing research on participation and ownership in the PRS.

3.4. The Hypotheses

The theory and arguments underlying this paper have now been discussed, and the importance of institutions for both sustainable development, and successful PRS

implementation, communicated to the reader. The Chapter will move on to outlining the hypotheses. The central hypothesis of this paper is that adoption of the PRS should be associated with higher levels of institutional quality, measured by the four WGIs. Adoption of a PRSP should have worked to improve institutional quality through the following

mechanisms: setting quantifiable targets and policies; targeting critical areas for

improvement; taking country-specific contexts into account; setting up procedures for the oversight of policy implementation; and developing methods for monitoring progress. Also, the fact that the PRSP incorporated plans for improvements in institutional quality

represented a public commitment towards the achievement of these goals. It follows that once this commitment was made, governments were likely to have been subjected to more pressure both from their own citizens and the IFIs to achieve these goals. The next section of the chapter will discuss each WGI in turn and elaborate on both its impact on development and how it relates to the PRS.

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Government effectiveness refers to the quality of public services, civil service, policy

formulation and implementation, as well as the credibility of the government's commitment to such policies (World Bank 2018). To achieve sustainable economic development, countries must first have an efficient public sector. This makes them better able to develop effective poverty-reduction policies, and means they are more likely to have the mechanisms in place for assessing such policies. A more effective government is also likely to lead to a higher quality of public goods being provided, which is critical for reductions in poverty.

Public administration reform and decentralization were key features of PRSPs, focused on enhancing efficiency in the public sector. Additionally, the formation of the PRSP itself should have increased the credibility of the government’s commitment to poverty reduction policies. I therefore expect that through increasing the credibility of the government’s commitment to these policies, and by increasing the effectiveness of the wider public sector, PRS adopting countries should have experienced better performance on this indicator than non-adopters.

𝐻0 = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑛𝑜 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑡ℎ𝑒 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑛𝑒𝑠𝑠 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 𝐻₁ = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑎 𝑠𝑖𝑔𝑛𝑖𝑓𝑖𝑐𝑎𝑛𝑡 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑛𝑒𝑠𝑠 3.4.2. Control of Corruption

The Control of Corruption indicator captures the extent to which public power is exercised for private gain (World Bank 2018). The World Bank has described corruption as the single greatest obstacle to development, as it distorts the role of the law and weakens the

institutional foundation on which economic growth depends (Anwar & Shabbir 2007: 751). Corruption is recognized to undercut development in a variety of ways: by undermining the state’s legitimacy; impeding its ability to raise revenues and leading to deterioration in the quality of public goods; hampering investment; and raising transaction costs and uncertainty (Gray & Kaufmann 1998). Gray and Kaufmann (1998) argue that strategies aimed at tackling corruption must pay attention to its root causes, and thus to the roles of incentives,

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As part of the effort to promote ‘good governance’, the majority of PRSPs included a specific strategy on how to reduce corruption. This is often tailored to country-specific issues such as corruption in previously state-owned enterprises (SOEs) or in specific sectors. The anti-corruption strategies also include the creation of Commissions to oversee policy implementation and the setting up of monitoring methods. I therefore expect that PRS adopting countries will have experienced better performance on this indicator then the control group of countries.

𝐻₀ = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑛𝑜 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑡ℎ𝑒 𝑐𝑜𝑛𝑡𝑟𝑜𝑙 𝑜𝑓 𝑐𝑜𝑟𝑟𝑢𝑝𝑡𝑖𝑜𝑛 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 𝐻1 = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑎 𝑠𝑖𝑔𝑛𝑖𝑓𝑖𝑐𝑎𝑛𝑡 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑐𝑜𝑛𝑡𝑟𝑜𝑙 𝑜𝑓 𝑐𝑜𝑟𝑟𝑢𝑝𝑡𝑖𝑜𝑛 3.4.3. Regulatory Quality

Regulatory Quality refers to the government’s ability to formulate and implement sound policies and regulations, to promote private sector development (World Bank 2018). Sumner (2006: 1404) argues that effective regulatory structures underpinning markets are critical for economic growth and multidimensional poverty reduction. Rodrik & Subramanian (2003: 32) also emphasise the importance of market-regulating institutions for long-term economic development, particularly those that deal with externalities, economies of scale, and

imperfect information. They argue that appropriate regulation works to build resilience of the market to shocks, as well as facilitates socially acceptable burden sharing in response to these shocks (Rodrik & Subramanian 2003: 32).

Regulatory Quality in PRSPs often covered a broad range of sectors, including improving business regulation to create a more competitive environment; improving the regulation of micro-finance institutions to ensure they do not exploit the poor; and in some cases (such as Albania) syncing regulations with European standards. I expect that PRS adopting countries will have achieved better results on this indicator through: the specific targeting of critical sectors and regulatory issues; reforming and streamlining regulation to increase its

effectiveness; the development of quantifiable methods for assessing the effectiveness of regulations; and through the creation of commissions to ensure regulation is properly enforced.

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𝐻₀ = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑛𝑜 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑡ℎ𝑒 𝑟𝑒𝑔𝑢𝑙𝑎𝑡𝑜𝑟𝑦 𝑞𝑢𝑎𝑙𝑖𝑡𝑦 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 𝐻₁ = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑎 𝑠𝑖𝑔𝑛𝑖𝑓𝑖𝑐𝑎𝑛𝑡 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑡ℎ𝑒 𝑟𝑒𝑔𝑢𝑙𝑎𝑡𝑜𝑟𝑦 𝑞𝑢𝑎𝑙𝑖𝑡𝑦 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 3.4.4. Rule of Law

Finally, the rule of law indicator captures the extent to which agents have confidence in and abide by the rules of society (World Bank 2018). A great deal of the empirical research exploring the relationship between institutions and economic growth has focused on this particular set of institutions, highlighting their important role for development (Rodrik & Subramanian 2003). Rodrik and Subramanian (2003: 31) refer to property rights and the rule of law as “market-creating institutions”, since in their absence markets either perform poorly or fail to exist altogether. They argue that the rule of law defines societal norms and creates incentives for economic behaviour, which in turn determines the direction of economic change in an economy (Rodrik & Subramanian 2003: 31).

Policy proposals concerning the rule of law within PRSPs often took the form of judicial and criminal justice system reform. Many were focused on improving the application of laws; streamlining laws; and enhancing accessible and affordable justice for the poor. Also, a large majority of the PRSPs sought to tackle country-specific issues, these included reform of the unfair criminal justice system inherited from the colonial era and tackling corruption in the local police force. By targeting critical and country-specific areas for improvement; setting quantifiable targets; creating methods for monitoring progress; and establishing commissions to oversee implementation of policies in this area, I expect PRS adopting countries to have experienced better performance on this indicator than their non-PRS adopting counterparts.

𝐻₀ = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑛𝑜 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑡ℎ𝑒 𝑟𝑢𝑙𝑒 𝑜𝑓 𝑙𝑎𝑤 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 𝐻₁ = 𝑃𝑅𝑆 𝑎𝑑𝑜𝑝𝑡𝑖𝑜𝑛 ℎ𝑎𝑠 𝑎 𝑠𝑖𝑔𝑛𝑖𝑓𝑖𝑐𝑎𝑛𝑡 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑛 𝑡ℎ𝑒 𝑟𝑢𝑙𝑒 𝑜𝑓 𝑙𝑎𝑤 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 3.4.5. Positive Reinforcement

The idea behind each of the hypotheses and confirmed by the expansive literature on development and institutions (Acemoglu et al. 2005; Rodrik 2000; Rodrik & Subramanian

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2003), is that a reinforcing relationship exists between institutional quality and economic development. Institutions of higher quality lead to increased levels of economic growth and poverty reduction, in turn creating a higher demand for better institutions. This research paper is focused on whether the adoption of the PRS has facilitated higher levels of institutional quality in the first place.

The chapter will conclude with an example of how the WGIs translate into country-specific policy proposals, using the PRSP of Bangladesh.

Box 1: Bangladesh’s 2005 PRSP

This evaluation of Bangladesh’s first PRSP, submitted in 2005, intends to describe the casual mechanisms through which adoption of the PRS is expected to lead to higher levels of institutional quality. Each of the four indicators are discussed in turn with corresponding policy examples.

Government Effectiveness (IMF 2005: 164)

• Improving the implementation capacity of government is established as a key priority area. Two sources of implementation problems are defined:

(1) Personal Related → recruitment; training; postings and transfers; promotions (2) Work-Related → coordination; meetings; supervisions; monitoring; expenditure

control; delegation; decentralisation • Policy Priorities identified in this area are:

o Reducing the number of under-completed and under-funded projects within the Annual Development Plan.

o Streamlining the project preparation and approval process

o Improving incentives, motivation, and capacity within the administration. o Improving information flows – coordination; accountability; and

transparency

• Decentralisation and promoting local governance is also recognised as a key area of focus. Priorities in this area include:

o Initiating a revamped training strategy in collaboration with research organisations and Non-Governmental Organisations (NGOs)

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o Consolidating a performance-linked second resource channel for union parishads

o Incremental strengthening in institutional, functional, and resource availability, as well as political decentralization

o Streamlining the plethora of laws on local government into a comprehensive national legislation

Control of Corruption (IMF 2005: 167)

• Corruption is defined as a ‘critical governance issue’

• Aim is to move beyond anti-corruption as a stand-alone deterrence agenda and build a comprehensive Anti-Corruption Strategy, touching on three levels: (1) Deterrence

(2) System improvements (3) Value-creation

• The following issues are identified as sources of corruption: o Breakdown of oversight functions

o The onset of Parliamentary democracy in 1991 bringing new challenges of weak system development in the politician-administrator interface

o Quality of political competition – this is limited to the affluent class, politicians often prioritise development outcomes in own constituencies regardless of the wider consequences

o Inadequate human resource policies and institutions leading to a capacity deficit

o In development projects, the ‘cost estimation’ stage of the project cycle providing opportunities for a corrupt distribution of resources among stakeholders

o Unreformed strategic sectors – namely police, judiciary, and transport o The existence of a value-deficit: corruption has become tolerated by a

value-system promoting success at any cost • The following priorities are identified:

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o Strengthening oversight functions through parliamentary standing committees, auditors and ombudsman

o Enforcing codes of conduct within the electoral process o Targeted transformation of recruitment and HRD

o Strengthening information flows – particularly a right to information

legislation brought about through a well-debated and participatory process o Establishing better indices and evidence on mis-governance and corruption Regulatory Quality (IMF 2005: 71)

The overall objective is to facilitate a fair and competitive business environment, with the following priorities being identified:

• Improving the legal environment:

o Reforming bankruptcy laws; contract enforcement and dispute resolution; and copyright protection laws

o Streamlining the legal and regulatory environment – particularly regarding labour laws and wage legislation

• Competition Policy:

o Introduce an operational competition law that addresses the monopolistic practices of domestic and foreign enterprises

• Financial Sector Reform:

o Maintain macroeconomic and financial stability and implement speedy reform and privatisation of the four nationally owned banks

o Promote lending in the Small Medium Enterprise (SME) sector through the Small Enterprise Fund

o Expand access to finance and develop financial markets to improve the performance of the private sector.

• Reform of Micro-Finance Programmes:

o Increase access to these programmes for the poorest members of society – develop a simple and effective regulatory framework for these institutions

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to ensure good governance and prevent them from charging high interests rates

• Reform of SOEs:

o Accelerate the privatization of SOEs

o Set-up a commission to develop a comprehensive strategy for privatisation and public-sector reform

Rule of Law (IMF 2005: 169)

• Policies in this area focus on Criminal Justice Reform and Enhancing Accessible and Affordable Justice for the Poor

• Identifies ‘good governance’ as being critical for effective law and order and the functioning of the justice system

• Identifies the inherited colonial justice system as posing a major barrier to the poor in terms of affordability and accessibility of services

• Key policies identified in this area:

o The separation of the judiciary from the executive o Development of a comprehensive police reform agenda

o Strengthening safeguards in the application of speedy solutions o Establishment of the independent government attorney service o Consolidation of jail reform

o Standards setting on the lower judiciary o Community policing

The Poverty Reduction Strategy and institutional quality : the missing link? : to what extent has the adoption of the Poverty Reduction Strategy been associated with higher levels of institutional quality in participati