Governance in an International Institution

Abstract

The governance of an institution is normally partly ensured by other institutions, which depend on yet other institutions for their governance. But who ultimately guards the guardians? For the liberal electoral democracies of Europe and America the answer that evolved from the political thought of the eighteenth century and the limited liability joint stock company of the nineteenth was, crudely put, checks and balances and voters, who could be the electorate or shareholders. Its limitation is that it presupposes a state and the right of the voters to vote in their own interest. How, then, can good governance be ensured for international organisations, especially the World Bank and the International Monetary Fund, in which the representatives of the developed countries hold the majority of the votes on the Boards and are expected to cast them, not in their own immediate interests, but in the long term interest of the developing countries that borrow from these institutions? For a long time the question did not seem to arise, the only departures from good governance that the Bank was accused of was that its decisions were on occasion influenced by politics, an accusation that did not seem to hurt the institution. The major shareholders, notably the US, were widely believed to have used their power in the Bank to help, deny help or even harm a country or government for motives other than the economic development of the country. Such behaviour is contrary to the Articles of Agreement of the Bank, but the financial markets on which the Bank depended were, if anything, inclined to share the same political biases. Nor were major shareholders of the Bank who disapproved likely to make an issue of it, while the governments that thought they had been treated unfairly and in violation of the Bank's statutes refrained from breaking off with the Bank. Invariably, once such a government had been replaced by one the major shareholders approved, the country resumed borrowing from the Bank. Politically influenced behaviour, provided it was only occasional, did not jeopardise the governance of the Bank and could be tolerated. The question of governance was finally raised for the Bank in 1986, when allegations that it was over-staffed and cumbersome led to a succession of changes in its internal organisation imposed from outside. Upon The Lahore Journal of Economics, Vol.2, No.2 40 becoming President of the Bank that year, Mr. Conable began preparation for a reorganisation that was carried out in 1987. Some of the salient features of the new organisation were changed soon after and, when Mr. Wolfensohn became President in 1995, a further reorganisation was started that culminated in 1997. The history of the Bank in recent years is, therefore, unlike that of the IMF, which, despite having practically the same external governance mechanisms, has remained unchanged in all important respects; rather it resembles that of UNESCO, the ILO, and the United Nations Secretariat, bodies that have all gone through some reorganisation. But the requirements of governance at the Bank are different to those of the other UN bodies that have been reorganised; because of the large amounts that it lends to developing countries and the governance functions it itself performs in these countries as a consequence, the Bank is subject to pressures that these bodies are not. To the extent that it was successful in carrying out its mission despite the pressures, it was because it had robust mechanisms of governance. Taken together, developing countries can borrow over $ 20 billion a year. To ensure that this money is correctly used, the Bank must often exercise governance over individual government agencies that implement the projects being financed and sometimes over the government itself. Its governance is also frequently demanded because the Bank's approval of a country's economic management can be needed for obtaining aid from other sources, for rescheduling external debt or for reassuring financial markets. This often means that measures must be carried out that powerful interest groups in the country oppose or that cause widespread discontent. Almost all governments of borrowing countries have found that, at some time or other, perhaps all the time, their relations with the Bank involved high stakes. There has always been motive enough for governments or interest groups to influence the Bank's decisions by offering inducements to its staff. Yet this did not happen. Up to 1987 the governance of the Bank coped with the pressures. The most obvious evidence, perhaps, was the Bank's reputation for being rigid in applying its methods and standards. To its critics it was doctrinaire and heartless. Neither they nor its supporters suggested that the organisation had become lax in imposing its economic doctrines or that its staff was amenable to personal favours. In place of a watchful external authority, the Bank relied on internal controls, what can be termed for present purposes, “internal governance”, as opposed to the “external governance” deriving from bodies that do not come under the authority of the Bank's management. Their most elaborate form was reached when Mr. MacNamara, as president, reorganised the Bank in 1972 to cope with a rapid growth of its lending and a wider range of Sikander Rahim 41 purposes for which it would lend. Some of its features are described below, but its basic logic was straightforward. A substantial part of the Bank was occupied with watching over the activities of the other parts and almost no decision that committed the Bank could be made by a staff member without referral to some other member answering to managers in a different line of command. There was close and independent scrutiny; but it was also collaborative, the scrutinising staff provided expert advice case by case and formulated guidelines, usually in the form of policy notes or papers, for dealing with the myriad specific and general issues that arose in the course of operations and seemed to warrant special attention. As will be seen, the author believes that the Bank has greatly helped the developing countries, through its loans, its technical expertise in preparing projects, its advice on managing their economies in its reports and, most of all, the governance it provides. Developing economies usually do not have the governance mechanisms of the developed countries, notably the checks balances and voting systems of the democratic market economies, and the Bank often substituted for them. It was bound to fail often, given the magnitude and complexity of the task, but overall its successes were greater than is commonly realised. Some of its failures might be attributed to its economic doctrines - and the author has reservations of his own about some of them - but doctrines are not the subject of this discussion. The subject is how the governance of the Bank affects the governance the institution performs for the developing countries. These countries are still putting their own governance mechanisms in place and, for a long time, they will need a World Bank that can help them there.