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Ottawa, September 22, 1997
1997-081

Statement prepared for the Development Committee

The Honourable Paul Martin, 
Minister of Finance for Canada

Hong Kong
September 22, 1997

Delivered text is official version

I would first like to underline how pleased I am to see the issue of governance given a prominent place on this year's Development Committee agenda. Few areas are more challenging than improving governance in a rapidly changing world. Our collective efforts to help promote longer term economic growth and poverty reduction in member countries cannot be successful without meeting this challenge. Moreover, in an increasingly integrated world, governance can no longer be considered purely a domestic concern – actions taken in any one country often spill over national boundaries.

Good governance is also necessary to ensure continued support for international development assistance. Members have a responsibility to their taxpayers to ensure that scarce international funds are used efficiently. Support for international assistance can only be sustained if our publics believe that funding is being used effectively and this will not be the case where governance systems are weak. Public support will be eroded if it is perceived that funds are wasted, or misdirected, due to fraud and corruption. At the same time, corruption is a very complex issue, often with a long-standing historical basis and strong structural linkages to poverty. Eliminating corruption as part of the development of good governance systems will require sustained and even-handed efforts by all parties. Developed countries have equal responsibility in this regard.

For these reasons, I welcome the work undertaken by the Bank and the Fund to further their understanding of governance issues over the past year. At last year's Annual Meetings, Mr. Camdessus and Mr. Wolfensohn underlined that good governance is central to the basic economic objectives that the Bretton Woods Institutions are trying to help their members achieve. The institutions should be commended for acting on this by going beyond rhetoric to providing practical guidance to their staff on issues of governance.

A Growing Understanding of Governance Issues

Our knowledge of governance issues continues to improve as we gain a better understanding of its role in our member countries. We now recognize that governance transcends the state to include civil society organizations and the private sector. Since these interrelationships are complex, and work is still in progress, there is no single definition of good governance accepted internationally. However, good governance is generally considered to include the following key components:

• the development and implementation of sound economic and social policies.
• strong management in the public sector, with a professional administrative cadre and an effective public service.
• the existence of a sound, predictable legal framework and respect for the rule of law.
• financial probity and accountability with organizational structures that ensure transparency.
• levels of military expenditures that are reasonable.
• very low levels of corruption in public life and the existence of effective mechanisms to deal with that which does exist.

This last component of governance, combating corruption, is of particular and growing concern to the international community and to many citizens in developed and developing nations. First of all, morally it is wrong. Moreover, from a practical perspective, corruption burdens the private sector and deters foreign and domestic investment. The costs of corruption often fall disproportionately on the poor, who are unable to pay bribes, and thus may be denied essential services. Widespread bribery also undermines the public's trust in government and prevents the emergence of a well-performing bureaucracy, necessary ingredients for economic and social development. In this regard, Canada is supportive of OECD action to criminalize corruption and make bribes non-deductible for tax purposes. Canada has also begun to include anti-corruption clauses within contracts our aid agency signs with Canadian companies.

In light of these costs, both the Bank and the Fund, in their operations, must make particular efforts to address the issue of corruption. Fighting corruption requires levelling the playing field of all stakeholders through means such as strengthening the rule of law, clear legislation, effective enforcement capacity, diligent statutory oversight agencies, and an independent judiciary. A good start has been made in recent guidance to Staff on corruption issues and in the Bank's work on procurement guidelines and in promoting a non-bribery pledge for firms competing for Bank projects. We look forward to more such work over the coming year.

Governance is First a Domestic Responsibility

In the first instance, individual countries bear the primary responsibility for governance issues. The support of the Bretton Woods institutions and donor countries can build on the efforts of national governments and civil society, wherever possible, to strengthen their governance capacity, but ultimate accountability rests with individual countries.

Many countries world-wide are now taking the initiative in improving their governance systems. My Caribbean partners in the constituency I represent are fully aware of the importance of governance issues, and, in fact, have for some time had in place the institutions and practices essential for good governance. They provide an example of the positive effect good governance can have on economic growth, development and improvement in the quality of life of citizens in developing countries.

Also, of particular note is the proposed Partnership for Capacity Building. In 1996, the Bank's African governors undertook a series of consultations across their societies to explore ways in which to build capacity in the public and private sectors and to strengthen human capital development. They have released a report "Partnership for Capacity Building: Strategy and Program of Action" which will provide important guidance for capacity building work to the Bank and other donors in the coming years. We are also pleased to note that the Global Coalition for Africa will follow up a Canadian initiative by focusing on the issue of corruption at their Policy Forum meeting this fall.

However, in some countries, governance problems are not being adequately addressed. Correcting this must be an increasingly important element in policy development at the Bank and the Fund. As a first step, the economic consequences of not addressing weaknesses in governance should be stressed. Beyond this, it should be underlined that a lack of attention to serious governance problems, including continued corruption, will have explicit consequences for the type and size of future Bank and Fund programs in individual countries.

The Role of the Bank and the Fund

Given the breadth of governance issues, individual organizations and donors must concentrate on those areas where they have a comparative advantage. The Bank and the Fund can be particularly effective in helping to develop a predictable and transparent framework of rules and institutions through policy reform and building public sector capacity. In terms of its project work, the Bank is also well placed to address issues of fraud and corruption in the design and implementation of its projects.

Because of their mandates and Articles of Agreement, the Bretton Woods Institutions focus on economic issues. However, we have increasingly come to realize that in practice it is often difficult to separate the "economic" and "political" dimensions of governance. Policy advice which is based on economic considerations may have political dimensions. This should not prevent the Bank and the Fund from addressing legitimate governance concerns which have significant economic implications because of political aspects.

In dealing in such sensitive areas, the Bank and the Fund must be particularly aware of the differing contexts within which each country operates and their unique needs and abilities. They must also strive to be even-handed in the treatment of governance issues across member countries.

Future Challenges

The Bank and the Fund can play strong complementary roles in addressing governance issues by bringing their unique areas of expertise and skills to the problem. However, there are several areas where more could be done, both within their individual programs and through collaboration with other parties. I see four key opportunities for greater Bank and Fund attention in moving forward on governance issues:

Better integration of governance issues into Bank and Fund operations - Both institutions have a variety of means to better integrate governance considerations into their operations. The Fund is supporting a more comprehensive treatment of governance issues in the context of both the Article IV consultations and IMF-supported programs. The Bank should consider governance issues, including corruption, more explicitly in a variety of mechanisms, including policy dialogue, country assistance strategies, public expenditure reviews, lending programs and project design. As well, program and lending decisions can increasingly address the issue of excessive military spending, particularly when such expenditures come at the expense of basic health and education and other poverty reduction programs.

Improving donor coordination - International cooperation on issues of governance has grown tremendously in recent years, with the UN system, bilateral donors, developing countries, the OECD, the regional development banks, the Bretton Woods Institutions, NGOs, academics and private institutions all playing a role. However, there is much scope for further action, particularly in helping to fight corruption. Global problems such as money laundering and transnational bribery can only be overcome if all parties are willing to take a firm stand. This will require greater consultation and more effective sharing of information.

As small states, highly dependent on external investment flows, and faced with the competitive pressures of the globalization process, my Caribbean colleagues are fully aware of the complexities and difficulties in managing transnational sources of corruption. In this regard, they urge the Bank and the developed member countries to provide the necessary support and assistance to aid them in their own national and regional efforts. My Caribbean colleagues also urge the Bank to continue the work of developing a more formal and objective basis for determining the level and importance of corruption in a country's economic development.

Capacity building – Effective government - including a professional civil service, predictable and accountable policy-making process and a fair and transparent tax system - is critical to ensuring good governance. However, capacity building must go beyond public sector institutions to assist local organizations and groups. Good governance is only possible if people are involved in the decision-making process. More attention needs to be paid to local capacity building, in the form of educating people to better understand governance systems and in providing viable forums for exchange of ideas.

Sharing knowledge of best practices – Knowledge dissemination of best practices in such areas as effective tax systems and efficient public sector management are becoming increasingly important in providing lessons of good governance for developing countries. Those developing countries with the ability to retrieve such available information are at a marked advantage in improving their own governance systems.

In this respect, Global Knowledge ‘97, a recent international conference on Knowledge for Development in the Information Age co-hosted by Canada and the Bank, represented an important step forward by the international community to ensure that developing countries gain greater benefits from the information revolution. Participants were able to exchange their ideas and experience as part of a broader learning dialogue on how we can best share knowledge and harness the tools of the information age. But further work is needed to bring the more marginalized developing countries into the information network.

Sharing knowledge of best practices is also important for strengthening institutional structures in developing and transition countries. In this regard, Canada is proud to be directly involved in the G-7 initiative to assist emerging economies with their efforts to strengthen their financial systems. Partly in response to the Halifax, Lyon and Denver Summits and partly as a result of continuing shocks to the emerging markets financial systems, the World Bank has been working with the Canadian government to create an executive development program for senior public officials from emerging markets. The Toronto Centre, as it will be known, will provide a leadership forum in which to address issues of financial sector safety and solvency as well as to improve the participant's ability to deal with difficult challenges within their institutions and larger political environments.

Good Governance and Private Sector Involvement in Infrastructure

It is also very appropriate that we should be addressing the issue of governance at the same time as we are discussing how to encourage private involvement in financing for infrastructure. In the wake of fiscal pressures, unsatisfied demand for infrastructure services and constrained development, donors, multilateral agencies and governments in the developing world have had to consider more broadly the ways in which the private sector can play a more prominent role in the provision of infrastructure.

Stable, predictable and transparent governance systems provide investors with the assurances they need for project financing in sectors which may have long gestation and pay-back periods. In this respect, MIGA can play a key role in providing political risk insurance against such risks as: currency transfer restrictions; expropriation; war and civil disturbance; and, breach of contract. To decrease the prospect of disputes among the participants, a clear legal framework for fair settlement is also needed. This will ensure that rules are in place for assessing eligible projects for private sector participation, for identifying qualified private sector participants and for assessing performance.

Conclusion

Good governance has taken on a growing importance in the globalized economic system in which we live. Strengthening the capacity of member countries and civil societies to meet this challenge is a shared responsibility and is critical to our common efforts to promote longer term growth and poverty reduction. Improving governance is also fundamental to continued international support for development assistance. The Bank and the Fund have already made key contributions to advancing governance issues and they have the strong support of our constituency to continue to press ahead on these issues in the future.