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Operations Manual

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OM Section 54: Issued on 13 January 1997
Governance

Bank Policies (BP)

Introduction

1. From the Bank's point of view, governance is concerned directly with the management of the development process. As such, it has to do with the institutional environment in which citizens interact among themselves and with government agencies and officials. The capacity of this institutional environment is important for development because it helps determine the impact achieved by the economic policies adopted by the government. Hence, this capacity, and the governance quality it reflects, is a vital concern for all governments.

2. This OM section defines what governance means for the Bank, identifies elements of good governance, and indicates ways in which the Bank will address governance issues in its developing member countries (DMCs).

Definition of Governance

3. The definition of governance that is most appropriate from the Bank's viewpoint is "the manner in which power is exercised in the management of a country's economic and social resources for development." Accordingly, the Bank regards good governance as synonymous with sound development management. It involves both the public and the private sectors. It is related to the effectiveness with which development assistance is used, the impact of development programs and projects (including those financed by the Bank), and the absorptive capacity of borrowing DMCs. Thus, irrespective of the precise set of economic policies that find favor with a government, good governance is required to ensure that those policies have their desired effect. In essence, it concerns norms of behavior that help ensure that governments actually deliver to their citizens what they say they will deliver.

Elements of Good Governance

4. The Bank has identified four basic elements of good governance: (i) accountability, (ii) participation, (iii) predictability, and (iv) transparency. These elements of good governance are closely linked and mutually reinforcing. For example, a system of government or administration that is transparent is also likely to be predictable and accountable. However, the Bank notes that the requirement of, and capacity for, good governance seems independent of the political character of the government concerned.

A. Accountability (Building Government Capacity)

5. Accountability is the imperative to make public officials answerable for government behavior and responsive to the entity from which they derive their authority. Accountability also means establishing criteria to measure the performance of public officials, as well as oversight mechanisms to ensure that the standards are met. Lack of accountability tends in time to reduce the State's credibility as an economic partner. It undermines the capacity of governments to sustain the long-term business confidence essential for growth-enhancing private sector investment.

6. Economic accountability relates to the effectiveness of policy formulation and implementation, and the efficiency of resource use. Financial accountability covers accounting systems for expenditure control, and internal and external audits.

B. Participation (Participatory Development Processes)

7. The principle of participation derives from an acceptance that people are at the heart of development. They are not only the ultimate beneficiaries of development, but are also the agents of development, acting through groups or associations, and as individuals. Participation implies that government structures are flexible enough to offer beneficiaries, and others affected, the opportunity to improve the design and implementation of public policies, programs, and projects.

8. Participation in economic life by agents other than the State would cover not only the role of the private sector, but also the activities of nongovernment organizations (NGOs), including community based organizations. They offer an additional and complementary means of channeling the energies of private citizens. NGOs can be helpful in identifying people's interests, mobilizing public opinion in support of these interests, and organizing action accordingly. They can provide governments with a useful ally in enhancing participation at the community level and fostering a "bottom-up" approach to economic and social development.

C. Predictability (Legal Framework)

9. Predictability refers to the (i) the existence of laws, regulations, and policies to regulate society; and (ii) their fair and consistent application. These legal frameworks are essential for economic actors to make rational investment decisions. A predictable regulatory framework assists firms to plan their activities effectively and forecast the return on their investments with greater confidence.

D. Transparency

10. Transparency refers to the availability of information to the general public and clarity about government rules, regulations, and decisions. Thus, it both complements and reinforces predictability.

11. Access to accurate and timely information about the economy and government can be vital for economic decision making by the private sector. Transparency in government decision making and public policy implementation reduces uncertainty and can help inhibit corruption among public officials. To this end, rules and procedures that are simple, straightforward, and easy to apply are preferable to those that provide discretionary powers to government officials or that are susceptible to different interpretations.

The Bank's Focus on Good Governance

12. The Bank's approach will be guided by the provisions of its Charter as they relate to governance. These prohibit the Bank from (i) interference in the political affairs of a DMC, and (ii) being influenced by a DMC's character. Only economic considerations shall be relevant to decision making in the Bank.¹ However, this does not prohibit the Bank from taking into account demonstrable and direct economic effects of non-economic factors as part of "economic considerations" on which it must base its decisions. The economic effects of such non-economic factors must be clearly established before the Bank finances programs focusing on such non-economic factors.

13. The Bank will also take account of the need for flexible (i.e., nondoctrinaire) and country-specific approaches. In all cases, the guiding principle for the Bank will be to act on the basis of agreement with the DMC concerned.²

14. To enhance accountability, the Bank will focus on:

(i) public sector management (i.e., the overall functioning of Government, including line ministries, departments, and agencies);

(ii) public enterprise management and reform (i.e., corporate entities in the public sector, such as power utilities);

(iii) public financial management; and

(iv) civil service reform.

15. Under participation, the Bank will support:

(i) involvement of beneficiaries and affected groups in development programs and projects;

(ii) a closer interface between the public and private sectors;

(iii) decentralization of economic functions (including the empowerment of local government units); and

(iv) cooperation with NGOs.

16. With regard to predictability, the Bank will emphasize:

(i) enhancement of effective legal and regulatory regimes for economic development, including drafting and disseminating laws and regulations in respect of economic activities, protecting the environment, conserving natural resources, and improving the status of women and other disadvantaged groups; and

(ii) capacity building of institutions responsible for the administration and enforcement of such laws and regulations, including training of legal personnel.

17. To promote transparency, the Bank will focus on disclosure of information. For example, the Bank could work with national statistics agencies to improve their interface with end users in both the public and private sectors. The Bank could also encourage loan project executing and implementing agencies to produce, or improve the quality of, annual reports, and to disseminate these more widely to the public at large.

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Operational Procedures (OP)

This OM Section does not contain Operational Procedures.

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