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

Although research has established the importance of state capacity in economic development, lessis known about how state capacity comes about and the role of external partners in the process. This paper estimatesthe impact of an external project designed to build state capacity in a low-income country. Specifically, it evaluatesa multilateral development bank project in Tanzania, designed to incentivize investments in local state capacityby offering grants conditional on institutional performance scores. This program typifies many development projects tobuild state capacity implemented around the world by development agencies. The paper uses adifference-in-differences methodology to estimate the project impact, comparing outcomes between 18 project and 22non-project local governments over 2016–18. Outcomes were measured through two rounds of primary surveys of nearly 500local government officials and nearly 3,000 households. Over the course of the project, measured state capacity improvedin project areas, but due to comparable gains in non-project areas, the project’s value-added to change in state capacityis estimated to be zero across all the dozens of relevant variables in the surveys. The data suggest that improvementsin state capacity in Tanzania resulted from endogenous changes in trust and legitimacy in the country rather thanfrom financial incentives offered by external partners.