Building State Capacity : What is the Impact of Development Projects?

Although research has established the importance of state capacity in economic development, less is known about how to build that capacity and the role of external partners in the process. This paper estimates the impact of a typical development project designed to build capacity in a low-income country. Specifically, it evaluates a multilateral development bank project in Tanzania, which incentivized investments in local government capacity by offering grants conditional on performance scores. The paper uses a difference-in-differences methodology and two rounds of surveys with local officials and households to estimate the effects of the intervention. Over the course of the project, measured state capacity improved similarly in project and non-project areas: the project’s value-added to changes in state capacity is estimated to be zero. The data suggest that state capacity is evolving in Tanzania through endogenous changes in trust and legitimacy rather than from financial incentives offered by external partners