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Does Economic Analysis Improve the Quality of Foreign Assistance?
by Klaus Deininger, Lyn Squire, and Swati Basu

ABSTRACT

The World Bank undertakes large expenditures on economic analysis and advice for its member developing countries. What is the impact of this economic and sector work on the quality of World Bank lending? It would be useful to know whether past analytical work has generated measurable economic benefits that would justify its continued provision in an environment of increasingly scare resources.

This paper sets out an idealized model of decisionmaking in which a country manager makes a broad allocation of resources between lending services and economic and sector work. Given that decision, the task manager for each project makes project-specific decisions with respect to the allocation of resources between preparation and supervision. The analysis indicates that economic and sector work has a significant positive impact on the quality of World Bank loans. The results provide clear evidence of underinvestment in economic and sector work. And the analysis shows that resources could be switched from preparation and supervision to economic and sector work to the benefit of both the quality of programs and level of disbursements.

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