Building State Capacity: What is the impact of development projects?

Abstract
Although research has established the importance of state capacity in economic development, little is known about how state capacity comes about and the role of external partners in the process. This paper provides estimates of impact of external projects designed to build state capacity in developing countries. It evaluates the Tanzania Urban Local Government Strengthening Program, which was designed to incentivize investments in local state capacity by offering grants conditional upon scores attained on assessments of institutional performance. The evaluation methodology that was feasible to pursue in this context is that of “difference-in-difference” estimates of project impact, comparing outcomes between 18 project and 22 non-project local governments over the period 2016-2018. The comparator local governments were selected using propensity-score matching on available socio-economic and fiscal data, and after checking for parallel trends in own-source revenues, a key measure of state capacity, prior to the project. Outcomes were measured through two rounds, in 2016 and 2018, of primary surveys of 474 local government officials and 2998 households. Using the difference-in-difference methodology, the project’s value-added to existing processes of change in state capacity is estimated to be zero, across all the dozens of relevant variables in the surveys. The data suggests that improvements in state capacity in Tanzania are coming from endogenous changes in trust and legitimacy in the country rather than as a result of financial incentives offered by external partners (by Stuti Khemani, Vincenzo di Maro, David Evans and Thiago Scot).

Stuti Khemani is a Senior Economist in the Development Research Group of the World Bank.

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