World Bank Conditional Loans and Private Investment in Recipient Countries

SummaryWorld Bank conditional loans might affect private investment in recipient countries not only through the funds they provide, but also via the policy conditions they include and the transfer of knowledge they imply. This work investigates the impact of these channels on private investment, considering also the particular effect of the formal commitment to reform, which necessarily comes along with conditionality. Taking into account the selection problem posed by participation in World Bank programs, the results indicate that backed commitments are associated with lower investment ratios in the short-run, and none of the other potential channels of influence seem to counterbalance this negative impact.