In the last decade it has become a maxim that good policies and investments will go to waste if they are implemented among dysfunctional institutions and poor governance. Yet, reforming public institutions is a complex and difficult task, involving fundamental changes in the ‘rules of the game’ which require long-term high-level commitment, detailed knowledge, and extensive support and assistance.
This report reviews recent work on governance, reform of public sector institutions and capacity building, and addresses what the World Bank can do to help countries implement this agenda. The report focuses on reforms of core public sector institutions such as administrative and civil service reform, public expenditure management, tax administration, and public enterprise, legal and judicial reform, as well as on their interface with sectoral institutions.
Poorly functioning public sector institutions and weak governance greatly limit growth and equitable development in many poorer countries. Helping the public sector work better is a two-fold process which involves defining its role in line with economic rationale and its own capacity, and helping it to enhance its performance within that role. The report notes that:
- Capacity building is defined as building effective, accountable institutions to address development issues and reduce poverty. It is the core of World Bank work
- The economic functions of the public sector can be divided into policy making, service delivery, and oversight and accountability
- The Bank’s understanding of how institutions work and can be strengthened is lagging behind its understanding of ‘first generation reforms’ such as exchange rate reform and trade liberalisation
- There are three interlocking mechanisms which promote public sector effectiveness and good governance: internal rules and restraints; partnership and ‘voice’ (allowing users/customers to be heard); and competition
- Money lent to individual projects is fungible because it frees up resources which can be allocated elsewhere. Therefore foreign aid has limited impact where weak policies and institutions are the norm
The World Bank needs to concentrate more on helping governments develop the capacity to design and implement their own good policies. Only through such institution building will governments reduce poverty and improve levels of inclusion, environmental sustainability and the strength of the private sector. Furthermore:
- National leaders must be committed to the process, and must be given charge of it if they are to feel a sense of ownership
- The Bank must understand the broad range of pressures and incentives that affect public sector performance
- World Bank work must be based on a good understanding of the situation in each country, so that policies are chosen which suit the environment, rather than proceeding from a ‘one-size-fits-all’ notion of what is best for any country
- To best understand country specifics, the bank must work with partners to develop and apply good analysis. Indeed, collaborating closely with partners in all aspects of the Bank’s work is essential
- The key to long-term development is to focus on institutional reform and accountability in the system as a whole
- The Bank must continue to develop skills to better build institutions, governance and capacity and to fine tune its own organisational setup as required to enhance responsibility, accountability and assurance.
