Budgetary management quality and economic growth: Within-country evidence from developing economies

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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”.

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    • Figure 1. Mean GDP per capita growth by CPIA score bin (with 95% confidence intervals)
    • Figure 2. Evolution of CPIA Budgetary and Financial Management score, 2005–2024
    • Figure 3. CPIA FinMgmt coefficient by income group (95% confidence intervals)
    • Figure 4. Year fixed effects from baseline specification (Model 4)
    • Figure 5. Distribution of country fixed effects by region
    • Figure B1. Country fixed effects from baseline specification (Model 4), ranked
    • Figure B2. Country fixed effects vs. mean CPIA FinMgmt score (r = 0.327)
    • Table 1. Variable definitions and data sources
    • Table 2. Descriptive statistics (estimation sample)
    • Table 3. Baseline two-way fixed-effects regressions (dependent variable: GDP per capita growth)
    • Table 4. Sub-sample analysis by income group (dependent variable: GDP per capita growth)
    • Table 5. Robustness checks (dependent variable: GDP per capita growth)
    • Table A1. East Asia & Pacific (10 countries)
    • Table A2. Europe & Central Asia (9 countries)
    • Table A3. Latin America & Caribbean (4 countries)
    • Table A4. MENA (4 countries)
    • Table A5. South Asia (6 countries)
    • Table A6. Sub-Saharan Africa (33 countries)
    • Table B1. Country fixed effects by region
    • Table C1. Pairwise correlation matrix (N = 876)
    • Table C2. Variance inflation factors
    • Table D1. IV first-stage summary
    • Table E1. Model 4: Clustered vs. Driscoll–Kraay standard errors (N = 876)
    • Conceptualization
      Niyazi Ismayilov, Milos Tumpach
    • Data curation
      Niyazi Ismayilov
    • Investigation
      Niyazi Ismayilov
    • Methodology
      Niyazi Ismayilov, Milos Tumpach
    • Project administration
      Niyazi Ismayilov
    • Supervision
      Niyazi Ismayilov
    • Validation
      Niyazi Ismayilov
    • Writing – original draft
      Niyazi Ismayilov, Milos Tumpach
    • Writing – review & editing
      Niyazi Ismayilov, Milos Tumpach
    • Formal Analysis
      Milos Tumpach
    • Funding acquisition
      Milos Tumpach
    • Resources
      Milos Tumpach
    • Software
      Milos Tumpach
    • Visualization
      Milos Tumpach
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