Governance and Returns on Investment: An Empirical Investigation

November 1995 There is a strong statistical link between a country's civil liberties and the performance of its aid-financed govern-ment investment projects. But type of political regime (whether authoritarian or democratic) and the status of more purely political liberties do not appear to significantly affect project performance. Using data from the World Bank's Operations Evaluation Department, Isham, Kaufmann, and Pritchett examine the link between the performance of Bank-financed projects and various indicators of country governance. They find that: ° There is a strong statistical, and possibly causal, link between civil liberties and project performance. After controlling for a variety of determinants of project performance, they find that in countries with the best civil liberties records projects have an economic rate of return between 8 and 22 percentage points higher than the rate of return in countries with the worst civil liberties. (The average rate of return in the sample is 16 percent.) ° The type of political regime (whether authoritarian or democratic) and the status of more purely political liberties do not appear to significantly affect project performance. This paper --- a product of the Poverty and Human Resources Division, Policy Research Department --- is part of a larger effort in the department to understand the donor and country determinants of aid effectiveness. The study was funded by the Bank's Research Support Budget under the research project Bank Project Effectiveness and Country Policy Environment (RPO 679-49).