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p. 17 of 34 BACK | NEXT Executive Summary Introduction Good governance defined The elements of good governance The Bank’s concern with governance quality The Bank’s approach to governance issues The Bank’s charter and governance activities Need for flexible country-specific approaches 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 Bank’s approach to governance issues

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The Bank’s charter and governance activities

The General Counsel is circulating to the Board separately an opinion on the implications of the Charter provisions for governance activities. He has summarized this opinion as follows. Governance has at least two dimensions: political (e.g., democracy, human rights) and economic (e.g., efficient management of public resources). In dealing with governance and the promotion of the fundamental elements of accountability, participation, predictability, and transparency, the Bank needs to stay close to its mandate for accelerating the process of economic development in DMCs.20 Accordingly, the Bank regards good governance from the perspective of sound development management, and does not concern itself with aspects of governance not related directly to the latter. Such an approach is also justified by the fact that the Bank’s role in the field of governance is strictly circumscribed by its Charter. This is evident from Article 36 of the Charter, "Prohibition of Political Activity: The International Character of the Bank." In view of its importance in this context, the Article is reproduced in full below.

1. "The Bank shall not accept loans or assistance that may in any way prejudice, limit, deflect or otherwise alter its purpose or functions.

2. "The Bank, its President, Vice-President(s), officers, and staff shall not interfere in the political affairs of any member, nor shall they be influenced in their decisions by the political character of the member concerned. Only economic considerations shall be relevant to their decisions. Such considerations shall be weighed impartially to achieve and carry out the purpose and functions of the Bank.

3. "The President, Vice-President(s), officers, and staff of the Bank, in the discharge of their offices, owe their duty entirely to the Bank and to no other authority. Each member of the Bank shall respect the international character of this duty and shall refrain from all attempts to influence any of them in the discharge of their duties."²¹

Article 36(2) first prohibits interference in the "political affairs" of a member and, second, being influenced by its "political character." It then stipulates that "Only economic considerations shall be relevant" to decision making in the Bank, and that such consideration should be "weighed impartially... to achieve the purpose and functions of the Bank." The purpose of the Bank under Article 1 of the Charter is to foster "economic growth and cooperation" in the region and to contribute to the process of "economic development" of DMCs in the region. The focus of the Bank’s purpose is, therefore, economic, and the Charter clearly seeks to establish a technical and functional financial institution that is, as far as possible, free from ideological and partisan political considerations and influences in its decision-making process. The Charter, therefore, gives primacy to economic considerations in the achievement and carrying out of the Bank’s purpose and functions.

The term "economic considerations," however, has been widely interpreted by the Bank. A narrow and somewhat mistaken definition of "economic considerations" would exclude the Bank from engaging in some of the programming considered most important by its members; for example, programs that focus on the environment, education, or the position of women. While such programming may be viewed as "social," the Bank finances such programs on the basis of a clear consensus that they are based on direct linkages to economic development and that they can be justified on the basis of the economic effects of such noneconomic "social" factors. Therefore, while Article 36 prevents certain types of political activities, it does not prohibit the Bank from taking into account demonstrable and direct economic effects of noneconomic factors as part of the "economic considerations" on which the Bank must base its decisions. The economic effects of such noneconomic factors must, however, be clearly established before the Bank finances programs focusing on such noneconomic factors.

The Bank’s internal processes, in which the Economic and Development Resource Center and the Office of the General Counsel are involved, provide adequate and reasonable assurance that the provisions of Article 36 are not violated and that Bank financing in respect of apparently noneconomic factors is justified on "economic considerations," i.e., the demonstrable and direct economic effects of such non-economic factors. A further safeguard against the Bank basing its decisions on noneconomic and political considerations is provided by Article 14(iii) of the Charter, under which the DMC concerned has the final say over financing of any undertaking in its territory.²²

It is pertinent to mention that governance activities of the type contemplated in this Paper are carried out by the Bank’s sister institutions, especially the World Bank, under charters with almost identical prohibitions on political activities and provisions directing that decision making should be on the basis of economic considerations alone. Accordingly, the Bank will steer clear of overtly political goals, such as parliamentary democracy and human rights (however desirable these may be, for their own sake). That being said, however, it also needs stressing that, in many ways, the Bank’s operations are conducive, albeit indirectly, to the pursuit of these goals (e.g., through wider participation in development activities, raising living standards, expanding access to public goods and services, women in development). Hence, though the Charter provisions explicitly preclude any role for the Bank in the political aspects of governance, efforts to enhance the quality of economic governance in DMCs (i.e., management of resources for development) could well redound to the benefit of the former.

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