"Anticorruption and governance conditionality measurably improves institutional quality in borrowers"

"al. 2005; Botero, Ponce, and Shleifer 2012; Glaeser et al. 2004; Glaeser, Ponzetto, and Shleifer 2007). • Corruption. Over 30 percent of firms in EMDEs identify corruption and competition from the informal sector as major constraints to their growth. Several studies show that anticorruption reforms have significantly boosted long-term growth and Note: This box was prepared by Sergiy Kasyanenko. Research assistance was provided by Kaltrina Temaj. CHAPTER 3 G LO BAL ECO NO MIC PROSPECTS | J ANUARY 2021 141 investment, albeit with substantial variation in outcomes across countries.a • Informality. Informality is associated with considerably weaker development outcomes and well- designed reforms to reduce informality have often been associated with higher growth (World Bank 2019d). There is also a strong correlation between weak institutions—such as inefficient governance, excessive regulation, and high incidence of corruption—and informality (Guillermo et al. 2007). • Political stability and rule of law. Studies show that political stability encourages stronger growth and investment, and may also improve fiscal discipline (Aisen and Veiga 2013). Security, the protection of property rights, and the removal of undue influence on courts are strongly correlated with higher growth or lower growth volatility (Acemoglu, Johnson, and Robinson 2001; Haggard and Tiede 2011; World Bank 2017b). Well-established legal systems and property rights, high-quality institutions, and mature patent laws foster deeper integration into global supply chains, which require dependable interactions between producers and suppliers across multiple stages of production and jurisdictions (Alfaro et al. 2019; WTO 2019). Global supply chains, in turn, have been associated with the absorption of productivity-enhancing technologies through foreign direct investment (Alfaro 2017). • Education and innovation. By encouraging human capital accumulation and innovative activities, institutions can promote forms of economic activity that are associated with greater economic complexity and higher productivity growth (Dieppe 2020; Vu 2019). Secure intellectual property rights are critical to incentivize firms to innovate, increase research and development spending, invest in knowledge-based capital, and promote knowledge diffusion (Andrews and Criscuolo 2013; Cong 2013). Business climates and growth. Poor business climates allow anticompetitive practices to flourish, perpetuate corruption, discourage innovation, and distort the efficient allocation of factors of production (Aghion and Schankermann 2004; Bourles et al. 2013; Buccirossi et al. 2013). • Reforms to improve regulatory quality. Burdensome business regulations amplify the adverse effect of corruption on firms’ labor productivity (Amin and Ulku 2019). Substantial improvement in regulatory quality is often associated with a significant increase in long-term growth as it encourages the entry of more productive firms, including multinational companies, and stimulates research and development spending (Alam, Uddin, and Yazdifar 2019; Egan 2013). • Reforms to increase labor market flexibility. Labor market regulations are designed to provide social protection and improve workplace safety. If excessively distortionary or poorly enacted, they can discourage formal employment and"