Policy performance: Is it weaker in the least developed countries?

As structural handicaps, economic vulnerability and a low level of human capital have received great attention in the literature for a long time (see a survey in Guillaumont 2009a and 2009b). Their detrimental impacts on policy and aid allocation may lead to a double punishment for LDCs, which face structural economic vulnerability and low human capital. The problem then is that if lower performance in LDCs can be to some extent explained by economic vulnerability and low human capital, the usual and unadjusted measure of performance is not a fair criterion to allocate aid. This chapter addresses this issue by focusing on the measures of performance commonly used by bilateral and multilateral donors. It shows that once structural characteristics—economic vulnerability and low human capital—are taken into account, LDCs on average do not display lower performance either in institutional quality or the quality of their economic policies. It then proposes to correct governance indicators for the impacts of these exogenous structural handicaps to reflect genuine performance explained only by autonomous political choices of countries. In the first part the chapter proposes a way to test and take into account that low scores of LDCs on usual indicators of governance and institutional quality reflect structural factors independent of the country’s will. In the second part it shows that structural factors shape the macroeconomic policy of LDCs.