Niyazi Ismayilov

Type of the article: Research Article

Abstract
Despite the central role of the World Bank’s annual Country Policy and Institutional Assessment (CPIA) – specifically its Quality of Budgetary and Financial Management rating – in determining concessional lending allocations under the International Development Association (IDA) Performance-Based Allocation system, the within-country growth effect of this governance dimension remains empirically underexplored. This paper aims to quantify the within-country association between public financial management quality and economic growth across 66 IDA-eligible developing economies over 2006–2021, testing whether governance upgrades yield measurable short-run effects on GDP per capita growth. The analysis employs an unbalanced panel of 876 country-year observations, two-way fixed effects, Driscoll–Kraay inference to accommodate cross-sectional dependence and serial correlation, and instrumental-variable two-stage least squares (IV-2SLS) estimation using the second lag of the CPIA score as an instrument. The baseline within-country estimate is negative and statistically insignificant (β = −0.843, p = 0.140); a one-standard-deviation improvement in the CPIA score (0.58 points) is associated with approximately −0.49 percentage points of growth, or roughly 22 per cent of the sample mean. The negative direction is consistent across all three income groups, all six World Bank regions, and seven robustness specifications, with Sub-Saharan Africa being the only sub-sample to reach conventional significance (β = −1.223, p = 0.046). Standard growth controls – convergence, investment, trade openness, inflation, and government consumption – perform robustly across all specifications and align with established findings. These results suggest that the growth payoff from public financial management reform operates through slower institutional channels rather than a direct output effect detectable in the immediate post-reform horizon.

Acknowledgments
This study was supported by the International Visegrad Fund: Visegrad Grant No. 22420285, Title of the project: “Distress prediction models in V4 countries and their audit applicability”.