improving public sector governance: the grand … · improving public sector governance: the grand...

MANY GOVERNMENTS IN DEVEL-oping countries face the chal-lenge of delivering a wide

range of services essential for development—frominfrastructure and social services to the functioningof the legal system and enforcement of propertyrights—all of which pose the challenge of how toget governance “right.”

States have responded with varying degrees ofsuccess. At one end of the spectrum are the failedstates, where governments barely exist, and wherethey do, provide hardly any services. At the otherextreme are a handful of countries where govern-ments and their leaders are doing well by mostdevelopment measures. In between are weak orpredatory states that “consume the surplus theyextract, encourage private actors to shift from pro-ductive activities to unproductive rent seeking, andfail to provide collective goods” (Evans 1995, 24);young democracies managing simultaneous politi-cal and economic liberalization with weak bureau-cracies and few checks and balances; and moremature democracies where governments face thesame difficulties as advanced countries when itcomes to political corruption and abuse of office.Then there are the large, continent-size politiessuch as India and Brazil, within whose nationalboundaries can be found the entire range of gover-nance configurations.

Though extensive research had probed thecauses and impact of poor governance, and in par-ticular of corruption,1 it was not until the mid-

1990s, with improvements in data and econometrictechniques, that large, cross-country analysesemerged on the impact of governance institutionson investment and growth.This research has shownthat corruption—which is both a symptom andcause of bad governance—discourages privateinvestment and, more generally, that the quality ofgovernance institutions has a significant impact oneconomic growth (Mauro 1995; Knack and Keefer1995;Wei 1996, 2000;World Bank, World Develop-ment Report 1997; Kaufmann, Kraay, and Zoido-Lobaton 1999; Kaufmann 2003; Kaufmann, Kraay,and Mastruzzi 2003; Rodrik, Subramanian, andTrebbi 2002). Further, the research provides evi-dence that corruption distorts the allocation ofresources in ways that hurt the poor (Mauro 1998a,1998b;Tanzi and Davoodi 1998; Gupta, Davoodi,and Alonso-Terme 2002).2

Combined with urbanization and the spread ofdemocracy, and also the extensive public awarenessefforts of international organizations such as Trans-parency International and the World Bank,3 theempirical research gave rise to governance reformsin developing countries.These ranged from veryfocused technical reforms of budgetary and civilservice systems to more encompassing efforts suchas decentralization and the overhaul of legal andjudicial systems.

This chapter reviews these reform efforts andthe lessons they yield.Section 1 introduces key gov-ernance concepts and discusses why governancereforms are particularly challenging, and section 2

Improving Public Sector Governance:The Grand Challenge?

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Chapter 9

comes, both through elections and through checksand balances on the abuse of power. Periodic elec-tions provide the basic means through which citi-zens can hold politicians’ feet to the fire. Restraintsin the form of court adjudication of disputes amongcontracting parties, especially between governmentand the citizenry, and legislative oversight of execu-tive or ruling party decisions and actions, fosteraccountability between elections. In well-function-ing democracies, these latter features are embodiedin the constitution and promote the rule of law:everyone, politicians included, behaves in accor-dance with agreed rules as embodied in laws andregulations and no one is above the law.

However, many countries are not democraticand even in those that are, as discussed in the nextchapter, the conditions needed to make democracyfunction well are very demanding. In many coun-tries, the formal trappings of democracy do nottranslate into accountable decision making for avariety of reasons—from the lack of a truly inde-pendent parliament or judiciary to electoral marketimperfections. Even in countries with regular com-petitive elections among multiple political parties or

E C O N O M I C G ROW T H I N T H E 1 9 9 0 s280

draws emerging lessons. Recognizing that one sizedoes not fit all, section 3 presents a heuristicapproach to identifying avenues for reformsdepending on broad country characteristics. Sec-tion 4 concludes the chapter.

1. Understanding the GovernanceConundrum4

Public sector governance refers to how the stateacquires and exercises the authority to provide andmanage public goods and services.

The quality of governance (and thus the natureand extent of corruption) depends fundamentallyon institutions. As discussed in chapter 1, institu-tions are the “rules of the game” that shape thebehavior of organizations and individuals in a soci-ety (North 1990, 3). Institutions can be formalrules, such as a country’s constitution, its laws andregulations, contracts, and internal procedures.5 Orthey can be informal rules, such as the values andnorms that drive bureaucratic behavior. Scholarlyresearch and concern with institutions is not new,but a strong interest in institutions reemerged in the1990s, largely because the stronger macroeconomicpolicies of the 1980s had not achieved more rapidprogress in development and poverty reduction.Interest moved from “getting the policies right” to“getting the institutions right” and had a particularfocus—the rules of the game on which the gover-nance of the public sector is grounded.

Fundamentally, public sector governance isabout the nature and quality of three principal rela-tionships: between citizens and politicians, betweenpoliticians as policy makers and the bureaucracy(those responsible for providing public goods andservices), and between the bureaucracy as deliveryagents and the citizenry as clients (figure 9.1).6

Citizens and Politicians:The Heart of Governance In an ideal world, citizens can hold politiciansaccountable for their actions and for policy out-

Delegation and

voice

Providers

State capture

Bureaucratic capacity

Public goods/service provision

Policy-makers

Citizens Client power

Political accountability

accountabilityInternal

FIGURE 9.1

Citizens and Politicians

Source: Author’s elaboration.

candidates, elections often do not have the desiredeffect, so that politicians can easily renege on cam-paign promises and responsibilities.7 In either case,the relationship between citizens and politicians istypically governed by weak institutions—whetherpolitical institutions (rules or arrangements thatdefine, govern, and influence how leaders and otherpoliticians are selected and replaced) or institutionsof restraint (rules or arrangements that establishchecks and balances on the abuse of power andauthority). Courts are easily swayed by influentialpoliticians; the legislature rubber-stamps the nar-rowly focused special interest initiatives of the exec-utive; high-ranking officials abuse their authorityfor private gain; and enforcement agencies prey onthe citizenry. In other words, the rule of law is weak.

When the rule of law is weak, the risk of statecapture is high. State capture “refers to actions ofindividuals, groups, or firms… in the public and/orprivate sectors to influence the formation of laws,regulations, decrees, and other government policiesto their advantage, through the illicit and nontrans-parent provision of private benefits to politiciansand/or civil servants” (World Bank 2000a)8 and is aserious problem in many developing countries(Kaufmann 2003).When pervasive, it becomes theprincipal stumbling block for efforts to reform gov-ernance institutions.

Politicians and Policy Makers and theBureaucracy:The Core Principal-AgentProblemPoliticians make policy and are responsible to thecitizenry for the policies that are promulgated andimplemented, but they delegate the implementa-tion of policy to an army of bureaucrats. In dele-gating, they establish the rules and regulations thatgovern the operations of the civil service.Theseinclude, for example, formal institutions such as thecivil service code, the budgeting system,and report-ing systems as well as informal institutions (such asthe practice of amakudari in Japan).

Delegation almost always gives rise to theprincipal-agent problem.The principal delegates

I M P ROV I N G P U B L I C S E C TO R G OV E R N A N C E : T H E G R A N D C H A L L E N G E ? 281

the implementation of a task to an agent but willneed to monitor the agent efficiently to confirmexactly what has been accomplished.

To delegate implementation,policy makers estab-lish a compact with bureaucrats that has two majorfeatures. First, it provides the means through whichthe bureaucracy can develop and enhance its capac-ity to implement policies and deliver public goodsand services.Capacity in this context refers to (1) theskills bureaucrats need to deliver on various man-dates, (2) the resources (capital and financial) to sup-port the needed efforts, and (3) the processes andsystems (such as the budgeting system and the proce-dures for using it) that enable large numbers of indi-viduals to function efficiently together. Second, thecompact establishes means through which bureau-crats can be held accountable to policy makers forperforming their tasks.That is, the bureaucrats areresponsible to policy makers for accomplishing cer-tain tasks and are prepared to explain and face theconsequences of deficiencies or failures. Account-ability mechanisms typically involve checks and bal-ances internal to government agencies, such asinternal audit, ex post program evaluations, and expost reporting, as well as external restraints such asexercised by an ombudsman, supreme audit institu-tions, and anticorruption commissions.

Adequate capacity is needed if accountability isto work.Auditing, performance evaluation, report-ing, investigations, and prosecution require infor-mation. And to produce the right informationrequires processes, skills, and resources to provideappropriate infrastructure and create appropriateincentives. In the same vein, more effectiveaccountability helps strengthen capacity becausepolicy makers are more willing to grant greaterflexibility and because resources make the bureau-cracy even more effective. Figure 9.2 highlights thesalient features of the compact.

The nature of the compact between policymakers and bureaucrats critically determines theoutcomes of policies.When the compact is defec-tive, because capacity is weak or accountability ispoor, administrative (or bureaucratic) corruptiontypically emerges.Weak capacity and accountability

Bureaucrats and the Citizenry:Where the Rubber Hits the RoadMost citizens’ immediate contact with the state isthrough the bureaucracy. Citizens can complain totheir congressman or mayor about the poor qualityor inadequacy of some service and hope that therepresentative will intercede with or pressure thebureaucracy on their behalf. If they are generallyunhappy with the response, they can vote the per-son out of office. But they cannot penalize or pun-ish bureaucrats directly or officially.10

Citizens acquire leverage over the bureaucracy ifthey can organize themselves into nongovernmentalorganizations (Rose-Ackerman 2004).The capacity toorganize gives citizens “voice” (the ability to monitorthe performance of the bureaucracy,generate valuableinformation, and pressure politicians for action) and“client power” (the ability to engage directly with theproviders of services). Both of these attributesstrengthen the compact between politicians and thebureaucracy and thus help to improve the delivery ofpublic goods and services.11 Figure 9.3 highlights therole of voice and client power in the triad.


translate into numerous opportunities for solicitingor extracting bribes and other illicit payments.9

The compact is itself partly conditioned by theextent of state capture. Administrative corruptiondiffers fundamentally from state capture but isinextricably linked to it. Politicians are at the heartof state capture—whether as perpetrators or aswilling respondents to the captors—but since it isbureaucrats who implement the distorted policiesthat result from capture, corrupt politicians needat a minimum the acquiescence of at least somesegments of the bureaucracy. In practice thisimplies that politicians constrain the capacity ofbureaucrats or weaken their accountability. Forinstance, in many developing countries, the annualbudgets allocated to the ombudsman or to thesupreme audit institution are inadequate and thepersonnel appointed to key posts are rarely themost qualified (Heilbrunn 2002). Moreover,politicians will prefer to sustain clientilistic prac-tices within the bureaucracy rather than to intro-duce formal, transparent merit-based recruitmentprocesses (World Bank 2000b).

Administrative corruption

Delegation and

voice

Providers

State capture



Policy-makers




FIGURE 9.2

Politicians and Policy Makers and the Bureaucracy


Delegation and

voice

Providers

State capture



Policy-makers




FIGURE 9.3

Bureaucrats and the Citizenry


Citizens generally find it difficult to organizethemselves, however. Collective action is costly andthus does not always emerge naturally.A weak linkbetween citizens and politicians, as when electoralprocesses are flawed, can exacerbate the problem ofadministrative corruption:desperate for service, cit-izens may ultimately offer bribes to bureaucrats orto give in to bureaucratic demands for bribes.Theinability to organize can thus worsen an alreadydefective compact.

2. Public Sector GovernanceReforms in the 1990s

Using the three-part analytical framework outlinedin section 1 as a guide, this section identifies somepotential lessons from the governance reforms ofthe 1990s.

Enhancing Political Accountability:Legal and Judicial Reforms Democracies, particularly nascent ones, face dilem-mas in promoting genuine political competition,and thus in establishing political accountability.When the citizenry cannot clearly attribute respon-sibility for poor outcomes to politicians, elec-tions—already blunt instruments foraccountability—become distorted, and this enablesnonperforming or poorly performing politicians toremain in power (see also chapter 10).12

Perhaps partly because of the immense diffi-culty of addressing problems in political institu-tions, countries in the 1990s turned to the otherchannel of political accountability: reforming legaland judicial systems,which seemed more amenableto technical solutions.13 Two trends—the privati-zation thrust and the new emphasis on private sec-tor development—helped to make legal andjudicial reform an imperative in many developingcountries.14 Several other factors also provided animpetus: globalization and trade, drug trafficking,human rights, immigration, protection of intellec-tual property, suppression of terrorism, and the


consolidation of emerging democracies (Messick1999). Law reform and development activities sky-rocketed during the decade, encouraged by sup-port from the international financial institutionsand key donors.15

Pragmatic Approaches Have Been More Effective and Are More Likely to SucceedMost reforms affecting private sector law weresupported through short-term technical assistanceinvolving foreign law professors or expert practi-tioners (Kovacic 1995; deLisle 1999).The foreignexperts typically brought the text of their owncountry’s laws, either as a basis for drafting acountry-specific statute or simply for adoptionwholesale.16

Many of the new laws have had little or no effecton behavior. For example, several former Sovietnations have statutes that on paper provide corpo-rate shareholders more protection than underFrench or German law, but in practice, as capitalflows attest, investor rights in France and Germanyare much more secure (Pistor, Raiser, and Gelfer2000, 65). Albania and Romania have enactedstatutes governing the posting of collateral for a loanand the regulation of banks and securities markets,but businesses report that the statutes are ineffective(Gupta, Kleinfeld, and Salinas 2002, 13–14). Andalthough new laws in Bangladesh, Benin, and Pak-istan require bank debtors to repay their outstand-ing loans immediately, most debts remain unpaid(Messick 1999).

Experience emphasizes the need for pragma-tism in legal reform. First, a new law must reflectthe realities of the institutional environment withinwhich it is to be inserted, including in particularthe state of the institutions that will enforce it—judiciary, ministry of justice, the police, and regula-tory agencies (box 9.1).When the agencies thatwill enforce a new law are corrupt, technicallyincompetent, or insufficiently independent ofpolitical authorities, the law must compensate forthese deficiencies.

Second, implementation is easier if a new lawincorporates customs, or norms that citizens are

and legislators but also of businesses and other civilsociety groups.

Poor Incentives Rather than Weak CapacityHave Been the Root Cause of Poor JudicialPerformanceConcern to improve the implementation of lawsgave rise to parallel reforms of the judiciary. Early inthe 1990s, reforms focused on contract enforce-ment, influenced by seminal work on institutionsand economic growth that emphasized the impor-tant role that contract enforcement plays in eco-nomic development (North 1990;Weingast 1995;see also Oliver Williamson 1985).The rationale forjudicial reform broadened as the decade unfolded,and with increasing frequency a better functioningjudiciary was linked to, if not equated with, the ruleof law.17 This broader emphasis coincided with thegrowing recognition in the international commu-nity that a well-performing judiciary was part of thesolution to many development problems. By theclose of the 1990s, judicial reform had, in the wordsof one practitioner, become “the big tent for social,economic,and political change generally.”Because itlent itself more readily to technical solutions, judicialreform became the entry point for addressing aproblem that was fundamentally political in nature.

The widening of objectives caused significantchanges in judicial reform programming among assis-tance agencies.At the World Bank, for example, judi-cial reform projects to create commercial courts andsupport similarly focused interventions gave way tomuch more ambitious undertakings: supporting newinstitutions to assume responsibility for governing thejudicial branch, revising rules on the selection andpromotion of judges,overhauling the management ofthe judiciary’s human and physical resources, rootingout corruption, constructing new court houses andequipping them with modern communications andcomputer technology, training lawyers and judges,providing programs to reach out to women and thepoor, and establishing administrative courts.

Judicial reform proved to be a far greater chal-lenge than expected.As did the attempted reformsof other public sector institutions during the 1990s,


already observing. Hernando de Soto, for instance,spearheaded several law reforms in Peru that incor-porated the norms and practices of street vendors,urban transit operators, and small landholders (deSoto 1989). Peru’s new land law, granting urbansquatters property rights to their land, relies on cus-tomary methods of showing possession to establishthese rights.

Experience also shows that a transparent andinclusive reform process reduces opposition to anew law and enhances compliance with it. In itsprojects, the European Bank for Reconstructionand Development has included representatives notonly of government ministries, regulators, judges,

BOX 9.1

Bright Line Rules versus Standards

An early lesson that law reformerslearned was the importance of sub-stituting bright line rules for stan-

dards wherever possible. A bright line rulespecifies the exact conduct expected (forexample a law establishing a 45 miles perhour speed limit) whereas a standard leavesthe question of violation to the enforcementagency (for example a law that makes a “rea-sonable speed” the limit). Bright line rulesput less of a burden on enforcers than stan-dards. Determining whether a driver wasexceeding 45 mph is straightforward,whereas deciding whether a speed was rea-sonable requires investigation into such fac-tors as time of day, weather conditions, andthe presence of pedestrians and other traffic.Bright line rules leave enforcers with little orno discretion and so reduce opportunities forbribery. Since the enforcement of bright linerules is far easier to monitor, this can provideopenings for self-help and other means ofenforcing the law without resort to theauthorities.

most of these interventions produced little change(Burki and Perry 1998). As experience grew, itbecame clear that the roots of poor performance inthe judicial system lay much less in a lack ofresources and skills than in the behavior of judges,clerks, lawyers, and litigants. For example, India hascreated an enormous number of tribunals to handlecivil service, tax, land, and consumer cases, toreduce the burden on the regular civil courts andspeed up the disposition of cases, but these reformshave had little effect (Moog 1997).The reason isthat lawyers, clerks, and many litigants have aninterest in court delays and thus continue to frus-trate reform efforts. State capture has compromisedthe proper functioning of formal institutions.

Development of Complementary Institutions IsEssential for ReformThe absence of parallel institutional reforms will tendto negate any progress in judicial reform. For exam-ple, efforts to improve the judiciary will be hinderedif they are not complemented by reforms of thepolice and the public prosecutor offices (box 9.2).

While most efforts at judicial reform focused onimproving court systems, some dealt with alterna-tive dispute resolution mechanisms, offering arbi-tration, mediation, and other dispute-resolutionmethods as a way to channel disputes away fromthe courts to private fora.These projects tended tooverestimate the potential of alternative dispute res-olution methods. Unlike state-sponsored courts,private dispute resolution fora cannot induce theparties to appear or to comply with the resultingdecision. For private methods to substitute effec-tively for resolution by the courts, the parties musthave some incentive to submit their dispute and tobe bound by the outcome.

At the same time, the projects largely ignoredthat many disputes could be avoided altogether ifmore information were available on the creditwor-thiness and reliability of potential contracting par-ties.The importance of credit bureaus and otherdevices for sharing information is beginning to berecognized. For instance, recent research has shownthe significance of information availability for


deepening credit markets (World Bank, WorldDevelopment Report 2003, 101–103).

Improving information sharing is a relativelyapolitical approach to improving the rule of law,butby itself it cannot solve the problems of crediblecommitment that are inherent in contractingamong private parties.The question that then arisesis what else a country can do to make an invest-ment environment more predictable, while waitingfor the courts-based rule of law to emerge.

Reforms to the Legislature Deserve Greater AttentionIn most countries, the legislature is the constitu-tionally mandated institution through which theelectorate holds government to account. In doingso, the legislature can use several means, includingapproval of budgets, the questioning of senior gov-

BOX 9.2

Integrated Justice Sector Reforms: The Jamaican Case

The justice sector plays a critical role in enforcingthe rule of law and protecting property rights andthe rights of citizens. Safeguarding the accounta-

bility mechanisms that underpin the justice sector requireseffective collaboration between the courts and the police.Successful violence reduction programs substantiallyincrease the cost of crime by combining a high probability ofcapture (by the police) with a high probability of conviction(by the judicial system).

Jamaica’s fairly well-developed judicial system has beencriticized because of dramatic increases in political andcriminal violence. To have an effective crime preventionstrategy, Jamaica would need to match the effectiveness ofits judicial system with better police capabilities; it wouldneed to increase police accountability and improve police-community relations.

Sources: U.S. Library of Congress country study and study by theWorld Bank Group Jamaican country team, 2004.

In assistance for democracy, it is support to leg-islatures that most often falls short of its goals, andlegislative strengthening efforts should be seen ascomplements to related improvements in gover-nance. In the case of money committees, this meansdovetailing reform activities with broader efforts toenhance government accountability and strengthenpublic financial oversight, and ensuring that train-ing activities include participants from other stake-holder organizations, such as the ministry offinance, the auditor general’s office, and representa-tives from civil society.

Strengthening the CompactFor more than two decades now, public sectorreforms have focused strongly on improving thecompact between politicians as policy makers andcivil servants as implementers of policy andproviders of services.With the fiscal crunch arisingfrom the debt crisis of the 1980s, efforts to pruneand rationalize the role of the state led to privatiza-tion of state-owned enterprises. Budget and finan-cial management reforms were initiated, and evenchallenging and controversial New Public Manage-ment reforms were undertaken in a great numberof developing countries.18

The public sector reforms had essentially twothrusts.The first was to build the capacity of thepublic sector—personnel skills, systems, andprocesses—to formulate and implement policies.The second, whose emphasis increased during the1990s, was to instill clearer and more bindingaccountabilities in civil servants to policy makersand politicians. Underpinning both of these trendswas the move toward greater democratization ofpolitics, which sought to strengthen politicalaccountability.This often took the form of a majordecentralization of financial and functional author-ity to local governments, to bring governmentscloser to the people.

Three caveats apply to the lessons offered below.First, given the slow pace at which institutionschange, and the fact that most of these reformefforts are rather recent, it is too early to reach


ernment officials, the review and confirmation ofexecutive appointments, impeachment and/or thepower to dismiss the government, the establishmentof parliamentary committees, and the formation ofcommissions of inquiry.

Relatively few attempts were made to reformlegislatures during the 1990s (Manning and Stapen-hurst 2002).The reasons included the more politi-cal and controversial nature of such reforms,donors’lack of experience with such reforms, and the nas-cent state of many legislatures (Lippman andEmmert 1997).

Nevertheless, the spread of democracy createdthe space for legislatures to evolve into independentpolitical institutions that could oversee the execu-tive and, with or without foreign assistance, legisla-tures ventured slowly to build their oversightcapacity. Numerous organizations, including bilat-eral donors, multinational organizations, and inter-national financial institutions, supported theseefforts.Their assistance ranged from supplying officeand other equipment to helping establish legislativebudget offices and strengthening committees.

The decade saw a trend toward legislative budgetactivism in developing and transition countries,reflecting the process of democratization and theopening up of possibilities for legislative involve-ment in what were previously closed budgetary sys-tems. In Brazil, for example, where Congress hadhistorically played no significant role in the budgetprocess, constitutional changes gave Congress pow-ers to modify the budget. In Africa, too, changesoccurred. For example, South Africa and Ugandapassed financial administration or budget acts thatgive more influence to the legislature during thebudget formulation and approval processes.

The experience to date suggests that developing-country legislatures have a long way to go before theycan adequately perform their oversight functions,especially over national budgets. Building oversightcapacity involves, among other things, strengthening“money committees,” establishing dedicated researchstaff, enhancing complementary institutions such asnational audit offices,and encouraging public input atthe various stages of the budget cycle.

definitive conclusions about successes or failures.Second, very little systematic research has evaluatedresults and outcomes.Third, since reforms implychanges in formal and informal rules, both ofwhich are deeply rooted in a country or organiza-tion’s culture and history, it is not obvious that suc-cessful reform efforts in one organization can betransplanted into other circumstances.

Fiscal ManagementGovernments faced with populist pressures can strengthenfiscal discipline by tying their own hands. During the1990s, governments attempted to improve fiscal dis-cipline in a number of ways.As noted in chapter 4,the most high-profile efforts granted independenceto central banks, as a means to clarify the banks’direct responsibility for controlling inflation and togrant them the flexibility to meet this mandate.Recent research suggests that the central bank’s abil-ity to play this role depends heavily on the natureand efficacy of checks and balances in the largerenvironment (Keefer and Stasavage 2003, 407).

On the public expenditure side, the experienceof the 1990s suggests that institutions define andconstrain the political bargaining that affects fiscaloutcomes.19 Well-defined antideficit rules, especiallywhen coupled with credible limits on governmentborrowing, induce smaller deficits and more rapidadjustment of taxes and spending to unexpected fis-cal shortfalls.20 In recent years, a number of develop-ing countries and subnational governments havepassed fiscal responsibility acts to strengthen fiscalmanagement.These laws enhance transparency, aswell as the accountability of the executive to the leg-islature and the accountability of both the executiveand the legislature to the citizenry, by stimulatingdiscussion of fiscal policies and their implicationsbefore and after budget deliberations.Although nostudies have yet assessed their effects, the new lawsare expected to strengthen fiscal discipline.

Fiscal transparency is essential for maintaining fiscaldiscipline. The Asian financial crisis highlighted theimportance of budget transparency, since hiddencontingent liabilities can destroy the fabric of fiscaldiscipline. Greater budget transparency provides a


basis for informed debate about budgetary policyamong the public and the legislature, and withinthe executive; it also increases the chances that fiscalrisks will be identified and policy responses put inplace. But the adoption of more transparent prac-tices has often been slow, partly because of capacityconstraints and partly for political reasons (box 9.3).

A medium-term expenditure framework (MTEF) willwork only if politicians embrace it. Many countriesadopted MTEFs during the 1990s, as a way toincrease the transparency of budgeting and enhancethe predictability of agency budgets.The primaryfunction of an MTEF is to infuse a multiyear per-spective into budgeting, enabling policy makers torecognize the implications of current budgetarydecisions for future government finances and creat-ing a more disciplined, sequenced budget processthat clarifies the deliverables and accountabilities ofboth central and line ministries.21 Part of anMTEF’s value comes from the discussion, debate,and agreement that it generates among differentparties engaged in the budget process—in particu-lar the legislature—about the tradeoffs that need tobe made among programs, activities, and projects.To be effective, an MTEF needs to be integratedinto the budget process and budget documents.

Among Organisation for Economic Co-opera-tion and Development (OECD) countries, fewhave adopted the full plethora of features ofMTEFs, whether by choice or by circumstance.22

Their adoption of multiyear features evolved grad-ually, usually as technical improvements to thebudget process.Their experience suggests that anMTEF may be better used as a conceptual frame-work for thinking how elements of budget reformfit together, rather than as a reform in and of itself.Pursuing the key features of an MTEF individuallyappears to be a more effective approach thanwholesale adoption of the full gamut of features.

Largely through donor initiatives, developingcountries have introduced the MTEF as a processtechnically superior to annual budgeting. In Africa,implementation has been slow and MTEFs have notproduced the expected results.As of 2002, 19 coun-tries had MTEFs at some stage of implementation,

the state should match its role to its capacity, sincetaking on too much makes the state less effective.This was certainly evident from the various reformsthat were pursued in public expenditure manage-ment, but it is perhaps most salient in the attemptsof many developing countries to adopt New Pub-lic Management (NPM) approaches.

NPM reforms are a challenge even in countrieswith strong capacity. In environments where thebasics are very weak, resort to NPM-style perform-ance management techniques has been associatedwith poorer performance, as measured by increasesin administrative corruption (Anderson, Reid, andRyterman 2003; Schick 1998).These authors foundthat the most significant factor contributing to betterperforming public organizations is the creation ofmerit-based personnel management practices: put-ting in place recruitment and selection systems, per-formance evaluation procedures, promotion


but only five had integrated MTEFs in a meaningfulway into their budget processes.In most cases,MTEFshave operated in parallel to the general budget process(Le Houerou and Taliercio 2002). Only four coun-tries had submitted MTEFs to both cabinet and par-liament and, in some cases, the MTEF has remainedstrictly a technical document of the ministry offinance (Le Houerou and Taliercio 2002, 13).

Just as is the budget, an MTEF is fundamentallypolitical. Its effectiveness depends heavily on thewillingness of politicians to embrace it as areformed budget process and to accept the disci-pline it brings.

Organizational and Human Resource ManagementCapacity constraints are binding: strategic incrementalismmay be the only option for many developing countries.World Development Report (WDR) 1997 argued that

BOX 9.3

Fiscal Transparency and Developing Countries

The International Monetary Fund introduced theCode of Good Practices on Fiscal Transparencyin 1998 as a response to the financial crises of

the late 1990s, and updated it in 2001. The Code isbased on the following objectives: roles and responsi-bilities in government should be clear; information ongovernment activities should be provided to the public;budget preparation, execution, and reporting should beundertaken in an open manner; and fiscal informationshould attain widely accepted standards of data qualityand be subject to independent assurances of integrity.

The IMF helps countries to implement the fiscaltransparency code through participating voluntarily infiscal modules of reports on the observance of stan-dards and codes (ROSCs). These assess the availabilityand quality of fiscal data and evaluate the fiscal man-agement framework, including relations between levelsof government and accountability for fiscal activities

outside the budget. As of end-2003, ROSCs had beencompleted in 63 countries; 58 of these reports had beenposted on the IMF Web site.

Countries electing to have a fiscal ROSC are oftenthose already engaged in fiscal management reform,yet in developing countries the reports have identifiedpervasive problems of data quality (unreconciledaccounts, lack of clarity in accounting policies, weakexternal audit); excessive discretion in tax administra-tion and poor enforcement; unrealistic budgeting; weakinternal controls; significant payment arrears; and lackof clear responsibilities at various levels of government.In a number of developing economies, the scope andextent of off-budget activities (including quasi-fiscalactivities) is an issue to be addressed. Further, exceptfor a few industrial countries, most countries do notquantify tax expenditures. Many of these problemsreflect underlying institutional problems.

Source: IMF 2003e.

procedures, salary-setting rules and procedures,wagebill controls, and due process protections, and ensur-ing that they function as planned.23 The implicationis that these core systems and practices are precondi-tions for effective performance management.

Performance-based budgeting emerged as acorollary reform of NPM,and over the past 20 yearsOECD countries have gradually shifted the focus oftheir public sector budgeting and management frominputs to outputs. Arguably this development hasenhanced public sector management and increasedthe effectiveness and efficiency of governments.But, as has the multiyear expenditure framework, ithas taken many years to mature.And the experiencehas debunked the earlier belief that performancemeasurement can often be an effective catalyst fororganizational change (Schick 2003). An importantlesson for developing countries is the fact thatOECD countries already had basic personnel man-agement systems that functioned very well,many inthe Weberian tradition, before they launched intoperformance management and budgeting.

Capacity constraints and political imperatives canseverely impede civil service reform. In many develop-ing countries, establishing basic personnel manage-ment systems requires overhauling the civil service.A malfunctioning civil service creates disillusion-ment among the citizenry, and a de-politicized, rea-sonably well-compensated, and skilled civil servicecan serve as a credible commitment mechanism sig-naling that better public services are on the way(Shepherd 2003).Thus one might expect politi-cians to be interested in improving the internalincentive mechanisms that affect the civil service.However, many developing countries attemptedcivil service reforms under conditions where clien-telist politics of one form or another were alreadydeeply entrenched. Hence the reforms met formi-dable opposition and, not surprisingly, their resultshave been quite discouraging (World Bank 2000a;Levy and Kpundeh 2004). A key part of the diffi-culty is that such efforts must inevitably transfersome authority from the political echelons (legisla-tors, ministers, and their political appointees) to acadre of de-politicized officials (civil servants)


(Manning and Parison 2003). In many developingcountries, the political history and environmentmake this a gargantuan task.

Enclaving is a potential path to sustained reforms ofthe civil service. The challenges of politics and capac-ity constraints have led some countries to experi-ment with enclave approaches to civil servicereform, spinning off selected government entitiesfrom central government ministries.

Increased autonomy for revenue collectionagencies became a key feature of governancereforms in Latin America in the early 1990s, start-ing with Peru in 1991, followed by República Boli-variana de Venezuela, Mexico, Bolivia, Guatemala,Argentina, and Colombia. Such reforms becamepopular in Africa in the late 1990s, with 12 coun-tries experimenting with revenue boards or semi-autonomous agencies. In Asia, by contrast, onlyMalaysia and Singapore have given greater auton-omy to their tax administrations, although othercountries in the region are beginning to considerthis.24 In general, an autonomous revenue agencyhas more flexibility in managing personnel andfinances and more control over corporate gover-nance than does the typical government agency.Atthe same time, it also has clearer and more transpar-ent accountabilities.The introduction of such agen-cies implied that collections would increase andservice would be more taxpayer friendly.

In practice, the performance record of theseagencies has been mixed.25 Performance problemshave resulted mainly from lack of political support,tensions between the autonomous revenue agencyand the ministry of finance, and poor organizationaldesign, including weaknesses in the new accounta-bility regime.Nonetheless, on the whole the recordsuggests that,with enough political push and properdesign, these agencies can improve tax administra-tion and be sustainable (box 9.4).26

Given the immense difficulty of overhauling thewhole of government, for many developing coun-tries enclave reforms may be the only game intown.The important lesson is that enclaving mustbe strategic if it is not to constrain and/or distortthe capacity-building efforts of government (box


9.5).27 Part of the reason why autonomous revenueagencies have been modestly successful in somecountries is that revenue collections dictate govern-ment budget envelopes.

In Africa, narrowly focused strategic interven-tions tended to be more successful than broaderreforms over the long run, and among the morenarrowly focused reforms, the capacity-buildinginitiatives that focused on improving expenditureaccountability were considerably more successfulthan those that focused on human resource man-agement, according to Engberg-Pedersen and Levy(2004).These authors conclude that the expendi-

BOX 9.4

SUNAT in Peru: A Modest Success

In the late 1980s, Peru decided to set up a semi-autonomous revenue authority (SUNAT), since taxadministration was riddled with corruption and on the

verge of collapse, with revenue collections dropping to arecord low of 9 percent of GDP in 1988. A comprehensivestaff screening and replacement program was initiated, andless than one-third of the original tax administration staffwas rehired by the new organization. A modern humanresource management system was introduced and SUNAT wasallowed to operate under private sector labor laws and with-out undue political interference. Salaries were adjusted toprivate sector levels. A new financing mechanism providedfinancial stability. By 1997 tax revenues had recovered to 14percent of GDP.

After its successful start, however, SUNAT suffered fromdecreasing political support for efficient revenue collection;a decline in the quality of the tax policy framework, whichmade fair and efficient tax collection more difficult; andincreased interference by the Ministry of Finance. As a con-sequence, SUNAT has suffered a loss of standing in publicopinion. Despite these problems, however, its creation haspermitted the launch of far-reaching efficiency- andintegrity-enhancing reforms, which are having an ongoingimpact. Revenue collection, at 12 percent of GDP in 2001,remains far above the prereform level.

BOX 9.5

The Enclave Conundrum in Uganda

The Government of Uganda now hasto decide the fate of more than 70enclave units, most of which are

outgrown project implementation units andsemi-autonomous organizations called secre-tariats. These were set up at the behest, orwith support, of donors who doubted lineministries’ capacity and were dissatisfiedwith ministries’ procurement practices. Theenclave units were allowed to set their ownwage rates, above ministry levels, based onthe premise that the necessary skills wouldnot be available at the public service’s lowsalary levels.

Ironically, with these higher salaries, theenclaved units recruited substantial num-bers of skilled personnel from within thepublic service, depleting the capacity ofministries and demoralizing competent min-istry staff.

Enclaving has also undermined thebudget process. First, although budgetedunder development expenditures, two-thirds(71 percent) of the enclave units’ expendi-ture is of a recurrent nature. These recurrentexpenditures come from the government’s 10percent contribution to donor-funded proj-ects. While this may seem a nominal propor-tion of any project’s total budget, the totalconstitutes nearly one-third (28 percent) ofthe government’s own generated funds. Thissignificant share is spent without the rigorthat is associated with allocating other gov-ernment expenditures.

Source: Draft report, “Affording Uganda’s PublicAdministration Sector” (December 2003), WorldBank. The report is currently being reviewed bythe Government of Uganda.

ture accountability reforms, given their more tech-nical nature, may have been less threatening tovested interests than the more politically sensitiveadministrative reforms, and, perhaps more impor-tant, that expenditure reforms produce more read-ily observable results that generate the generalpublic support needed to counter vested interests.

Values, commitment, and pride in public service mat-ter as much as controls and compliance. NPM reformssought to introduce stronger market-based incen-tives as a means of reforming government bureau-cracies. Emulating the experiences of developedcountries such as New Zealand and the UnitedKingdom, developing-country governmentsadopted performance management techniques thatgrew out of reforms in the private corporate sectorand sought to enhance the autonomy and account-ability of public sector managers and staff. Suchreforms have arguably led to improved service and


performance in developed countries, but have hadlittle success in developing countries.

Industrial countries’ experience with industrialperformance and workplace transformation showsthat workers’ dedication to the job is an importantexplanation for improvements in performance(Tendler 1997).Recognition of this relationship hascaused firms that perform well to pay close atten-tion to innovative practices that increase workerdedication.Tendler contrasts this with the develop-ment literature, which has been rife with suspicionthat “civil servants are self-interested, rent-seeking,and venal, unless proven otherwise.”Her research inCeará, Brazil, demonstrates that the creation of asense of calling and ownership around public ser-vice by a committed leadership, a dedicated workforce, and an informed and engaged civil societycan increase acceptance of reform and improve ser-vice delivery (box 9.6).

BOX 9.6

Building a Sense of Calling and Commitment in Public Service Delivery: Ceará, Brazil

Ceará has substantially improved its preventivehealth services, as reflected in indicators suchas infant mortality and vaccination coverage.

Agriculture programs have raised output and productiv-ity. Spillover effects from procurement reform programshave resulted in local economic development, in addi-tion to increasing output and productivity for small-firmsuppliers. Public works construction has created morejobs in the economy than usual, resulting in a greatershare of public expenditure being allocated to labor.

Four closely intertwined explanations can be offeredfor this improved performance:

First, civil servants in these programs showed highdedication to their jobs. Either they were dedicatedentrants into civil service, and work conditions perpet-uated that dedication, or the circumstances of the jobselicited their commitment.

Second, the government repeatedly and publiclydemonstrated admiration and respect for the civil ser-

vants by regularly announcing successes and openlyrewarding good performance, building a sense of call-ing and pride around the workers and creating a senseof chosen elite in the public service. Publicity alsoincreased citizen awareness and public monitoring ofcivil servants and local governments, and created a newconstituency that would help leaders and agenciesovercome political opposition.

Third, innovative organization of tasks for workersin the public programs resulted in often voluntary own-ership of varied and multiple tasks. These multiple tasksoften coalesced into client-centric, problem-solvingapproaches to service delivery.

And fourth, repeated messages from the governmentand reorganization of tasks kept rent-seeking behaviorunder control by creating a sense of pride, ownership,and recognition around public service, in the eyes ofsociety and civil servants alike.

Source: Tendler 1997, 135–65.

of the effectiveness of efforts to introduce comput-erized integrated financial management systems inAfrica concludes that “technology can only addvalue in the context of an underlying commitmentto disciplined decision making, and internal man-agement systems geared to monitoring compli-ance” (Dorotinsky and Floyd 2004). Second, moste-government projects have faced substantial resist-ance from public servants who tend to see suchprojects as a threat to their jobs; publication andeasier access to information dilutes their controland diminishes their responsibility as informationbrokers.Hence, reform projects can stall unless ade-quate change management processes are adopted.30

Third, political support from top leadership is criti-cal. In Andhra Pradesh, India, for example, top lead-ership publicly pushed for e-government andallocated resources accordingly for an ambitiousprogram. Several services are now delivered onlineand the state secretariat is moving to a paperlessoffice and electronic workflow. In the Republic of


The effectiveness of information and communicationstechnologies (ICT) depends on the reengineering of under-lying processes and the proactive use of change manage-ment.To increase transparency and efficiency in thedelivery of front-line services, many countries inthe 1990s began adopting ICT in such varied areasas tax collection, customs valuation, procurement,treasury and cash management, issuance of licenses,land registration and titling, passport issuance, andother focused front-line public services.This trend,which has come to be known as “e-government,”involved significant experimentation with theapplication of ICT to internal processes (box 9.7).28

In a wide range of countries, e-government hasbeen a powerful tool for enhancing the efficiencyand effectiveness of public services (table 9.1).29

Experience nonetheless suggests that e-govern-ment is not a panacea for basic problems. First, forreal gains to be made, processes need to be simpli-fied and automated in ways that reduce the discre-tion of government officials. For example, a study

BOX 9.7

Mexico’s e-SAT Program for More Efficient Tax Administration

Inspired by the early successes of Argentina, Brazil,and Chile in using ICT to improve the delivery of gov-ernment services, the Mexican government (as part

of its OECD-based program of regulatory and administra-tive reform), began moving government information andservices online. Mexico’s federal tax administration (Ser-vicio de Administración Tributaria, or SAT) embarked one-SAT, a program to offer tax services online. Starting in1995, e-SAT has evolved gradually. By 1998, SAT hadestablished an interactive Web page that contained basicinformation on tax laws and procedures and permittedtaxpayers to file their annual declarations electronically.The main beneficiaries of the first phase of this new sys-tem were large corporations. During 2000–03, SATexpanded the nucleus of online tax services to allow tax-

payers to (1) obtain a personal form of electronic iden-tification, (2) obtain a corporate tax ID for new entitiesvia the Internet, (3) submit a tax declaration and otherrelevant forms, (4) enquire into the status of a taxpayeraccount, and (5) schedule an appointment with a SATtax counselor. In August 2002, SAT promulgated a newregulation requiring the electronic submission of mostindividual and corporate taxpayer declarations (throughSAT’s portal) and payments (through the portal of thetaxpayer’s bank). SAT is now working to develop andmake operational online systems for the receipt and pro-cessing of credit card payments and payment of taxrefunds. e-SAT has greatly reduced the amount of paper-work previously managed by Mexico’s tax registry, decla-ration, and collection units.

Source: Kossick 2003.

Korea, the success of the OPEN project has beenlargely due to the support of the mayor of Seoul,who took a multipronged approach to curbing cor-ruption.31 In Gujarat, India, with strong supportfrom the leadership, computerized check-posts tre-bled the fines collected from overloaded trucks, butwhen this support waned, the verve to reduce cor-ruption weakened, and new forms of extortionhampered the overall effectiveness of the program.

External RestraintsTo combat corruption, prevention may be more effectivethan investigation and prosecution. With the spiralingconcern over corruption in the public sector,devel-oping countries began to establish institutions ofrestraint that focused mainly on enhancing internalaccountability: supreme audit agencies, theombudsman function, and anticorruption agencies.

Among these, anticorruption agencies gainedmost currency, in countries from Latin America toAfrica.These agencies have had mixed results.Thesuccesses of Singapore’s CPIB and Hongkong’s


ICAC are widely known. More often, however,such agencies have been seriously impeded byresource constraints, weaknesses in complementaryinstitutions such as the judiciary and the police, andmultiple goals (Meagher 2002). Some have been setup to satisfy a political need—such as an outcryfrom a corruption scandal or loan conditionality—but lack enough resources or political backing toactually do their work.They have served to deflectdemands for action against corruption while theauthorities fail to undertake any real responses(Heilbrunn 2002). Box 9.8 outlines the demandingrequirements for an effective anti-corruptionagency.

Supreme audit agencies are crucial for enforcingthe financial accountability of the government, andduring the 1990s such agencies were established orrestructured in many developing countries.Theireffectiveness has been highly variable (Heilbrunn2002). In many countries, the auditor general’sindependence is compromised by an executive thatseeks to prevent the opposition from learning of

Table 9.1Examples of Efficiency Gains from ICT

Country, region Type of government application Time to process before application Time to process after application

Brazil Registration of 29 documents Several days 20–30 minutes per document, one day forbusiness licenses

Chile Taxes online 25 days 12 hoursChina Online application for 32 2–3 months for business license 10–15 days for business license

business services Several visits to multiple offices Several seconds for routine filing for for filings companies

India, Valuation of property Few days 10 minutesAndhra Pradesh

India, Andhra Pradesh Land registration 7–15 days 5 minutes

India, Karnataka Updating land registration 1–2 years 30 days for approval, request completed on demand

India, Karnataka Obtaining land title certificate 3–30 days 5–30 minutesIndia, Gujarat Interstate check posts for trucks 30 minutes 2 minutesIndia, Statutory certificates on caste 20–30 days 15 minutesAndhra Pradesh

Jamaica Customs online 2–3 days for brokers to process entry 3–4 hoursPhilippines Customs online 8 days to release cargo 4 hours – 2 days to release cargoSingapore Issue of tax assessments 12–18 months 3–5 months

Source: Bhatnagar and Deane 2003.


BOX 9.8

What It Takes to Create a Successful Anticorruption Agency

Establishment: Carefully situate the agency withina set of well-defined supports: a comprehensiveanticorruption strategy, careful planning and

performance measurement, realistic expectations, andstrong enough political backing (across class and partylines) to make it effective regardless of political andpersonal consequences. Agencies that score high onthese measures are those in Hong Kong (China), Singa-pore, Malaysia, Uganda, and Australia’s New SouthWales.

Focus: Define the agency’s focus in a way that willmaximize its effectiveness. For example, an agencycould focus on prevention and monitoring governmentimplementation of anticorruption policy, forgoing acomprehensive mandate (as in Korea); or its jurisdic-tion could be mainly prospective, with only limitedconcern with past cases (as in Hong Kong, China); or itcould choose cases selectively, based on clear stan-dards (as in Argentina and New South Wales); or itcould deal only with the probity and reputation of thepublic service (as in the United States and India). Clar-ity of focus seems to be consistently associated withsuccess, except where massive resources are available.

Accountability: Promote the agency’s accountabilitythrough such factors as the application of legal stan-dards, the availability of judicial review, systems ofpublic complaint and oversight, a requirement that theagency answer to all branches of government and thepublic, and precise and comprehensive expenditureaccountability. Some commentators also suggest mini-mizing the agency’s size, as well as the “free” supportgiven by aid donors. Accountability is not uniformlyassociated with success. Many successful anticorrup-tion agencies are strongly accountable, but this is prob-ably an outgrowth of the rule of law, which seems to bemore consistently associated with success (see below).

Independence: Independence arises in some casessimply from outside accountability, and in others from

the agency’s placement and line of responsibility, theappointment and removal procedures for top officials,or some forms of fiscal autonomy. The most importantsign of independence is the absence of political intru-sion into the agency’s operations. De facto autonomyenables anticorruption agencies to operate on a consis-tent and professional basis with relatively little parti-san intrusion. In most environments, this mode ofoperation is important to success.

Powers: A successful anticorruption agency will havestrong research and prevention capabilities, along withthe authority to do the following: access documentsand witnesses, freeze assets and seize passports, pro-tect informants, monitor income and assets, proposeadministrative and legislative reforms, and exercisejurisdiction over the head of state. Many agencies havemost or all of these powers on paper but frequentlycannot put them into effect owing to lack of coordina-tion, weak capacity in cooperating institutions, andpolitical factors.

Resources: Agencies in this field, as in others,depend on well-trained personnel, including sufficientnumbers with highly specialized skills. Staff should alsobe well compensated, subject to integrity reviews andquick removal, and endowed with a strong ethic of pro-fessionalism, integrity, and high morale. Also impor-tant are sufficient funds, adequate facilities and assets,high-level information sharing, and coordination withother government bodies.

Complementary institutions: Anticorruption agenciesdo not succeed without the basic features of the rule oflaw: functioning courts, free and active media, anactive community of nongovernmental organizations(NGOs) and public interest groups, and other capableinstitutions such as supreme audit agencies and centralbanks. Civic factors such as free media and capablenongovernmental watchdogs are not as clearly associ-ated with their success.

Source: Meagher 2002.

possible cases of illicit enrichment. For instance,reports from the auditor general are submitted tothe president who then determines when and howto release the information.Too often, the informa-tion is not released.

Focusing on cure rather than prevention of cor-ruption has rarely worked in developing-countrycontexts, at least not in the short to medium term.As the 1990s ended, it became clear that the gesta-tion period for such reforms would be much longerthan had been expected and that, over the mediumterm,better results could probably be obtained frompreventive measures that achieve the following:

• Reduce the likely benefits from corruption. Promot-ing competition in the private sector, throughlowering barriers to entry and reforming regu-lations where there are natural monopolies,serves to reduce rents and rent seeking.Ensuringcompetition in procurement through nation-wide advertising and efforts to prevent collusioncan also greatly reduce corruption. More radicalmeasures include calling for a referendum forthe public to approve large projects and the taxand expenditure allocation choices these imply.

• Reduce the number of transactions that create opportu-nities for graft, for example by liberalizing imports,removing price controls, removing industrialand trade licensing requirements, or makingsuch licensing automatic. For example, whenIndia liberalized industrial licenses in the early1990s, a large industry aimed at obtaininglicenses disappeared, along with the corruptionassociated with it. Similarly, when Indonesia lib-eralized its trade regime in the 1980s it radicallyreduced corruption in import licensing. Stream-lining bureaucracy by reducing the number ofapprovals required for particular transactions,reducing bureaucratic instructions, simplifyingrules, improving service standards, and decen-tralizing services all have this effect.

• Increase information, transparency, and public over-sight.Corruption often occurs because of lack ofinformation. Governments lack information on


what their agents are doing on the ground.Con-sumers of government services are not aware ofwhat rules or charges are legitimate. Clarifyingrules and increasing transparency helps to reduceopportunities for corruption, as does involvingbeneficiaries in the oversight of governmentprograms. Indonesia’s Kecamatan DevelopmentProgram is a good example of this (World Bank2003c).

• Establish time-tested, basic systems of personnel man-agement. Merit-based recruitment systems andlong-term career path arrangements—essentialattributes of a Weberian system—significantlyreduce bureaucratic corruption (Evans andRauch 2000), and there is evidence that smallerpay differentials between the public and privatesectors lead to lower levels of bureaucratic cor-ruption (Van Rijkeghem and Weder 2001).

Much current thinking about fighting corrup-tion is influenced by the principal-agent problem.The above lessons assume that the principal (thepolitician or the head of a government agency) ishimself or herself not corrupt, and that he or shehas an interest in ensuring that his or her agents arenot corrupt. But most principals, that is, politicians,even if they themselves are honest, need money tostay in power, fight election battles,or buy off oppo-sition.Those who contribute such money can theninfluence the way power is exercised. If politiciansare beholden to special interests or are captured byvarious interest groups, fighting corruptionbecomes rather difficult (see the discussion in sec-tion 3 on reform strategies in captured states).

Nurturing Voice and Client PowerBy the mid-1990s, it was clearly seen that civil soci-ety organizations—such as NGOs and religiousorganizations—could play an important role ininducing better performance from government. Inmany developing countries, the introduction ofelections opened the way for citizens to hold politi-cians accountable for the performance of the pub-lic sector. Homegrown experiments sprouted

nance gap is significantly wider than in other devel-oping regions, largely as the result of weaknesses inpublic accountability (World Bank 2003c). Thoughthere appears to be much less governance reformactivity than in other regions, civil society efforts toaddress poor service delivery appear to be sproutingat the community level.All regimes care about theirlegitimacy, and one way that nondemocraticregimes can maintain their legitimacy is by provid-ing adequate public services.34 To do this, they needinformation about service delivery problems. Civilsociety organization efforts such as report card sur-veys provide such information.

If demand-raising efforts are to be effective,pub-lic officials and civil society groups must be willingto work closely together (box 9.11). Civil societyorganizations need partners inside the public sector,since they have the knowledge and understandingneeded to move a reform agenda within the gov-ernment. Likewise, reform-minded politicians andcivil servants need civil society organizations to gal-vanize public support.

DecentralizationMany developing countries embarked on wide-ranging decentralization efforts in the 1990s (WDR2000; Litvack,Ahmad, and Bird 1998; Burki, Perry,and Dillinger 1999b; Ebel and Yilmaz 2002). Indeveloping countries on average, the share of subna-tional governments in total government spendingincreased by 20 percent from the 1980s to the1990s.35 Although some of the decentralizationefforts may have been indirectly stimulated by fiscalcrisis, as in Indonesia,most were inspired by changesin the political landscape: the collapse of long-stand-ing highly centralized regimes and the emergence ofstrong global pressures for democratization. In manycountries, including Thailand, pent-up distasteamong the citizenry for tight, unchecked centralcontrol and a greater desire to hold political leadersaccountable provided the impetus.

Decentralization is a political choice,whose design andimplementation may not improve service delivery.Designed well, decentralization can move decision


throughout the developing world, showing thatactive civil society participation in reform canpotentially lead to much needed improvements inthe compact.32 For example:

• Citizen report card surveys, which originated inBangalore (box 9.9),have spread to other parts ofIndia and are now being tried in other develop-ing countries including Peru and the Philip-pines. This instrument has channeled thecollective voice of citizens seeking better publicservices.

• Different forms of participatory budgeting haveemerged in parts of the developing worldincluding Brazil and South Africa. At its core,participatory budgeting engages citizens andtheir elected representatives, such as the mayoror governor, in a partnership to determine thepriorities of the community and what projectswill be funded from the local budget during thecoming fiscal year.Typically, this process has beenlaunched by forward-looking local politicians asa means of locking future politicians into a trans-parent budget process for which they can be heldaccountable.

• NGO advocacy for greater transparency andfairness in public procurement and monitoringof procurement processes has become morecommon as well.So-called integrity pacts devel-oped by Transparency International have nowbeen used in several countries as part of hugeprocurement contracts, for example in Colom-bia and Mexico.33

Most demand-driven reforms have taken placein the delivery of public services, because servicedelivery is where the state meets the average citi-zen. Changes in quality, quantity, and access to ser-vices affect everyday lives and thus make citizensmore prone to support, if not to seek, reforms ingovernance.

Interventions to improve service delivery are apotential entry point for broader governancereforms (box 9.10). In the Middle East and NorthAfrica, there are few democracies and the gover-

making closer to the people, enhance the efficiencyand responsiveness of service delivery (Faguet1997; Kahkonen and Lanyi 2001; Bardhan andMookherjee 2000), support economic growth, andoffer a potentially powerful tool for alleviatingpoverty. But designed inappropriately, or intro-duced without strong local participation andaccountability (of local officials to local citizens), itcan lead to macroeconomic instability, decliningservice levels (Martinez-Vazquez and Boex 2001),heightened regional disparities or conflicts (Smoke2001), and increased corruption (Brueckner 1999).


Because the ultimate objective of devolvedarrangements is to provide needed public servicesin an equitable and technically efficient manner,the most critical concern is the political accounta-bility of locally elected officials to local residents.Political representation appears to be insufficient,however, reflecting capture by elites and the weak-nesses of local political processes (Crook andManor 1998; Conning and Kevane 2001). Experi-ence also shows that even if local elected officialsare strongly committed to responding to localneeds, the intended services may not be forthcom-

BOX 9.9

The Report Card Survey in Bangalore, India: Stimulating Administrative Reforms

The 10-year experience of the Public AffairsCentre (PAC) in Bangalore, India, illustratesthe potential of using client surveys as a lever

to induce upstream public management reforms and animprovement in service delivery. Established in 1994to improve public sector governance in India, PAC’sprimary focus and strength lies in assisting citizengroups in “using knowledge as a basis for collectiveaction” (Paul 1995). In 1994, the PAC conducted itsfirst report card survey, effectively an opinion poll, ofcitizens in Bangalore on their perceptions of the qual-ity of services provided by eight key government

organizations. Citizens showed themselves generallydissatisfied with the delivery of public services. Theresults of the survey were published in a leading news-paper, raising their visibility and leading public offi-cials in a number of agencies to discuss their agencies’problems with PAC and citizens’ groups. PAC offered tohelp these agencies address some of the problems. Fur-ther surveys, undertaken in 1999 and 2003, show thatover 10 years the public has become much more satis-fied with the service delivery across all eight agencies.The lesson: demand pressures can lead to needed pub-lic sector reforms.

Satisfaction with various agencies across three report cards The middle class

1019 13 16

0 2 0

41 41 42

67

3216

32

73

94

73

9278

8596

0

20

40

60

80

100

BMP BESCOM BWSSB BSNL POLICE BDA BMTC

Agencies

% s

atis

fied

1994 1999 2003

Source: Paul 2003.

(Rodden, Eskeland, and Litvack. 2003). Otherwiselocal governments may borrow recklessly to fundlocal initiatives or find other ways to transfer liabil-ities and potentially expose the national govern-ment to unwanted fiscal risks.


ing without appropriate inputs by the bureaucracy(Schroeder 2002).

A local government should be just as account-able for funds transferred to it as for funds collecteddirectly from local taxpayers. Instruments for ensur-ing financial accountability are often in place, buttheir implementation is often poor. Financial auditsof local accounts, for example, tend to be delayedfor long periods, and as a result, they have notbecome effective instruments of accountability.Experience has varied widely across countries, butemphasizes the importance of imposing credible,hard budget constraints on local governments

BOX 9.10

Service Delivery and Civil Society inthe West Bank and Gaza

A1998 review of service delivery inthe West Bank and Gaza asked a rep-resentative sample of beneficiaries

about the provision of health and educationservices by NGOs, the private sector, and thePalestinian Authority. Meanwhile, specialistscarried out institutional reviews of educationand health facilities. The findings show thatbeneficiaries often select a particularprovider because its service is better or eas-ier to access—areas in which NGOs and theprivate providers ranked higher than the gov-ernment. The findings were presented at dis-semination workshops that were attended byministers, senior civil servants, and seniorrepresentatives from NGOs and private organ-izations. The ministers of health and educa-tion reacted by using the findings to improvethe quality of health and education servicesacross the board and to improve coordinationamong the government, the NGOs, and theprivate sector.

Source: World Bank 1999.

BOX 9.11

Procurement Watch: Working with the“Enemy”

In the Philippines, Procurement WatchInc (PWI) was born in part out of theneed to harness citizens’ collective anger

and frustration about widespread corruption.It was organized as a nonprofit institutionwith encouragement from the governmentDepartment of Budget and Management(DBM) and seed funding from the WorldBank’s Asian Emergency Trust Fund (ASEM)grant facility, along with private contribu-tions. To establish its credibility with citizengroups and legislators, PWI quickly devel-oped technical expertise in the area of pro-curement. With well-trained and experiencedstaff and an active board of directors, it drewattention from the media on the need for aprocurement reform bill. It secured advocacysupport from different citizen groupsthroughout the country, was invited to par-ticipate actively in the three technical work-ing groups formed to formulate the law—onein the executive, another in the House ofRepresentatives, and the third in the Sen-ate—and was sought after for advice by pro-ponents of the bill in both the House and theSenate. With technical assistance fromdonors and advocacy support coordinatedand managed by PWI, DBM secured the enact-ment of the Government Procurement ReformAct of 2002. The President signed the billinto law on January 10, 2003, almost fouryears after the effort was initiated.

Throughout the 1990s, decentralization effortsfeatured intergovernmental fiscal reforms.Argentina’s experience highlights the challenges inthe design and evolution of a good intergovern-mental fiscal system (box 9.12).

The administrative aspects of decentralization are asimportant as the fiscal aspects. The details of imple-mentation arrangements ultimately determine out-comes.The challenges that have emerged fall intothree categories: (1) adoption of a more systematicview of decentralization (Bahl 2000); (2) balancingof responsibility with resources, capacity, andaccountability; and (3) creating incentives forimplementation to match formal decentralizationarrangements. Experience shows the value of prag-matism in implementing decentralization (Litvack,Ahmad, and Bird 1998;Bahl 2000;Bahl and Smoke2003). A pragmatic strategy would be unique toeach country undertaking decentralization, butshould include a general vision and framework forreform,mechanisms for coordination and resolving


conflicts, a prioritization of reforms and plan forsequencing them, information to monitor out-comes and adjust the reform program, and incen-tives to change central and local behavior.

Information and Media Help Build CitizenPowerThe media can be a powerful instrument for galva-nizing citizen action. A free press raises popularawareness of inappropriate actions by elected andappointed officials.When people are aware of cor-rupt officials or networks, their reaction mayinclude voting against incumbents, protests, andmanifestations of unrest,or disengagement from theformal economy.36 Widespread press coverage wasnotable in the deposition of former Brazilian Presi-dent Collor in the early 1990s, which brought citi-zens to the streets to protest (Stapenhurst 2000). Itwas also instrumental in building the people powermovement in the Philippines to depose then-Presi-

BOX 9.12

Hard Budget Constraints: The Challenge of Fiscal Decentralization in Argentina

Provinces in Argentina depend on federal trans-fers for the bulk of their fiscal resources. Rev-enue sharing (coparticipaciones) was introduced

in the 1930s to compensate provinces for the introduc-tion of national income and sales taxes, and in 2000, 56percent of provincial resources came from this commonpool. The majority of provinces (roughly 60 percent)relied on their own resources for less than 30 percent oftheir spending.

The challenge of ensuring hard budget constraintsunder fiscal decentralization depends on a country’ssocial, cultural, and institutional features. Experiencein countries such as Argentina and Brazil underscores

that central commitment problems and limitations ineffective regulation can conspire to weaken subna-tional hard budget constraints. Strong efforts by thecentral government to regulate can exacerbate prob-lems, as for example when subnational governmentscircumvent the spirit of regulations through recourse toaffiliated state-owned enterprises, including regionalbanks. Argentina’s experience shows that such prob-lems have no quick fixes. They require the evolution ofcredible policies—and political will—buttressed byeffective institutional arrangements, whether predomi-nantly market based or hierarchical and dependent oncentral oversight.

Sources: Eaton 2003; Perry and Servén 2002; Rodden, Eske-land, and Litvack 2003; Saiegh and Tommasi 1999;Tommasi 2002; Webb 2003.

cent of the funds due them. Alarmed by the hugeleakage, the ministry launched a nationwide aware-ness program that informed communities of thefunds that were due their respective districts, thusgiving communities a benchmark for monitoringthe flow of funds.As a result, the leakage has fallento less than 20 percent of the budgeted funds.37

Laws on the right to information empowerNGOs, business organizations, and civil societymore generally. For example, a grassroots campaignin Rajasthan, India led by a local nongovernmentalorganization, MKSS, used information gleanedfrom government files to expose and then combatmassive corruption at the local level, showing howpublic officials skimmed money off the wages ofworkers and paid friendly contractors for worknever done.A recently passed freedom of informa-


dent Estrada in 2001, and widespread protests inEcuador to oust then-President Bucharam in thelate 1990s.

Media pressure (more precisely, from progressiveelements), can create the impetus for reform. Just asbrave reporting brought down the Nixon adminis-tration in the United States, so too it can shake thefoundations of corruption in developing countries.

The power of good research that feeds into themedia should not be underestimated (box 9.13).Experience in Uganda illustrates how access toinformation can galvanize civic action.The Min-istry of Finance launched a public expendituretracking survey to monitor the flow of funds fromthe budget for per capita education grants to localschool districts.The survey showed that, in 1994,the local districts received on average only 13 per-

BOX 9.13

Investigative Journalism: Lifestyle Checks of Public Officials

In 2003, over an intense period of six months, ateam of researchers from the Philippines Center forInvestigative Journalism (PCIJ) conducted a

lifestyle check on personnel from the Bureau of InternalRevenue (BIR) and published their findings in a three-part report, “BIR Officials Amass Unexplained Wealth,”which later was picked up by the daily newspapers.Throughout the years, survey after survey has indicatedthat the Bureau is one of the most corrupt governmentagencies.

The research produced a wealth of information onthe lavish lifestyles of BIR officials and employees,ranging from grand houses in highly exclusive neigh-borhoods to expensive luxury vehicles, despite modestofficial incomes. The research covered 25 officials atvarious levels and found that many of them could notexplain how they acquired their assets, including sharesin businesses and companies. As the report stated,“One regional director, for example, lives in a big house

in posh Ayala Alabang, yet he earns less than P300,000(approximately $5,400) a year. Parked in his garage onthe day PCIJ visited were a Ford Expedition, a ToyotaLand Cruiser, and a brand new BMW.”

The report also uncovered interesting schemes, suchas BIR officials petitioning the Civil Service Commis-sion to change their birth records so that they coulddelay retirement and hang on to their lucrative post-ings. The PCIJ team discovered 24 such applicationsfrom the BIR between 1989 and 2001.

Since the publication of the report, one senior offi-cial has resigned and several have been suspendedpending investigation by the ombudsman. It remains tobe seen whether any of the officials under investigationwill be indicted and convicted of corruption, as manychallenges still confront the legal and judicial system.But lifestyle checks have now been added to the arse-nal of the anticorruption agencies, making it more dif-ficult for public officials to enjoy illicit wealth.

Sources: Bacalla 2003; Porcalla 2004; Nocum 2004.

tion law made it possible for MKSS to conduct thisvigorous and successful campaign.38

3. Strategy and Implementation:The Challenge for GovernanceReforms

Governance reform strategies in the 1990s typicallyfell into two broad categories:“big bang” or ad hocincrementalism. Big bang approaches proved to belargely inconsistent with capacity constraints andpolitical realities—in Hirschman’s words, countrieswith the wherewithal to carry out a coordinatedbig push “would not be underdeveloped in the firstplace.”The main results of these approaches weremajor changes in formal rules: new or amendedconstitutions, new legislation, ostensibly independ-ent courts and audit institutions, and so forth. Suchchanges are not unimportant. But in practice theyrarely shape behavior unless there is an equal com-mitment to better aligning informal rules to improvethe incentives that face politicians, bureaucrats, andcitizens (Burki and Perry 1998).39

Ad hoc incrementalism has also been problem-atic.With few exceptions, the ad hoc reforms wereoften symbolic, intended to preserve the old rulesand informality while pretending to reform. Insome cases they represented well-motivatedattempts of individual or small groups of reformersthat, for lack of support, were undermined by jeal-ousy, intrigue, or fatigue. More important, theytended to be unrelated to a more coherent reformstrategy and thus over time many lost their steam.

What may be needed instead are highly focused,pragmatic interventions that may be termed “strate-gic incrementalism.” These interventions areopportunistic because they exploit the willingnessto reform, but they are better grounded in politicalrealities and consistent with the capacity constraintsof the country concerned.Knowing what is appro-priate in which country situation is often half thebattle.Though providing a detailed road map toguide strategy is a task requiring fundamentallynew research and analysis, the following discussion


suggests a possible approach to governance reformstrategies in developing countries.

A recent survey of firms conducted by the WorldBank in Eastern Europe and Central Asia providedinformation that can be used to array the countriesof that region along a two-dimensional matrix,withan administrative corruption index on one axis anda state capture index on the other.40 Since adminis-trative corruption reflects the quality of the com-pact and state capture affects the strength of politicalaccountability, the quality or state of governance ina country can be broadly characterized by these twoindexes.41The matrix in figure 9.4 suggests a classi-fication of countries into four possible types: capa-ble, weak, captured, and restrained. Each type facesdifferent challenges and different opportunities forreform.

Capable: In capable states, administrative corrup-tion tends to be low and state capture not heavilyentrenched. Examples are Korea, Chile, Hungary,and the Czech Republic. To a lesser extent,Botswana and the Indian states of Andhra Pradeshand Karnataka may fall into this category. In capa-ble states, the challenge is usually to increase thequality and efficiency of public services, so as to bestutilize limited public resources. Episodic scandals,

Administrative corruption index

Medium

Medium

High

MoldovaAzerbaijan

Kyrgyz Rep.Ukraine

Georgia

Armenia

Albania

Romania

Russian Fed.

LithuaniaKazakhstan

HungarySlovenia

EstoniaPoland

Slovak Rep.

BulgariaLatvia

Croatia

45

40

35

30

25

20

15

10

5

00 1 2 3 4 5 6

CzechRep.

High

Stat

e ca

ptur

e in

dex

FIGURE 9.4

Classification of States by Governance Profile

Source: World Bank Business Environment and Enterprise Performance Survey (BEEPS), 1999and 2003.

types of reforms are the least likely to be adoptedwhile vested interests remain strong.

Restrained:The bureaucracy in these states tendsto have sufficient capacity and accountability so thatadministrative corruption is relatively mild.Politicalaccountability is likely the weakest link in the chain,resulting in a high level of state capture. Examplesof such states are Croatia (in 1999), the SlovakRepublic (in 1999), Serbia and Montenegro (in1999), Latvia, and, possibly Argentina, the Philip-pines, and some states in India. Reform options arelimited in such states while the existing leadershipis well entrenched.When a genuine change in lead-ership occurs, as in Croatia,Latvia,Serbia and Mon-tenegro, and the Slovak Republic, and where civilsociety is relatively robust and can play an impor-tant role in stimulating demand for change, reformscan emerge fairly fast and can potentially be sus-tained.

Table 9.2 highlights the potential entry pointsfor strategic interventions in each of the four typesof states. “Breaking through” a captured state maybe the most difficult strategic challenge in gover-nance reform.

4. Conclusion

Improvements in governance are critical to ensur-ing sustainable development. Perhaps the mostimportant lesson of the 1990s is that technocraticresponses to improve governance work only in veryauspicious settings—where there is committedleadership, a broadly based coalition in support ofreform, and sufficient capacity to carry the reformprocess forward. Clearly, these conditions exist inonly a minority of developing countries and rarelyin those countries in most urgent need of gover-nance reform.This is the crux of the challenge forthe decade ahead.

Meeting the challenge requires a good under-standing of the political dimensions of reform, and,in particular, of how reform can be used to identifyand build constituencies that are capable of sustain-ing the reform momentum.This requires funda-


reported by vigilant media or civil society organiza-tions, usually result in public dialogue and ulti-mately in a set of actions to reduce opportunitiesfor corruption. In these countries it is often possi-ble to undertake difficult systemic reforms using amore or less technocratic approach, providing thereis leadership and support that coalesces around thereform objective.

Weak:Weak states lack many of the basic struc-tures needed to manage the public sector. Manyhave only recently emerged from conflict orattained statehood. Bureaucratic capacity andaccountability are weak, and administrative corrup-tion is high. Often weak states have largely escapedcapture by business interests, not because accounta-bility mechanisms are effective,but because the stateis itself insufficiently developed to be captured. Infact, as these basic structures are established, the risksof state capture quickly increase. Examples of suchstates are Albania (in 1999) and Armenia (in 1999).Nepal and Tanzania may also be examples, as maymany low-income countries under stress.42 In weakstates, the primary challenge is to ensure that taxesare collected, key services are delivered, and budgetexecution is sufficiently controlled. Given limitedbureaucratic capacity, it is especially important thatreform efforts be targeted and that internationalsupport for these reforms be highly coordinated.

Captured:These states have serious problems ofadministrative corruption and their environmentmakes them highly subject to capture. Many havean urgent need to build capacity in the public sec-tor, but investments in capacity are unlikely to pro-duce sustainable improvements, because politicalcorruption (grounded in rents) permeates the sys-tem at all levels. Examples of such states includeAzerbaijan (in 1999), the Russian Federation (in1999), and the Kyrgyz Republic. States that areweak but resource-rich or dominated by a fewvaluable industries can fall easily into this category.The challenge in these states is to break the stran-glehold of special interests, for example by breakingup powerful monopolies if capture is by privateinterests, or by reducing military expenditures ifcapture is by the military. Not surprisingly, these

mental changes in current methods of analysis. Inthis context, a focus on “drivers of change” is prom-ising (Duncan 2003).While the particular driverswill naturally vary from country to country, thecommon thread of this approach is a focus on solv-ing the specific, highly salient problems facing indi-vidual communities—for example in health care,sanitation, or business regulation.These are prob-lems around which constituencies for reform bothinside and outside government may be easier tobuild and maintain than, say, upstream reforms incivil service reform or financial management.

Almost all successful reform efforts have beenshepherded through by dynamic leaders (WorldBank, World Development Report 1997, 154). Inmany countries, the drivers of change may be agroup of young, perhaps inexperienced, leaders inneed of training and support.

The challenge is creating and nurturing an envi-ronment that encourages dynamic, forward-lookingindividuals to push much needed reforms. In some


cases, this may be achieved through political decen-tralization and economic liberalization, where theformer gives local public officials autonomy overtheir localities and the latter creates pressures forcompetition among localities. In other cases, thepressure for reform may come from outside. Civilsociety groups, media, business associations, and/orreligious organizations are fertile sources of change.While these groups are often plagued by collectiveaction problems,experience shows that they are fullycapable of overcoming these problems.The challengethey face is one of sustainability; a problem thatdonors and private foundations can address throughtechnical assistance and funding.Because better gov-ernance is a public good, groups working on gover-nance reforms will generally find it more difficult tosolicit contributions from the general public.

Whether this focus on problem solving andresults-oriented drivers of change will help coun-tries to navigate the difficult terrain of governancereform in the next decade remains to be seen.What

TABLE 9.2

Types of States and Entry Points for Strategic Interventions: A Governance Typology

Type of state Governance profile Main implications for the triad Key challenge Possible entry point

Capable Low to modest Some gaps in bureaucratic Increasing efficiency of Technocratic reforms in pub-state administrative capacity and internal public service delivery lic administration, as

corruption accountability needed; comprehensive Mild state capture reform strategy may be

feasibleWeak High levels of Very weak bureaucratic Ensuring delivery of basic Highly targeted reforms in state administrative capacity and/or internal public goods key sectors only, supple-

corruption accountability mented by limited reformsMild state capture in budget execution to

ensure financial accountability

Captured High levels Very weak political and Breaking hold of vested Build demand for reforms; state of administrative internal accountability; interests on the process possibly explore

corruption possibly weak bureaucratic of policy and institutional opportunities at High state capture capacity reform subnational level

Restrained Low to modest Very weak political Increasing “voice” Build demand for reform; state administrative accountability await change in leadership

corruption caused by crisis related to High state capture corruption, after which

technocratic reforms to increase political accountability may be possible

Source: Authors’ elaboration.

9. Several empirical studies have shown that deficiencies incivil service processes and procedures tend to increaseadministrative corruption (Van Rijkeghem and Weder2001;Evans and Rauch 2000;World Bank,World Devel-opment Report 1997) and have confirmed the findings ofnumerous case studies (for instance Rose-Ackerman1978;Wade 1985; Klitgaard 1988, 1990).The relationbetween public sector pay and corruption is controver-sial: it is commonly presumed that the lower is publicsector compensation, the greater is administrative cor-ruption, but various empirical studies suggest that otherfactors confound this relationship. See http://www1.worldbank.org/publicsector/civilservice/ineffectivemon.htm#4.

10. Citizens can use shame tactics to pressure local-levelcivil servants who live within the same community.

11. “Client power” also includes the ability of citizens tochoose among different providers of the same service.This does not require collective action on their part;rather it requires policy decisions to promote some formof competition among service providers.Voice (and thusorganization) can play a role in getting politicians topromulgate such policies.

12. Political accountability during elections can beenhanced by independent electoral commissions.How-ever, such institutions may themselves also be subject tocapture.

13. Work has been done on reforming political institutions,including attempts at reform in political campaignfinance. But such efforts have been far fewer than thosedevoted to legal, judicial, and legislative reforms.

14. The heightened concern with improving legal and judi-cial systems in the 1990s was predated by similar con-cerns and reform efforts in the 1960s—some of whichare only now beginning to bear fruit.

15. The World Bank’s first significant effort was a 1990adjustment loan to Bangladesh, followed two years laterby support to Tanzania for training judges, upgradinglegal libraries, and publishing court decisions. In 1992the Bank also extended a $30 million loan to Venezuelasolely for judicial reform.This was the first of 11 invest-ment loans totaling close to $200 million that the Bankextended principally for judicial reform during the1990s. Data from other organizations show a similarincrease in judicial reform activities. Starting fromscratch in the 1990s, the Inter-American DevelopmentBank had made 18 loans totaling $418 million by June2001, and entered into 65 technical cooperation agree-ments comprising another $43 million to supportreform of judicial institutions (Biebesheimer and Payne2001, 12).

16. For example, in the early 1990s the Ukrainian legisla-ture was asked to enact a verbatim translation of the


is certain is that governance reform will retain ahigh place on the reform agenda.

Notes

1. See, for instance, Rose-Ackerman (2004) and Klitgaard(1988). Much of the literature on rent seeking from themid-1970s to the 1980s, for example Bhagwati (1978),essentially tackled conceptual issues.

2. The causality can work both ways, with growth alsoperhaps inducing better governance. Some recent stud-ies address this (Rodrik and Subramanian 2003; Subra-manian and Roy 2001).

3. The 1996 “Cancer of Corruption” speech given byWorld Bank President James Wolfensohn is considered awatershed in the Bank in the fight against corruptionand the push for reforms of governance institutions indeveloping countries.The publication of TransparencyInternational’s Corruption Perception Index made gov-ernments and their constituent publics more aware ofproblems of corruption and helped trigger the develop-ment of cross-country empirical studies and survey-based diagnostic work on corruption (see, for instance,Kaufmann, Kraay, and Zoido-Lobaton 1999; Reinikkaand Svensson 2003).

4. This section builds on an analytical framework from theWorld Bank’s World Development Report (WDR) 2004.

5. Formal organizations such as the central bank are alsooften referred to as institutions. In the abstract,an organ-ization is a collectivity functioning within a predeter-mined set of formal rules.That is, it is an agglomerationof rules that affects the behavior of a given set of indi-viduals.

6. WDR 2004 characterizes the bilateral relationship asone of accountability (of agents to principals). But therelationship can also be affected by other factors—inparticular, capacity issues. If the agent lacks the ability orthe resources to perform his or her task, then no matterhow strong the accountability link, he or she will beunable to deliver on his or her mandate. If, for instance,bureaucrats have a poor financial management informa-tion system to work with, they cannot produce ade-quate information upon which to judge theirperformance.

7. See also WDR 2004, chapter 5.8. More specifically, the possibility of obtaining rents drives

influential groups and/or individuals to bribe politiciansor high-ranking civil servants. In turn, the latter intro-duce and maintain bad laws, policies, or regulations inorder to perpetrate their illicit earnings. In this context,corruption causes bad governance.

Uniform Commercial Code—a lengthy Americanstatute governing sales, leasing, and related transac-tions—and advisors to the Mongolian government sug-gested that to create a stock market Mongolia simplycopy U.S. securities laws.

17. This Anglo-Saxon concept—and related ones in use inEurope, Latin America, Asia, and Africa—can meanmany different things. But in the parlance of the devel-opment community the rule of law became synony-mous with a state where laws effectively restrainedrulers from opportunistically seizing private propertyand simultaneously promoted welfare-enhancing coop-eration among the citizenry.

18. Though there are differing interpretations of the com-position of New Public Management reforms, there isgeneral agreement that the key components includederegulation of line management, conversion of civilservice departments into free-standing agencies; per-formance-based accountability, particularly throughcontracts; and competitive mechanisms such as con-tracting-out and internal markets.Various authors alsoinclude privatization and downsizing as a part of thepackage (Polidano 1999).

19. See Poterba (1996) for a review of the literature circa1996.

20. Alesina and Perotti (1996) discuss institutions in termsof the degree of centralization of authority in thebudget process and the degree of transparency. VonHagen (1992) provides summary information on thebudget process in European Community nations.VonHagen and Harden (1996) suggest that tighter budgetrules are associated with smaller budget deficits andlower levels of government borrowing.

21. An MTEF has five key features: (1) a top-down processfor establishing hard budget constraints at the aggregateand sectoral level; (2) a bottom-up process in which lineministries prepare forward estimates of expendituresover a three- or four year period; (3) a system for rec-onciling the forward estimates and the hard budgetconstraints, which includes processes for making inter-sectoral reallocations; (4) a transparent system for incor-porating changes to the forward estimates duringrollovers to the following year; and (5) a tractable sys-tem for undertaking program evaluation (World Bank1998b).

22. World Bank/OECD Survey on Budget Practices andProcedures (2003). Available online at http://ecde.dyndns.org.

23. Their finding is consistent with related work by Evansand Rauch (2000), and with research at the sector level.Gunnarsson et al. (2004) find strong evidence indicat-ing that the granting of autonomy to local districtschool principals (akin to delegation under NPM)


improves student performance only if the principal andthe school staff have adequate capacity to take advantageof the increased autonomy.

24. In related reforms, more than 40 developing and transi-tion countries have set up special large taxpayer units toimprove the tax compliance of the largest taxpayers andto pilot new organizational structures, systems, and pro-cedures.

25. For a particularly strong critique, see Fjelstad (2002);and for a more general country survey and balancedassessment, see Taliercio (2003).

26. The same political support might perhaps have achievedthe same results without the move to an autonomousrevenue agency, but in some instances introducing suchan agency has energized and crystallized support formore wide-ranging administrative and civil servicereform.

27. Harding (2003) analyzes different approaches to healthcare provision: direct provision by the public sector,through nonprofit providers, through for-profitproviders, and through informal providers.The lessonssuggest possibilities for focused strategic interventionsin the health sector.

28. E-government applications have normally evolvedthrough a four-stage process.The first stage includes thepublication of information on a Web site for citizens toseek knowledge about procedures governing the deliv-ery of different services; the second stage is interactivityonline, allowing clients to download applications forreceiving services; the third stage involves electronicdelivery of documents; and the fourth results in elec-tronic delivery of services, which may involve morethan one department in processing a service request orservice.

29. E-government can also enhance transparency. Forinstance, the use of electronic bulletin boards in govern-ment procurement has made information on govern-ment contracts much more widely available (Bhatnagarand Deane 2003).

30. Bhatnagar and Deane (2003) estimate that roughly 40percent of an e-government project’s cost must be allo-cated to managing the change process.

31. http://www1.worldbank.org/publicsector/egov/seoulcs.htm.

32. WDR 2004 provides examples and indicates the exten-siveness of citizen-based mechanisms for raising thedemand for better governance.

33. An integrity pact embodies a transparent process of pro-curement which all participating bidders agree to bindthemselves to.A civil society organization, such as a localchapter of Transparency International, monitors theprocess step by step to assure all bidders that each haskept to the joint commitment.

the opportunist in the knowledge that reform will befrustrated and his opportunism can continue” (Burkiand Perry 1998, 128).This is not to imply that in devel-oped-country settings there are no informal rules.Thesenever disappear. But they tend to be better aligned withformal institutions rather than being inconsistent withthem (North 2002).

40. This is the Business Environment and Enterprise Per-formance Survey (BEEPS) conducted first in 1999 andmost recently in 2003.The findings of the 1999 surveywere analyzed and published in World Bank (2000a).

41. Ideally, a third dimension measuring client power wouldbe desirable.This dimension could be constructed usingavailable data on citizen voice.

42. World Bank data suggest that 25 to 30 countries qualifyas low-income countries under stress. In these coun-tries, securing law and order and ensuring the deliveryof very basic public services remain the primary gover-nance tasks. Beyond this, the evidence suggests thatcomprehensive and/or more technically demandinggovernance reforms are unlikely to be feasible.


34. For examples see John Pomfret, “SARS Reported inRural China,” available online at http://stacks.msnbc.com/news/904928.asp?cp1=1, and John Pomfret,“China to Open Field in Local Elections,” WashingtonPost, June 12, 2003. In Cuba, while dictatorial tacticshave certainly kept the Castro regime in power foralmost four decades, the high quality of health ser-vices—which are among the best in the developingworld—is a factor that has contained citizen dissent.

35. Based on IMF Government Financial Statistics.36. An excellent study that analyzes the effect of type of

electoral system on policy outcome is Myerson (1999).Persson,Tabellini, and Trebbi (2000) assess the impact ofcorruption and voting in different electoral systems.

37. Reinikka and Svensson (2003, 2004).38. For more on lessons on freedom of information laws,

see World Bank (2004a).39. There is “often a vicious circle whereby the failure of

the state breeds more corrective rules which bothreformer and opportunist applaud—the reformer undermistaken formalistic notions about how to reform and

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