In most developing countries eradication of mass poverty has been the major development policy objective throughout the post-war era. In the 1950s and 1960s economic growth through capital accumulation was seen as a means of alleviating poverty. This policy emphasis led to huge capital-intensive investment, particularly in urban areas. However, growth brought about by capital accumulation, which was mainly centred in urban areas, failed to eradicate mass poverty, particularly in rural areas.1 By the early 1970s, it was increasingly realised that capital accumulation was not enough, and that health and education were equally important in eradicating widespread poverty. This view was strongly articulated in a number of empirical studies, which argued that improvements in health and education were important not only in their own right but also to promote growth in income of the poor.2 This led to a change in donor priorities. In 1973, Robert S. McNamara (then the World Bank’s President), in a speech to the Board of Governors in Nairobi, stressed a need for donors’ priorities to move away from capital-intensive infrastructural lending of the 1960s towards rural development designed to benefit the poor. However, under a planned development strategy, in the absence of incentives for efficient utilisation of resources across activities, these investments failed to generate sustainable growth and alleviate poverty.3 The inability of the planned development strategy in meeting the basic needs of the people came under severe attack by the late 1970s, which gave way to a wide range of policy reforms including trade liberalisation.4 It is now widely believed that it is not only the rate of investment but also the incentives for its efficient utilisation which are important for sustaining growth and alleviating poverty (Easterly 2001; Srinivasan 2001).