Indoor Air Quality for Poor Families: New Evidence from Bangladesh

Indoor air pollution (IAP) from cooking and heating is estimated to kill a million children annually in developing countries. To promote a better understanding of IAP, the authors investigate the determinants of IAP in Bangladesh using the latest air monitoring technology and a national household survey. The study concludes that IAP is dangerously high for many poor families in Bangladesh. Concentrations of respirable airborne particulates(PM10) 300 ug/m3 or greater are common in the sample, implying widespread exposure to a serious health hazard. Poor households in Bangladesh depend heavily on wood, dung, and other biomass fuels. The econometric results indicate that fuel choice significantly affects indoor pollution levels: Natural gas and kerosene are significantly cleaner than biomass fuels. However, household-specific factors apparently matter more than fuel choice in determining PM10 concentrations. In some biomass-burning households, concentrations are scarcely higher than in households that use natural gas. The results suggest that cross-household variation is strongly affected by structural arrangements - cooking locations, construction materials, and ventilation practices. The authors' analysis also suggests that poor families may not have to wait for clean fuels or clean stoves to enjoy significantly cleaner air. Within their sample household population, some arrangements are already producing relatively clean conditions, even when "dirty" biomass fuels are used. Since these arrangements are already within the means of poor families, the scope for cost-effective improvements may be larger than is commonly believed. This paper - a product of the Infrastructure and Environment Team, Development Research Group - is part of a larger effort in the group to identify appropriate policies for the improvement of environmental quality.

The Development in Practice series publishes reviews of the World Bank's activities in different regions and sectors. It lays particular emphasis on the progress that is being made and on the policies and practices that hold the most promise of success in the effort to reduce poverty irG the developing world.
The findings, interpretations, and conclusions expressed in this study are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Preface Trwo years ago the World Bank published Governance andDevelopnient (World Bank 1992b), its first report expressly on the topic of governance. In that report, the Bank explored the meaning of govcinance and why it is important for development. Governance was defined as the manner in which power is exercised in the management of a country's economic and social resources for developnmet.t-

Library of Congress Cataloging-in-Publlcarion Data
The World Bank's interest in governance derives from its concern for the sustainability of the programs and projects it helps finance. If sustainable development is to occur, the 1992 govemance report concluded, a predictable and transparent framework of rules and institutions for the conduct of private and public business must exist. Good governance is epitomized by predictable; open, and enlightened policymaking (that is, transparent processes); a bureaucracy imbued with a professional ethos; an executive arm of government accountable for its actions, and a strong civil society participating in public affairs; and all behaving under the rule of law.
In analyzing governance, the World Bank draws a clear distinction between the concept's political and economic dimensions. The Bank's mandate is the promotion of sustainable economic and social development. The Bank's Articles of Agreement explicitly prohibit the institution from interfering in a country's internal political affairs and require it to take only economic considerations into account in its decisions. Thus, the Bank's call for good governance and its concern with accountability, transparency, and the rule of law have to do exclusively with the contribution they make to social and economic development and to the Bank's fundamental objective of sustainable poverty reduction in the developing world.
The purpose of this report is to summarize the Bank's activity in the area of governance in the past two years. The record shows that the Bank's work on viii GOVERNANCE governance has greatly expanded, albeit with different points of emphasis, in all regions of the developing world and in the countries that are in transition from 'socialist to market economies.
Following the pattern established, by the 1992 report, the current report describes developments under four sub-headings of governance: (i) public sector management; (ii) accountability; (iii) legal framework for development; and (iv) transparency and information. Despite their inevitable overlap, these headings provide a template against which the Bank's governance work can be assessed.
Of the four, public sector management (PSM) is the most readily identified dimension of the Bank's governance work. The language of PSM is predominantly, technical: changing the organizational structure of a sector, agency to reflect new objectives. and to retrain staff; making budgets work better through better integration of capital and recurrent components; sharpening civil service incentives through new pay and grading structures. or placing public enterprise managers under performance contracts. Behind the emphasis on PSM as a key dimension of governance is the"-growing conviction that an efficient government is a sine qua non for sustainable economic growth. The other three dimensions of governance underpin PSM. Collectively; all four profoundly affect the performance of the public sector by shaping the environment in which it exists. Accountability and transparency are desirable qualities in the private sector and make government agencies responsive; and the legal system supplies a framework of rules for the public and private sectors. Institutional development in both the. public and private' sectors occurs when the various dimensions of governance reinforce one another. Institutional decay and loss of capacity ensue when the governance conditions in a country are adverse.
One result of the World Bank's work on governance has been innovation: in the types of projects undertaken; in fresh ways of preparing projects; and in the development of new topics for economic and sector work and for research; Another result, not susceptible to measurement but nevertheless important, is the way governance concerns have influenced 'the regular economic and project work of the Bank. In the process, the complementarity of the public and the private sectors and the importance of public sector management have been underscored. In turn, 'the Bank itself has been affected by the governance agenda, and this report looks at how Banlc processes are changing, how governance considerations are increasingly being taken into account, and where more could be done.
As with Governance and Development, this report has been adapted from a World Bank board document, discussed and endorsed by the Bank's Executive Directors on December 16, 1993. In the interest of providing greater Acknowledgments This report, which hias been prepared by the Operations Policy *Department of the World Bank, draws on material provided by the public .~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 Ir sector management staff in the Bank's technicd,1 ep-artments and on contributidons by the World Bank-Legal Department. Tfhe principal authorswr Mikec Stevens. Roberto: Gonzalez Cofino, Ernesto Betancourt, and Shimo .Gnanaselvam, who drew extensively.on contributions from Ladipo Adamolekun, Barbara Nunberg, Geoffrey L am-b, Richard Moore, Claude Satern, andl Hans-Juergen Gruss. The report was produced under the general guidance, of Jim Adams. ' ment (degree of democratization); The temn usually descnbes condiaccountability of pwlitical and official tions in a country as a whole. Howelements of govprnrnent (media freeever, it may be'applied in a more 'dom, transpareni decisionmaking, specific sense, such as corporate accountability mechanisms), compegovemance-the framework of laws, tence of govemments to forrnulate regulatory institutions, and reporting policies and deliver services; and rerequirements that condition the way spect for human rights and rule of the corporate sector is governed. '

law (individual and group rights and
The African Development Bank secui ity, framework for economic and has introduced the notions of macro-, social:activity, and participation). meso-, and microgovemance to conditions atvarious levels of govemrnment, a. World Bal*1992b.5p. 52. suggesting that authoritarian regimes b. Afdcan Development Bank 1993.
E X E C U T I V E SUMMARY x v

BOX 2 MEASURING GOVERNANCE
In a parallel exercise, the World

IN WORLD BANK OPERATiONS
Bank's Latin Amrerica and Caribbean Region recently reviewed its lending Precisely how much governance work program' according to the program's is being carried out in the World Bank irmpact on governance, using a definiis difficult to estimate numerically. This tion that emphasized public sector is because govemance is a broad term management (PsM) improvement. The that straddles the functional classifireview concluded that some 90 percations the Bank uses to classify its cent of the World Bank's current or lending operations. One dimension, pending operations in the region are. public sector management, can be expected to have an impact on goverpartly measured. Others, such as acnance, half of them a major one. countability and transparency, defy The volume 'of PSM work can be quantification. In short, there are govpartially quantified because it is one emance components in all projects. of the functional categories used to In an attempt to quantify these-comanalyze the lending program in the ponents, this report aggregated data Bank. In fiscal 1993, total lending clascovering 455 projects across three sified as PSM was US$609 million. regions during the 1991 to 1993 fiscal However, this figure does not include perod. This provided examples of the many projects where PSM is not projects in which govemance was a the primary purpose of the loan but a major component. These data manisubsidiary activity, for example, in a fest the extent to which govemance sector project. Nor does the amount topics pervade World Bank lending include technical assistance. operations.
Proportion Public sector management A substantial part of the govemance work in which the World Bank currently engages includes traditional public sector management (PSM) categories such as civil service reform, public financial management, and public enterprise x v I GOVERNANCE * reform. Experience in all regions confirms that PSM is a key issue of development effectiveness. Renewed emphasis on PSM has been influenced by changing perceptions of the role of the-state. The new model requires a smaller state equipped with a professional, accountable bureaucracy that can provide an "enabling environment" for private sector-led growth, to discharge effectively.core functions such as economic management, and to pursue sustained poverty reduction. With respect to civil service reform, work has focused not only on retrenchment and cost containment but also on performance improvement and human resource management.
In public financial management, there is a trend toward integrated finan-cial management reforms rather than isolated improvements to budgeting and. : public investment programs. The World Bank provides extensive advice to governments on the allocation of budgetary expenditures, within and amongsectors, through public expenditure reviews (PERS), increasingly carried out on a joint basis. Public enterprise reform has been a key feature in virtually all countries undergoing structural adjustment reforms as govemments have sought E to downsize and seek, better performance from inefficient parastatal sectors through divestiture, privatization, and management reform. In so-called transition countries-that is, those making the transformation from socialized to free-market economies-privatization has been a central thrust of the Bank's overall assistance. Reflecting the complexity of the task, the vested interests at stake, and the uneven commitnent of govemments to the task, the success with which public enterprise sectors have been reformed varies greatly among countries and regions.

Accountability
The World Bank has also made an effort in the last two years to help its borrowers, in a variety of ways, to improve the accountability of their public sectors. Decentralization of government as a means to improve accountability has been a major focus of lending and ESW. Financial accountability has been strengthened through lending operations focused on improving accounting and auditing practices and promoting compliance wit.i financial management standards. Financial accountability assessments, a new form of ESw, are beginning to be undertaken. Microlevel accountability has been promoted by encouraging beneficiary participation in projects and, in scme cases, competition in service delivery.

Transparency and information
Support for greater transparency and information has been closely linked to the Bank's work on accountability. Improvements in financial management and introduction,of transparent budgeting systems have been a feature of a number of lending operations. Country procurement assessment. reviews by Bank staff and the policy dialogue between Bank staff and governments have been used to raise the issue of public procurement systems with borrowing govemments, and in many countries the Bank is assisting reform. Training programs (provided by the Bank's Economic Development Institute) for developing-country journalists have attempted to raise public awareness and improve public debate on economic reforn. Legal framework Support for the legal firamework for development has taken the form of Bank advice on new laws to establish a framework for economic activity in transition countries. For example, laws on property rights, companies (bankruptcy. laws), banking, competition, foreign investment, and the establishment of regulatory bodies. In addition, the Bank has been providing assistance to a growing number of countries for legal training and judicial infrastructure. Several research programs on a variety of legal issues have supported the Bank's assistance in-this area.

Policy dialogue
Governance issues have featured prominently in the Bank's policy dialogue with many countries. In its role as chairman of the Consultative Group (Cc) meetings between donor agencies and governments, the Bank has at times communicated to borrowing countries the views of donors on issues relevant to the political dimensions of governance that fall outside the Bank's mandate. In such circumstances the role of the chairman of a meeting of aid donors and recipients is to facilitate a constructive exchange on matters that may affect aid commitments and thus the financing of a government's aid program. In other settings, high-level meetings between Bank senior management and government policy makers, Bank mission work with country coun-* terparts, the day-to-day communication between the Bank's resident mission staff and govemment officials, and special workshops have.all been vehicles. for an expanding dialogue on governance issues.

Participatory approaches
A major effort is under way within the Bank to explore and mainstream participatory approaches to the design and implementation of Bank-financed projects and the preparation of economic reports on countries. Case studies of best practice are being analyzed, workshops organized, and a handbook pre-xviii GOVERNANCE pared. This is likely to have a significant impact on the way projects are prepared, and it has the potential to greatly improve country ownership of the projects the Bank finances and, thus, relevance and sustainability.

Military expenditures
The World Bank has confronted the issue of military expenditures in several countries where such spending is crowding out budget allocations for social and other development-oriented programs. In some_ countries, the Bank has responded to the govemment's request to develop options for bringing military expenditures more into balance with other spending priorities. To assist in the conversion of defense industries, the Bank has supported macroeconomic and sector policy reforms for providing an environment in which the restructuring of market-based enterprise may take place. To help countries in the aftermath of civil war, for example, the Bank has studied the comparative experience of other countries in demobilizing and reintegrating their economies.

Human rights
The Bank's contribution to human rights is embodied in its strategy on poverty reduction through economywide and sectoral policies that encourage rural development and urban employment and through the provision of basic services to the poor. These efforts are augmented by targeted transfer programs and social safety nets. The share of Bank lending to .human resources development is strongly rising, and a greater proportion of resources is being allocated to primary services or targeted to the poor and other marginalized groups. Accompanying this has been. a sharp increase in country-specific analytical work through country poverty assessments and other ESW.
Internal procedures Improvements in the World Bank's internal procedures following the recommendations of the Task Force on Portfolio Management ("Wapenhans Report," World Bank 1992a) will raise the profile of governance issues. For instance, the country assistance strategy (CAS) papers will bring relevant governance issues to the Bank's Executive Board in the context of country strategy discussions; country portfolio perfornance reviews will highlight systemic problems of. project implementation; and the new system of operational policies and procedures will provide best-practice advice to Barik staff on many topics where governance is a factor.

Institutions
The past two years of work on governance underscore the importance of institutions in the development process. In the coming years, the Bank's ESW and research efforts should focus on how to assist countries in building strong institutions and should explore further the relationship between institutional development. PSM, and the other dimensions of governance. There is a need for more determined efforts to foster local ownership of reform programs and to direct support to the institutions of civil society. Within the framework of the World Bank Articlcs of Agreement there is likely to be continued scope fcc; substantial govemance work in future years.

G0VERNANCE CAPACiTY AND
sign arid implement appropriate adjust-STRUCTURALADJUSTMENT ment policies, and sustain the course of economic reform. A research program is currently under Based on the analytical framework way in the Private Sector Development of the conceptual paper that has been Department of the World Bank to in-prepared,a. ten case studies (Bolivia, vestigate the relationship between Brazil, Egypt, Ghana, Malaysia, governance capacity and successful Mexico, Pakistan, Tanzania, Turkey, economic reform in developing counand Zambia) will be carried out.b The tries. Governance, in this instance, is aim is to analyze and contrast the exassessed in terms of thle capacity of periences of successful,;or attempted, the state to avoid capture by promi-reform in these countdes in relation to nent economic interests and to formutheirgovemance capacity and to study late and iimplement policy indepen-ways in which governments have tried dently in the public interest.
to increase this capacity. The findings Structural adjustment imposes of the research program will serve to high costs on diverse segments of educate World Bank staff as well as society. Experience has shown that inform future policy decisions. states are chronically weak in withstanding pressure from prominent economic interests. The research program a. Frischtak 1993. explores the conditions under which b. All the case studies, except one, will be written developing ountry govrnments ca by local researchers. Work has begun on seven of developing country governments can the ten studies. The final versions of the papers deploy enough governance capacity will be presented in a conference in the Bank in to overcome political resistance, de-. June 1994.

N E
The World Bank's Experience with Governance, 1991-93

Public Sector Management
Public sector management (PSM) is the most visible of the four dimensions of governance.' PSM has to do with the capacity of governments to make and implement public policy, the effectiveness of public programs, and the strength of public institutions. The subject matter of PSM is the means to achieve these-the civil service, the government budget, the public investment program, accounting, auditing, and other financial management systems, strategic planning and program evaluation, aid coordination, economic management agencies, the cabinet system, and other parts of the machinerv of gov-. emnment that are essential to a well-functioning public sector. PSM is also concerned with the relationship between central government, agencies, and public enterprises, on the one hand, and between central and subordinate tiers of government on the other. Over the years, the World Bank's approach to PSM has grown beyond project-linked institutional strengthening and attempts to improve the workings of specific parastatal ag,encies. This approach generally worked when conditions in the public sector were less strained and govemments were still expanding the coverage of their progr-ams. However, the limitations of restricting attention to individual agencies became increasingly apparent as the structural adjustment agenda in many countries lengthened. As systemic prob-I~~~~~~~~~~~~~ lems became more evident, the Bank began to expand its approach to PSM with broad-based sector adj:istment loans; with support for improved financial managel.ment; and with civil service reforms focused initially on cost containment and retrenchment. In response to the deteriorating condition of the parastatal sector 1 the Bank began to encourage the divestiture anid privatization of puolic enterprises. At the same time, it became evident that dispersed and disconnected reform efforts were not adequate to cope with the institutional modernization demands that emerged from the structural adjustment process, both in scope of work and in terms of the effort required.

Ci'il service reform
In the past two years, the World Bank's best-practice wvock has evolved further. In civil service reform, the Bank has tried to move beyoiid cost contain-' ment and retrenchment and to deal with issues of improved performance and more effective management of human resources. Thus, current programs contain measures to strengthen personnel management.in government and civil service ministries, install human resources management information systems, and in some cases, revise civil service codes. -However, although civil service reform programns are being implemented in many countries (thirty with Bank assistance), most countries have yet to face up to the magnitude of change needed within the government sector to sustain efficient, market-led economies.2 Moving from a highly interventionist paradigm of government to one in which the role of the public sector is to c create ani enablinig environment for the private ,ector, to regulate where necessary, and to ensure efficient delivery of key public services requires major changes (box 1.1). In addition to decentralization, these changes affect staffing levels and orientation, departmental functions, and the machinery of government for policy coordination. They may also entail a sharper distinction between the core functions of government and those that can be contracted out or otherwise left to the private sector. In this way, governance is strengthened by shifting the boundary between the public and private sectors, thereby enlarging the latter, with the government's role changing from direct provision to regulation. Many civil service reform programs provide forfunctional reviews, but contrary to. what the term suggests, these have been concerned mainly with adjusting staffing levels to existing, not redefined, functions. How to manage the transition from an overstaffed, underskilled, and poorly motivated civil service to a smaller, realistically paid, and professional one in a way that does not provoke resistance to change is not yet adequately understood (box 1.2). In many.countries, bureaucratic attitudes are part of the problem and require alteration. In others, the social consequences of massive layoffs are understandably feared.

BOX 1.1 PRIVATE SECTOR
policy instability are the greatest con-ASSESSMENTS straints to business. High taxes and interest rates are also a problem. The World Bank has been surveying Access to finance is not a major conprivate enterprises in borrowing coun-straint overall, although the surveystries to assess the institutional and suggestthatithasaffectedsmall firms policy framework .hat governs private more than larger ones. sector activity. Private SectorAssess--A t g constraints ments (PSA) have been carried out in .~~~~~~~Registration processes were found to. latory weaknesses; and identify ar-be long and costly. eas where institutional reforms will improve the business environment.
Failure of public infrastructure is a The findings are valuable for devel-large problem. Infrastructure probopinganinstitutional and policyframe-lems tend to be sector specific, alwork that supports private sector-led though larger firms in any sector are growth.
better able to bear the costs of infra-The results of nine recently com-structure failure than are smaller pleted surveys indicated the follow-firms. ing: ; * Government arbitrariness and the I in countries facing serious macrolack of predictability in official policies economic problems, inflation and discourage long-term investment.
Finally,. it has become increasingly clear that the loss of capacity in many governments and their continued unsatisfactory performance are due to governance factors. This means that reform programs based on technical measures alone will fail.

Financial management
The trend in this area has been toward integrated financial management sys-. tems rather than isolated reform efforts in public investment,: budgeting, accounting, auditing, and information systems. Best practice in public financial management is well understood in technical terms. The challenge is to adapt it Lo country circumstances, to provide adequate amounts of training, and to ensure that leadership in both the executive and the legislature is committed to improved financial management in the public sector. In some regions the requirement. is-system modernization. In others, existing systems are fundamentally sound, but capacit has been eroded.

State enterprise sector
In virtually all countries undergoing structural adjustment reforms with the assistance of the World Bank, the reform of the state enterprise sector has Assess the extent to which tradi-tional values influence attitudes to-The Government of Zambia recently ward the civil service. embarked on a major civil service reform (csR), a complex process that Thesothersurvey assessedocivilesermust take many factors into consid-vants themselves. Its objectives were eration, such as the attitudes that civil to servants bring to their work.and the * Understand how ofticials viewed * views the general public has. of civil their work service efficiency.
. . * Identify behavior patterns associ-In Zambia, the govemment decided ated with superior performance and to conduct attitude surveys prior to explain them. developing its civil service reform pro-* Identify better-performing units gram.. The data from the surveys * A.ssess the influence of traditional would be used to formulate the CSR values on bureaucratic behavior. strategy so that constraints to civil --service efficiency and responsiveness This is the first time the World Bank could be identified and addressed has financed work of this nature. The Two surveys were conducted with survey has provided valuable inputs assistance from the World Bank's In-for program design and is an example stitutional Development Fund (IDF). of the innovative use of IOF money for One questioned the attitudes of cli-upstream institutional work. In addients toward the civil service. Its obtion, this project also supported ca---jectives were to: . pacity building in Zambia's National Institute of Public Administration * Assess client satisfaction with ser-(NIPA), which carried out the surveY. vice delivery NIPA can now design and carry out * Determine client needs other surveys and act as the moni-* Find out about client willingness to toring and evaluation unit of the CSR cooperate with the bureaucracy . program in Zambia.
been an important component. The Bank has. devoted much attention to both reforming individual enterprises under public ownership and,supporting systemic reforms. The latter include performance contracts; performance evaluation systems; changes in the composition and role of boards of directors; changes in the selection, remuneration, and incentives of managers; improvements in pricing and labor policies; and removal of the so-called soft budget .constraint by ending easy access. to. subsidies and government-g,uaranteed loans, among other things. These efforts to corporatize and' reform state firms continue in all regions and in the former Soviet Union.
In the mid-1980s the Bank added an emphasis on privatization and divestiture to promote competition and efficiency and on the liquidation of nonviable firms to ease the crushing budget deficit and the crowding-out of the private sector. Experience has greatly varied among countries and regions, ranging from highly successful public enterprise refornm programs in Chile, Malaysia, and Mexico to disappointing results in most of Africa. Public enterprise reformn has also been an important part of the Bank's Psm research program. For example, a major research project on the lessons of experience with privatization in middle-income and industrialized Countries was completed last year by the World Bank Country Economics Department and . f demonstrated the gains from privatization(Galal and others forthcoming). Follow-up work on low-income countries in Asia and Africa is under way. In additon a major research study is proceeding using the experience of twelve countries to articulate a taxonomy of reform strategies for improving public enterprise performance compatible with countries' differing economic, institutional, and political conditions. Finally, important work has been done on the governance foundations for utility regulation (box 1.3).
As with other aspects of governance, Bank work by regions differs depending, on the-state of development of public administration and the absorptive capacity of the member countries. * In the Latin America and Caribbean.Region, reforms are driven mostly by the desire of governments to modernize public sector management. 3 In mnany countries, the work of the Bank has moved fromn partial to comprehensive reform within a medium-term frarnework, using an array of Bank instruments:' In a growing number of countries in the region, an integrated approach to financial management reform is being adopted, comprising changes in budget. laws,. the modernization of accounting and auditing systems, computerized finaxcial information systems, the introduction of corporate planning tech-'. niques, and revenue administration reform. Examples range from Argentina (box 1.4) and Ecuador to Guyana, Honduras, and Jamaica. Comparable efforts are being made to modernize civil services, and the Bank has been assisting . :s the judiciary independent, and Where utility services are provided by do other conflict-resolution mecha-. private companies, regulation hastwo nisms exist? goals: to encourage investment and.Arthecosiuonlfars to support efficiency and equity in the thAt imihepoer ernments provision of the service. These two to reform the law? goals can (ften be contrasting. A research program, undertaken by the * What is the political structure in the World Banis Policy Research Depart-country, and are there. frequent ment, comparing the regulation of pri-changes of .government? vate telecommunications utilities in a A t i i --. " ~~~~~~~~~Are.there Intermediary agencies number of countries" has, produced sugner o coutnes hasprodced that-are capable -of furctioning indesome interesting results on how the aen capabl of furctining and cdivergence in goals has been resolved. pendenfy of political influence and.
The bthat could be involved in the regula- The basic finding is that the-success t of private, utilities depends on achiev-tory system? ing the best fit between the regula-* Is administrative capacity in the butory system and otherinstitutions (leg-reaucracy and the judiciary sufficient islative, executive, and judicial) in the to implement complex regulatory syscountry. .

tems?
A particularly useful output from the R h research program has been a check-ceseatorya reorm depends onc with divestiture of public enterprises in those Latin American countries having a good record.
U For South Asia, Bank-supported programs aimed at administrative and civil service reform have been more limited, notwithstanding substantial ESW -b-i the Bank and a regular discussion of-PSm issues in the dialogue with governments. This reflects partly the hitherto weak commitment of govenments and partly their ambivalence toward seeking technical assistance ac-7 BOX 1.4 PUBLIC SECTOR reduction in federal employment, mn-

REFORM IN ARGENTINA
isterial reorganic:Aiion, wage decompression, and strengthening ol admin-In 1989 the Government of Argentina Istrative capacities. The enactment of instituted one of the mriost comprehen-new legislation impro'ied accountabilsive public sector reform programs ity and transparency in public finanever undertaken: complete restructur-cial management. Tax policy reform ing of the state. Administrative re-and restructuring of the Central Bank forms have since reduced the size were also undetaken. In addition, and scope of government and im-managemeili infkrmation systems for proved control over expenditures. In-customs, the civil service, and bud-creased transparency in revenue get administration were developed. sharing with the provinces was achieved, and selected expenditures * Public Enterprise Reform-Adjustwere decentralized. A mrnassive pmoment Loan and Public Enterprise Regram of privatization and asset sales forr:r Exccution Loan. Privatization occurred.. As of December 1992 this and restructuring of public onterprisprogram had raised US$5.3 billion in es (PEs) in the telecommunications, cash' and reduced public-debt by railways, and hydrocarbons sectors, US$9.4 billion. Reforms in tax admin-among others, were supported under istration increased federal revenues these two operations. In addition, the from 17.6 percent of GDP in 1989 to World Bank financed capacity-build-25 percent of GDP in 1992.
. ing in the government to plan, ex- The results of the reform program ecute, and monitor public enterprise have been striking.. From a state of efom. A more recent'loan will supinsolvency in 1989, Argentina's pub-port retorm of PES in the defense seclic finances have stabilized, and the ton as well as improve the environeconomy is now in its third year of ment for private sector activity. strong expansion.
The World Bank has supported ' Second Tax Administration Loan.
Argentina's efforts through a number This projects objective is to strengthen of lending operations. . ; furtherthe tax system. It supports simplification of the legal framework * Public Sector Reform Adjustment governing tax administration, de-Loan and Public SectorReform Tech-centralization of tax administration nical Assistance Loan. These two systems, improvements in service complementaryoperationssupported quality, and increased efficiency in a wide range of changes. Adminis-collection and taxpayer auditing. trative reforms included a 20 percent cording to the Bank's loan terms. This situation now appears to be changing, and Bank assistance in administrative reform features prominently in the fiscal 1994-95 program. For example, work will be undertaken in Sri Lanka on administrative reform; civil service reform is being discussed with the 8 . .

BOX 1.5 THE IMPORTANCE
growth with social equity as well.

FROM THE EAST ASIAN
this economic success, one of which

MIRACLE ECONOMIES
is the existence-of strong institutional frameworks in all eight economies.
0 From 1965 to 1990 East Asia sus-Some specific aspects of the institutained a rate of economic growth onl framework that enabled rapid economigrowth growth were emphasized in a recently that. was greater than that of -any got eeepaie narcnt thatwasgreaer hanthatof*any completed major research study by other region in the world. Much of this growth has been concentrated t .. among just eight economies-Hong * Competent, honest, and realistically Kong, Indonesia, Japan, the Repub-paid bureaucracies. Explicit mecha-' lic of Korea, Malaysia, Singapore, nisms were adopted to attract highly Taiwan (China), and Thailand.
qualified individuals into the civil Theseso-callednewlyindLs,trialized service. These included merit-based econoMies (NIES) have managed to rectuitment and pmmotion, incentivecombine high levels of economic based compensation, and clearly de-Government of Nepal; and Bangladesh has requested assistance for training public servants andl improving civil service management.
* In East Asia and the Pacific the Bank's work on pubiic sector management reform has varied considerably, according to the type of country involved.: Most governments in higher-performing economies do not require assistance from the Bank. Their budget systems operate satisfactorily; civil services are skilled and professional (box 1.5); and public enterprise sectors; in the maihn, perform satisfactorily. Bank PSM work has therefore tended to be.concentrated in countries such as Indonesia, which, while performing well economically,' still require assistance in government financial management and civil service reform. In countries such as the Philippines and Papua New Guinea, the' dialogue on PSM reform has been more intense, but results have been elusive.
In the smaller transition countries,. there is growing Bank involvement in financial management and civil service reform, and the Bank has been assisting China in decentralizing public administration.The Bank may assist with civil service reform and aspects of central government reorganization as well.
U Bank assistance to Africa is dominated by the collapse of public sector capacity in many countries, brought. about by a combination of state overextension, delayed adjustment to changed external economic circumstances, nataral events-, and poor governance.'The emphasis is. thus on rebuilding capacity while addressing the s stemic failures that have contributed to a downward spiral of public sector. performance. This task has made Sub-Saharan Africa * both one of the regions wher the Bank is most intensively epgaged in Psm mlending and mlmnigeo n exaple lendin,Esw, ad research, and one.where it is being innovative (forexapl by examining indigenous management systems). Civil service reforms are beinc supported in close to half the countries in the region, with a clear progression of approaches, from the first pay and retrenchment refosms of the mid-1980se to the current ,governance approach being tested.-The Gambia (box-1.6) and radical grovernment restructuring in Uganda. State enterprise divestiramshav longbeena afeatureofBankslending,thouhahtheimp emen-atue pro,in Yvlbe InEuoein tation record in many countries has been disappointing. In a growing number of.
countries, the Bank is helping rebuild govement accountingiand auditing. capacity.
In Europe and Central Asia, the primary emph as bee definingthe role of the state in the economy. The main thr'ust of Bank work has been supporting prvtzto n rvt ector development to help countries move away from the command system and to create the institutional basis for -functioning market economies. More broadly, however, the Bank is supporting the development of social safety nets, the clarification of property rights, BOX 1.6 THE GOVERNANCE tons. The institutional assessment

APPROACH TO CIVIL SERVICE
would focus on key governance is-REFORM sues such as-accountability, openness and transparency, and rule of The World Bank's Africa region relaw and would yield a patrimonial procently published 'A Govemance Aprile of the country. The type of civil proach to Civil Service Reform in Sub-service reform strategy that is adopted .Saharan Africa T (Dia 1993), in which will be linked to the patrimonial proa new approach to civil service re-. file.Thus,acomprehensive approach, form was advocated for the region.
an enclave approach, or a hybdd ap-The paper reviewed prior Bank. expe--proacwould be adorted, depending rience with civil service reform and on whether the patrimonial profile of drew attentiontothe ratherdisappointthe country was high, low, or avering results of these operations. The age, respectively. Different lending outcomes were traced to the patrimoinstruments would be used in each nial character of the state, which, in instance. the context of civil service, referred The concepts developed in the pato, among others, such features as per are in the process of being made recruitment based on subjective crioperational. The World Banksoon will teria; remuneration levels unlinked to. carry. out an institutional environment . productivity; and loyalty of employees assessment in The Gambia. The reto individuals rather than the state. . sults of the assessment will be used The new .approach advocates ciil to develop a civil service reform stratservice reform that begins with an egy that is appropriate to the Gambian assessment of the institutional envi-context. ronment in which the civil service functhe establishment of market-based financial systems, and other institutional elements necessary to separsite civil society from the state while putting the business, of govemment on a sounder footing. The Bank has made particular use of institution-building loans to help governments develop new capacity to implement reforms-former Seviet republics such as Arnenia, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Ukraine,.and Uzbekistan have benefited. These loans have included capacity building for macroeconomic management, --. aid coordination, budgeting and treasury management, tax and customs admin--.istration,. statistics development, and public enterprise divestiture. However, while these loans are undoubtedly addressing core functions of governments in transition to a market economy, unsettled political conditions and bureaucratic resistance to change are inhibiting their full implementation.
In Albania work is under way to build core economic agencies, and ESW has focused on fiscal aspects of decentralization. In Poland a Bank study started an effort to reform public administration, which may lead to a public sector loan, THE WORLD BANK'S EKPERIENCE WITH GOVERNANCE 1 and a study of decentralization has also been undertaken. !n the Baltics, Russia, and Romania, public expendliture reviews are under way or in the planning stage. At the samectm'; in Russi.a, the Bank's wo-rkat theoblastlevel is expanding. U In the Mfiddle East and North Africa, the Bank's efforts in public sector managrment have concentrated on state enterprise reform, including pnivatization, deregulation, and bette'r finiancial discipline for enterprises. improving economic management and dec:nrtralizing have also received at-9 .g tention. Public -administration and civil servict reform are now beginning to come to the fore in several countries as governme'nts respond to the needs of modernization.
Lending in Algeria, Egypt, Moroccc', Tunisia, and Yemen has dealt with issues of improved economic management. In Morocco there has been support for decentralization through the Municipal Finance Projecct. In-Lebanon the Bank will assist the government in restoring essential administrative capacity, and with the unification of North and South Yemcn the Bank will provide support for the reform of the newly unified public administration. In Egypt, civil service-reform, a huge and long-term task, is likely to focus initiallyo on economic agencies, while in other countries, such as Algeria and Tunisia, restructuring of k-ey sectoral ministries is under way or envisioned, with Bank support. In the special case of the Occupied Territories, the Bank is assisting in the establishment of a Palestinian entity to manage the emergency development program and will provide support for the institutions taking responsibility for public management functions under the evolving agreements on self government.

Emerging lessons.
There is a need for further work within the Bank, drawing lessons from existing civil service reformprogramis to develop new approaches, particularly for countries where the miismatch between numbers on the payroll anid the ability to pay is so large that the transition to a smaller, better paid and motivated civil service seems intractable. One example of a. new initiative has been taken by the Bank's Africa Region, which has adoped a new governance approach to civil service reform. Questions abound,for example, whether reform programs should *be more radical in their approach to retren:hinent, how commitment and ownership can be built and change managed, how performance incentives can be sharpened, and whether traditional bureaucratic models are appropriate in the *cultural and social settings of some countries.. Across regions, progress with divestiture and public enterprise-reform has *been uneven'. Progress in Latin America and the Caribbean has been strong whereas performiance in Sub-Saharan Africa has been disappointing. Countries.
with weat governmental institutional capacity have found it-especially difficult to resolve public enterprise sector problems either through making enterprises accountable for their performance or through privatization. As with economic.reforms, the sequencing of i-EM reform is important. In transition countries the immediate priority is to create capacity in core agencies for economicmanagement tasLs, such as macroeconomic policy, privatization policy, aid coordination, fiscal management, and revenue collection. Subsequent priorities include creating a civil. service, rebalancing central and local responsibilities, reorienting economic statistics collection, changing departmental functions, and reorganizing the machinery of government for a market economy. In countricu where government capacity has collapsed, civil service reform must be high on the agenda even,tough it takes a great deal of time. Countries that are beginning to modernize public administration should makle the government budget a focus of attention. And many countries should give priority to strengthening revenue collection agencies. In all countries, actions that promise visible success early are'needed to generate support for reform and to offset adjustmentfatigue.
Expenence with budget reform has been uneven, underlining the importance of ownership and sustained commitment, In some countries the requirement may be for evolutionary reform of budget processes whereas in others, wholesale systemic reform may be indicated. The latter, especially; requires commitnent over a long period of time if the benefits of new budget systems are to be enjoyed. Work is needed in this .area to understand better the reasons for failure and how government budgeting, the arena in which key resource * allocation choices and tradeoffs should be made, could be made more effective.
In all regions there is strong confirmation that pubic sector management is a key issue of development effectiveness and that systemic issues of governance, institutional development, and public sector management are at the core of country development performance and therefore must be central in the . Bank's dialogue with governments.

Accountability
Accountability is at the heart of good governance and has to do with holding -governments responsible for their actions. At the political level it means making rulers accountable to the ruled, typically through the contestability of political power. Although accountability has always been something that Bank operations have sought to enhance, systematically assisting countries in improving the accountability of their public sectors has been an important thrust of the activities of the Bank in the past two years. This has coincided with an increased emphasis on accountability by both aid agencies and borrowing countries.

Demandfor greater accountability
At the official level of government, accountability takes several forms. The traditional form is hierarchical, based on administrative structures reporting, ultimately, to the political level. The Bank's 1991 governance report termed this macrolevel accountability. It can be reinforced by mechanisms of microlevel accountability, involving decentralization, participation, and competition. rhe last two factors enable the public to influence the quality and quantity of a service by articulating its views or shifting its demand. In almost all countries, citizens have become more critical of government performance in the management of the economy, in the delivery of services, and on other occasions when they encounter officialdom. Within government, particularly in the more advanced countries, emphasis is being given to managerial accountability based on the production of outputs rather than the use of inputs and an expanding use of performance indicators. The global trend is toward less authoritarian modes of exercising power. One reason is the decline in many countries in the effectiveness of public institutions and, thus, their credibility. Another is the growing importance of the private sector and a realization that the private rather than the public sector is the driving force of sustained economic growth. Information on what is happening at home and abroad is widely available through multiple channels. A further factor is the attenuation of state power, caused or. the one hand by the globalization of the world economy and on the other by the trend toward decentralization. And all countries have been affected by the systemic changes under way as a result of the end of the Cold War.
The move toward more democratic and therefore participatory modes of exercising power, as well as the abandonment of centralized economic man-agement-schemes, affects the manner. in which power is exercised even in countries that were not membe-rs of the socialist bloc. This is takfing the form of demands for greater accountability of governments for the functions that must be performed centrally and for de-entralization of the functions tat can be carried out more responsively at local levels.
The trend toward decentralization of gvernment, therefore, has become one of the principal ways in which this demand for greater accountability is being expressed. For the Bank this hps meant both renewed involvement in an area that has long been associated with Bank lending and an opportunity to review traditional approaches. One outcome has been the involvement of staff from all regions in-local govenment studies, leading in many cases to project preparation and lending. 4 Another outcome has been an in-depth review of the Bank's approach to municipal development, which has already begun tc influence the design of projects in the urban sector (World Bank 1993d). The review suggests that interventions based on strengthening the internal workiings of local government administrations-the Bank's traditional approach-are unlikely to be effective by themselves and that a new approach must be adopted that places local governments within a broader framework. This entails taking a fresh lookattheassignmentof functions to lowertiers of government: whether* these are commensurate with revenue-raising capacity, how local government bodies are held accountable, and whether there are problems of public sector management that must be addressed systemically if local governments are to function properly. .At the same time, it means. taking care not to dilute the capacity of central governments to perform tasks that must still be carried out. centrally.
Another aspect of accountability in which the Bank has been actively involved isfinancial accountability in both the public and the private sectors, but especially in the former. Again, Bank efforts and results differ, depending on. the region. In some cases, such as in South Asia, in East Asia and the Pacific, in Africa, and in Europe and Central Asia, much effort has been dedicated to establishing the infrastructure for sound financial management. This has entailed improved budgeting, accounting, and information systems; building professional cadres of accountants and auditors; and strengthening the legal framework of modern accounting practice. These eftorts should be reinforced by 'regular assessments of the country's financial accountability, following the recommendations of the Bank's Financial Reporting and Auditing Task Force (World Bank 1993e). These assessments, proposed for all regions, will review borrower countries' accounting and auditing standards, laws, and regulations and will take stock of professional capacity within the country to undertake accounting and auditing work and training arrangements. The assessments will also examine the independence of auditors,.in both the public and the private sectors.
Some of the Bank's work in all regions has been oriented toward strengthening auditing offices to counter misuse of funds and to promote compliance with financial management standards. At the same time, in recognition that obsolete auditing practices can be an obstacle to prompt and effective delivery of government services, one of the goals of auditing reform has been to introduce.modern post-auditing practices to expedite governmental processes. In many countries, for obvious reasons, it has been necessary to proceed withf accounting and auditing reforms in tandem.
Mention should be made of a tlhird manifestation of the demand for greater accountability, the beginning of a change in attitudes toward corruption. This change is by no means uniform, but two distinct trends can be observed. First, in the main bilateral donor countries, corruption has become part of the debate on aid effectiveness, and the perception that ail resources are diverted -by corrupt elites in developing countries is one factorweakening the long-standing consensus on aid programs. Second, in certain developing m.d industrialized countries, exposure of large-scale corruption has brought down political leaders in unanticipated ways and shed light on systemic corruption, suggesting that. a shift in public tolerance may be happening.
These events are likely to have an impact on how power is exercised in many cuuntries. In terms of the Bank's work, reform measures that direc:tly help countries control'corruption have been part of structural adjustment. programs for years. These measures comprise, first, ways to reduce renttaking by simplification of rules and by replacing administrative with market mechanisms" and second, institutional strengthening to improve financial controls and to ensure that civil servants have fewer incentives to become corrupted. A reduced government role through deregulation and direct involvement in the production of goods should reduce opportunities for rent-seeking.. Reinforced by dialogue, and research, these measures could be regarded as building blocks of a strategy against corruption (box 1.7). Meanwhile, acceptance of World Bank efforts to improve financial accountability in many of its borrower countries has been. made easier by the. publicity that widespread political corruption has attracted. The expectation is that. there will be increased calls on the Bank to assist countries in combating corruption.

World Bank experience
Because World Bank membership is diverse, such general trends have a different impact on member countries, depending on the political system and the cultural context in which power is exercised. This diversity is reflected in Bank experience in the last two years and, as can be observed, leads to different approaches from region to region in supporting.improved accountability: * In Latin America and the Caribbean the Bank is moving beyond assistance solely to the executive branch of governments and extending technical assistance for improvements to the legislative and judicial branches. Illustrations of this trend are the loan to Chile to improve access to information by the legislative branch and the loan to Venezuela for judicial modernization (box 1.8). In Colombia the legislature is being. assisted in monitoring and evaluating public spending. These operations, although modest in themselves, show i how modernization of the state for effective governance requires actions in new areas that are nevertheless within the boundaries of the Bank's mandate.
a A major theme in the Bank's lending and economic and sector work is decentralization. Many loans to strengthen municipal or provincial govem- professional, accountable, realistically paid, and well-motivated bureaucracy.. Although such action was not conceived in the first instance as an ele -*Strngthenin9 public procurement systems, through the reform of laws, ment in an anti-corruption strategy, more tre redure opthe intervention of the World Bank in a number of areas helps countries to -tion of improved bidding documentacontrol corruption. .
tion, competitve bidding, and staff The first four types of action retang.
duce opportunities for rent-taking by U Modenization of public sector acsimplifying rules and by replacing ad-counting, upgrading intemal auditing ministrative with market mechanisms: capacity, and strengthening the su-.
. . . .~~~preme audit institution.; -Trade regime reforms, which limit p a institution. the scope for discretionary treatment This agenda could be broadened. by customs officials and replace ad-. to include a research program aimed ministrative actions with prce mechaat better understanding of: (i) the nisms in the allocation of import liframework of economic incentives for censes and foreign exchange.
corrupt behavior, (ii) whether some C Tax rehm7 based -on lower, unikinds of corruption are more dys!uncform rates and simpler rules 'and the tional than others; (iii) the relationstrengthening of tax administrationship between corruption and political. andtrecord-keeping. of taxadministrasystems; (iv) best practice in counand record-keepig. ..
tres that have succeeded in curbing * Regulation reform, such as the abo-corruption; and (v) measures that inlition of price controls; the simplificadustrialized countries. could take to. tion of license requirements, and simi-discourage corrupt practices by exlar deregulaton measures.
porters. In addition, the World Bank * Prvatizaton, to reduce the size of -should maintain a dialogue with watchdog organizations established the state enterprise sector under bu-toht orruptiona with gover reaucratic control to fight corruption and with-govern-:. re.ucratic control.
rments seeking practical ways to re-The next three actions are ex-duce the moral and economic costs amples of institutional strengthening of corruption. to improve controls and reduce incentives for corrupt behavior. ment have been or are being made throughout the region, such as in Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela. Decentralization, however, is a complex process that requires simultaneous attention to capacity building, transfer of responsibility, fiscal reform, and the participation of ecutive branches of government will WORLD BANK INVOLVEMENT be strengthened. All these efforts will corntribute toward increasing the effi-Good governance requires improve-ciency of government policymaking. ments not only in the executive branch * J R P n Ve-eza of governments but in the judicial and legislative branches as well. The ela. The judicial system in Venezuala World Bank has begun to extend jtS is extremely weak, characterized by: support in the latter two areas. Two long delays and inconsistent-rulings. * SecondPublicSectorManagement Judicial Council staff (the principal Project (PSM IJ) in Chile. The ability. administrative organ of the judicial of Chile's Congress to evaluate new system),.and weak information syslegislation is tied to the quality of in-tems. Personnel policy lacks transformation and analysis it receives. The parency, and is often politically motiprimary institution resporsible for pro-vated. In addition, the physical infraviding this type of information is the structure of the court system is se-Library of Congress. However, the -verely run down.. services provided by the Litbrary of The roject aims to improve the Congress. have deteriorated consid-p efficiency of the judiciary. To achieve. erably, therebY*. affecting the this the institutional capacity of the -legislature's ability to carry out Rs r Judicial Council rwil be strengthened.
Measures such as automating court-The PSM ii project has a significant room procedures, improving training legislative assistance component. It in the Judicial School, and strengthaims to improve the ability of-the leg-ening the planning, .budgeting, and islative branch to review and formu-management capacity of the council late policy by strengthening the U-will be supported. brary of Congress. This will involve Speeding up.the process to reduce computerizing communication sys-: litigation and transaction costs gentems, strengthening reference hold-erally is an important objective. ings, and conducting training probeneficiaries if it is to be successful. In the case of Venezuela, which passed a comprehensive decentralization law in, 1989, experience has demonstrated that more attention has to be given to municipal development before attempting full-scale political devolution of responsibility to local governments for provision of services. 5 The Public Administration and Decentralization Project is now being prepared, which combines municipal capacity building with transfer of responsibility and authority, and at the same time creates competition in the delivery of local services. In the Municipal Development Project in Chile an incremental approach is being used.that.offers hope of an orderly process, based on applying learning experiences from selected municipal governments to the. design of reform programs for other local governments. U In South Asia, a region that contains the world's largest democracy and where institutional structures are long established, the thrust of the Bank's governance work is to assist governments in improving the financial accountability of their public sectors. In Pakistan, a major project to modemize accounting anud auditing is in an advanced stage of preparation (box 1-9), and in Bangladesh, public utilities have been a focus of attention. Another thrust has been privatization and deregulation, redrawing the boundary between the public and private sectors and thereby improving governance. Continuing reforms in Bangladesh and India reflect this approach. Although.decentralization programs have been implemented in the region, the Bank has been only peripherally engaged. More striking is the large number of projects the Bank is supporting in all countries with strong community participation to improve accountability. It is.in this area that the Bank's work has been the most innovative. . U In the East Asia and Pacific region, progress in performance accountability differs substantially. Transitional economies undergoing systemic changes. face the greatest challenges, and progress has been uneven. In China, decentralization of decisionmaldng authority to local levels is occurring more rapidly than anticipated, and the Bank is supporting local government development in several provinces. In other transition economies, decentralization is less advanced, and there have been reversals. As to the high-performing economies, accountability mechanisms are well established, and tCie Bank's. involvement, understandably, has been less, although in one country UIndonesia) the Bank is supporting a major accountancy project. In. the case of lowperforming economies in the region, progress in strengthening accountability mechanisms has been uneven, and the. Bank's involvement may increase.
Overall, there has been an*-emphasis on improving governance through privatization and deregulation, and this is particularly reflected in the Bank's work in Indonesia and the Philippines. 0 In Africa, much of the Bank's operational work has been focused on financial accountability, where the need is to rebuild accounting and auditing capacities in goverrunent. Support has also been provided for the strengthen-BOX 1.9 PROMOTING FINANCIAL ln Indonesia. This'project seeks to ACCOUNTABILITY IN ASIA improve accounting andauditing practices in both the public and private Strengthening financial accountabil-', sectors by improving the processes ity has been a major focus of the of accounting and auditing and con-World Bank's public sector manageducting training programs for personment reform' efforts. Transparen'y nel in the field. The operation will fland consistency in accounting pracnance efforts to promote consistency tices, as well as an independent auand improve the utility of accounting diting bodv, are vital underpinnings processes in govemment. Technical of a well functioning financial system. assistance and equipment will be pro-The Bank is supporting a number of vided to improve the quality of acinitiatives throughout the world to counting education, which will involve strengthen public and pnrvate accountprograms at the university as well as ing and auditing functions. Two at the'secondary level. Nonformal projects in the Asia region merit ataccountancy training programs will tention. also be offered. diting practices and making them ration. Financial accounting and moni-Amore suitable to a mnarke't economyr toring are extremely weak in Pakistan, Accounting standards that conform, largely because of the Pakistan Audit to international generally accepted Departments (PAD) havirg the dual accounting principles (GAAP) will be ccounng priciples(G) Wll be responsibilitY offmaintaining the ac--developed and disseminated Staff will ronty of maintinin the attend seminars to be trained in the couns of ent it a The use of the new standards and sysproose pojectwleate ac new tems.Auditing capacity will be 'entityto undertake the accounting tems. ~~~~~~~~function, revise accounting standards, strengthened and new, internationally improve financial reporting and finanacceptable procedures instituted. The cial administration procedures, and project also finances technical assismodernize auditing approaches. tance to develop a continuing profes-Computerized systems for accountsional education program forChinese ing and financia! reportng will be in- ing of professional associations of accountants and auditors. In Zambia, assistance is planned for the parliament's Public Accounts Committee. Decentralization. has also been a theme of the Bank's governance work. The Bank has * played a leading role in the Municipal Development Program, a multidonor initiative to strengthen municipal governments in Sub-Saharan Africa, with coordinating centers in Cotonou and Harare. The Bank.has increasingly used nongovernmental organizations (NGOS) in the delivery of services, and in* several countries, public works agencies have been set up with Bank encouragement outside the structure of government to manage and implement public works and employment creation.' These agencies have promoted. beneficiary participation in the design of schemes, reduced construction costs, and improved service delivery. However, at present they are sustained almost exclusively by donor funds and leave untouched the issue of capacity rebuilding within governments.
* In Europe and Central Asia,.problems of accountability are set in the national contexts of state rebuilding as a result of the transition from command to market economies and the introduction of democratic institutions. Traditionally, government agencies and subordinate tiers were highly subservient to the central governments. With the collapse of communism, the power of central authority has greatly diminished, and with the fragmentation of political authority,.de facto decentralization has occurred. In some of these countries the situation has become parLicularly complicated as a result of regional conflicts, political instability, and power struggles between the executive and the legislative branches, which have severely affected the World Bank's ability to undertake normal lending actions. Within this broad situation, the Bank's work on decentralization has been concentrated more in Central and Eastern Europe, in those countries. where political reforms are a few years older than in the republics of the former Soviet Union (FSU). In several transition coun' tries, the Bank-is also assisting in establishing a framework of financial accountability and the adoption of modern public and commercial accounting systems to supplant the previous politicized and state-centered system. * In the Middle East and North Africa there has been limited .progress in performance accountability beyond the level of particular projects, in part because, until recently, many governments in the region preferred to limit their interaction with the World Bank to a narrow set of issues, mostly related to project work. This situation,. however, is changing rapidly as a result of economic changes and because of political developments such as the end of the Cold War, the Gulf conflict in 1992, and the current Arab-Israeli peace process. Middle East governments are embarking on economic reforms that also entail changes in the traditionally closed governance of some of the countries. In' various sectors there have been a number of innovative projects that encourage local initiatives (box 1.10).

Emerging lessons
A number of lessons and issues arise from the Bank's recent experience assisting countries.in strengthening accountability, * Modernizing accounLing and auditing to improve the overall accountability of public organizations means putting better financial management systems at the disposal of both government leaders and the legislature. They are tools for BOX 1-10 ACHIEVING formation was factored into the MICROLEVEL ACCOUNTABILITY: project's design.

VOICE MECHANISMS IN WORLD
Once the project had been pre-

BANK PROJECTS
pared, community groups (CGS) formed to involve the local population World Bank operations-in the Middle in. the implementation of the project East and North Africa have been suc-Each CG represents a subtribe opercessful in promoting microlevel ac-ating in the. project area and is recountability. In particular, the Bank sponsible for preparing a community has been incorporating so-called action plan (cAP). The CAP allows the voice mechanisms in its projects by objectives of the project to be tailored encouraging popular participation and to the specific needs of individual com-NGO involvement munities. Although government and The Matruh NaturalResourceMan-project personnel are available to asagement Project in Egyptis an excel-sist, the main idea is to draw on local lent example of a participatory op-knowledge in defining the state of reeration. Natural resource degradation sources and understanding customis extremely high in the project area, ary practices for land use, grazing, and the main purpose of the inter-and so on in that community. Once vention is to couple agriculturat and the CAP has been prepared and aplivestock development with improved proved, the CG becomes Involved in natural resource management prac-both implementing and monitoring the -tices. The project is being imple-program in its community. Any revimented in the northwestern coastal sions to the CAP after periodic evaluazone of the country, an area inhab-tions will follow the same participaited by a tribal. Bedouin population. tory process.-Popular participation was identified The mechanisms developed in this early as a means of gaining local sup-project ensurethatthe community has port for an action program and has a voice in the interventions affecting been encouraged from the outset A them. The method not only builds sup-* participatory rural assessment (PRA) port for the initiative and increases at the identificaton stage helped de-the likelihood of sustainability but also* termine the priorities and needs of ensures that the project conforms to the the affected population, and this in-particular needs of each community.
greater accountability; to be effective, they need to be matched by a demand for accountability from; overnment managers by the legislature or by the public through an active press. The World Bank can facilitate the process but not substitute for it.
* In several regions where government capacity has been eroded (Africa in particular) efforts to strengthen accounting skills and upgrade systems require parallel action to address deep-seated civil service problems, including pay and working conditions. Before capacity can be rebuilt the causes of its erosion in the public sector must be addressed. Many of these causes are governance related in origin.
The World Bank's experience with decentralization across the world in the past two years corroborates the conclusions of the Bank's Municipal Develop--ment Sector Report. This stresses a broad approach and the importance of synchronizing fiscal decentralization, transferring service responsibility, supporting municipal capacity building, and tackling systemic public sector management problems. In most countries the factors contributing to weak-local government are complex, and World Bank interventions that do not address the fundamental causes of this weakness will not be succesrful.
N' The number of investInent projects with significant participatory components has expanded rapidly. In -this area, the Bank has found it easier to incorporate voice mechanisms (for example, involvement of local NGOs) for beneficiaries than exit mechanisms (for example, competition in service delivery and an opportunity for beneficiaries to seek alternative suppliers). In administrative terms it is easier to set up consultative mechanisms than to erect a framework for competition. in service delivery and the transfer of entitlements (Paul 199 17).
* The World Bank's experience confirms the importance-of rooting accountability in local processes and institutions and the need to avoid substituting international governance for local governance. This is an inherent risk in heavily aided countries with weak institutions and must be guarded against when developir, niew channels for service delivery outside the traditional framework of government departments.

Legal Framework for Development
The laws and regulations, the processes through which they cperate, and the institutions that apply them comprise Ehe legal framework of a country. Although in all societies a range of informal meehanisitis exists to resolve conflicts, and enduring business relationships are based on trust, market economies require a framework of clear laws and efficient legal institutions within which the interaction between economic agents and the state can take places . An appropriate legal system will provide stability and predictability, which are essential elements in creating an economic environment where business risks may be rationally assessed and the cost of transactions lowered.

Economic and social development and the legal system
The legal framework in a country is as vital for economic development as it is for political and social development. Creating wealth through the cumulative commitment of humran, technological, and capital resources depends greatly on a set of rules secunng property rights, governing civil and commercial behavior, and limiting the power of the state. As Govemance and Development emphasized, this set of rules -must be clearly defined and known in advance; effective institutions must be in place to ensure its uniform applica-* i bility; there must be mechanisms to resolve conflicts based on the binding decisions of an independentjudiciary; and procedures should exist for amend--ing the rules when it becomes clear that change is necessarv. In many countries the inappropriateness of laws, uncertainty in'their application, weak enforcement, arbitrariness of discretiorary power, inefficient court adminiswtration, slow procedures, and the subservience of judges toward.the executive branch greatly hinder development, discourage and distort trade and invest-* -; i-lment, raise transaction costs, and foster corruption. Laws may be unenforceable. because they contradict economric logic, thereby destroying the incentive for compliance.

-
The legal framework also affects the lives of the poor and, as such,: has become an important dimension of strategies for poverty alleviation. In the struggle against discrimrination, in the protection of the socially weak, and inr the distribution of opportunities. in society, the law can make an important contribution to an equitable and just society and thus to prospects for social development and poverty alleviation. Conversely, the legal framework can; cement existing inequalities through laws that discriminate by race, religion, ethnic affiliation, national origin, or sex, or where tax laws, land laws, family laws, and social security laws fail to protect the weak or discriminate against them. Inherent-in the concept of the rule of law is the notion of fairness and social justice.

The World Bank's experience
In helping cotuntries to improve their legal systems, the Bank has used a variety of instruments. New laws and judicial reform have been components . GOVERNANCE in sector or economywide programs supported by adjustment loans; investment loans have included legal system, components; there have been standalone technical' assistance projects and, more recently, grant assistance from. the Bank's Institutional Development Fund. In addition, through its own staff, the Bank has provided extensive advice directly to governments.-Although the passing of specific legislation or the amending of regulations has long been a feature of investment projects financed by the Bank, the bulk of the Bank's present activities in the area of legal systems is new.
-In Eastern Europe and Central Asia, substantial technical assistance has been extended to countries moving from a command to a market economy. A first step has been the passing of privatization laws. Second, with Bank assis-* tance, transition countries are enacting. banking laws, bankruptcy laws, company laws, contract laws, fair competition and consumer protection laws, foreign investment laws, mineral laws, and land laws (in Belarus, Latvia, Lithuania, Romania, Russia, Ukraine, and Uzbekistan, for example). At the. same time, the Bank is assisting the countries with legislative, admrinistrative, and judicial reforms so that the institutional framework is in place to enact, administer, and enforce laws. Law reform units within government structures have been established with the Bank's help (box 1.11). Antimonopoly and financial supervision agencies are being set up or strengthened, and training programs for judges, lawyers, and court officials have been launched. In addition, a major research program is under way in. the World Bank Policy Research Department to analyze the economic impact of legal. reform in Central and Eastern Europe (box. 1.12).
* In East Asia, similar efforts are being made to introduce new laws and to create an institutional framework for the transition economies of that region. Major new laws have been enacted with the Bank's assistance in the Lao ' People's Democratic Republic and. Viet Nam, and a large comnuercial law reform project is under preparation for China. In addition, the Bank has supported court administration and the dissemination of laws in Indonesia, where the slowness of courts and their lack of specialization have eroded confidence in the legal system. * In the Middle East and N-Torth Africa the Bank's work has focused on improving the effectiveness of legal and regulatory frameworks, particularly those governing economic life. In Egypt, Iran, Morocco, and Tunisia, the Bank has supported the reform of banking and finance laws, and in these and other countries the Bank is supporting an array of legal reforms to simpl;fy trade and customs procedures, encourage new businesses, and generally im-. prove the legal environment for the private sector. The transition from a command to area of law market economy requires substantial * to monitor the implementation and changes in the legal and regulatory enforcement of the newly enactedframework goveming economic ac-laws and regulations tivities in the Eastem European and * to assist govemment agencies.in Central Asian republics. Legal reforn strengthening their enforcement cahas begun inthe financial sector and pabilities. the. energy and mining sector, and privatization rules and regulations are The legal reform component of the in place. But there is an urgent need Rehabilitation Credit to the Kyrgyz to develop an overall program for le-Republic illustrates this approach. gal-reform in the various sectors of Thus far, legal reform in the.areas of each economy.
agriculture, auditing and accounting, So far, the republics have focused banking, corporate governance, minon the passing of. new laws. How-ing, and privatizatilon has been uncoever, newly enacted laws and decrees ordinated. A central legal reform unit may: (i) be. contradictory; (ii) ignore will be established, :financed by the the implementation capabiliies of the credit, in;the-Office of the President. enforcing agencies; (iii) deal with is-The credit will finance office equipsues in isolation, and (iv) reflecttrans-ment, libraryfacilities, a computerized -. planted concepts and structures alien legal database,.the services of a resito the country's legal tradition. dent legal adviser, and short-term le-To overcome these deficiencies, gal consultants, and it will provide for * the World Bank has supported com-in-country and foreign legal training ponents in existing or planned institu-for the staff of that unit. tion building projects (in .Armenia, It.is the expectation that these le-. *: Azerbaijan, Georgia,-Kazakhstan, gal reform units will foster the devel-Tajikistan, Turkmenistan, and opment and implementation of comrn Uzbekistan) or technical assistance prehensive and integrated legal recomponents in rehabilitation loans form programs and enable the counand credits (in the Kyrgyz Republic. tries to promote the rule of law as a and Moldova) to establish central le-governing principle for all economic gal reform units. The objectives have activities. been the following: * In South Asiatheemphasis ison modernizing commercial laws and strength--ening judicial administration and staff taining (in Bangladesh-and Pakistan) * -= by using industrial and financial sector adjustment credits. In Nepal, changes Hungary, Poland, Romania, and TRANSITIONAL ECONOMIES Slovenia was carried out 0 *A number of countries throughout the * In-depth cross-country comparworld are transforming their econo--sons, drawing heavily on.the experi-. mies from centrally planned to mar-ene of advanced marketeconomies ket-based systems. This transition are in progress. Five'core areas of needs Support fromn-a variety ofit 'MW .* the legal framework for private sector tutional reforms, including changes in development have been identifiedthe legal framework A clear and con-competition corporate goverance -*-'. sistent legal 'framework for private debt collection and bankruptcy, for-, sector development promotes effi-eign investment, and real property ciency and ensures sustainability of rightwith work well under way in -*. the reformns.
the first four. The research hopes to In 1992 the World Bank began a identify best legal practices in adresearch program to understand bet-vanoed market economiies for eachter the evolving legal framework in of these areas and consider their aptransitional economies and to deter-plicability to CEE countries. mine how addifional reforms could im-* The final component'of the programn provethe environmentfcr private sec-extends the area of study beyond the tor development. The: Economics-of cEE region to the formrer Soviet Union Legal Reform in Reforming Socialist and to socialist countries in Africa and Economies is well under way in the Asia. Studies of property rights re-Policy Research Department of the -form in Tanzania and Ghana. and of -Bank. Its aim is to rnonitor and evalu-postprivatization corporate goverate the economic impact of legal re-nance in Russia are already in formn in selected Central and Eastern progress. European (CEE) countries. Later stage-"the exercise will extend to a. The country case studles have already been other 1 'eforming socialist economies published indvidually and in a synthesis book. as well. The program has three com- (Gray and Associates 1993).

ponents:
in water and forestry legislation are being pursued to increase the efficiency of the sector. and.the involvement of local communities. * In Latin America and the Caribbean, the Bank has also helped countries in modernizing their economnic laws. Particularly noteworthy is Venezuela, where. the Bank is helping to strengthen the judicial system. Here the Bank is assist-ing the government upgrade court infrastructure, install modern management systems, train personnel, and publish the laws. Similar projects are being prepared in Argentina, Bolivia, and Peru. As already noted in Chile, the Bank is helping to strengthen the legislature's capacity through better information systems.
* In Sub-Saharan Africa the Bank is helping to strengthen legal institutions relating to property rights and contracts in the context of prvate sector development loans and credits (in Angola, Cape Verde, COte d'lvoire, :Ghanai Guinea, Mali, and Uganda). A start'is being made with projects specifically addressing legal institutions, such as legal training and court infrastructure in Tanzania and Zambia as well as in Burkina Faso and Mozambiquc. A particular feature of the former iE targeted training for legal draftsmen. As part of the. World Bank Africa Region's research program, legal aspects of the role of women in development are being studied (box 1.13).

Emerging lessons
From the Bank's growing experience with legal reform across regions, lessons are emereng: * Legal reform cannot be successful without the full conviction and political commitment of the government concerned. * There is a need to avoid wholesale transfer of particular Western-based legislation without due regard for the legal traditions of a country (a particular risk in transition countries)-More generally, in all countries the effectiveness of legal reforns depends greatly on how the reforms take into account the social, religious, customary, and historical factors in a society. * Scope, however, does exist for sharing the Bank's experience among regions. Projects developed in Latin America, for example, are influencing the work of Bank staff on legal system reform in other regions. * Of crucial importance is the institutional framework so that new laws can be applied firmly but fairly and the right balance is struck between license and regulatory control in a market economy. In tis way, legal framework reform involves broader issues of public policy anu institutional development. iesln Uganda,forinstance,theWorld Bank is working with the Department Legal reform is essential to the eco-of Justice, the Ministry of Women's nomic empowerment of women.. A Affairs, and the national university to program of studies and workshops to prepare a legal reform strategy for support this has been launched by. women. the World Bank Africa region's P o w t t -Women in Development (WID) unit, in consultation with the Legal Departquest of legal associations. Where ment, and is currently in its second thereisn'tsufficientmomentumto miphase.
: ---................ --tiate legal reform, workshops are heid The first phase. of the program ex-to build this momentum (for example, plored the relationship of law, gen-recently in Mali). The workshops are der, and economic development. a conducted at the request of a local The second phase is more opera-legal association, and they identify tionally focused. Drawing on the strategic entry points for legal reform. framework developed in the first efforts with the assistanceof the Bank. phase, the .WLD unit and the Legal * Participation in subregional work-. Department plan to address legal is-shops on legal literacy. The Bank suesthrough the lending program and recently participated in a workshop sector work At present the WID unit on legal aid clinics for women in. supports the following types of activi-francophone Africa. The workshop ties: provided an opportunity for the Bank to become familiar with other donors' ment and raises transaction costs for the private sector generally (a pervasive problem in South Asia).
* Legal reform requires a long gestation period, particularly if it is seen as more than drfting new legislation. It is therefore advisable to pursue freestanding legal reform projects and to include legal reform components in conventional investment projects.
* Although the Bank is assisting countries in all regions in strengthening aspects of their legal systems, the subject is likely to remain a politically. sensitive one, and the extent to which the Bank is involved in legal system reform will continue to depend greatly on country circumstances. In addition to the assistance in the drafting of individual laws, the Bank is increasingly. emphasizing the need for the formulation and implementation of comprehensive legal reform agenda, including the establishment of appropriate enforcement mechanisms, and the strengthening of the judiciary and regulatory insti-i efforts in the region as well as to make tor and private sector development contact with women's jurist organizaoperations. In such cases, the Bank tions in West Africa.. encourages the borrowing country to take women's issues into consider--Consultation usth existing research *gConsRegultatio n with existongrear-h ation when planning its law reforms. groups. Regular consultation with or-Foexml,arcnprvtzin -.For examnple, a recent privatization -: ganizations such as Wornen In Law -.---ganiz n sh as W n ioperation in southern Africa was con-: and Development In Africa (MLDAF) . and Developmen in Afra (ditional on a study cf land reform, and Women in Law in Southern Af-w t * . . -~~~~~~~which thus provided an opportunitvy -: * ria. (WILSA) IS under way. These re-* .WILSA) is under way. These re-to examine the impact of land reform gional associations of practicing o women lawyers work to identify and E lega f c b a , .~~~~Esting lega frmwrkscnb a. : address common legal issues that -. affect women in their region. Consul-major impediment to economic de-t : ~~~~~~~~~velopment. Identifying the legal contation with these groups enables the . I straints faced by women in Africa will Bank to draw on local expertise, build h t B tr help-the Bartk to design and imple-.
projects Inthe region. To include the reformn efforts in a a. Three papers were prepared: 'Law as an institutional Bariierto th Economic Empowerment region's lending program, the World aiWomef; "Gender,theEvolutionofLegalinsti-Bank'swID unit focuses on operations tullons, a,id Economic Development in Sub-Sathat typically include a legal reform haranAfrica";and"WomeninDevelopment:The component-primarily financial sec-Legal Issues in Sub-Saharan Africa Today.' ttions. In this respect, the Bank has to recognize and respect the exclusive jurisdiction and responsibility of each country over its own legal and institutional framework.

Transparency and Information
The themes of transparnricy and information pervade good governance and reinforce accountability. Access to information for the various players in the market is essential for a competitive market economy. Transparency improves both the availability and the accuracy of market information and thereby lowers transaction costs. Governments come to value transparency as they depend more on market mechanisms for economic management. Transparency is important for specific public programs, such as the divestiture of state-owned enterprises, which will quickly forfeit pub!ic confidence if privatization is not seen as an open process. Furthermore, transparency is a prerequisite for successful beneficiary participation in program design and implementation.

Markets, govemment, and transparency
Transparency assists-governments in implementing market-environment policies by clarifying government policies and programs. In this way, expert opinions can be voiced,, and those affected may have an opportunity to express their views. Programs to change the functions of departnments and agencies, to tackle excess numbers of staff, and to redeploy the remaining staff also need to be transparent. Without transparency there will be resistance to change, a characteristic of many civil service reform programs in the past; Because it means removing the walls that bureaucracies build around themselves, transparency implies more open government.=Thus, it is an essential element in any effort to improve performance accountability. Transparency is also a deterrent to corruption. It underpins competitive public procurement and generally creates a climate in which the scope for public corruption is lower and the chances of exposure higher.
Transparency should extend to private sector as well as public sector organizations so that reliable information is available to all decisionmakers. Although relationships with customers may be confidential, banks require accurale financial information on companies to assess credit risk. Banking systems as a whole will not be healthy if depositors cannot rely on the published accounts of the banking institutions with which they place their money. Insider trading undermines confidence in capital markets. As state enterprises are privatized, it may be necessay to set up new regulatory agencies, with processes that include provision for public disclosure.
Closely linked to transparency and information is freedom of the media, of which a free press is especially important if there is to be an infonrned debate on public policies. The press plays an important role encouraging community organizations and other civil society groupings to become engaged in policy and program debate. At the same time a free press, by exposing wrongdoing, encourages accountable behavior by public officials and politicians while discouraging corruption. Furthermore, the information media must build responsible self-policing mechanisms to maintain professional reporting standards and to avoid government censorship..
-Although specific aspects of transparency, such as requiring companies to publish financial results in a standard format, opening public procurement tenders in the presence of bidders, and the timely publication of government budgets and accounts, can be readily addressed in World Bank operations, in a broader sense transparency reflects what goes on in a society as a whole. Thus, a willingness to make public processes more open depends, in turn, on the culture, tradition, and attitudes toward openness in society as a whole, which may change only slowly. Transparency requires supportive institutions, political commitment, pressure from civil society, and free media. For many of the players involved, information is power and money. Secrecy and nontransparent decisionmaking provide an oppo'rtunity for private gain or for political arranigements against the pblic interest And there could be occa;sions when government may be right. to withhold information, such as on national scecurity issues or when reforming governments have had to move stealthily to prevent vested interests from coalescing to block reform. Improv-., ing transparency,therefore, is a necessary but complex process that will take time in many countries.

Thze World Bank's experienice
.Bank experience in relation to transparency and information in the various regions can be summarized as follows: U The situation in Latin American and the Caribbean geographic region has traditionally been characterized by substantial political;obstacles to greater transparency. However, Ctie trend toward democratic rule and freedom of the press has created a more favorable climate for actions that promote transparency. In this regard, World Bank work in this region has concentrated at the level of improving financial management and in the introduction of transparent budgetary systems, which allow a clearer disclosure of the relationship between performnance and expenditure. Revenue administration reforms supported by the Bank in several countries havenmade tax and customs;schedules, more easily comprehensible. As'an illustration of the role of transparency in regulatory reform, an NGQ in Argentina. was engaged to monitor complaints by the public and how they were -resolved by the new. private telephone p~~~~~~~~~~~~~~~~~~~~c ompanies.
UIn South Asia, World Bank efforts to promote transparency have included support for the introduction of proram-oriented budget systems. This type of budget makes more explicit the relationship between goals and expenditure than the line-irmm budgeting systems commonly in place. and facilitates the possible use c-i value-for-money assessments. Past experience in the region. with budget-reform, however, has. not been encouraing. Another effort related to transparency has been in the area of procurement through the promotion of standard bidding, procedures in all countries in the region. * In East Asia and the Pacific, transparency is a new issue for the govern-mentS of those countries in transition to market economy, and thus far die principal-instrument has been the policy dialoguel The World Bank has urged trade liberalization, more informative budgeting,-legral reform to encourage, foreign investment, and moue-clarity in privatization programs. Elsewhere in 32 .

GOVERNANCE
the region, considerable progress has been made removing trade and investment barriers, with the Bank's encouragement, thercby reducing opportunities for rent-seeking behavior.. In several countries, the Bank has assisted'. governments in introducing more open and predictable procurement processes.
a Bank action in Africa has been to encourage a variety of actions to imrprove transparency in the public and private sectors. Economic reform programs supported by the Bank have led to simpler tax and tariff structures, which have' aided transparency and reduced opportunities for collusion between tax collection officials and taxpayers. To improve public debate on economic reform programs, the World Bank's Economic Development Institute-has organized programs for iournalists. Cowutry procurement assessment reviews have been used to situate procurement issues prominently in policy dialogues, and procurement reform has become a component in many Ftuctural and sectoral adjustment loans. One means oI encouraging government transparency in this region has been to support publication of official gazettes (in Burkina Faso BOX 1.14 TRANSPARENCY the transparency of accounting and OF FINANCIAL REPORTING auditing practices in South Africa-.

SYSTEMS
specifically, the legal framework, standards of accounting, and. the inde-Transparent financial reporting by pendence of the auditing profession both the prvate and public sectors is in both the public and the priva!e secessential for a well-functioning mar-tors. The main findings of the study ket economy. It lowers transaction were the following: costs, reduces misuse of funds and theft, anld improves decisionmnadng. *Th euaofrmwkisel Intheft,-andimproves decir, onmakingestablished, aid several improve-In the public sector, transparency ments have already been made. In' helps enforce policymakers' accountability. In the private sector, adher-the public shere, new legislatve enence to internationally accepted re-aptments have increased the indeporting standards is necessary to at-pendenre of the Auditor General's tract foreign investors and lenders, office. Cther legislation has strengthand it facilitates the growth of finanened disclosure requirements for pricial markets.
-. vate ins:itutions. Standards have also *The World Bank is now directly ad-been drafted to ensure uniformity in dressing this subject in iats economic financial reporting across private inand sectorwork. A recent report rRestiltions. public of South Africa: An Assessment u Widt-lisparity exists in financial reof Financial Accountability") examined porting and accountability at the local and Mauritania, for example), which advertise public tenders and announce their award, and publicize new laws and changes in administrative regulations. In addition, the World Bank has encouraged governments to publish their budgets in a timely manner and in some cases prepare a summary version for wider distribution. (In Kenya, at the Bank's urging, the government beganpublishing a summary booklet of the budget proposals,. throwing into.sharp relief the imbalance between the civil service wage bill and supporLing expenditures, which triggered lively debate in parliament and the media.) Concern for transparency has led to a new form of economic.sector work, financial accountability assessments, thus far carried out in Ghana and -South Afrca (box 1.14). . exist in South Africa, their member-* Inadequacies besetthe financial re-ship policies, as well as the education porting practices of central govem-system, continue to discriminate indiment departments. This is partly re-rectly against participation by nonlated to the absence of govemment whites. accounting standards as well as to the lack of a professional body deal- The direct focus on transparency ing with central govemment account-in this report marks a new direction in ing.
World Bank's economic and sector work and emphasizes the Banks * The private sector still has room to commitment to addressing goverincrease disclosure requirements in nance issues. This commitment also the. areas of fixed assets, reserves,. provides the. basis on which to deand transfers to employee pension velop lending operations that support funds.. population at large. More specifically,,there is no tradition of open and competitive procurement in the region, since previously there were only admfinistratively determined transactions between state agencies. Public procurement at present is at a half-way stage between administrative orders and market bidding; with little clarity or consistency and wide open to the diversion of -public monies. Neverthzless, compared with the past, there is now much more' openness in decisionmaking.
In support of greater transparency in policymaking and implementation, the World Bank has stressed the need for open privatization and procurement processes in its considerable assistance to governments in -this region. To encourage a wider debate and greater understanding of reforms, the Bank has sponsored seminars on aspects of economic management in market economies, involving its own Executive Directors and resident mission staff, on one hand, and local policymakers, legislators, government officials, and opinion makers on the other. The Bank has also forged links with local institutes and think tanks to help build a cadre of high-quality technical and policy expertise beyond the core of government. And in several countries (Belarus, Russia, -and Ukraine), Bank operations have supported publicity and public-awareness campaigns to deepen popular knowledge about voucher schemes, smallscale privatization, and the like. In doing so, it has helped spread understanding about the emerging opportunities in a market economy. Advice has also been provided on procurement legislation (box 1.15).
As to transparency in privatization, the centerpiece of the World Bank's strategy in the region, the Bank has emphasized quick marketization measures and wide distribution of ownership under transparent and unambiguous rules. * Many governments in the Middle East and North Africa have not been accustomed to publishing information about public policy, encouraging public debate and participation, and conducting government business openly. This picure is now changing in important respects, with elections, newly empowered legislatures, and other developments. The World Bank is contributing to this process through a much broadened dialogue with opinion leaders in the region (for example, through the Council of Middle Eastern advisers), wider dissemination of Bank reports, outreach-public affairs activities by resident missions, and regional research initiatives involving nongovernmental research institutions. As the process of political renewal-and opening advances, recognition of the benefits of greater transparency in both the public and private sectors is growing. Through individual projects and through the World Bank's country portfolio performance review process, the Bank is also working for more transparent approaches to procurement, foreign exchange allocation, and tax codes, among other things. and finally, through all of these en-The legal framework goveming prodeavors, to maximize economy and curement is weak in many of the efficiency in procurement. At present countries borrowing from the World the model law covers procurement. Bank. In most of the reformiing soof goods and construction; work is cialist economies of Central and underway to developa similarframe-Eastern Europe and in the former workfortheprocurementofservices. Soviet Union, for example, a public The World Bank is now using this procurement code does not exist instrument to assist its borrowers in Nevertheless, this is an important drafting legislation in-this area. So component of the legal framework, tar the model has been applied only. needed both for a market economy in Eastem European countries where and for effective public sector manthe need for this type of legislation is agement.
the greatest In Poland and Bulgaria Recently the Bank has worked the Bankhas financed consultantserclosely with the United Nations Comvices to draft procurement codes mission on International Trade Law based on the UNCITRAL model. The (UNCITRAL) to develop a' model pro-work is at an advanced stage in Pocurement law that -can be useful to land, where the draft code is ready countries trying to develop procureto be presented to parliament. In ment codes of their own. The model Bulgaria the drafting process is well was developed in consultation with under way. Use of the model code is representatives of member governbeing encouraged in other countries ments as well as representatives of of the region as well. international organizations such as Although a sound legal framework the World Bank, the Inter-American is an essential foundation for im-Development BanK and the Interna-provements in public procurement, tional Bar Association.
it is not the only determinant. Institu-The model code seeks to achieve tional development and training of transparency in the procedures repersonnel are also required to enlating to procurement; to promote the sure success. The Bank's efforts in integrity of the procurement process; this area mark an important and necto provide fair and equal treatment essary first -step in the direction of of all suppliers and contractors while improved procurement practices.

Emerging lessons
Trnsparency in government policies and programs is important if progress is to be made with participatory approaches to project design. By thr; same token, transparency is crucial for effective environmental policies and to combat corruption. Transparency in procurement is not an established feature of government processes around the world. Governments may conform with best procurement practice for goods and services acquired under World Bank-financed projects, but procurenment using governients' funds is often much less transparent Without transparency, the full benefit of competitive bidding will not be realized, and oppoitunities for,bribery will exist Assisting countries in improving public procurement is likely to continue to be an important part of public management reforn supported by the Bank. In several countries, the Bank's own procurement guidelines have become a model for national procedures.
Finally, transparcncy and accountability are closely linked. Thus, efforts to strengthen accountability are likely also to involve parallel measures to increase transparency. Tc be accountable, the activities of government agencies need to be visible; Progress toward greater transparency in governments is likely to be a gradual process in which there will be opportunities for the Bank to assist, most likely as a by-product of interventions in other areas.

Governance and World Bank Processes
Major changes are under way in the Bank following the work of the Portfolio Management Review Task Force in 1992 and the adoption by the Executive Board of the Next Steps action program (World Bank 1992a, 1992c. The task *force examined the declining performance of the World Bank's portfoio of project loans and made recommendations for improvement. The recommendations included the need to build comnmitment and local ownership of projects and to emphasize project quality at entrthe phrase used to capture the relevance and quality of project design-and how the latter could be addressed. The task force also stressed attention to portfolio performance, taking into account, more systematically, various implementation issues in the country dialogue and the lending program. These recommendations are now being put into effect through the Next Steps program. From a governancepointof view, the most significant measures are, first, two new instruments: the Country Portfolio Performance -Reviews (CPPRS) and the CountryAssistance Stralegy (CAS) discussions; and second, the new system of Operational Policies and Bank Procedures. A related factor is the Bank's new disclosure policy.
These developments are likely to have a significant impact on the Bank's governance work. The CPPRS, which will be carried out on an annual basis for most countries, address, much more systematically than before, key implemen-tation issues, such as borrower ownership and commitment .to projects under implementation, the iderntification of generic implementation issues, and the development, with the borrower, of time-bound remedial action programs. Because many of the implementation problems Bank's projects face are public sector-management related, and ownership and commitment are linked to underlying governance conditions, the new emphasis on country portfolios is likely to bring governance issues to the fore in the dialogue between the World Bank and individual countries. This is likely to be reinforced further by the CAS process, which is already ensuring that portfolio implementation issues are discussed alongside the future lending program and are taken into account in decisions on the volume and composition of lending. However, as box 2.1 indicates, there is room for more systematic treatment of governance issues in the CAS.
The World Bank's new Operational Policies and Procedures system is likely to -reinforce the positive effects of portfolio reviews and country assistance strategies through the progressive revision and reissue of all previous BOX 2.1 GOVERNANCE AND issues were being taken into consid-

COUNTRY STRATEGIES
eration and, second, whether certain aspects of governance were receiv-The Country Assistance Strategy ing more attention than others.

(-AS) statement is one of the primary
The overall finding Was that the vehicles for reviewing the World majority of. CAS statements covered Bank's lending strategy in a given govemance butthatthetreatmentwas country. In determining the compo-almost exclusively directed toward nents of a country's lending program, public sector management. Other govthe CAS should provide a frank evalu-ernance concerns, such as accountation of factors that constrain the ef-ability, transparency, and rule of law fectiveness of development assis-were almost never raised. Twentytance. A discussion of governance nine of the CAS statements reviewed issues is therefore necessary in this contained only a discussion of public context. sector management concerns (civil An analysis of a recent representa-service reform, economic managetive sample of fcrty CAS statements rment,. an enabling environment for from all the geographic regions ex-private sector development, and pubamined whether govemance factors lic enterprise reform, for example). were being sufficiently considereu in Public sector management was the the formulation of country strategies. only govemance concern consistently The purpose of the analysis was to raised. Only eight of the CAS stateassess, first, whether all governance ments discussed additional gover-

39
operational directives in a Pew format during the next two to three years. This reinforcement will happen in two ways: first, by providing more explicit best-* practice guidance to staff and, second, by emphasizing governance in the reissued Operational Pclicies and Procedures handbook. 8 Another contribution is the technical assistance handbook (box 2.2), which provides best-practice * guidance to staff on the preparation of technical assistance projects and project components, with.a particular emphasis on technical assistance for institution building.
With regard to staff and organizationa' matters, the World Bank has seen in recent years an increase in the number of specialists in public sector management (fifty-two specialists as of this year) and the formation, of public sector management units in the Bank's Technical Departments. 9 Nevertheless, there is a need for an enhanced training effort in areas such as institutional development, participation, technical assistance, public expenditure management (including financial management), and civil service reform. This is required not just to keep specialist staff on the cutting edge of their field nance topics but didi not cover the full and the absence of discussion on range of:the topic. Three cAs state-more sensitive governance topics. ments did not discuss any aspect Of Th1rd, staff might be unfamiliar with governance, the subject mailer and uncomfortable; Interviews with World Bank regional with concepts of accountability and managers suggest the following rea-transparency.' sons for the failure to cover gover-However, the absence of:govternance issues consistently in country nance from the CAB statements does strategy documents. not mean that it plays no role in deci-First, because the subject mailer of sions on the Bank's country lending. governance is often highly sensitive, As the report elsewhere makes clear, Bank staff might be reluctant to corn-both the nu mbe r of projects with gaymit their analysis to paper. emance elements and the extent tO Second, because the political and which governance issUes have feaeconomic dimensions of governance tured in the country dialogue with the are closely linked, staff might feel that Bank suggest otherwise. Whatever just raising certain governance issues the reason for the relative absence of involves treading near the boundaries governance analysis in written Bank delineated by the Bank's Articles of documents, governance issues are of Agreemnent. This would account forthe such fundamental importance to the predominance of comment on famil-development agenda that they wariar issues such as public enterprises rant more systematic treatment. and the condition of the civil service countries. Subsequent sections deal with the formulation of a TA strategy Institutional development is the basis for institutional development, the deof public sector management reform.
sign and implementation of that strat-Much of the World Bank's support for egy, and'finally the supervision, moniinstitutional development is provided toring, and evaluation ofTA operations. in the form of technical assistance (TA). In this context, topics such as the pro-In March 1993the Bank published the cess approach to institutional devel-Handbook on Technical Assistance opment, modes of transferrng experto. give substance to the recommen-tise, management concerns, and the dations-of the Technical Assistance costs of IDTA are covered. Review Task Force. The handbook The handbook is presented in modfocuses primarily on institutional ules, facilitating easy access to dedevelopment technical assistance . tailed information on matters of par-(lDwA) and is intended to guide staff in ticular interest to the user. In this way. capacity-building initiatives.
it provides brief, yet well-focused, T'he handbook takes a comprehen-training for World Bank staff. It will be sive approach to institutional C(ovel-updated periodically to keep staff inopment and covers a broad range of formed of experience gained from new activities that increase the capacity of TA operations.' The handbook marks institutions to perform their functions.
an important step toward consolidat-The first section of the handbook dis-ing best practice and providing guidecusses the role of TA in furtherng in-lines for staff in this area stitutional development in recipient but also to keep the large number of operations staff, such as country economists, country officers, and sec-or specialists current with governance issues. Upgraded training programs are under preparationiin all of these areas and will be put into effect in the coming year (Arnold 19932.10 Policy Dialogue on Governance The Bank's policy dialogue with its borrowing members is being carried out in a political and economic framework that has changed substantially over the last ten years. Because of these changes, the environment for discussing development policy is much more open than it was before. In this new climate, certain governance issues have become important components of the Bank's overall policy dialogue with many of its borrowers. This dialogue has generally been carried out at four levels: first, in coordination with other donors through consultative groups and similar meetings of donors and aid-recipients (box 2.3); second, through discussions between the Bank's senior management and the political leadership of borrowing governments; third, through the regular exchange of ideas between the Bank's country teams and their counterparts on the government side; and fourth, through the day-to-day interactions of the Bank's resident missions. In countries that have no consultative groups (such. as most of those in the Latin America region and East Asia) the dialogue is maintained through the last-named channels.
The World Bank also pursues consultations at the regional level and with groups outside government. Discussions between Bank staff and advisorygroups, such as the World Bank's Council of African Advisors and the Council. of Middle Eastern Advisers, as well as Bank seminas for public policymakers from Africa in particular, have he!ped to'place governance on a regionwide agenda as well. In Bolivia and Venezuela, at their governments' invitation, the World Bank held seminars recently with the leading presidential candidatesand their advisers to explain Bank strategies and to relate them to policy options prior to the elections. Although not explicitly focused on governance, these sessions added transparency to the local political process and allowed the Bank to piace important development issues in the context of the different parties' political platforms.
Policy dialogue has become a critical vehicle for raising governance issues with borrower countries. In its role as head of consultative group meetings, the Bank coordinates complementary approaches to the provision of aid in a way that strengthens the adoption of good governance practices." Chairing the meetings also often puts the Bank in the position of having to act as an intermediary between donors and the borrower countries'. Sometimes this involves issues that the Bank will not address in its own dialogue with borrowers because the issues relate to the political dimensions of governance that fall outside the Bank's mandate. However, the Bank has advised borrowing governments on such issues in the context of adequately communicating bilateral donor concerns-as these may have an impact on subsequent aid commitments and, thus, the financing of the government's economic program.
The Bank has also used policy dialogue as the vehicle for discussing issues that fall within the framework of economic governance but are nevertheless of a sensitive nature. Such concerns are raised both in the context of consultative 0 group meetings as well as in senior management discussions with a country's political leadership. The issue of military expenditures has been discussed with a number of African and Asian governments. Aspects of human rights that have an impact on the effectiveness of the Bank's assistance have also been raised in this way, and in a number of cour.tries, public sector corruption and its implications for continued Bank lending have been part of the dialogue agenda.
Finally, the World Bank's economic and sector work is being used as an 42 .

CONSULTATIVE GROUP MEETINGS
diting capacity; decentralize decisionmaking to encourage the growth of re-Governance has been a recurring sponsible local govemments theme of the consultative group meeting of donors and governments * Ensure greater participation of NGOS chaired by the World Bank since 1990. and civil society in the development The different dimensions of gover-. process nance-political, iristitutional, techni-* Make reliable, timely, and relevant cal, and material-have been recog-economic information available to.the nized by donors and governments as plers important factors in development Consensus has evolved on the need * Develop a legal framework to proto ensure accountability of govern-mote private-sector development and ment officials to their superiors and to public sector management the public, to enhance transparency * Ensure independence of the judicial in govemment expenditure programs and policies, and to develop and en-process, transparency of laws, and force a legal framework to promote freedom of-the media developmenta. * Protect the 'egal rights of women, Donors urged the goverments to: children, and labor.
effective tool for dialogue on governance issues. Country economic memorand, publicflnance reviews, public expenditure reviews, sector reports, Country procurement assessment reviews, and private sector assessments, for example, have all been used to bring to governments' attention the Bank's analysis and recommendations on govermance issues.

Participation and Governance
Participation is intrinsic to good governance. Indeed, participatory development can be thought of as a local-level reflection of good governance. Measures at the national level to improve the effectiveness and efficiency of govenment have direct parallels at the microlevel as well. Transparency enables people affected by development plans to know the options available to them. Accountability of government structures and officials to local organizations (for example, civil councils and village committees) reinforces macrolevel accountability. Due process of public hearings and other-local-level consulta-Corruption in some govemments defense take important social and ecowas also a concern.
nomic resources away from develop-In all meetings, the importance of ment programs, some governments public sector management. was dis-argued that these expenditures ought cussed. Administrative, financial, and jo be looked at in the geopolitical coninstitutional capacity for an effective text of the country. Bilateral donors also and efficient public sector was recog--emphasized that observing democratic nized as the central issue. Donors processes and respect forhuman rights stressed the need to privatize public are part of.good governance and susenterprises, eliminate excessive rules tainable development and regulations that constrain private sector development, and enhance procurement capacity for efficient use a. From October 1990 to January 1993, forty-five V of external assistance. Greatertransconsultalve group meetirgs were held fortwentynine countries. Following Is a list of the issues disparency in budgeting was deemed key cutsse n h ubrfconre wlhec -cssedandthe numberotcountdesforwhicheach to the continued availability of coun-Issue was discussed. miiitary expenditure (12); terpart funds. transparency (13); human dghts and democracy Clear consensus did not emerge (18); accountabllity (21); legal framework for def wrom any side on reducing mnilitary veTcpment (22); and public sector management spending. Although most governments agreed that expenditures on dons ensures that people affected by development acth ities can voice their concern, debate altematives, and negotiate compensat.on. Finally, the effective voice of local people, particularly the poor, can be increased by policy reforms at the national level that allow greater freedom to join nongovernmental organizations, trade unions, and other bodies to understand better and influence decisions Ciat affect them.
Public involvement thus helps improve information flow, accountability, due process, and voice and thereby improves public sector management.

Instrumentsforparticipatory development
Participatory development requires good govemance policies and practices within borrowing countries. The World Bank is assisting government efforts in this respect, as part of its regular institutional development work, by looking at factors that impede participation in borrowing countries. Staff incentives, training, and the skills mix of civil servants can be strengthened. In addition, the Bank can promote participadon in borrowing countries through its support to governments in their administrative and fiscal decentralization eforts and by strengthening the dialogue between governments and civil society.
The Bank is also encouraging a more participatory approach in its own economic and sector work and lending operations-to involve a wide range of entities that have a stake in the outcomes; from govemment bodies to NGOs and local community groups. The World Bank's report on portfolio management (World Bank 1992c) lists a variety-of actions that can deepen borrower ownership and public participation through information sharing, consultation, wider decisionmaking, and increasing local groups' iinitiatives on behalf of their own development. Available instruments include joint sector work with government agencies; beneficiary assessments and stakeholder workshops during project preparation and appraisal; and greater NGO and communitylevel involvement in the design, preparation, and implementation of projects. Other methods would include broader and more substantive borrower participation and leadership in implementation planning, project launch workshops, joint implementation reviews of the country portfolio, and joint discussions of country strategy, including the development of a pipeline of projects for futue financing by the Wotkd Bank.
The World Bank's new informnation disclosure polic;y, will facilitate public participation in borrowing countries.and increase transparency and accountability. Although NGOS by themselves do not ensure greater participation of the beneficiaries of World Bank projects, they are nonetheless likely to continue to play an intermediary role in channeling information to and from beneficianes. In the past year, NGOs have participated in 73 (30 percent) of the 245 NWurld Bank projects approved by the Executive Directors.

Recent initiatives
Against this background, an effort has been under way since 1991 throughout the World Bank to learn more about and strengthen efforts to promote participatory approaches in Bank work. This learning process has been supported by the Swedish International Development Authority and guided by the Bank's Participatory Development Learning Group. After the Bank's hosting of an international workshop on participation in February 1992 and with the support of senior management over the past year, the learning process has been transformed into a major effort to mainstream participation concerns into the Bank. In this respect the learning process has yielded several important products, and there have been some encouraging developments in participatory approaches throughout the Bank: * Select Bank-supported operations, including economic and sector work and lending, that are considered participatory have been identified and are being documented as best practice. About thirty-five cases are being analyzed, fifteen of them in depth. * A number of other studies are being produced on particular aspects nf Bank or country experience in promoting participation. One study focuses on popular participation in economic theory and practice (Gerson 1993). Another study examines how the Bank's procurement and disbursement procedures facilitate or hinder efforts to support community participation in projects. A study is also under way to determine the costs and time implications of supporting participatory approaches in Bank-financed operations. A further study, almost completed, statistically analyzes the experience of 121 completed rural water and sanitation projects around the world and shows clearly that participation is the single most important determinant of project effectiveness. * A handbook for World Bank staff on participatory approaches to development is being prepared with technical and financial support from the German Technical Assistance Agency (cTZ)1 2 .
* The World Bank's Africa Region has taken a clear lead in exploring and supporting efforts to promote participatory approaches. Workshops on participatory planning techniques have been held, and a few country implementation reviews have been conducted in a consultative manner. The Southern Africa Department issued an instruction requiring that each new pruject under preparatio!' include a provision for systematically listening to relevant stakeholders and beneficiaries. On the basis of its growing.experience, this department is preparing a guide for the staff on participatory assessments. Other regions are also actively pursuing participatory approaches. The Latin America and Caribbean region has tr ade explicit the link between strengthening popular participation early in the design of operations and ensuring borrower commitment to improving the quality, impact, and sustainability World Bank projects. And the Bank jointly sponsored with the South Asian Association for Regional Cooperation a regional workshop on poverty in South Asia, with a particular focus on promoting greater participation by the poor.
* Complementing its continuing work on poverty assessments, the World Bank has started to develop and employ participatory techniques to listen to poor people's own views on their condition and on poverty reduction strategies. Guidelines onparticipatorypoverty assessmentshave been prepared and some 46 GOVERNANCE ten participatory poverty assessments are expected to be undertaken in the coming year.
* InJuly 1993 aparticipatiotnfundwas established in theamountofUS$300,000 to support innovative activities in both lending operations and economic and sector work. Through the benefit of a matching requirement, the fund allowed World Bank staff to lay claim to up to US$600,000 in the past six months. More than thirty proposals have been submitted from twenty-five different units representing a wide range of countries and sectors; of these, seventeen have been approved. The fund was almost fully committed in less than two months and should be replenished in the current year in a larger amount.
The final report of the Participatorty Development Learning Group will' expand on the above lessons and drw on the cases and other studies commissioned for the learning process. A workshop will take place in May 1994 to review these lessons, to recommend how to make the World Bank's core business processes more participatory, and to improve staff incentives, training, and administrative procedures.

Making participation effective
Early lessons from the learning group on the practicalities of encouraging participation include the following: * It is already clear that there is growing staff awareness of the *..portance of participatory approaches, more so as a result of the work of the World Bank's Portfolio Management Task Force and the Nwa-Steps program. To ensure that the World Bank is in a position to support these efforts will require major investments in training and some changes in the skill mix of Bank staff. * Participatory development is not without risk: those with a stake may not gain directly from their efforts, or their benefits may be negated by external factors; local voluntary organizations may not represe:nt the views of ultimate beneficiaries; and elected officials and bureaucrats are often out of touch with the needs and interests of their constituents or are actively hostile to local initiatives.
* The extent to which participatory approaches yield better projects varies from sector to sector. In the water sector, for example, the experience with participation is well documented, and the approach clearlv works-all participants have an interest in cooperating to share water. In the education and health sectors, the scope for participatory approaches requires further exploration. Progress has been slower than expected with participatory poverty assessments.
* More work needs to be done on tlhe cost of using participatory approaches for project preparation. There are incremental overhead costs associated with participation, in the form of increased pressure on World Bank staff time and support costs. This may require tradeoffs with staff budgets and work programs, given the expectation of zero growth in the Bank's budgetary resources. Participation also implies a more flexible approach to the Bank's.traditional -project cycle.
* Despite these risks, there is evidence that projects requiring beneficiary -contributions of time ormoney are more effective. TheWorld Bank Operations-Evaluation Department's review of fiscal '992 project evaluations broughtout the importance of borrower ownership and beneficiary participation in the success of the twenty-four projects evaluated as outstanding. The greater the intensity of participation (in terms of information sharing, consultation, decisionmaking, and initiating action), the greater the sustainability.
s Government has a key role to play in promoting an environment for participation. With the right incentives, including a degree of autonomy, public agencies have been able to reorient themselves in support of beneficiary participation. Linked to this is the need to strengthen public sector management capacity and to encourage grcater decentralization in governments. The legal framework for intermediary organizations is also critical in supporting participation -of the poor.

Military Expenditures
The level of military expenditures in some countries has long been a concern of the Bank. In many developing countries, government budgets lack transparency, especially with regard to military expenditures. The latter may be no more thian a single-line entry in budgets, tax revenues may be directed to extrabudgetary funds, and military debt is often unrecorded. Military spending may not be properly scrutinized 'when budgets are prepared or accounted for and audited when the money is spent. Furthermore, the military in some countries may control protected state enterprises that impose a heavy fiscal burden. Because of the secrecy that traditionally surrounds military budgets and the sensitivity of governments to the questioning of defense outlays, and because providing for security needs is intrinsic to political sovereignty, the level of mili-tary expenditure has been seen as a governance issue rather than a straightforward matter of public expenditure priority. * In recent years, the World Bank's interest in military expenditurcs has grown. First, as countries struggle to contain fiscal deficits and create conditions for sustained growth, there is a need to shift resources from public consumption to more productive spending categories, such as infrastructure-and the social sectors, which contribute more directly to economic performrance. There are member countries in which the high share of military spending in the budget is crowding out allocations to pmgrams more directly relevant to social progress and economic growth. Second, the end of the Cold War provides an opportunity to reassess military budgets thatowed more to a country's association with major power blocs than to domestic or regional security needs.
Third, there is the perception by many bilateral donors that because of the fungibility of budget resources, aid has indirectly financed higher levels of. military spending than would otherwise have been possible. This concern applies as much to World Bank Group lending as it does to bilateral aid. Donors have raised the subject of military expenditure in aid coordination forums in which the Bank is looked toward for leadership. Some bilateral donors have m ade reductions in the level of military expenditures an explicit allocation criterion for their aid. Finally, there have been countries whose governments have directly sought Bank assistance, either for the conversion of defense industries topeaceful purposes orfordecnobilization and reintegration of former combatants into the civilian economy.
To explore the implications of military expenditures for the Bank's man-. date, a working group was convened in 1991. This working group reviewed the issues raised by military expenditures in relation to the 'Bank's Artcles of Agreement, whether the Bank had a comparative advantage in the field, and the types of assistance tbat might be-sought by governments trying to reduce military outlays. In addition, a symposium on military expenditure issues was held (Lamb and Kallab .1992). A clarification of the Bank's approach was provided to the Executive Board and to World Bank staff in December 1992 while the Bank agreed to work closely with the International Monetary Fund (IMF) in seeldng from borrowers.better information on military-related aggregate expenditures and military-related debt.
Within the framework of its guidelines, the World Bank.has confronted the issue of military expenditure in the cazc of several countries in which such allocations seemed excessive relatuve to spending on development-objectives and when important social and physical infrastructure programs were being starved of resources. Because of the sensitivity of the topic, the dialogue has been at the level of Bank senior management and country leaders. The Bank stands ready to work with borrowers to analyze the impact of nondevelopment expenditures, including.military expenditures, with a view to.reducing them to the extent feasible.
In some countries (Argentina and Uganda, for example), the World Bank has responded to government requests to develop options for bringing military. expenditures more in balance with other spending priorities and has provided broad support for implementing such changes. In such circumstances, care is taken to ensure that a proper distinction is made between 'those aspects of the subject that fall within the competence of the Bank.to advise on and those that lie outside it. Although the aggregate level of military expenditure is an appropriate area for-the Bank to focus on if such expenditure has an adverse impact on development programs, the focus on specific equipment purchases, for example, is not. The. Bank addresses the level of military expenditure in the context of the resources needed for economic development.
An important study has-recently been completed by staff of the Bank's Africa region on the comparative experience of eight countries in demobilization and reintegration of military personnel, following civil war. The purpose of the study is to better equip the Bank to provide assistance to countries that seek to reintegrate former combatants (box 2.4), a task that has some parallels (as well as major differences) with civil service reform and downsizing.
Several conclusions may be drawn from the Bank's experience of grappling with the issue of military expenditure. The first is the complexity of the. topic. Although there may be a number of countries where high levels of military expenditure crowd out budgetary allocations to more directly productive programs in the social and economic sectors and also contribute to high fiscal deficits, a direct inverse relationship between military expenditure and economic growth is difficult to establish. In an econometric study of data from 71 noncommunist countries (Landau 1993), no clear relationship could be found between military spending and economic growth except at very high levels of the former. A strong correlation, however, was found between military expenditure in one country and the level of 'Military spending in neighboring countries.
Second, the cases where the Bank has discuissed military expenditure as an issue have tended to be countries with a relatively high dependence on external aid flows. Since bilateral aid donors are increasingly making the level of military expenditure a criterion of their assistance, the issue inevitably arises in the dialogue with governments, given the Bank's central role in aid coordination forums. Elsewhere, the Bank's treatment of this highly sensitive issue has depended on country circumstances and the state of the dialogue with the government.
Third, as Argentina's experience shows (box-2.5), there is scope for developing what might be termed a governance approach to military expenditure. In contrast to many developing countries, civilian control over the military is mocratization. It sees an overall agenda emerging in the aid policies of its .member states with the following links: legitimacy of government (degree of democratizasion), accountability of political and official elements of government (media freedom, transparency of decisionmaking, accountability mechanisms), competence of governments to formulate policies and deliver services, respect for human rights and rule of law (individual and group rights and security, framework for economic and social activity, and participation) (OECD 1993).
Although human rights are in a larger sense indivisible, the WorldBank, as an international financial institution, deals with those aspects of human rights. -relevant to its mandate. Except in situations where the violation of human rights has created conditions hostile to effective implementation of projects or has' other adverse economic consequences, or where there are international oblig ations relevant to the Bank, such as those mandated by binding decisions of the U.N. Security Council, the World Bank does not take into account thepolitical dimensions of human rights in its lending decisions. The World Bank's Articles of Agreement prohibit the institution from taking political considerations into account, interfering in the political affairs of any country, or being affected by the political form or orientation of a country. Consistent with the Articles, the. f-ocus of the Bank's efforts in the area of human rights is on those rights that are economic and social in nature. 14 The Bank's contribution to economic and social human rights is embodied in its strategy on poverty reduction and has two mutually reinforcing elements. As elaborated in World Development Report 1990, the first element in this strategy is to promote the productive use of the poor's most abundant assetlabor-through policies that provide opportunities and enable poor people to participate in economic growth. Irn turn, this means economywide and sectoral polices.that encourage rural development and urban employment, such as relatively undistorted product and factor markets, sound macroeconomic management, public provision of infrastructure, and an environment that makes technical change accessible to small farmers and the poor. The Bank's strategy for economic and social human rights also means specific policies to improve the participation of the poor in growth by increasing their access to land, credit, and public infrastructure and services, together with special measures for resourcepoor regions where poverty and environmental degradation are interrelated. 5

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The World Bank has also-been concerned with the treatment of indigenous * people, such as in regard to resettlement and land titling. An example of the latter is the new Natural Resources Management Project in Colombia.
The second element in the Bank's poverty redtuction strategy is to provide basic social services to the poor, such as primary health care, family planning, : nutrition, and primary education, thus enhancing economic and social human 54.

GOVERNANCE
rights. These policies may also need to be augmented by targeted transfer programs and social safety nets.
The promotion of human rights through the.Bank's poverty reduction strategy is reflected in the growing share of World Bank lending commitments to human resources development. As noted in the Bank's 1993 poverty report (World Bank 1993c), total Bank lending to human resources development has --increased almost fivefold in dollar terms since the early 1 980s and rose from 5 percent of total Bank lending in fiscal years 1981-83 to 14 percent in fiscal years 1990-92. The share of lending further rose in fiscal 1993 lo 16 percent.
Accompanying the rising share has been a shift in the composition of. World Bank lending to human resource development, with lending now concentrated in the development and extension of basic social services, such as primary health care and primary education, with special emphasis on maternal and child health and on improving educational opportunities for girls. There has also been increased targeting of resources within projects toward the poor. An increasing number ofWorld Bank adjustment loans are addressing povertyrelated issues, such as the promotion of social safety nets, the protection and reorientation of public spending for social services, and the development of poverty policy and the monitoring of poverty conditions by the government. In addition, in recent years a major shift has occurred in human resources lending, with a growing numberof investment loans supporting the introduction, development, and extension of the various facets of social safety nets and labor market interventions, such as social security systems, health and social insurance systems, and social assistance schemes. Accompanying this has been a sharp increase in the amount of country-specific poverty analysis the World: Bank is carrying out, through its country poverty assessments and poverty related economic and.sector work. By mid-1994, twenty-nine country poverty assessments had been carried out, with a further forty;under way. These assessments provide a vehicle for dialogue on poverty issues-in some countries not just with governments but with a wider audience (for example, Uganda and Zambia).

Findings and Future,:Directions
A s this report makes clear, the volume o'f governance-related lending, economic and sector work, and research currently being conducted by the World Bank is substantial. Across regions, it is clear that. the areas where the WorldBank-is most comprehensively involved in governance are Latin America. and the Caribbean and Africa. In the Lati'n America and Caribbean a driving force behindthe Bank's engagement is the region's'strong desire for public sector modernization. In Africa the Bank's governance work is mostly a re-. sponse. to. a continentwide crisis of public. sector capaicity. Within geographic regions, the intensit of governancevwork varies from country to country-This unevenness is consistent with the original expectation that the Bank's support: for governance, the approaches used, and the instruments chosen would vary according to country circumnstances and be driven by country requirements. In many countries the Bank is at an early stage of support in.tackling governance issues, and the Bank's efforts must be.judged in. that light Looking to the future, the volume of the Bank's governance work is likely to continue to grow, and in regions such as Europe and Central Asia to expand significantly. A substantial part of the governance work in whtich the Bank is currently engaged comprises traditional public sector management categories such as civil service reform, public expenditure management, and public enterprise reform. This is a reflection that these categories are central to how power is exercised and that in these areas there is a substantial agenda of rehabilitation, Ss modernization, and change. At the same time the Bank has extended its governance activities to new areas of support, specifically accountability, rule of law, and transparency.
Much of this work is in response to a change in the paradigm of the state as governments seek to adjust from a pattem of control and intervention to one in which the role of government in the economy is to provide an enabling environment for the private sector. Here the requirement is for macroeconomic: management, selective intervention, greater use of indirect means for the delivery of public services, and a capacity to regulate where private providers enjoy a monopoly. This model requires a smallerstate equipped with a highly professional bureaucracy that is accouintable for results. Currently, divestiture of state. enterprises is. uneven, with disappointing progress in -regions such as Africa where the need for the state to dismantle large parastatal sectors through dives--titure and the reform of the remainder is very great. Few governments have transferred responsibility for functions to the private sector, and although there is widespread interest in contracting out, achievements have been modest.
In civil service reform, new approaches are needed for.restoring a professiornt bureaucracy, ensuring accountability, and dealing with formidable transition problems caused by historical overcommitment of functions and excess staffing. Although the need to reform the role of the state and expand the private sector is recognized in many countries, the transition is proving difficult. A major constraint is the problem of government itself-the unreconstructed state acting as a resource drain and an obstacle to both market-oriented economic adjustment and effective social action. The challenge for the World Bank is to assist in restructuring the public-sector in ways that go beyond employment reduction and bureaucratic rationalization to effect a new synergy -between smaller, more foensed governments and a renewed private sector.
Encouraging progress has been made in the past two years developing new * ways of improving accountability and effectiveness in the Bank's sector lending operations through the participation of beneficiaries in the design and implementation of projects. Although progress has been made with voice mechanisms to improve microlevel accountability, the creation of exit mechanisms, through such devices as competition in service delivery and vouchers, has been slower. This partly reflects the greater managerial demands exit mechanisms make on governments. The challenge now is to continue to expand the Bank's knowledge of participatory approaches and to apply them in areas where their use demonstrably improves the quality and sustainability of projects. For the Bank this will require considerable investrment in training and the recruitment of staff with new skills. It may also mean an increase in project preparation costs, although this should be amply repaid by higher economic and social returns and more sustainable projects. Furthermore, the challenge is notjust to FINDINGS AND FUTURE DIRECTIONS .57 use participatory approaches in Bank projects, but to encourage governments to adopt them more widely for their own programs..
A major thrust of the World Bank's governance work has been support for decentralization, responding in many countries to a fundamental shift in attitudes toward central government. At the same tirme there has been a reassessment of past approaches to-local government strengthening and the adoption of a comprehensive approach that views capacity building of local governments in the context of the allocation of functions between different tiers. This approach also asks whether this is matched with revenue capacity and examines the effectiveness of accountability mechanisms. Of critical importance is the nature and quality of the relationship between central and local or municipal agencies and the capacity of the central agencies to support the decentralization process. It is likely that.the World Bank's support for decentralization, through economic and sector work and capacity-building projects for lower tiers cf government, will continue to be an important part of the Bank's governance work and increasingly will incorporate a more comprehensive approach.
-As mandated, the World Bank's work has been exclusively on the eco-* . nomic and. social dimensions of governance (also consistent with the existing Bank staff skills and the comparative advantage of the institution). This is in contrast to bilateral aid donors who have made performance in the political dimensions of governance a criterion of aid allocation. The Bank, nevertheless, may find itself close to the political dimensions of governance in the policy dialogue with governments. This derives from its position as chairman of the * consultative group process, which entails responsibility.for coordinating external aid in support of a country's economic program. In addition, within its mandate, the Bank has discussed sensitive-issues such as the level of military expenditure where it is clear that high military expenditure is impairing fulfillment of a country's social and economic programs. In a more general way, consultative groups have proven to be an important forum for a governance dialogue between the Bank, bilateral donors, and governments and for the coordination of external support for a country's development efforts. Sinice the current policy of donor governments-making good governance, in both its political and economic dimensions, a condition for the allocation of bilateral aid-is likely to be maintained, the Bank's aid coordination role in facilitating a constructive exchange on these issues will continue to require sensitive handling. The Bank's governance work is highly relevant to present concerns of bilateral donors and international agencies with the development effectiveness of aid. Bilateral donors and other regional development banks are reviewing their aid programs. In the case of many bilateral donors this is occurring against a background of declining domestic support for aid, partly a conseqUeilce of -58 -. .

-GOVERNANCE
fading Cold War imperatives. More fundamentally, it reflects disillusionment with patterns of aid that have channeled' resources to governments without commensurate performnance improvement, institution building, and accountability. This crisis of development effectiveness has several implications for the Bank. First, it underscores the importance of Bank work on govemance, the need to deepen it, and the need to draw lessons from expenence. Second, it pointsto research on the impactof aidon public sector managementand governance. Third, it suggests that the Bank should broaden its understanding of corruption, how it affects development, the economic calculus that drives it, and the measures that governments may take to control *t.
More broadly the past two years of work on governancein the World Bailk underlines the key role played by institutions in the development process, both from the perspective of the enabling environment for the private sector and f6r. effective programs in the public sector in poverty alleviation and other areas.. Central objectives of the Bank's economic and sector work and research efforts in the coming years should be how to assist countries in building strong instituidons and to explore further the relationship between institutional development,. public sector management, and the other dimensions of governance. A better understanding of these key relationships should help operational staff develop. more coherent country strategies for institutional development and public management reform.
A major strategic issue for the Bank is how much further the govemance agenda should be developed. As this report makes clear, the main thrust of the Bank's governance work has been public sector management, but being mainly technical in character, it addresses theprocesses and machinery of public sector perforrmance, not necessarily its causes. This suggests'action at two levels: first, -moi-c determined attempts to foster iocal ownership of reform programs and, second, encouragement of institutions of civil society so they can grow and demand greater accountability from governments in the economic sphere.
Within the World Bank the new procedures now being introduced to improve project preparation and portfolio management are likely to have a strong positive influence on the work on governance. * First, the new country assistance strategy process will raise the profile of governance issues by bringing them to the Executtive Board in the context of country strategy discussions. * Second, through the country portfolio peffornwnce reviews, emphasis will be increased on systemic problems of project implementation. Many of these are governance related, thereby bringing governance issues that are relevant to the Bank's mandate to the fore in the dialogue with the country, in economic and sector work, and in the planning of.future lending operations. From the Bank's perspective, there must be a determined search for higher effi-. ciency.and greater Service, to balance the country dialogue's traditional emphasis on government constraints.' -Third, the World Bankl's new system of operationalpolicies:and procedures will provide guidance and best-practice advice to staff on relevant aspects of governance.
* Fourth, simplified procedures for the institutional developmentfund should facilitate its use for innovative governance-related purposes.
-*| * Fifth, the Bank's new disclosure policy provides an excellent opportunity to make much.more transparent to the outside world how the Bank approaches complex situations in borrowing countries. This is particularly opportune in'. -terms of the Bank's efforts to improve participatory processes.
The final area for emphasis is on staff skills to deal with governance issues. There is a need to upgrade staff skills in the broad areas of public sector management, institutional development, financial management (including accounting and auditing), procurement, and participatory approaches in the design and implementation of projects. NOTES 61 constrained by government salary scales, they recruit staff at market rates and typically include a general manager with a privatc sector background. Their accountability is through a framework agreemcnt with the govemment ministcr responsible for public works and through the production or quarterly financial accounts, indepcndently audited and scrutinized by govcrnmcnl donors.
7. Drawing on Albert Hirshman's pathbreaking work (Etit, Voice and Loyalty), Paul develops a framework for making public scrvices more accountable through (i) exft mneclhanismns, which allow bencficiaries to withdraw from a governmcnt-provided service to a more competitively provided service, at no additional cost to them, or which in other ways promote competition and choice; and (ii) voice mnechanisms, which allow bencficiarics a say in the design and operation of scrvices. "Capture" occurs when special interests gain control over a program to the disadvantage of others. Follow-up rescarch is now being conducted in the irrigation sector in Indonesia to explore ways to increase voice and improve accountability and efficiency.
S 8. For examplc, the World Bank's best-practice guide, to be issued shortly, requircs the CAS document to asscss "any govcrnance issues rclated to the government's willingncss and capacity to carry out necded reforms ...... " Future best-practice guidelines, covering such topics as investmcnt lending, recurrent cost financing, cost recovery, entcrprise reform and divcbtiturc, and public sector managemcnt, are likely to include explicit directives on governance issues. 9. Public sector management has bcen identifled as onc of the areas for cmphasis in World Bank staff recruitment, and a modest expansion in number of staff is expected relative to other categories.
10. See also the World Bank's "Report of the Financial Reporting and Auditing Task Forcc" (October 1993), which recommends that "due attention should be given to developing a family of training courses to ensure that staff are properly cquipped to deal with borrower accountability issues." (para. 29) 11. In recognition of the importancc of aid coordination and the policy dialogue, the Bank's Africa Region held a symposium on consultative groups in October 1992. The symposium's work has becn incorporated into the work of the region's so-called Thematic Team on Governancc.
12. A workshop in May 1993 assessed training objectivcs and explored strategies for increasing staff awareness and improving skills in participatory approaches. As reflected in the Next-Steps action plan, the Pcrsonnel Managemcnt Department of the World Bank is committed to offering an initial course for Bank staff in the conmng year.
13. Assisting countries in adjusting their economics to pcacetime is specifically mentioned in the World Bank's Articles of Agreement. Article I (i) gives one of the purposes of the Bank: 'The reconversion of productive facilities to peacetime needs..." 14. Article III, Section 5(b). For a fuller account of the Bank's position on human rights, see the World Bank's report to the Vienna Conference on World Human Rights, -The World Bank and the Promotion of Economic and Social Human Rights" (report submitted to the World Human Rights Confcrence, Vienna, June 1993).
Thus, "through its contribution to cconomic growth, its lending for human resources development, especially education, and for poverty reduction, its emphasis on