GOOD GOVERNANCE

The term "governance" means different things to different people. It is useful, therefore, for the Bank to clarify, at the very outset, the sense in which it understands the word. Among the many definitions of "governance" that exist, the one that appears the most appropriate from the viewpoint of the Bank is "the manner in which power is exercised in the management of a country’s economic and social resources for development."4 On this meaning, the concept of governance is concerned directly with the management of the development process, involving both the public and the private sectors. It encompasses the functioning and capability of the public sector, as well as the rules and institutions that create the framework for the conduct of both public and private business, including accountability for economic and financial performance, and regulatory frameworks relating to companies, corporations, and partnerships.5 In broad terms, then, governance is about the institutional environment in which citizens interact among themselves and with government agencies/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. It has been observed that, while many governments have undertaken broadly similar reform packages, the outcomes have varied significantly across countries. There are several factors underlying these differences, but clearly one is the quality of governance in the countries concerned; in other words, the ability of governments to implement effectively the policies they have chosen. Hence, "getting policies right" may not, by itself, be sufficient for successful development, if standards of governance are poor. It is for this reason that improving governance, or sound development management, is a vital concern for all governments.
Although policy aspects are important for development, the Bank’s concept of good governance focuses essentially on the ingredients for effective management. In other words, 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.
Similarly, the experience so far, especially within the region, does not establish any direct correlation between the political environment, on the one hand, and rapid economic growth and social development, on the other. Successful development has taken place in countries with different political systems. However, the common features that stand out in respect of high-performing economies are stability in broad policy directions, flexibility in responding to market signals, and discipline in sticking with measures necessary for meeting long-term objectives despite short-term difficulties, all hallmarks of good governance.
A basic issue that arises in relation to governance is the proper role of government in economic management. The growing consensus among development specialists in this regard is that, with the limited access of governments to information, markets generally allocate resources more efficiently. In market economies, production and consumption decisions are based essentially on the price mechanism. However, even in such economies, governments are expected to perform certain key functions. These include (i) maintaining macroeconomic stability, (ii) developing infrastructure, (iii) providing public goods, (iv) preventing market failures, and (v) promoting equity.
Without macroeconomic stability, business prospects are uncertain and investment risks are high. Inflation and external imbalances do not provide a healthy environment for rational business decisions. An important dimension of macroeconomic stability is the link with equity. While the adverse effects of inflation are felt economy-wide, it is the lower-income groups that are usually the hardest hit, since they have limited scope for reducing consumption in response to price increases. Thus, macroeconomic instability militates against equity in the distribution of economic welfare, a stated objective of most governments.
By developing infrastructure, governments can create conducive conditions for private investment in commercial activities. However, given the fiscal constraints of most governments, the role of the private sector in infrastructure development is likely to increase. The challenge for governments is to devise a policy and institutional framework that allows wider participation to the private sector in infrastructure development and management, while safeguarding the public interest at the same time.
Public goods are those that are jointly demanded and whose consumption by one individual does not diminish their availability to others. Education and health care are common examples of public goods. In most countries, governments assume responsibility for the provision of public goods, with fiscal resources being channeled in a preferential manner to ensure their supply. This also contributes to improving equity in the economy (although user fees may be levied to promote cost recovery where feasible).
In a market-oriented economy, the government has the obligation to see to it that markets function efficiently and that the playing field is level for all participants. This requires mobility of factors of production, free flow of information regarding prices and technology, and competition among buyers (for outputs) and sellers (for inputs). Market regulation by the government should ensure that the operating rules do not discriminate between individual participants or interest groups. This implies wide publicity for legislation and administrative rules and their fair and transparent application.
A key responsibility of government is ensuring that the benefits of economic growth are equitably distributed across society. Taxation and expenditure measures are prominent instruments for this purpose. While taxes should not be excessive (so as not to discourage production and growth), they should be collected effectively to provide adequate revenue for essential services (and help maintain fiscal balance). The latter consideration also requires that public spending avoid excessive debt-service burdens, and subsidies for low priority activities be phased out. This underscores the close relationship between equity and macroeconomic stability.
Given the role of government as economic development manager, as outlined above, policies that best suit these responsibilities need to be followed. Once those policy choices are made, however, good governance is required to make sure that implementation is effective and consistent. As a development partner, the Bank has a clear and direct interest in the capacity of borrowing governments to fulfill their economic role by implementing the associated policies. More specifically, the success of the Bank’s project investments depends crucially on the efficacy of the institutional framework in DMCs and the consequent capability for purposive implementation.