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World Bank Lending and Regulation, by Christopher Kilby (February 2005)

One of the policy reforms promoted by the World Bank in recent decades is to reduce the often burdensome level of regulation by developing country governments and thus promote a reorientation from highly regulated and centrally controlled to deregulated and market-based economies. Indeed, poor growth performance and balance of payments problems on their own might well necessitate this transformation. Does World Bank lending promote deregulation with stronger incentives and critical resources (finance and advice) or slow the process by blunting the impact of crises and indirectly promoting state control via development planning and government sponsored projects? This paper analyzes empirical links between aid flows and regulatory burden. Econometric estimates based on panel data for 83 aid receiving countries from 1970 to 2000 find that World Bank lending, while not specifically targeting high or low regulatory states, is linked to lower subsequent regulation. This link holds for multilateral donors more broadly while bilateral donor funds apparently fail to influence the level of regulation.

JEL classification codes: F35, L51, O19 Key words: foreign aid, regulation, deregulation, World Bank

Working Paper (172 K, PDF)

Published: Economics Systems, December 2005, 29(4):384-407.