Governance: Sound Development Management

1 governance : SoundDevelopment ManagementGovernance: Sound Development ManagementAugust 1995 Published by Asian Development Bank, 1999 The Asian Development Bank encourages the use of the materialpresented herein, with appropriate credit given to ADB. Please addressinquiries for copies to the Chief, Office of External Relations, AsianDevelopment Bank, Box 789, 0980 Manila, rights reservedISBN: 971-561-262-8 Publication Stock No.: 090699 ContentsiiiExecutive summaryvIntroduction1 good governance defined3 The elements of good governance7 Accountability8 Participation9 Predictability10 Transparency11 Interlinkages among the elements of governance12 The Bank s concern with governance quality15 Policy context of the Bank s project lending15 Focus on equity and Development performance16 Project quality17 The East Asian experience18 Outlook for the future19 The Bank s approach to governance issues21 The Bank s charter and governance activities21 Need for flexible country-specific approaches24 Promoting the elements of good governance in Bank operations 25 Building governance capacity26 Participatory Development processes33 Legal frameworks38 Information openness42 The Bank s modalities for enhancing governance in

2 DMCs45 Resource implications49 Reporting arrangements51ivAbbreviationsADF-Asian Development FundBIR-Bureau of Internal RevenueCPC-Committee for Planning and CooperationDMC-developing member countryGCI-General Capital IncreaseGDP-gross domestic productIA-Irrigators AssociationIMF-International Monetary FundKESC-Karachi Electricity Supply Corporation LimitedMOF-Ministry of FinanceNGO-nongovernment organizationNIA-National Irrigation AuthorityOECD-Organisation for Economic Co-operationand DevelopmentOGC-Office of the General CounselO&M-operation and maintenancePBPM-Program Budgeting and Project MonitoringPPBF-planning, programming, budgeting, andfinancing processRWSS-rural water supply and sanitationSPO-Strategy and Policy OfficeTA-technical assistanceTFIPQ-Task Force on Improving Project QualityUNDP-United Nations Development ProgrammeVAT-value-added taxv(i)In recent years, there has been increasing concern aboutgovernance issues in the Development debate.

3 In February 1994,the President issued interim staff instructions on , in May 1995, the Board considered a Working Paperon the subject. The present Paper takes into account the viewsexpressed by the Board at that time and sets out the role, approach,and policy of the Bank in relation to governance issues.(ii)Being concerned directly with the Management of thedevelopment process, from the Bank s point of view, governancehas to do with the institutional environment in which citizensinteract among themselves and with government agencies/officials. The capacity of this institutional environment is importantfor Development because it helps determine the impact achievedby the economic policies adopted by the government. Hence,this capacity, and the governance quality it reflects, is a vitalconcern for all governments.

4 (iii) Although policy aspects are important for Development , the Bank sconcept of good governance focuses essentially on the ingredientsfor effective Management . Irrespective of the precise set ofeconomic policies that find favor with a government, goodgovernance is required to ensure that those policies have theirdesired effect. In essence, it concerns norms of behavior that helpensure that governments actually deliver to their citizens whatthey say they will deliver.(iv) Similarly, the experience so far, especially within the region, showsthat successful Development has taken place in countries withdifferent political systems. However, the common features thatstand out in respect of the high-performing economies are stabilityin broad policy directions, flexibility in responding to marketsignals, and discipline in sticking with measures necessary forExecutive summaryvimeeting long-term objectives despite short-term difficulties, allhallmarks of Sound Development Management , , goodgovernance.

5 (v) A basic issue that arises in relation to governance is the properrole of government in economic Management . With governmentshaving limited access to information, there is a growing consensusthat markets generally allocate resources more , even in market economies, governments are expectedto perform certain key functions, namely (a) maintainingmacroeconomic stability, (b) developing infrastructure,(c) providing public goods, (d) preventing market failures, and(e) promoting equity.(vi) Governments decide the policies they adopt to perform thesefunctions. Once those policy choices are made, good governanceis required to make sure that implementation is effective andconsistent. As a Development partner, the Bank has a clear anddirect interest in the capacity of borrowing governments to fulfilltheir economic role by implementing the associated policies.

6 Morespecifically, the success of the Bank s project investments dependscrucially on the efficacy of the institutional framework indeveloping member countries (DMCs) and the consequentcapability for purposive implementation.(vii) A number of multilateral organizations have reflected on theelements of governance and their relation to Development . Insofaras the Bank is concerned, the approach of the World Bank is themost relevant. For the World Bank, the essence of governance issound Development Management , and the key dimensions ofgovernance are public sector Management , accountability, thelegal framework for Development , and information andtransparency.(viii)The Bank, too, regards questions of governance from thestandpoint of their relation to the effectiveness with whichdevelopment assistance is used, the impact of developmentprograms and projects, and the absorptive capacity of borrowingDMCs.

7 However, the Bank s analytical framework for addressinggovernance issues draws a distinction between, on the one hand,viielements of good governance and, on the other, the specific areasof action ( , public sector Management ), in which they couldbe promoted or their existence enhanced.(ix) Accordingly, and building upon the approach of the World Bank,the Bank has identified four basic elements of good Governance: accountability, participation, predictability, and transparency.(x) The Bank s interest in governance issues has intensified, over time,as a result of several factors. These include (a) the growingrecognition of the importance of the policy environment in whichdevelopment takes place, (b) an increasing focus on equity issuesand Development performance, (c) the lessons highlighted by theTask Force on Improving Project Quality, and (d) the experienceof the high-performing economies of the region.

8 (xi) The Bank s approach to governance issues will be guided by theprovisions of its Charter. These explicitly exclude political activitiesand considerations. Hence, the Bank cannot act as an agency forpolitical reform in DMCs. Nevertheless, if on purely economicgrounds, the Bank has considered an action or measure worthsupporting, it has not hesitated to do so even though the actionor measure may have had political implications. The Bank s workon governance will follow this pragmatic approach.(xii) Differences in political history have resulted in a diversity ofpolitical systems and institutional cultures in the Asian and Pacificregion. None of these can reasonably claim to have anycomparative advantage from the point of view of can, accordingly, be many institutional alternatives formanaging the Development process soundly.

9 When applying thecriteria of good governance , therefore, the Bank will take intoaccount the characteristics and situation of individual countries.(xiii) To make the elements of good governance operationally relevant,the Bank needs to translate them into specific areas of action. Tothis end, this Paper indicates some ways in which these elementscan be promoted in the context of Bank operations. In most ofthese areas, the Bank is already contributing to quality governanceand has been doing so for some time. The areas of action includeviiiAccountability (building government capacity) public sector Management public enterprise Management and reform public financial Management civil service reformParticipation (participatory Development processes) participation of beneficiaries and affected groups public sector/private sector interface decentralization of public and service delivery functions(empowerment of local government) cooperation with nongovernment organizations (NGOs)Predictability (legal frameworks) law and Development legal frameworks for private sector developmentTransparency (information openness) disclosure of information.

10 (xiv) The Bank will integrate governance dimensions into its the extent possible, Bank-supported programs and projectswill be designed such that they raise governance quality in thesectors concerned ( , through inclusion of appropriate policymeasures, project components, or technical assistance [TA]). Inaddition, the Bank will provide, on request, advisory TA forspecific governance -oriented policy studies, seminars, andtraining. In all cases, the guiding principle for the Bank will be toact on the basis of DMC requests, rather than to seek loanconditionalities.(xv)The Bank s modalities for enhancing governance in DMCsencompass the full range of its operations. In due course, it islikely that capacity-building activities and assistance for legislativereform will become central pieces in the Bank s efforts to helpimprove governance in DMCs.