What explains the success or failure of structural adjustment programs?

In the 1980s development assistance shifted largely from financing investments (such as roads and dams) to promoting policy reform. This change came because of a growing awareness that developing countries were held back more by poor policies than by a lack of finance for investment. After nearly 20 years'experience with policy-based or conditional lending, there have now been many studies of adjustment lending, most of which take a case-study approach. Many conclude that policy-based lending works if countries have decided on their own to reform. The authors examine a database of 220World Bank-supported reform programs to identify why adjustment programs succeed or fail. They find that a few political economy variables can successfully predict the outcome of an adjustment loan 75 percent of the time. Variables under the World Bank's control -- resources devoted to preparation and supervision or number of conditions -- have no relationship with an adjustment program's success or failure. What development agencies must do, then, is select promising candidates for adjustment support. When the candidates is a poor selection, devoting more administrative resources or imposing more conditions will not increase the likelihood of successful reform. To improve its success rate with adjustment lending, the World Bank must become more selective and do a better job of understanding which environments are promising for reform and which are not. That is likely to lead to fewer adjustment loans, unless there is a significant change in the number of promising reformers. To become more effective at supporting policy reform, the agency must be willing to accept that this may lead to smaller volumes of lending.