Reforming Public Institutions and The World Bank Public Sector Group Poverty Reduction and Economic Management (PREM) Network A World Bank Strategy November 2000 Strengthening Governance Reforming Public Institutions and Strengthening Governance The World Bank 1818 H Street N.W.,Washington, D.C. 20433 U.S.A. Telephone: 202-477-1234 • Facsimile: 202-477-6391 Internet: www.worldbank.org • E-mail: feedback@worldbank.org ISBN 0-8213-4875-2 Reforming Public Institutions and Public Sector Group Poverty Reduction and Economic Management (PREM) Network A World Bank Strategy November 2000 Strengthening Governance Copyright © 2000 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. 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Reforming Public Institutions and Strengthening Governance iii CONTENTS Foreword vii Acknowledgments viii Acronyms and Abbreviations ix Executive Summary xi Part I Reforming Public Institutions and Strengthening Governance: Main Strategy 1 I. Focusing our Agenda: Moving Institutional Development and Capacity Building to Center Stage 7 Institutions and policies interact in complex ways. 7 Institutional and governance concerns touch all sectors. 9 This strategy focuses primarily on core public institutions and their sectoral linkages. 12 A broad view of capacity building must encompass institutional reform. 12 II. Building on Lessons of Experience 15 Our past performance has been uneven but is improving. 15 It is important to maintain realistic expectations. 19 The need for institutional reform challenges our conventional ways of doing business. 19 We will achieve much more if we work closely with our development partners. 20 Our strategy is fourfold. 21 III. Broadening Our Approach: Empowering Clients and Fostering Accountability 22 Public sector reform requires not only internal bureaucratic change—but also “voice” and competition. 22 iv Reforming Public Institutions and Strengthening Governance We are exploring new ways to empower and enable clients. 25 But selectivity is also key . . . and difficult. 27 IV. Analytic Work: Grounding Individual Project and Broader Country Strategies in Institutional Reality 33 Careful diagnostic work can help us focus our assistance. 34 “Upstream” diagnostic work—Public Expenditure Reviews and Institutional and Governance Reviews—can help. 38 New options are also needed for knowledge transfer and capacity building. 40 V. Lending Instruments: Focusing on Long-Term Institution-Building 43 The Bank’s traditional approaches remain useful in certain circumstances. 43 And new approaches to longer-term institution-building look promising. 45 VI. Achieving Our Goals: Staffing, Organization, Incentives, and Partnerships 50 We need to continue to strengthen our staffing. 50 We need to continue to fine-tune our organizational structure. 52 We need to continue to reassess the incentives facing Bank staff. 53 We need to deepen our partnerships. 53 VII. Conclusion and Summary: Our Plan of Action 59 Our strategy to help strengthen public institutions and governance has four broad objectives. 59 And these can be translated into objectives and monitorable indicators of country performance by thematic area. 59 It is difficult to forecast specific levels of lending for public sector reform. 62 But the proactive elements of the strategy are clear. 63 PART II: Regional, DRG, and WBI Strategies I. Africa Region (AFR) 73 II. East Asia and Pacific Region (EAP) 85 III. Europe and Central Asia Region (ECA) 97 IV. Latin America and Caribbean Region (LCR) 109 V. Middle East and North Africa Region (MNA) 121 VI. South Asia Region (SAR) 130 VII. Development Research Group (DRG) 142 VIII. World Bank Institute (WBI) 147 Reforming Public Institutions and Strengthening Governance v Annexes 160 Annex 1.Lending for Public Sector Reform in Fiscal 1997-99 161 Annex 2.Instruments for Institutional and Governance Analysis and Assessment 164 Annex 3.Bank-Fund Collaboration on Public Sector Work 168 Annex 4.Indicators of Governance and Institutional Quality 171 Annex 5.The Links between Governance and Poverty Reduction: The Empirical Evidence 175 Annex 6.An Inventory of the Bank’s Governance and Institutional Reform Programs, Fiscal 1998, Fiscal 1999, and Fiscal 2000 (1st half) 187 Boxes Box 1. Accountable Public Institutions Are Key to Poverty Reduction 2 Box 2. Public Sector Reform and the Comprehensive Development Framework 5 Box 3. Why an Institutional Focus in Public Sector Reform? 8 Box 4. Tax Policy, Tax Administration, and Institutional Reform 10 Box 5. Reforming the “Rules of the Game” for Policymaking Through a Medium-Term Expenditure Framework 11 Box 6. The Links Between Public Governance and Corporate Governance 14 Box 7. How Foreign Aid Affects Public Management in Poor Countries: PIUs, Salary Supplements, and other Distortionary Practices 20 Box 8. Decentralization: A Key Element of The Public Sector Strategy 24 Box 9. An Integrated Approach to Helping Countries Combat Corruption 26 Box 10. Realizing the Potential of E-Government 28 Box 11. The Partnership for Capacity Building in Africa (PACT) 29 Box 12. Linking Governance Concerns and Country Assistance Strategies 30 Box 13. The Importance of Institutional Analysis: The Latvian Revenue Modernization Project 35 Box 14. Adapting “New Public Management” to Developing Country Settings 36 Box 15. Gender and Governance: Gender Budgets 39 Box 16. Pilot Institutional and Governance Reviews: Armenia and Bolivia 41 Box 17. Civil Service Reform and Structural Adjustment Lending 45 Box 18. Bringing Government Closer to the Guinean People 46 Box 19. Staff Skills in Public Sector Work 51 Box 20. Promoting Partnerships Through Governance Trust Funds 57 Box 21. An Emerging Quality Assurance Plan for the Public Sector Board 68 Box 22. Subnational Assistance for Governance and Public Sector Reform in India 134 Box 23. Power Sector Reforms in South Asia 135 Box 24. Transforming Water Management in Pakistan 136 Box 25. Addressing Public Sector Management Reform in Bangladesh 137 Box 26. Examples of Possible Indicators of Public Sector Institutional Performance 173 vi Reforming Public Institutions and Strengthening Governance Figures Figure 1. Governance-Related Lending Has Grown Rapidly 3 Figure 2. Governance-Related Nonlending Activity Has Also Expanded 3 Figure 3. Institutional Capability Improves Economic Growth 9 Figure 4. The Impact of Bank Lending on Institutional Development 16 Figure 5. Mechanisms to Enhance State Capability 23 Figure 6. Results of Diagnostic Surveys 101 Figure 7. Institutional Quality 122 Figure 8. Lending for Public Sector Reform in Fiscal 1997-99 163 Figure 9. Technical Assistance as a Percentage of Lending in Fiscal 1997-99 163 Tables Table 1. Institutional Topics: Their Fit with Broad Functions of Government and with Poverty Objectives 13 Table 2. Examples of Bank Partners in Institution-Building 54 Table 3. Monitorable Progress Indicators for Country Outcomes 60 Table 4. Proactive Initiatives in Support of Strategic Objectives 64 Table 5. Number of Public Sector Components in Fiscal 1997-99, by Region 162 Table 6. Cost of Technical Assistance in Fiscal 1997-99, by Region 163 Table 7. External Polls and Surveys on Governance 174 Table 8. Empirical Studies of Governance and Development: An Annotated Bibliography 179 Table 9. Countries with Programs to Strengthen Governance 188 Reforming Public Institutions and Strengthening Governance vii FOREWORD The critical importance of well-performing public institutions and good governance for development and poverty reduction has come to the forefront in the 1990s. Just as it was increasingly recognized in the 1980s that individual investment projects are less likely to succeed in a distorted policy environment, so it has become obvious in the 1990s that neither good policies nor good investments are likely to emerge and be sustainable in an environment with dysfunctional institutions and poor governance. At the same time, it is also clear that reforming public institutions is a complex and difficult task, both technically and politically. “First-generation” reforms, such as exchange rate unification and trade liberalization, could often be undertaken through the actions of a relatively small number of policymakers and public managers. Institutional reform typically involves fundamental changes in the “rules of the game” for a large number of civil servants and private citizens. Such changes are likely to require long-term high-level commitment, in-depth knowledge, and extensive support and assistance. The World Bank is deeply committed to helping its client countries build well-functioning and accountable governments. As a result, both our lending and nonlending support for core public sector reform have expand- ed rapidly in the past four years. Reforming Public Institutions and Strengthening Governance is part of a broader World Bank effort to delineate sector and thematic strategies. While it is intended primarily as a guide for our own work, we hope that the lessons of experience and the goals and approaches for the future that it lays out will serve the broader development community. Kemal Dervis Vice President Poverty Reduction and Economic Management Network viii Reforming Public Institutions and Strengthening Governance Acknowledgments This strategy paper was prepared by the Public Sector Board of the Poverty Reduction and Economic Manage- ment (PREM) Network, under the direction of Public Sector Director Cheryl Gray. Current or past members of the Board who contributed to the report and were primarily responsible for the individual VPU strategies in Part II include Shanta Devarajan (Development Research Group), Ali Khadr (Middle East and North Africa), Daniel Kaufmann (World Bank Institute), Brian Levy (Africa), Helga Muller and Sanjay Pradhan (Europe and Central Asia), Barbara Nunberg (East Asia and the Pacific), Shekhar Shah (South Asia), and Geoffrey Shepherd (Latin America and the Caribbean). Melissa Thomas and Tripti Thomas had major roles in editing parts of the docu- ment. Anna Hansson was primarily responsible for compiling the data on the public sector portfolio. Nick Man- ning contributed to the annex on analytic tools, and Steve Knack had a major role in updating the annexes on governance indicators and on the links between poverty and governance. Vinaya Swaroop contributed to the annex on Bank-IMF relations. In addition, many useful contributions were received from other Bank staff and external advisors, including Paul Bermingham, Isabelle Bleas, Colin Bruce, Monali Chowdhurie-Aziz, Mamadou Dia, John Heilbrunn, Malcolm Holmes, Arturo Israel, Phil Keefer, Jennie Litvack, Yasuhiko Matsuda, Robert Pic- ciotto, Allen Schick, Miguel Schloss, Graham Scott, Anwar Shah, Rick Stapenhurst, Mike Stevens, Eric Swanson, John Todd, and Ulrich Zachau. We also benefited from extensive comments from members of the Executive Board during discussions with the Committee on Development Effectiveness (CODE) in December 1999 and January 2000 and discussions with the full Board in July 2000, and from comments received from numerous external partners during consultations (most between January and May 2000) in Abidjan, Copenhagen, Harare, London, Maastricht, Manila, New York, Paris, Stockholm, Warsaw, and Washington. We are grateful to the many other people inside and outside the Bank who also provided valuable comments on previous drafts. The strategy and extensive related and supporting material on various aspects of public sector reform and gov- ernance are available through the World Bank’s website at www.worldbank.org/publicsector. Extensive governance- related information is also available through WBI’s website at www.worldbank.org/wbi/governance. Reforming Public Institutions and Strengthening Governance ix ECA Europe and Central Asia Regional Vice Presidency ECSPE Poverty Reduction and Economic Management Sector Unit, ECA EDI Economic Development Institute (now WBI) ERF Economic Research Forum ESSD Environmentally and Socially Sustainable Development Network ESW Economic and Sector Work EU European Union EUROMEDEuro-Mediterranean Partnership FIAS Foreign Investment Advisory Service FPSI Finance, Private Sector and Infrastructure Network GCA Global Coalition for Africa GDP Gross Domestic Product GNP Gross National Product GR Institutional and Governance Review GTZ German Association for Technical Cooperation IBRD International Bank for Reconstruction and Development HD Human Development Network HNP Health Nutrition and Population HIPC Heavily Indebted Poor Country IBTA Institution-Building/Technical Assistance ICITAP International Criminal Investigation Training Assistance Program ICRG International Consulting Resources Group IDA International Development Association IDB Inter-American Development Bank IDF Institutional Development Facility IGR Institutional and Governance Review INFID International NGO Forum on Indonesian Development IFI International Financial Institutions IMF International Monetary Fund INDECOPI Instituto Nacional de Defensa de la Competen- cia y de la Protección de la Propiedad Intelectu- al, Peruvian Competition Agency INTOSAI International Organization of Supreme Audit Institutions IRIS Center for Institutional Reform and the Informal Sector, University of Maryland IRMT International Records Management Trust ACBF Africa Capacity Building Foundation ADB Asian Development Bank AfDB Africa Development Bank AFR Africa Regional Vice-Presidency AMF/ Arab Monetary Fund/Arab Fund for AFSED Social and Economic Development APL/C Adaptable Program Loan/Credit ASA Association for Social Advancement ASEM Asia-Europe Meeting AU Anti-bribery Undertaking BERI Business Environmental Risk Intelligence BRAC Bangladesh Rural Advancement Committee CAPAM Commonwealth Association for Public Management CAS Country Assistance Strategy CCCE Caisse Centrale de Coopération Economique CDF Comprehensive Development Framework CEE Central and Eastern Europe CEM Country Economic Memorandum CFAA Country Financial Accountability Assessment CIDA Canadian International Development Agency CIS Commonwealth of Independent States CLAD Centro Latinoamericano de Administracion para el Desarrollo CMU Country Management Unit CPAR Country Procurement Assessment Report CPI Corruption Perception Index CPIA Country Performance and Institutional Assessment CSR Civil Service Reform DAC Development Assistance Committee DANIDA Danish International Assistance Agency DEC Development Economics Vice-Presidency DECDG Development Data Group DRG Development Research Group DFID Department for International Development, U.K. DL Distance Learning EA5 East Asia 5 (Indonesia, Korea, Malaysia, Philip- pines, Thailand) EAP East Asia and Pacific Regional Vice-Presidency EASPR Poverty Reduction and Economic Management Sector Unit, EAP EBRD European Bank for Reconstruction and Development Acronyms and Abbreviations [...]... reform Programmatic lending instruments—such as sector-wide approaches (SIM/SIP), the Adaptable Program Loan (APL), and the Programmatic SAL or SAC (PSAL/C)— can be useful to encourage a longer-term and more systemic approach to public sector reform APLs for Ghana, Bolivia, Tanzania, and Zambia and PSALs in Latvia, Thailand, Uganda, and Uttar Pradesh are among those that have been approved or are under... proactive measures to enhance the quality and impact of Bank analytic work, partnerships, in-country training initiatives, and lending for institutional reform and governance in the public sector Strategic goals and performance indicators by substantive area are summarized in Table 3 (main text), and the proactive steps we plan to take to address past issues and problems are laid out in Table 4 The strategy. .. reform to date Analysis by OED and QAG, as well as the experience gained during the past decade by the Bank s operational staff, show the extensive breadth and depth of Bank involvement and effort, with both successes and failures as outcomes They also point to several systemic shortcomings of past Bank work in this area: • The Bank has sometimes taken a rather narrow and “technocratic” view of what is... understand institutional systems—through country-specific variants of Institutional and Governance Reviews (IGRs) and Public Expenditure Reviews (PERs) and integrate this knowledge into country strategy formulation A growing number of country strategies (such as those for Albania, Armenia, Azerbaijan, Bangladesh, Bolivia, Bulgaria, Kenya, Mexico, Papua New Guinea, Philippines, and Thailand) are designed around... aim for the Bank to be considered an expert along with other partner organizations in several other areas, including (a) revenue policy and administration, (b) legal and judicial reform, and (c) other accountability Reforming Public Institutions and Strengthening Governance xvii and law enforcement institutions (such as ombudsmen, audit institutions, and parliamentary oversight bodies) For reasons of... Governance and Management in Central and Eastern European Countries SIP Sectoral Investment Program SSR Social and Structural Review TA Technical Assistance TACIS Technical Assistance for Commonwealth of Independent States TAL Technical Assistance Loan TI Transparency International UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNICEF United Nations... Finally, Section VII summarizes our plan of action and specifies objectives and performance indicators to gauge Bank outputs and country outcomes Part II includes strategies and examples of innovative activities undertaken over the past year by each of the Bank s six regional vice-presidencies and by the Development Research Group and the World Bank Institute This strategy also serves as an update... innovative initiatives prepared by each of the Bank s six regional xviii Reforming Public Institutions and Strengthening Governance vice-presidencies and by the Development Research Group (DRG) and the World Bank Institute (WBI) While aggregate lending volumes and in-country Bank activities are determined largely by country demand, the overall strategy and the strategies for individual Regions, DRG, and. .. other sectors, although recent OED and QAG data indicate a marked improvement over the past three years Bank and other donor efforts at technical assistance have been criticized for over a decade, and questions more recently have been raised about the quality and impact of analytic work, in particular Public Expenditure Reviews (PERs) Given the complexity and depth of the challenge, this strategy envisions... Accountability Diagnostics Norwegian Agency for Development Cooperation New Public Management Operations & Maintenance Organization of American States Operational Core Services Network Organization for Economic Co-operation and Development Operations Evaluation Department Oficina Nacional de Etica Publica Operational Policy Office of Professional Ethics Organization for Security and Co-operation in . Ali Khadr (Middle East and North Africa), Daniel Kaufmann (World Bank Institute), Brian Levy (Africa), Helga Muller and Sanjay Pradhan (Europe and Central Asia), Barbara Nunberg (East Asia and. sys- temic approach to public sector reform. APLs for Ghana, Bolivia, Tanzania, and Zambia and PSALs in Latvia, Thailand, Uganda, and Uttar Pradesh are among those that have been approved or are under consideration Maryland IRMT International Records Management Trust ACBF Africa Capacity Building Foundation ADB Asian Development Bank AfDB Africa Development Bank AFR Africa Regional Vice-Presidency AMF/ Arab