Macroeconomic Policies and Project Performance in the Social Sectors: A Model of Human Capital Production and Evidence from LDCS

Abstract

This paper investigates the relationship between economy-wide policies and the performance of investment projects in education and health sectors. The model highlights the fact that the production of human capital requires an interaction of the demand for and supply of social services, both are related to labor market conditions and macroeconomic policies. A Probit analysis shows that the probability of project failure is positively and significantly associated with indicators of macroeconomic instability and distortion; and negatively associated with the overall dynamism of the economy. Economy-wide policies therefore are crucial for the success of social projects, which underscores the need of linking the lending in the social sectors to the overall policies and reforms.