Conditionality, Commitment and Investment Response in LDCs

The private investment response to structural reforms in developing countries is of paramount importance, both for the future economic growth and the survival of the reforms themselves. By employing a sample of countries, recipients of World Bank Structural Adjustment Loans, the present paper assesses whether agreements, including policy conditionality, represent a positive signal for the private sector and translate into capital formation. The empirical investment equation adopted is estimated using dynamic panel data econometric methods, allowing for simultaneity and country-specific effects. The main result obtained is that, while a higher propensity to commit does not seem to affect the private investment response, a higher percentage of tied funds might impact negatively on the demand of fixed investment.