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p. 7 of 34 BACK | NEXT Executive Summary Introduction Good governance defined The elements of good governance Accountability Participation Predictability Transparency Interlinkages among the elements of governance The Bank’s concern with governance quality The Bank’s approach to governance issues Promoting the elements of good governance in Bank operations The Bank’s modalities for enhancing governance in DMCs Resource implications Reporting arrangements

Governance: Sound Development Management : The elements of good governance

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Predictability

Predictability refers to (i) the existence of laws, regulations, and policies to regulate society; and (ii) their fair and consistent application. The importance of predictability cannot be overstated since, without it, the orderly existence of citizens and institutions would be impossible. The rule of law encompasses both well-defined rights and duties, as well as mechanisms for enforcing them, and settling disputes in an impartial manner. It requires the state and its subsidiary agencies to be as much bound by, and answerable to, the legal system as are private individuals and enterprises.

The importance of rule-based systems for economic life is obvi-ous. They are an essential component of the environment within which economic actors plan and take investment decisions. To the extent, therefore, that legal frameworks help ensure that (i) business risks can be assessed rationally, (ii) transaction costs are lowered, and (iii) governmental arbitrariness is minimized, they should prove conducive to risk taking, growth, and development. In the opposite scenario, the capricious application of rules generates uncertainty and inhibits the growth of private sector initiatives. Regulatory uncertainty also tends to raise the cost of capital by increasing the risk of investment.⁸

Besides legal and regulatory frameworks, consistency of public policy is also important. Government policies affect the investment climate directly, and economic actors require reasonable assurance about the future behavior of key variables such as prices, the exchange rate, and employment levels. However, consistency does not mean rigidity. Governments do need to respond flexibly to changing circumstances and to make midcourse corrections, as necessary. Also, when governments change, the successor administration will, understandably, want public policy to reflect its priorities, rather than those of its predecessor. Barring such situations, though, consistency in the broad directions of government policy is valuable (with modifications being limited, as far as possible, to fine-tuning).

Predictability can be enhanced through appropriate institutional arrangements. For example, it has been argued that an autonomous central bank could lead to more predictable monetary and exchange rate policies. Many governments face the challenge of regulating money supply, while pursuing expansionary fiscal policies to encourage investment. In such situations, if monetary policy is too accommodating, inflationary pressures can put investor confidence at risk, thus defeating the very objective of the fiscal policy. In some countries, managing the fiscal deficit may be made more difficult by compulsions to bail out a politically manipulated banking sector. Granting greater autonomy to the central bank is one way that governments can signal investors that macroeconomic policy will be prudent and sound. Insulating economic ministries from political pressures can have similar benefits, but may be even more difficult to achieve.

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