OVERVIEW - AsianLII · publication is a summary of these eight presentations. The focus of the seminar was on public admin-istration and legal system reforms. First, Messrs. Shoji

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The Bank�s Governance Policy

OVERVIEW

On the occasion of the Asian Development Bank�s30th Annual Meeting in May 1997 at Fukuoka,

Japan, it was deemed appropriate to hold a seminaron a theme pertinent to the Bank�s mandate. A deci-sion was therefore taken to invite an elite group ofhigh-level speakers to address the subject Governance:Promoting Sound Development Management. Thispublication is a summary of these eight presentations.

The focus of the seminar was on public admin-istration and legal system reforms. First, Messrs.Shoji Nishimoto and Barry Metzger provided anoverview of Bank policy and practice in the area ofgovernance.

In his Opening Remarks, Mr. Nishimoto empha-sizes that governance is increasingly recognized as anessential component of sustainable and equitabledevelopment. In August 1995, the Bank�s Board ofDirectors approved a major policy paper, Gover-nance: Sound Development Management. This papercommitted the Bank to assisting its developingmember countries to enhance their capabilities inthis area. A Governance and Capacity BuildingResource Group was recently established under theOffice of the President to provide an institutionalfocal point for these issues within the Bank. Mr.Nishimoto concludes by expressing the view that,given the rapidly changing global economic environ-ment, the Bank will continue to be relevant only if itcan help bring about lasting improvements in theinstitutional capabilities of its developing membercountries to manage development.

According to Mr. Metzger, it is generally agreedthat the creation of an enabling environment foreconomic development implies the need for lawsthat regulate society, as well as the creation of

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GOVERNANCE: Promoting Sound Development Management

institutions that ensure consistent application andenforcement of those laws. A focus on the legaldimensions of the development process, however,means more than simply creating �modern� laws. Itis of crucial importance to communicate the ideathat specific legal interventions must be comple-mented by systemic approaches to law and develop-ment. A systemic approach implies a shift of focusto the resources made available to the courts andregulatory agencies, as well as to the efficiency withwhich such resources are utilized. Mr. Metzgerconcludes that, as a step towards a systemic ap-proach, the Bank�s recent law-related assistanceemphasizes continuing legal education for existingprofessionals, especially in the public sector; andenhancing the capacity of local institutions toprovide training in newly enacted laws and regula-tions for a market economy.

The two Bank presentations were followed bythree distinguished speakers from New Zealand,Japan, and Malaysia who advocated different ap-proaches to public administration reform.

The keynote speaker, the Honorable RuthRichardson, former Finance Minister of NewZealand, is a proponent of the �big bang� approachto governance. Outlining how market-orientedgovernance reforms had dramatically transformedthe economy of New Zealand, she cites the recentexperience of her country as proof positive that thequality of development management is a cornerstoneof prosperity. New Zealand�s governance reforms,which began in 1984, utterly transformed thecountry�s economic performance in only ten years.Its average growth has been number one amongmembers of the Organization for Economic Co-operation and Development (OECD) since 1991, itsunemployment rate is low, and the Government�sbudget now runs a surplus. Recent internationalsurveys place New Zealand at the top in terms of

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competitiveness and economic freedom. In herpresentation, Ms. Richardson explains that the NewZealand reforms were derived from a �rethink� ofthe entire role of the State. The reformers weretasked with identifying those areas where the Statehad a legitimate role and how its job could be mosteffectively fulfilled. The result was the wholesaleseparation of commercial functions from otherGovernment functions. Ms. Richardson concludesthat while there is no panacea for economic woes,global lessons, whether derived from the spectacularemergence of East Asia or the radical reforms of NewZealand, are the same. Nothing is more importantthan sound development management that combinesgood governance with sensible economic policy.

Mr. Isao Kubota, Director General of Japan�sMinistry of Finance, provides an alternative view onthe role of Government in economic development.He cautions against wholesale acceptance of thebelief that the East and Southeast Asian economicsuccess stories are the result of good governance.When discussing the role of Government, theapproach of the �new orthodoxy� is to assume thatthe government and the private sector are enemiesby nature � that Government is a kind of necessaryevil, and the smaller it is, the better. Mr. Kubotaargues that this is not the lesson one should derivefrom the successful Asian economic stories. Rather,the lesson is that the Government and the privatesector have basically similar goals and that whenthey work together to identify the optimal develop-ment policy aims for their country, and effect policymeasures to achieve these goals, the full potentiali-ties of the country are realized.

Like Mr. Kubota, Dr. Abdullah Sanusi Ahmad,Vice Chancellor of the University of Malaya, stressesthe importance of Government-private sector coop-eration and endorses a gradual approach to reform.He reflects that the most significant change in public

Overview

4


administration in Malaysia started with the estab-lishment of the Malaysian Administrative Modern-ization and Manpower Planning Unit (MAMPU) in1977. MAMPU�s objectives included providingmanagement consultant services to Governmentorganizations, carrying out administrative reforms,and coordinating activities on human resourceplanning and development for effective manage-ment. During the 1980s a number of innovationsand ideas were introduced and implemented. Theseincluded Government-private sector cooperationunder the concept of �Malaysia Incorporated�,replacement of western countries as role models byJapan and South Korea under the �Look East Policy�,and programs that resulted in significant changes inthe values and productivity of civil servants. Dr.Sanusi concludes that even though administrativereforms and transformation in Malaysia began morethan two decades ago, the goal of excellence isongoing and must be continually nurtured.

The three presentations on approaches topublic sector reform were followed by three casestudies of Bank-assisted governance and legal systemreform. These were presented by key representativesof the Governments of Sri Lanka, Gujarat (India),and Mongolia.

Presenting the first case study, Dr. LalJayawardena, Economic Adviser to the President ofSri Lanka, states that the primary economic goal ofthe Government is the elimination of the overallbudget deficit by 2000. This means nothing less thaneliminating loss-incurring enterprises, cuttingsubsidies, and reducing the civilian public servicewage bill and the pension burden. The objective ofthese reforms is to have an efficient, motivated,result-oriented, and vastly slimmed down publicadministration. Dr. Jayawardena explains that twomain instruments of reform will be created: anAdministrative Reforms Management Division,

5


charged with designing the reform program andoverseeing its implementation; and a ManagementCouncil, charged with providing a single, centralfocus for all strategic policy initiatives and ensuringthe overall coordination of policy development. Twoadditional elements of the reform process explainedby Dr. Jayawardena are the assigning of sole author-ity for public service appointments to an indepen-dent and revitalized Public Service Commission, andthe identification of redundant departments andinstitutions as candidates for elimination.

The second case study is presented by Mr. S. K.Shelat, Chief Secretary to the Government of theIndian State of Gujarat. Mr. Shelat tells how a weakand deteriorating fiscal position, a large state-ownedenterprise sector that was draining resources, andinfrastructure investment requirements far in excessof available public resources obliged the Governmentof Gujarat to initiate reforms. The process began in1994, and, with Bank support, a program aimed atreducing the State�s role in commerce and enhancingprivate sector participation in the economy wasadopted. As a result of the reforms, the Governmentwill vacate areas that can be successfully operated bythe private sector. Mr. Shelat explains how thesuccessful completion of the program will putGujarat on the road to self reliance and improve thequality of life of its citizens.

Presenting the final case study, Mr. JigjidUnenbat, Governor of the Bank of Mongolia, ex-plains how the Bank�s law and development programassisted with legal training, advice on commerciallegislation, translation into English of the Civil Code,and preparation of a compendium of principalcommercial and economic laws. Assistance was alsoprovided for reviewing the legal framework forrestructuring and liquidating commercial banks,amending the banking law and regulations, enactingthe Central Bank Law, and preparing a business plan

Overview

6


for the Ministry of Justice. Mr. Unenbat describesthe Bank�s assistance in establishing a retrainingcenter for teaching legal professionals to applymarket economy principles in commercial laws andregulations, and in such lawyering skills as negotiat-ing and drafting legal agreements and regulations.

Taken as a whole, these eight presentationsrepresent an important addition to the literature onthe subject of governance. The Bank�s careful selec-tion of speakers ensured that the subject would beaddressed engagingly by some of the prime moversof reform in the Asian and Pacific Region.

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OPENING REMARKS

THE BANK�SGOVERNANCE POLICYShoji NishimotoChief, Strategy and Policy OfficeAsian Development Bank

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G overnance, defined as �the manner in whichpower is exercised in the management of acountry�s social and economic resources for

development,� is being increasingly recognized as anessential component of sustainable and equitabledevelopment. There are many ways in which goodgovernance contributes to economic development.Governments make decisions on macroeconomic andsocial policy that have a direct impact on the long-term health of the economy. Governments providecritical goods and services, such as infrastructure,health and education, that determine thecompetitiveness of the economy. Governmentsfoster an enabling environment for private sectorgrowth and regulatory structures that balanceobjectives of growth and equity. The experience ofEast Asia shows that good governance is also anessential component of dynamic private sectorgrowth � simply put, markets will not functionwell without it.

The presentations in Part I of this seminar bythe Honorable Ruth Richardson, Mr. Isao Kubota andDato Abdullah Sanusi, bring out both the importanceof good governance and its multifaceted nature.

In August 1995, the Board of Directors of theAsian Development Bank (ADB) approved a paper,Governance: Sound Development Management, thathas committed the Bank to assisting its developingmember countries in enhancing capabilities in thisarea. The paper identifies four basic elements ofgood governance:

(i) accountability, the need for public officials to beheld responsible for delivering particular outputs;

(ii) transparency;(iii) predictability, the need for a stable, open, and

widely understood set of �rules of the game�; and(iv) participation, to ensure ownership and benefi-

ciary support for development initiatives.

The experienceof East Asiashows that goodgovernance is anessentialcomponent ofdynamic privatesector growth �simply put,markets will notfunction wellwithout it.


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The ADB is the first multilateral developmentbank to have an official Board policy statement ongovernance.

We are now moving forward to implement thekey thrusts contained in this paper. A Governanceand Capacity Building Resource Group was recentlyestablished under the Office of the President toprovide an institutional focal point for these issueswithin the Bank. Some basic information on theResource Group, including the e-mail address, isavailable in the first issue of our News and Notes:Governance and Capacity Building at the ADB, whichis included in the seminar materials provided to you.I urge those who are interested to contact theResource Group for information on governanceissues in general, as well as on specific activities ofthe ADB.

Since August 1995, we have made three loansamounting to $290 million and over 20 technicalassistance grants to help our developing membercountries reform their core administrative systems.In addition, about two thirds of our loans and over80 percent of Technical Assistance grants have somecomponent aimed at strengthening institutionalcapacity. The presentations in Part II of this seminarrepresent some of the prominent examples of theBank�s loans and technical assistance in the area ofgovernance.

Our work on governance and capacity-buildingissues is organized along several dimensions. Thereis a strong public sector management componentthat covers the parastatal sector, as well as howgovernments prepare and implement policies anddeliver public services. A second dimension is privatesector development and the role of governments increating and fostering an enabling environment forprivate sector growth. Another dimension isstrengthening civil society, which includes participa-tion of stakeholders and beneficiaries in development

The ADB is thefirst multilateral

developmentbank to have an

official Boardpolicy statement

on governance.

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policies and projects and a growing role of NGOs indelivering certain services. Keeping these in view,the thrusts of the Resource Group include publicadministration reforms in South Asia, a greater focuson public sector outputs and their measurement,increased responsibility on the part of executingagencies to design projects, and restructuring andimproving municipal management in major cities.

President Sato has stated on many occasionsthat the relevance of our Bank in the coming yearswill be measured by much more than just ourfinancial contribution to development. In my view,the Bank will continue to be relevant only if it canhelp bring about lasting improvement in institutionalcapabilities of our developing member countries inaddressing problems of development.

Finally, I would like to emphasize that goodgovernance is the responsibility of all. There aremany here today who have thought extensivelyabout these issues and done work in this area, andwe would like to benefit from your ideas andexperience. Also it has been demonstrated time andagain that involvement of stakeholders is essentialfor the success of all reform efforts. We thereforehope that this seminar will serve as an importantstep in building a partnership between our membercountries, civil society organizations, and the Bank topromote good governance in the region for sustainableand equitable growth and development.


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LAW AND DEVELOPMENT:An Essential Dimensionof GovernanceBarry MetzgerGeneral CounselAsian Development Bank

Law and Development: An Essential Dimension of Governance

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As the governance debate unfolds, it can besafely said that there is now a general consen-sus that creation of �an enabling environment�

for economic development necessarily implies theneed for laws to regulate society and the creationof institutions to ensure consistent applicationand enforcement of laws. This growing importanceof law in the development process is reflected in theincrease in the number of law-related projects andthe amounts committed for them by both bilateraland multilateral donors in recent years. For example,the latest issue of the Law and Development Bulletin, asix-monthly Bank publication that compiles informa-tion on law-related development programming in theAsian and Pacific Region, lists 231 law-relatedtechnical assistance projects undertaken by theBank and other multilateral institutions. Yet eventhis compilation is incomplete because it does notencompass legal components of project, program,and sector loans financed by the Asian DevelopmentBank and the World Bank.

This increased focus on legal dimensionsindicates that there is now a far greater realizationof the importance of law in the development processthan ever before. This can be attributed to a numberof factors.

■ First, the clarity of the perception that a whole-sale revamping of the legal system is necessaryto effect the transition from state-plannedcentral economies to liberalized market-orientedeconomies in such countries as the Cambodia,People�s Republic of China (PRC), Lao People�sDemocratic Republic, Mongolia, and Viet Nam.

■ Second, the growing recognition that the privatesector and private sector lenders must beencouraged to play a more active role in thedevelopment process than was permitted in

The privatesector must beencouraged toplay a moreactive role in thedevelopmentprocess than waspermitted inmany developingcountries duringthe past thirtyyears.


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many developing countries during the pastthirty years, and that such investors and lendersrequire a predictable framework of rules inwhich commercial activity and lending activitycan be conducted, including accessible andcomprehensive legal rules which are actuallyapplied and the breach of which gives rise tosanctions.

■ Third, a realization that the effectiveness ofgovernment in implementing development-oriented public policies involves the use of lawas an instrument of social change as well associal control, and that inefficiencies in the legalsystem have been a contributing factor toineffective development policies.

■ Fourth, in some countries the recognition thatlaw and legal process can help protect thecitizenry from the excesses of an overreachingstate (in the PRC immediately after the CulturalRevolution, in the former Soviet Union underthe Gorbachev reforms, and in Eastern Europe,the �rule of laws and not of men� has been aphrase oft-repeated by the leaders of new orreformist governments).

A focus on the legal dimensions of thedevelopment process, however, means more thansimply the creation of �modern� laws which areaccessible, comprehensible, and usable. There is agrowing realization that specific legal interventionsin the context of the Bank�s project, sector, orprogram lending must be complemented by a moresystemic approach to law and development. Asystemic approach to law reform involves shiftingthe focus away from the �black-letter law� of thelegal rules toward the institutional capabilities of thelegal system, including the judiciary and government

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administrative and regulatory agencies. It calls forgreater attention to the education, skills, andin-service training of the judiciary and governmentofficials staffing legal and regulatory institutions. Asystemic approach implies a shift of focus to theresources made available to the courts and regulatoryagencies and to the efficiency with which suchresources are utilized. The enactment of new legisla-tion and regulations is, in some respect, the easiestpart of donor-assisted law reform: it is often relativelyshort-term work and inexpensive. Institutionalreforms and the development of the necessaryhuman resources within such institutions, however,require longer-term commitments and greaterresources.

As a step towards a systemic approach, ahallmark of the Bank�s recent law-related technicalassistance has been an emphasis on (i) continuinglegal education for existing professionals, especiallyin the public sector; and (ii) enhancing the capacityof local institutions to provide training in newly-enacted laws and regulations for a market economy.Two examples of the Bank�s approach are

■ the Bank�s technical assistance in Cambodia,PRC, Mongolia, and Viet Nam, for institution-alizing continuing legal education; and

■ the recently approved technical assistance forMongolia on Restructuring and Capacity Buildingin the Ministry of Justice.

As the Bank and other donors come to realizethe importance of a systemic approach to lawreform, an important role they can play is tofamiliarize developing member countries with �bestinternational practices� in solving common problemsoften faced by different legal systems. An eclecticapproach to law reform which draws upon different


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international experiences is not altogether uncommonto the region as evident, for example, from the legalsystems of South Asia (Bangladesh, India, Pakistan,and Sri Lanka), the PRC, and Japan. Indeed, in thecase of Japan, the Meiji Restoration in 1868 saw aremarkable period of 20 years of institutionalmodernization. Feudal privileges were ended and amarket economy was created for land, labor, andcapital. And even though there were no foreigndonors in the 1860s and 1870s to provide legaltechnical assistance to the Japanese reformers duringthe Meiji Restoration, foreign advisers played asignificant role. Hermann Roesler, a German, playeda significant role in the writing of the JapaneseConstitution, which became effective in 1890. TwoFrench advisors, Georges Boussquet and GustaveBoissonade, came to Japan in the 1870s to teach lawand became quite active in the drafting of variouscodes and working with the courts in interpretingvarious laws. Five major codes were enacted. Theenactment of such codes was an ongoing process, asJapanese jurists made efforts to adopt foreignmodels to Japanese customs and mores. Indeed, thefirst codes of the Meiji Restoration were generallysupplanted within 10 to 20 years by new codeswhich were viewed as more appropriate to Japaneseconditions, though still patterned after European(and particularly German) models.

Law, more than most intellectual disciplines,has been much influenced by foreign models. In thedonor community today we may refer to the searchfor appropriate models and for the adaptation tolocal conditions as the application of �internationalbest practice�. The same process was at play duringthe Meiji Restoration, as Japanese jurists soughtappropriate foreign models, and then sought toadopt them to Japanese conditions, The sameprocess has been at play in other countries over thecourse of a far longer period of time and the techni-

Law, more thanmost intellectualdisciplines, hasbeen muchinfluenced byforeign models.

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cal assistance provided by the Bank and other donorsis consistent with this historical process and hasindeed helped to catalyze this process.

As the Bank and its developing member countriescontinue dialogue on law and development andother governance issues, experience of countries inwhich similar problems have been solved will enrichthis dialog and assist in the search for workable andefficient solutions to governance issues. I am surethat today�s seminar with its distinguished speakersand guests from around the globe will demonstratethe usefulness of such an eclectic approach.


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KEYNOTE ADDRESS

GOVERNANCE:Promoting SoundDevelopmentManagement Lessons fromNew Zealand

Ruth RichardsonFinance Minister of New Zealand, 1990�1993

Governance: Promoting Sound Development

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The Honorable Ruth Richardson was the first FinanceMinister in Jim Bolger�s National Party Government inNew Zealand (1990�1993), in which capacity she was thedriving force behind her country�s dynamic reform agenda.Ms. Richardson was first elected to Parliament in 1981.As a member of the opposition, she acted as ShadowMinister of Education from 1984 to 1987, and as ShadowMinister of Finance from 1987 until her party assumedpower in 1990. Since completing her fifth term inParliament in 1994, Ms. Richardson has been in demandas a policy consultant to governments around the worldon streamlining governance and public sector reforms. Sheis currently a Director of Wrightson Ltd and the AorakiCorporation, and Chairman of Dairy Brands Ltd.

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The quality of a country�s economic policy andthe integrity with which that policy is imple-mented are crucial factors for its prosperity.

Compared to these factors, natural resources areusually of strictly limited value to a country � a factattested by the existence of many poor but resource-rich countries, and rich but resource-poor countries.Cultural factors such as the capitalist ethic and civictrust are much more important for prosperity thannatural endowments, yet a poor policy frameworkwill still prevent even the most promising culturalconditions from being realized in the best economicoutcomes.

It is true that a rich country may often be ableto �carry� a poor policy framework for a period oftime before its underlying contradictions become toopressing and demanding to be addressed, whereas apoor country with an inadequate policy frameworkmore often and more rapidly reaches crisis point.But rich or poor, a country cannot indefinitely blameinferior economic performance on internationaltrading conditions or other such factors.

It is the quality of governance that makes thecrucial difference; in particular, the quality of thedevelopment management and the policies chosen toadvance a nation�s economic and social ambitions.At the end of the day � and no matter what thecharacteristics of an economy � prolonged lowgrowth, high unemployment, high inflation, andindebtedness are effectively political choices.

For instance, a country with high unemploymentresulting from inflexible labor market practiceseffectively makes a political choice to retain itsunemployment level. That country could choose �as New Zealand has done � to tackle vestedinterests through liberalizing its labor market, butinstead chooses to opt for the sclerotic status quo.

New Zealand was a rich country which wasreduced to �poor country status� by first world


At the end of theday,prolonged lowgrowth, highunemployment,high inflation,and indebtednessare effectivelypolitical choices.

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standards, as a result of poor policy choices.A heavily overregulated and inefficient domesticeconomy, high protective barriers, and inconsistentand irresponsible monetary and fiscal policies hadcaused New Zealand to have the worst productivitygrowth rate, and the worst economic growth per head,of any country in the Organisation for EconomicCo-operation and Development (OECD).

By 1984 we were also approaching crisis point,since the rapid buildup in our Government andoverseas debt � another OECD record � hadbecome unsustainable. New Zealand�s exports,though growing more diversified, were still dominatedby bulk unprocessed pastoral products, essentially adeveloping country�s export base. Our poor economicperformance could no longer plausibly be blamed onexternal influences. We had run out of excuses as aneconomy, and the need for reform was undeniable.

Reforms in Brief

The New Zealand economic reforms took placeunder two governments, starting in 1984. In thecourse of 10 years our economic performance wastransformed. Few other countries have undertakenreforms of such far-reaching scope or mutualconsistency. As the OECD put it in its latestsurvey of New Zealand: �While other OECDcountries have pursued similar policies, few, ifany, have done so in the context of such a coherentoverall framework, stressing predictability, trans-parency and accountability.�

The reforms included:

■ The internationalization of the economythrough the reduction of border protectionand abolition of exchange controls.

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■ Wholesale domestic deregulation in bothgoods and factor markets, including majorliberalization of the labor market.

■ The transformation of Government throughthe corporatization and privatization of statetrading activities, and major performancemanagement reforms to the core state sector.

■ The focusing of monetary and fiscal policy onsound medium-term objectives rather thanshort-term and unsustainable objectives.Monetary policy is now dedicated to pricestability and fiscal policy to reduce debt andto run balanced budgets over time.

In sum, the reforms greatly increased the roleof market forces in creating wealth, while puttingin place a sound macroeconomic framework toensure that poor monetary and fiscal settingswould not compromise the benefits from the newmicroeconomic climate.

There were two major waves of reform. Aninitial wave of rapid but uneven liberalization wasundertaken by the Labour Government elected in1984. A second wave of reforms, which included theliberalization the labor market and the reining in ofGovernment overspending, removed the final majoranomalies in the policy framework and set thescene for economic recovery. This final wave ofreforms was undertaken in the first term of the1990 National Government, in which I served asMinister of Finance.

A crucial component of New Zealand�s reformswas the strong commitment from key politicalplayers. The most successful periods of reformwere characterized by a clear strategy amongministers, and a consistent application of thatstrategy throughout the public sector. The poor


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performance of the economy, and the powerfulvested interests opposed to change, meant that asense of urgency was important in maintainingthe momentum of reform.

Just as important was the placing of highquality people in key public sector positions toensure that the vision of the reformers was notfrustrated during the implementation stage by abureaucracy resisting change. Effective communica-tion of the rationale for the reforms was crucial.Business needed to understand the overall reformstrategy so as to be in the best position to realizeits benefits. And a sufficient percentage of thepublic needed to be persuaded to give reform thebenefit of the doubt during a testing initial periodwhen the adjustment costs outweighed anytangible benefits.

Securing the support of key private sectorgroups to the cause of reform was an importantfactor in securing public acceptance of theliberalization program. So too was the overall resolveof the Government. As the reforms proceeded,sector groups typically gave up demanding to havetheir privileges restored, and instead began tourge the Government to treat them evenhandedlyby moving to reform those sectors that were notyet liberalized.

After coming through the difficult initialperiod, the New Zealand economy has now performedso robustly that the reforms have been described bythe OECD as �remarkably successful.� Since economicrecovery began in 1991, growth has averagedbetween 3 and 4 percent per annum, the unem-ployment rate has fallen to 5.9 percent (one of thelowest in the OECD), and the Government�sbudget has swung into surplus, allowing taxes tobe cut while simultaneously paying off allGovernment overseas debt. New Zealand�s creditrating has been upgraded.

It is important toplace high

quality people inkey public sector

positions toensure that the

vision of thereformers is not

frustrated by abureaucracy

resisting change.

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Surveys such as that of the World EconomicForum have placed New Zealand among the leadingnations for competitiveness. The Economist hascalled New Zealand�s monetary and fiscal policies�the world�s best.� The 1996 Survey of EconomicFreedom of the World ranks New Zealand as one ofthe top performers, second only to Hong Kong. AndGerman anticorruption organization TransparencyInternational has named New Zealand the leastcorrupt country of the 41 it surveyed � a reflectionboth on our culture and on the degree of economicfreedom now possessed by New Zealanders.

With all these favorable outcomes, it is nowonder that the Financial Times, in an articleentitled Lessons from the Antipodes (12 March 1996),stated that �New Zealand has demonstrated thatorthodox economic reforms, energetically executed,can make a difference to an economy�s prospects.For this reason, it offers important lessons.� In myview the most important of these lessons are:

■ The value of comprehensive reform. The NewZealand reforms were both microeconomicand macroeconomic. They encompassedcapital and labor markets, goods markets andthe Government sector.

■ The importance of balance in reform. TheNew Zealand economy began its period ofsustainable economic growth only after thelast principal obstacles to growth (namely aninflexible labor market and Governmentoverspending) had been effectively tackled.

■ The value of a medium-term focus. All NewZealand�s principal reforms had such a focus.

■ The value of political commitment, a clear strategy,and high-quality implementation by key people.


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■ The importance of effective communicationand a sense of urgency in reform.

Rethinking the Role of the State

The New Zealand reforms involved a rethink of theentire role of the State. Over time, Government inNew Zealand had become greatly overstretched: itwas undertaking many activities where it had nolegitimate role, and was generally doing badly thosethings that did constitute its core functions. Objectiveswere often confused or conflicting, accountabilityweak, incentives for efficiency minimal, and manage-ment hamstrung by centralized decisionmaking andexcessive bureaucratic rules.

The task facing our reformers was to identifythose areas where the state had a legitimate role,then determine in each instance how that role couldbe most efficiently and effectively carried out. Thisinevitably meant a reduced Government presence inthe economy, as well as a transformation in how theState undertook its remaining functions.

The State�s roles had included regulatingprivate sector activity, producing many goods andservices itself, and providing social services. Asregulator, the state has now taken on a much lessobtrusive role, though its core function of setting thelegal framework against which open and competitivemarkets can operate remains, of course, a quitecrucial function of Government. New Zealand nowcombines generally sound law with an uncorrupted,independent and relatively competent judiciary, andthus scores highly as an economy where the rule oflaw is upheld.

The Government has also reduced its role as aparticipant in economic activity, throughcorporatizing and privatizing many state tradingactivities. When it comes to the provision of social

The NewZealand reforms

involved arethink of theentire role of

the State.

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services, by contrast, the changes have mostlyconcerned how the Government discharges thatfunction, rather than involving a reduction in theoverall Government presence.

A decade of reforms in New Zealand�s publicsector has resulted in a model of public sectormanagement that has brought world acclaim. Themodel starts at the strategic level, where cabinetMinisters decide on their key priorities. As theonly participants with democratic legitimacy,ultimately it is only Ministers who can set thedesired social and economic outcomes resultingfrom Government action.

Each year a document is produced setting outthe Government�s vision of the outcomes it wishesto see achieved in the years ahead. Well in advanceof the presentation of the budget, the Governmentalso publishes a Budget Policy Statement �another strategic document incorporating theGovernment�s economic and social ambitions. Thisdocument binds the whole of the Government to thepublished strategy.

In line with the strategy, individual Ministersin turn choose the outputs they wish to purchasefrom their departments and from other State entitiesin order to help realize the outcomes sought byGovernment. The chief executive of each departmentis responsible for providing the relevant Ministerwith the contracted outputs.

The chief executive is on a fixed-term contract,and has wide discretion to manage departmentalinputs � including labor. Labor practices are flexible,with unionism voluntary and a large percentage ofstate sector workers covered by individual contracts(also the case in the private sector). Pay-by-performanceis commonplace. Often tasks are contracted out toprivate sector organizations that can perform thefunction more efficiently; there is no presumptionthat Government is the preferred provider.


30


Besides purchasing outputs, the Governmentalso has an ownership interest in the assets tied upin Government agencies. In the core state sector,each department must calculate a balance sheet, anda system of capital charging has been introduced.These twin disciplines provide a powerful incentivefor departmental chief executives to manage theirbalance sheet so as to make the most efficient use oftheir assets.

But it is the area of state trading activitieswhere the Government�s ownership interest hasbeen most radically reassessed. Prior to the reforms,most trading activities were contained in governmen-tal departments, facing poor incentives, bureaucraticcontrols, and often mixed objectives. Service wasnotoriously poor, and many activities ran permanentlyat a loss. Under the reforms, these activities wereseparated into distinct organizations, becoming state-owned enterprises (SOEs).

SOEs are registered under the Companies Actand are required to operate in most respects asprivate companies. They have a clear profit objectiveand their boards are largely free from politicalcontrol. They must borrow on their own account andpay tax and dividends to the Government. Nor arethey shielded from facing private sector competition.Day-to-day running of an SOE is in the hands of itsboard and management.

The shares are held by two ministers. The soletask of the shareholding ministers is to managetaxpayer ownership interest by appointing the board,setting dividend policy, and monitoring overallperformance. Under the improved incentives providedby the new regime, there were some huge productivityincreases following corporatization, some big realprice reductions and some rapid transformationsinto profitability on the part of SOEs.

While these developments were welcome, inthe case of the great majority of SOEs, there were

31


strong economic reasons for taking the further stepof transferring the business to the private sector.Only in the private sector would productivity bemaximized, and each business be best placed toundertake new investment. Corporatization was ahalfway house, and the performance incentives andmonitoring mechanisms under Government ownership,while much improved, still did not match thoseavailable in the private sector, where shares werefreely tradeable and companies subject to takeover.

There was also a genuine risk of policy slippageover time. Political fashions can change, and com-mercial considerations can easily become subordinatedto political considerations once again, given theoften short time horizons of the political process.The slow infiltration of politics into SOE policy canbe manifested in terms of soft required rates ofreturn, interference in key decisions such as pricing,or excessively political board appointments.

For all of these reasons, a major privatizationprogram was undertaken in New Zealand. Policy-makers were insistent that prior to any privatizationthe market must be deregulated, e.g., telecommuni-cations, banking, and transport. Most of the saleswere by open tender and it transpired that all weretrade sales. Since the objective of the program wasto maximize return to the taxpayer, very few restric-tions were placed on who could enter the bidding.

In a highly successful series of sales, aroundNZ$14 billion in assets were privatized � many tooverseas interests. Proceeds from the privatizationprogram were dedicated wholly to the retirement ofGovernment debt.

The wholesale separation of commercial functionsfrom other functions of governmental departmentshas been one aspect of an overall program of restruc-turing the public sector so as to make objectives andaccountability more unambiguous. Thus the provisionof policy advice has typically been separated from


The provision ofpolicy advice hasbeen separatedfrom theoperationalfunctions ofdepartments,and the fundingof activities hasbeen separatedfrom theirprovision.

32


the operational functions of departments, partly toremove any conflict of interest from those involved.For similar reasons, the funding of activities hasbeen separated from their provision.

Regulatory functions have also been isolatedinto separate agencies. In any given area of policy, asmall ministry is likely to be giving policy advice,and other agencies acting as purchaser or provider.Almost the whole of the public sector has beenrestructured along these lines.

Any government that takes seriously its role aspurchaser of outputs and as owner of assets will putin place sound systems to measure performance.After all, if you cannot measure it, how can youmanage it? Here, too, the New Zealand public sectorperformance management model leads the world.Information requirements right through the publicsector are substantial. In line with the new stress onoutputs, all departmental reporting and financialaccounting is on an output basis.

At the aggregate level, the New Zealand Govern-ment now calculates an annual operating statementon an accrual basis, as well as a consolidated balancesheet for the whole of the State sector � the onlycountry in the world to do so. Fiscal projections arealso open and transparent. By law, the Governmentmust produce and publish twice-yearly economic andfiscal projections, including a set of forecasts justprior to each general election.

The Government has gone further by bindingitself to conduct fiscal policy in line with certainspecified principles of responsible fiscal manage-ment. These principles are contained in the FiscalResponsibility Act 1994, which I introduced toParliament as Minister of Finance. The principlesinclude running balanced budgets over the course ofthe business cycle, reducing debt to prudent levels,and pursuing policies consistent with a reasonabledegree of predictability in future tax rates.

33


Any departure from the principles must betemporary, and must be accompanied by a publishedstrategy for ensuring that fiscal policy sooncomplies again with the principles of responsiblefiscal management. Thus the Fiscal ResponsibilityAct still allows an elected government to make afull range of expenditure decisions in line withits social priorities, but prevents irresponsibledeficit financing which damages economic growthand subordinates long-term to short-termconsiderations.

Principles of Good Governance

The Asian Development Bank has stressed four keyprinciples of good governance � accountability,transparency, predictability and participation. In theconcluding section of this paper I add a fifth:credibility. The New Zealand public sector reformsrate highly on all of these principles.

1. Accountability

In New Zealand, accountability has beenenhanced at all levels. Departmental chief executivesare now directly accountable for their performancein delivering their departments� outputs, and evenordinary employees are more accountable thanunder the old union-dominated state sector. Theoutputs of a department are now clearly specified.Both Ministers and the wider public can see whatthey are buying, how much it costs, and who isresponsible.

Privatized SOEs now face the disciplines of thecompetitive marketplace. SOEs that for variousreasons have not yet been privatized still face muchincreased accountability: shareholding ministers seekan economic rate of return on the taxpayers� assets,


34


and are empowered not to reappoint directors aftertheir terms have expired.

There are other means by which accountabilityin government can be strengthened. Free and openfinancial markets are an important ally of goodgovernment. They sit on daily judgement over acountry�s economic policy, and bring home to agovernment visibly, and rapidly, the medium-termconsequences of poor policy. Where asset pricesappear misaligned, they usually reflect underlyingimbalances in economic policy. By so doing, theyput pressure on policymakers to address thoseimbalances.

In New Zealand, the liberalization of exchangecontrols and interest rate controls in the mid-1980s,along with the clean float of the New Zealand dollar,played an important role in encouraging govern-ments to adopt prudent policies � especially in thearea of fiscal and monetary policy.

2. Transparency

The New Zealand model rates equally highlyin terms of transparency. Clear operating rulesand a free flow of information assist economicdecisionmaking, reduce uncertainty, and increaseconfidence in the legitimacy of a government(whether democratic or not). New Zealand has anOfficial Information Act [1982] policed by anindependent Ombudsman. That legislation setsdown the general principle that informationshould be made available in the absence of com-pelling reasons otherwise.

Crown-owned entities report regularly toParliament, while New Zealand�s fiscal reportingis the fullest in the world. The Government�soverall fiscal strategy must be disclosed inaccordance with the requirements of the FiscalResponsibility Act.

Clear operatingrules and a free

flow ofinformation

assist economicdecisionmaking,

reduceuncertainty, and

increaseconfidence in

the legitimacy ofa government.

35


Other important arms of economic policytypically operate also under substantial transparencyrequirements. For instance, the Reserve Bank Act1989 unambiguously sets down �stability in thegeneral level of prices� as the principal goal of NewZealand�s central bank. A public Policy TargetsAgreement between the Minister of Finance and theReserve Bank Governor details how the Bank willperform its function of maintaining price stability.

The Bank has day-to-day operating autonomy.However, twice-yearly it must produce a detailedmonetary policy statement, which is tabled inParliament and examined by a parliamentary selectcommittee. A government can temporarily direct theReserve Bank Governor to conduct monetary policyin accordance with an aim other than price stability,but such an action (which is most unlikely to occur)must again be transparent: any such �override�would need to be tabled in Parliament.

3. Predictability

Where policies are transparent and accountablethey are also likely to be predictable in theirimpact. Thus it is in New Zealand. Monetarypolicy furnishes a good example: the operationalautonomy of the Reserve Bank, its single andexplicit objective, and the transparent contractingbetween Government and Bank lends policy a highdegree of predictability. This predictability cameabout through explicit design: the more crediblethe Government�s commitment to price stability,the lower the inflation risk premium in interestrates, and the more confidently will business beable to invest in the expectation of a low inflationenvironment.

Similarly, the transparency and medium-termfocus of New Zealand�s public sector managementmodel lends fiscal policy increased predictability.


36


The requirement in the Fiscal Responsibility Act torun a balanced budget over the course of the businesscycle, along with the high level of informationdisclosure required by the Act, is an explicit mecha-nism for entrenching sound fiscal outcomes overtime. Governments are under constant short-termpressure to run fiscal deficits.

But so long as the Fiscal Responsibility Actremains in place � and it is supported by all butone minor party in parliament � business can beconfident that fiscal policy will be conducted in aresponsible manner. Already the Act has helpedchange the nature of political dynamics and thewider policy debate: the current coalition governmentwishes to be seen as �fiscally responsible� in termsof the legislation, while the private sector regardscompliance with the Act a key aspect of responsibleeconomic management.

4. Participation

Participation is a principle rightly stressed bythe Asian Development Bank. One of the features ofa market economy is that it is a vast network ofparticipation on a voluntary basis. Every consumeris a voluntary participator, as is every producer,every investor, and every worker who uses theopportunity provided by a free labor market to gainemployment. Clearly the quality of those participa-tions will be greatly improved where there is strongcivic society.

Government cannot itself create civic society,but the quality of its own participation can make abig difference to the success of an economy. In NewZealand prior to the economic reforms, participationby Government was far too obtrusive and largely ofthe wrong sort. Government did everything fromrunning financial institutions to participating intripartite wage-setting decisions (employers,

Governmentcannot itself

create civicsociety, but the

quality of itsown participation

can make a bigdifference to the

success of aneconomy.

37


unions, and Government) that were the properpreserve of the relevant private sector players.The predictable outcome was poor economicperformance.

The Government now participates in theeconomy to a much reduced extent, but with greatereffectiveness. All governments have a crucial role inassisting private sector participation by upholdingthe rule of law, allowing the free flow of informationin both public and private sectors, and making therules of the economic game as transparent aspossible. As we have seen, the New Zealand modelperforms well on these criteria.

Shortcomings of the New Zealand Reforms

Not all of the New Zealand reforms have been of thesame quality. In two sectors in particular � healthand education � policies have so far lacked thecoherence and boldness of most other elements ofthe reform program.

Health and education are politically sensitivesectors where powerful vested interests makeprogress particularly difficult. In reforming theseservices, there has been some limited progress inputting in place better supply side structures, buthardly any in introducing greater choice on thedemand side. As a result, improved outcomes havebeen limited, and widespread public dissatisfactionwith these services persists.

In restructuring New Zealand�s publicly-fundedhospital sector, moves were at least made towardsgreater accountability and transparency by (i) sepa-rating the funding of hospital services from theirprovision, (ii) by setting up hospitals on a morebusinesslike basis, and (iii) by explicitly contractingfor hospital services. But for political reasons, theGovernment has been relatively weak in demanding


38


high-quality performance from the hospital sector.Moreover, there is still relatively little competitionin the health system, either between public healthcare providers or between the private and publicsectors.

The Government shelved a plan to let individualNew Zealanders effectively take their share of publichealth funding and use it to purchase their ownprivate health care plans. Thus an initiative thatwould have broken up the uncompetitive andmonolithic public health service by allowingindividuals greater choice and participation did notin the end proceed.

In the field of education, a similar unwillingnessto adequately think through the Government�s rolefrom first principles has been experienced. Whilethere are good reasons for the Government to fundschooling, there is no reason why the State shoulditself provide schooling directly.

Such a task can be most effectively left toprivate sector incentives and disciplines through avoucher system or similar scheme. Unfortunately, inNew Zealand we are still at the stage of attemptingto make Government-run schools work better. Thatis inevitably a difficult task in a sector noted for itsinflexibility, unresponsiveness, and dominance byteacher unions. While some limited improvementshave been introduced, genuine parental choice andthe ability to participate as a consumer of educationremains largely unrealized.

The lesson from New Zealand regardinghealth and education is that deviation from soundfirst principles will result in unsatisfactory out-comes. As in other areas of policy, halfheartedreform sells the public short. Only by bringingabout maximum choice on the demand side, sothat control passes from producer to consumer,will we make progress of similar quality to thatelsewhere.

39


Conclusion

We possess a considerable body of theory andinternational evidence concerning the role of govern-ment, and the type of policy regime that mostencourages economic development. Too often,however, political considerations and the demands ofvested interests prevent a government from acting ina manner consistent with sound outcomes.

We know that open and competitive marketsare the most effective generators of wealth over anyreasonable period of time. The role of Governmentis to support markets by maintaining a consistentand predictable legal framework, involving fewrestrictions on contracting and maximum transparencyin the conduct of economic policy. While this maysound a comparatively minor task for government,it is a crucial role which is performed well by fewcountries anywhere. One of these countries isNew Zealand.

Credibility

Much that is important in governance ultimatelycomes down to the issue of credibility. Does thegovernment adhere to a consistent set of principles,and pursue policies that are not in contradictionwith each other? Can private sector participantsmake decisions in the confidence that the governmentwill act predictably in given circumstances? And atthe level of implementation, will policies be carriedthrough in a manner consistent with maintainingand strengthening the entire culture of a marketeconomy?

New Zealand�s reform program largely meetsthese tests of credibility. For instance, by makingfiscal policy more predictable, transparent, andaccountable, the Fiscal Responsibility Act has improved


Too often,politicalconsiderationsand the demandsof vestedinterests preventa governmentfrom acting ina mannerconsistent withsound outcomes.

40


the credibility of Government, transformed thenature of the political debate on fiscal policy, andassisted materially in generating better private sectorperformance.

Institutional Design

These outcomes from the Fiscal Responsibility Actillustrate how improved institutional design has apositive impact on the behavior of participants inthe economy, both in the public and private sector.Many other New Zealand institutional reforms alsodemonstrate this principle. For example, thediscipline provided by the Reserve Bank Act has ledsuccessive governments to pursue price stability inpreference to policies that favor the short term atthe expense of the medium term. That Act has alsochanged private sector behavior by reducing inflationexpectations and business uncertainty.

The new institutional framework under theState Sector Act 1988 and the Public Finance Act1989 promoting a performance management regimeinvolving accountability and transparency throughoutthe public sector � such as the requirement toproduce a departmental balance sheet � hasimproved performance at all levels.

And in the labor market, the change in frame-work under the Employment Contracts Act 1991from centralized bargaining to free contracting hasled to big cultural changes at the level of the firm, inthe form of greater cooperation between employersand employees, increased flexibility, and reducedindustrial conflict. Correct design of the institutionalframework clearly makes a big difference toeconomic performance.

Good governance is epitomized by a frameworkof policies that are consistent, transparent, predictable,and credible. The State should not attempt to

Good governanceis epitomized by

a framework ofpolicies that are

consistent,transparent,

predictable, andcredible.

41


perform tasks that are the proper province of theprivate sector, but should rather provide the overallclimate within which markets can flourish.

Private sector participants, for their part, mustbe prepared to take the lead in investment decisions,and look to their own skill and resources in thesearch for higher productivity, rather than seek tobe rescued by government rules that conferprivilege on them while raising costs on others.And private sector participants must observe thelegitimate rules of competitive markets and staywithin the law.

A policy regime that realized this partnership witha high degree of effectiveness would look like this:

■ A monetary policy aimed at price stability,and an institutional mechanism � such asNew Zealand�s Reserve Bank Act � thateffectively locks price stability into theeconomic framework.

■ Fiscal policy that does not attempt to beactively counter-cyclical, but which aims torun balanced budgets over the course of thebusiness cycle � preferably with an institu-tional mechanism such as New Zealand�sFiscal Responsibility Act as a means ofcementing in good fiscal behavior.

■ A government sector that is only performingthose functions that could not more effi-ciently be performed by the private sector,and is undertaking those tasks in as efficient,transparent, and accountable a manner aspossible. Commercial businesses belong inthe private sector.

■ A tax system where low rates of tax areconferred over broad tax bases.


42


■ Open and competitive markets withoutprice controls or monopoly powersconferred by statute.

■ No trade barriers. If import protection isdeemed necessary, tariffs are generallypreferable to quantitative controls. Rates oftariff should be as even as possible tominimize distortions.

■ Open, competitive, and lightly regulatedcapital markets, including an inward invest-ment regime that welcomes foreign capital.

■ A labor market where there is completefreedom to contract between employer andemployee (and freedom to form associationsvoluntarily).

■ Most important of all, clear and consistentlaws that participants in the economy can beconfident will be upheld in the courts. Strongproperty rights and an independent judiciaryfree of corruption are two vital elements ofthe machinery that is necessary to supportmarkets.

There is no easy recipe for economic success.But the global lessons � whether from the spec-tacular emergence of East Asia or the radical reformof New Zealand � are the same. More important tosound development management than anything elseis the successful combination of good governanceand sound economic fundamentals � stablemacroeconomic management, investment inpeople, open markets, and allowing prices to reflecteconomic scarcity. For most countries, realizing sucha template of policies would require a substantialadjustment in how the government sees itself �

43


from government-as-controller to government-as-setterof the framework within which markets can operate.But the lesson from New Zealand and othercountries is that such a transition is possible, andthat the economic and social benefits abundantlyrepay any transition costs. All that is required is thepolitical will.

The lesson fromNew Zealand isthat such atransition ispossible, andthat theeconomic andsocial benefitsabundantlyrepay anytransition costs.All that isrequired is thepolitical will.

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45


THE ROLE OFTHE GOVERNMENT INDYNAMIC ECONOMICDEVELOPMENT PROCESSIsao KubotaDirector-GeneralCustoms and Tariff Bureau, Ministry of Finance, Japan

46


Isao Kubota is currently Director-General of the Customsand Tariff Bureau of Japan�s Ministry of Finance.Mr. Kubota�s previous positions include Senior DeputyDirector-General of the International Finance Bureau,Director of the Research and Planning Division, andDirector of the International Organizations Division.Mr. Kubota won a Swire Centenary Scholarship for theUniversity of Oxford in 1967, and was awarded a Masterof Philosophy by Oxford in 1969.

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Behind the Asian Miracle

For a very long time, a successful economicdevelopment of Asian countries was considered tobe an extremely difficult, if not impossible, task.The efforts required to change Asia�s social,economic, and possibly psychological structuresseemed so daunting that, about 30 years ago, nosensible scholar expected the remarkable progress inthe region which was to come. Thus, when aneminent economist and sociologist of Sweden,Professor Gunnar Myrdal, predicted an extremelybleak outlook for Asia in his book Asian Drama(1968), nobody questioned his proposition. Hemainly focused on Burma (now Myanmar), Ceylon(now Sri Lanka), India, Indonesia, Malaya (nowMalaysia and Singapore), Pakistan, the Philippines,and Thailand.

A quarter of a century later, however, the WorldBank, the leading multilateral development bank,published a book, The East Asian Miracle:Economic Growth and Public Policy, in which itdetailed the extraordinary economic development ofEast Asian countries. In the book, the World Banktold the world the story of how eight countries andeconomies in East Asia � Hong Kong, China;Indonesia; Japan; Republic of Korea; Malaysia;Singapore; Taipei,China; and Thailand � hadsucceeded in attaining rapid per capita incomegrowth. From 1965 to 1990, the per capita income inthese countries grew at an average annual rate of 5.5percent. These eight economies grew roughly threetimes as fast as Latin America and 25 times fasterthan Sub-Saharan Africa. The World Bank also foundthat income distribution in these countries improvedduring the period. In recent years, other Asiancountries such as People�s Republic of China, India,Lao People�s Democratic Republic, Sri Lanka, andViet Nam have also been recording high growth rates.

The Role of Government in Dynamic Economic Development Process

48


Various factors have been conducive to theAsian Miracle, among them the strenuous efforts ofthe people and well-chosen governmental policies.One can look at these success stories both as theresults of sound development management and asexamples of good governance.

The Role of the Government as a Centerof Governance

Though there are many aspects to what we callgovernance, I think the role of the government indevelopment process is at the center of the issues.If Asian success stories are partly the result ofsuccessful governmental policies, as they are certainlyare, there should be right answers, or at least cluesto right answers, pertaining to the proper role of thegovernment for successful economic development inthe experiences in the region.

Thus, in spite of the fact that the role of thegovernment has become a popular subject, a subjectthat many eminent scholars and officials haverecently addressed, I am much tempted to focus onthe role of the government when we discuss theissue of governance.

Traditional Dichotomy in the Analysis

I believe that the traditional dichotomy in which therole of the government has been studied is thus farinsufficient. It seems that, in discussing the roleof the government in the literature of economics,people tend to put forward their argument,explicitly or implicitly, based on dichotomy inmany ways.

For example, many economists argue thatgovernmental measures are discretionary and oppose

49


market forces. The assumption is that the govern-ment always acts against market forces and that thegovernment and the private sector are each other�senemy by nature. The popular expression �market-friendly government� is only possible if you assumethat the government and the private sector areopponents by nature.

However, as I take up in detail later, thegovernment and the private sector have commongoals in many areas. For example, they have commoninterest in realizing a high growth with low infla-tion. Realization of safe and comfortable life forpeople should also be one of their common aims.Indeed, as the government is chosen, directly orindirectly, by the people, it is wrong to assume thatthe goals of the two are different, let alone that theyare opponents.

Many economists argue that government policymeasures are by nature against market forces andthat its discretionary intervention in the markets isto be avoided as much as possible. Not necessarily.Markets fail for various reasons. Contrary toassumptions made by many economists, informationis not equally shared, market participants are notalways rational, and they are not always experts onthe subject. Sometimes, market forces point toshort-term interests, which may not coincide withlong-term, hence ultimate, interests. Furthermore,the existence of externalities and the infant industryargument are also used to verify the insufficiency ofmarket forces. In such cases, interventions by thegovernment are called in for the benefit of the society.

Based on the experience in Asia, or indeed inany region where success has been achieved ineconomic development, policy recommendations andspecific policy measures based on such dichotomyare essentially mistaken.

The government and the nongovernmentsectors have basically common goals. As I argue later,


The popularexpression�market-friendlygovernment� isonly possible ifyou assume thatthe governmentand the privatesector areopponents bynature.

50


they have to work together to identify optimumdevelopment policy aims for their country and policymeasures to attain these goals.

In sum, so long as we base our analysis on falseassumptions � that the government is a necessaryevil, that the government and the private sector areenemies by nature, and that the smaller thegovernment, the better � we may not be able torealize the full potentialities of the country.

Government Industrial Policy

Next, let me touch on the often undue criticism of,or prejudice against, government industrial policies.There are many cases in the region where governmentshave taken proactive roles in introducing strategicallyimportant industries to their countries. Also, onemay encounter occasions when governments havehelped those sectors with potential comparativeadvantage in the economy. Some of these policieswere successful and some were not.

Indeed, it is not an easy task to support specificindustries with both comparative advantage andstrategic importance for the development of thecountry. It is important to avoid making mistakes inthe following three processes.

■ Policy aims or policy targets. The target of theindustrial policy should be correctly chosen.One must examine which industries are worthsupporting under the circumstances surroundingthe country. That specific industry should havecomparative advantage in the country. Also, oneshould estimate whether, by the time thespecific industry matures, its competitors in therest of the world would have become morecompetitive or not. The choice of the industrymust also reflect the present. A strategically

51


important industry in 1950s may not be thesame in 1960s. Even if your neighbor wassuccessful in choosing the shipbuilding industryfor a strategically important sector in the 1960s,you may be unsuccessful choosing the sameindustry in the 1970s. The correct choice ofpolicy targets is not easy.

■ Optimal policy measures. Realization of thespecific policy targets under specific circum-stances should be optimal. Again, the choice isnot easy. Countries are different in endowment.Demographic structures are different. Educationalsystems are different. Social structures aredifferent. Indeed, the cultures themselves aredifferent. You must find optimal sets of policymeasures that best fit the country at the time.There is no guarantee that measures adopted inother countries are suited for your country.

■ Timely implementation. Even if policy aims arecorrectly chosen and the measures best suitedfor the country, failure to implement themeasures in a timely fashion cannot ensure theexpected results. Factors such as politicalcomplications, social disturbances, and socialunrest can prevent timely implementation ofthe measures.

In sum, industrial policies may fail should anyof these three processes fail.

The important point is that cases of failureshould not be quoted as evidence of the ineffec-tiveness of industrial policies. Such cases onlyexemplify the difficulty of satisfying all threeconditions at the same time. We should notconfuse the case of failure of a specific industrialpolicy with ineffectiveness of the policy per se ineconomic development.


We should notconfuse the caseof failure of aspecific industrialpolicy withineffectivenessof the policy perse in economicdevelopment.

52


Unfortunately, however, many arguments arefound in the literature of development economicswhere these two are not distinguished. By quotingfailure examples of specific policies of specificcountries, the argument is often made that becauseindustrial policy per se is ineffective, a case can bemade for a smaller role for the government.

The Time Factor

A need exists to incorporate the time factor fully inpolicy for successful economic development. Therole of the government can be more positivelyevaluated if the time factor is taken into consideration.

In other words, development policy should beformulated based on dynamic terms so that consid-eration of time is considered in various aspects. Sofar, dominant development policy has been basedunsatisfactorily on comparative statics, which isextremely insufficient, because economic developmentpolicy aims at growth over a period of time.

The traditional theory of economic developmentdoes not assume change over time. And yet the aimof economic development policy is to realize changes(i.e., to attain faster growth with more equitableincome distribution).

It assumes that a country�s citizens have aconstant set of indifference curves, or tastes, thatensure growth, and that the purpose of economicpolicy is to realize successful development based onthat set of indifference curves.

They may be wrong. For successful development,the indifference curves must be addressed. Tastesmust be changed. For that purpose, the governmenthas a role to play.

For example, for a sustainable economic devel-opment, you have to agree that savings are importantand that a higher savings rate is desirable. To attain

Traditional theoryassumes that in

developingcountries, the

existingcircumstances

are fitted toeconomic

development asin developed

countries. In factthey are not.

53


a higher savings rate, people have to reduce theirconsumption patterns. In order to do that, thegovernment can offer a forum through which peopleunderstand the need for change in consumptionpatterns. The government has to create environmentswhich help people save more. A countrywide net-work of savings institutions would help, as wouldincentives for savings.

The traditional theory of economic developmentargument also assumes that conditions are the samein different countries. It implicitly assumes that indeveloping countries the existing circumstances arefitted to economic development as in developedcountries. In fact they are not. Underdevelopment ispartly the result of the existing environment. Foreconomic development, the surrounding circum-stances must be changed, and the government hasan active role to play, either as a prime mover oras a mediator.

Another shortcoming of traditional economictheory is that it does not take into consideration thetime required for successful economic development.Because the attainment of high growth from anundeveloped starting point requires considerabletime, the coverage of development policy should belong enough to realize it. The time required forattaining success varies depending on the specificpolicy aim. If it is desirable to reduce demand inorder to cope with external imbalances, i.e., deficitsin balance of payments, government expendituremust be reduced, taxes increased, and monetarypolicy tightened. The effects of these policies willbecome visible after about six months.

If the economic structure itself is changed, e.g.,deregulation of markets, the positive effects willreveal themselves after two or three years.

It takes many years to change people�s behavior.Sometimes it is necessary to wait a long time fordemographic changes to occur.


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These considerations underscore the importanceof incorporating a time factor in the establishmentof a successful economic development policy, whichin turn highlights the importance of the role of thegovernment.

The Role of the Government inDynamic Development Process

The government has a very important role to play inthe dynamic development process.

First, in choosing policy aims, the people, andindeed the government itself, might not fully knowwhich policy aims are best suited to the attainmentof long-term growth. The government is in a positionto show people alternative policy aims based eitheron their own analysis or following the advice of suchmultilateral development banks as the ADB. Peoplein the private sector may well have different ideas.The government then can offer opportunities toexchange views on policy aims through establish-ment of a board. Through discussions on the board,which are open to the public, both the governmentand the people can deepen the analysis for desirablepolicy aims. The general public will understand whatis at stake and offer comments on the issues takenup on the board. Public participation is popular andmakes people conducive to selecting choices likely tobe successful, and ultimately, to supporting theimplementation of measures that will realize thepolicy aims.

Second, a similar role is expected for thegovernment in choosing policy measures. Thegovernment may propose specific measures or offeropportunities to find the best measures to realizethe policy aims. Because policy measures largelyhinge on cultural, economic, and social structures ofthe country, successfully reflecting the will of the

55


people is important, and the government can play avital role.

Third, for timely and successful implementationof these policy measures, the role of the governmentalong the lines described above is expected. If thepeople have good understanding of the legitimacy ofpolicy aims and the need for the policy measures torealize them, these measures will be timelyimplemented, and a successful development policywill then be assured.

Observed from a slightly different angle, thegovernment has also important roles to play in thedynamic development process.

Governments must ensure economic, social,and political stability. Only in a stable country canpeople establish the medium- and long-term plansessential for sustainable growth, and hence for theeconomic development of the country.

Thus, in the dynamic economic developmentprocess, the government is expected to play a moreimportant and positive role than that preached bytraditional theory.

It is noteworthy that in order for the governmentto play these expected roles sufficiently in thedynamic development process, the participation ofthe people, the predictability of the system, and thetransparency of information � all important ingredi-ents of good governance � are essential.

In the dynamicdevelopmentprocess, theparticipation ofthe people, thepredictability ofthe system, andthe transparencyof information� all importantingredients ofgood governance� are essential.


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PUBLIC ADMINISTRATIONREFORMS IN MALAYSIA:A Developing CountryPerspectiveAbdullah Sanusi B. AhmadVice Chancellor, University of Malaya

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Dato� Dr. Hj. Abdullah Sanusi B. Ahmad is currently theVice-Chancellor of the University of Malaya. Prior to thisappointment, Dr Sanusi was the Vice-President of theHuman Resource Management Sector of PETRONAS,Malaysia�s national oil company (1986�1994). His civilservice career, which began in 1961, included varioussenior managements posts, including Secreatary General ofthe Ministry of Public Enterprises. Dr Sanusi is an alumnusof the school over which he now presides, receiving hisdegree in 1961. He obtained numerous postgraduatedegrees in the UK (Oxford Univerisity), the USA(University of Pittsburgh, University of Southern California,and Northeastern University), and Argentina(Universidad John F. Kennedy). In 1981, Dr. Sanusi wasawarded the DSNS by DYMM Yang DiPertuan Besar,Negeri Sembilan, which carries the title Dato� for hiscontributions toward nation building.

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Since attaining its independence in 1957, Malaysiahas seen a remarkable change in its publicservice organization. The reforms that the

Malaysian civil service has undergone as part of thecountry�s national transformation are nothing lessthan phenomenal. Through a series of innovativechanges and a perceptive reorganization, Malaysia�scivil service has been transformed from being a casteapart from the public into an organization dedicatedto serving and meeting the needs of the public.This paper explores the circumstances that led tothe metamorphosis of the Malaysian civil serviceand the values that brought it about. It alsoexamines the policies and practices underpinningthe political and economic framework of thecountry since independence, and how these led toan administrative reformation.

Background

A brief description of the Malaysian bureaucracysince independence is necessary in order to appreciatethe administrative reforms and changes that havesince transformed the Malaysian civil service to itscurrent dynamic position. When Malaya achieved herindependence from the British on 31 August 1957, thecountry inherited a new independent Governmentbased on parliamentary democracy similar to that ofits previous colonial rulers.

Tunku Abdul Rahman, the country�s first PrimeMinister, began to lay the foundation for the system-atic administration of the new nation. The Federationof Malaysia was formally established on 16 September1963. It consists of the Federation of Malaya inPeninsular Malaysia and the states of Sabah andSarawak on the island of Borneo in East Malaysia.Demographically, the population of Malaysia iscomposed of three major ethnic groups: Malays

Public Administration Reforms in Malaysia: A Developing Country Perspective

60


(12 million), Chinese (5.3 million), and Indians(1.5 million).

In the initial stages of its economic development,the country was dependent largely on its exports ofraw materials such as rubber, tin, timber, palm oil,and pepper. Today the country is moving fast towardan industrialized economy.

The supreme head of Malaysia is the Yang di-Pertuan Agong (the nearest western equivalent is �king�or �sovereign�), who serves a five-year term as both theHead of State and the religious head of the officialreligion, Islam. According to the Constitution, every actof Government flows from his authority, although heacts on the advice of the Cabinet.

Malayanizing the Bureaucracy

Like all developing countries in Southeast Asia thatobtained independence from colonial rule, Malayaadopted an �ization� policy in the civil service. TheMalayanization program was carried out in stageswith generous compensatory terms, thus preventingan exodus of expatriates. In many cases, anexpatriate was requested to retire only when therewas an understudy to replace him/her. This processof replacing the expatriates while enlarging thebureaucracy made for smooth transition, and theMalayanization process was less painful than theexperience of other former colonies where no suchpreparations were made.

In 1957, expatriate officers staffed 67 percent ofall Malayan Civil Service posts (about 1,564 officers).By early 1963, only 9.2 percent of the expatriates(24 officers) remained.1 In the technical andprofessional fields, the Malayanization process was

1 Tilman, R.O. 1964. Bureaucratic Transition in Malaya. Durham, N.C.:Duke University Press.

61


extended over a much longer period, as there werelimited numbers of local officers to replace theexpatriates, and training first had to be expanded.By 1980, there was almost a 900 percent increase inthe size of the bureaucracy.

The Need for Administrative Reforms

After independence, the role of the civil serviceremained relatively unchanged. In the late 1960s,however, strong pressure was exerted upon the civilservice to increase its performance and play a moredevelopmental role.

Fresh from the triumphant general election of1964, the Alliance Government sought to fulfill itspromises of increasing the welfare of the citizensand raising the standard of living of the masses. Itappeared, however, that the burdens thebureaucracy had been asked to shoulder sinceIndependence had increased more rapidly thantheir capabilities. So, in 1965, the Government ofMalaysia obtained the services of a team ofconsultants to undertake a review of the publicadministration. This was the first time in thehistory of the public service that a deliberateattempt was made to study the administrativesystems of the country with a view to suggestingreforms and innovations. The main objective ofthe study was, �to improve the administrativesystem and achieve efficiency and administrativeleadership in the public service to meet the needsof a dynamic and rapidly developing country.�2

The Report recommended improving adminis-trative systems by speeding government action,reducing costs, and improving the quality of service.


2 Montgomery, John D., and Esman, Milton J. 1966. DevelopmentAdministration in Malaysia. Kuala Lumpur: The Government Printer.

This was thefirst time in thehistory of thepublic servicethat a deliberateattempt wasmade to studythe administrativesystems of thecountry witha view tosuggestingreforms andinnovations.

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Proposal for Government Action onAdministrative Reforms

As a result of the study undertaken by the consultantsunder the Ford Foundation, a proposal forreformation of the Malaysian public service wasrecommended. The most important proposalsdrew attention to the need for three major govern-mental actions.

■ Creation of a Development AdministrationUnit in the Prime Minister�s Department,staffed by professional management analysts.This Unit would plan and guide the majorproblems of administrative improvement. Itwas intended that the Unit would focus onGovernment-wide systems, such as thoseinvolving personnel and career development,budgeting and expenditure control, procure-ment and contracting. It would also help thevarious Government departments andstatutory bodies plan and implement theirown management improvement activities.

■ Improvement of the Government�s educationand training programs for all levels of thecivil service. One such program was thecreation of a graduate study program indevelopment administration at theUniversity of Malaya. Also, it suggested thatmid-career university-level education shouldbe provided to professional officers. Finally,it envisaged that expanded in-service trainingfacilities should be made available to technicaland clerical staff, and that periodic seminarsbe held for senior officials.

■ Strengthening of professional competence ofthe civil service so that it could provide the

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necessary administrative leadership for therapidly developing country. This called for apost entry university course in developmentadministration for all newly selected officers.

The Report was accepted by the Government,the Development Administration Unit (DAU) was setup, and began functioning in November 1966.Training programs for all levels of the civil servicewere introduced and the professional capabilities ofthe administrative officers were strengthened.

During the 1960s, the bureaucracy faced manyproblems while implementing rural developmentprograms. The then Prime Minister, Tun Razak, wasprompted to equate them as the �seven deadly sins�of bureaucracy. These were:

1. interdepartmental jealousy in the course of day-to-day execution of governmental functions andconflicting departmental policies;

2. a lack of coordination between departments inwhat they were trying to do in the rural areas;

3. a complete lack of cooperation betweenofficers on the ground, mostly due to a lackof understanding of each other�s tasks;

4. every department thinking its actions werethe most important;

5. a lack of proper planning in various depart-ments resulting in an unfit master plan forthe rural areas;

6. a lack of a master plan at all levels for thepurpose of achieving the maximum develop-ment of rural areas; and

7. a lack of sufficient directive control at the topto ensure that Government in the rural areasfunctions as an efficient machine manned.3


3 Fisk, E.K. 1963. Features of the Rural Economy, in T.H. Silcock and E.K.Fisk (eds.). The Political Economy of Independent Malaya. Canberra:Eastern Universities Press.

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The Operations Room Technique

These �deadly sins� created bottlenecks in theGovernment administrative machinery and sloweddown economic development. It was imperative thatadministrative reforms of the entire civil serviceshould also impact positively upon administration ofthe rural sector and enhance improvements of thewhole economy. It was then that the OperationRoom (OR) technique was mooted as an adminis-trative effort to foster rural development. ORcomprised several mechanisms such as theCommittee System, the Operations Room, the RedBook Plans, the Briefing Method and FieldInspections, as well as the Adult Education andCommunity Development.

The OR technique was a successful mechanismfor improving communication and coordinationwithin the planning organization. It operatedespecially well at district levels. For minor ruralprojects, the system circumvented the authorityof the state, and gave direct supervisory andresponsibility to district committees, though italso allowed for accountability at the state level.For minor rural projects, the system facilitatedboth funding and spending for the developmentprojects.

The technique also boosted team spirit andcooperation between generalists and technicalpersonnel. Both served as one team and as a result,they perceived rural development as a commonobjective. The system also helped foster relationsbetween civil servants and politicians. By mobilizingtheir close cooperation towards a common goal, itpromoted greater understanding of the roles ofdifferent sectors in rural developments. In this way,the conflict between bureaucrats and politicians thathad previously existed at the state and local levelswas minimized.

The �sevendeadly sins�

createdbottlenecks in

the Governmentadministrative

machinery andslowed down

economicdevelopment.

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There were several factors contributing to theconsiderable success of the OR technique. The singlemost important factor was the top level directionalcontrol exercised by Tun Razak, who exerted controlboth at the ministerial level and at the local andstate levels. In 1976, changes were made in the ORTechnique, including new monitoring techniques andmore provision for feedback from less developed states.

The Process of Administrative Change �The First Phase

While the OR technique concentrated on speedyrural development, DAU concentrated on the majorsystems of the whole Government administration.After having operated for a few years in its originalform, in 1972 DAU and its functions were incorporatedinto a new body, the Implementation, Coordinationand Development Administration Unit (ICDAU).ICDAU was responsible for coordinating thegovernment�s policies in all departments and agenciesand improving administrative methods.

The role and mandate of DAU in institutingadministrative reform, however, was not clearlyspelled out in the new body. Moreover, DAU waseclipsed by emerging needs and the urgent task ofexpediting and coordinating the implementation ofdevelopment policies.

Important changes were therefore made in1976. The development administration part of theICDAU was transferred to the National Institute ofPublic Administration. The objective of the newinstitute was to develop its capacity for managementauditing and to offer management consultancyservices to public corporations for closer coordinationof their operations. The remaining functions of theICDAU were to be performed by the ImplementationCoordination Unit (ICU).


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Second Phase of Malaysian AdministrativeReforms � The Establishment of MAMPU

While the establishment of DAU and ICDAU providedthe first phase of administrative reforms and theirfoundation, they outlived their roles in meeting theurgent requirements of expediting and coordinatingthe implementation of development policies. Theadministrative machinery faced increasing demandon its capacity with greater complexity and amultifold increase of administrative functions.

By 1977, the urgent demands for improving theeffectiveness of the civil service resulted in theestablishment of the Malaysian AdministrativeModernization and Manpower Planning Unit(MAMPU). The background to the setting up ofMAMPU can be traced to Dr. Mahathir Mohamad,then Deputy Prime Minister. Dr. Mahathir wasresponsible for initiating the establishment of MAMPU,while the writer of this paper was given the onerousresponsibility of conceptualizing the structure,functions, and role of this new organization.4 Theconcept paper of this dynamic organization wasaccepted when presented to Dr. Mahathir, and soonMAMPU was established and supported by thepolitical leadership as the unit for modern adminis-trative reforms in the Malaysian civil service.MAMPU was established after cabinet approvalthrough Cabinet Paper no. 207/1079/97.

MAMPU was located in the Prime Minister�sDepartment to give it sufficient political leverage tocarry out directed programs of reform. There weretwo main tasks of MAMPU in carrying out adminis-trative modernization and human resource develop-ment. The objectives were (i) to provide managementconsultancy services to Government organizations;

4 Abdullah Sanusi Ahmad, 1994. Perkembangan Pentadbiran Awam danPengurusan (Development of Public Administration and Management),Kuala Lumpur: Dewan Bahasa dan Pustaka.

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(ii) to carry out administrative reforms, updatepublic administration, and strengthen administrativecapacity for implementing national economic planseffectively; and (iii) to coordinate activities onhuman resource planning and human resourcedevelopment and deployment. MAMPU successfullyinitiated and instituted changes in the area of fieldadministration, and dedicated itself to the creationof a model district office to improve the delivery ofservices to the people at the grassroots level. At thesame time, MAMPU mooted the master plan forhuman resource planning and budgeting at thenational level. These actions were in line with itsestablishment objectives of spearheading administra-tive modernization and reforms at the Federal, Stateand Local/District levels.

When Dr. Mahathir became Prime Minister in1981, MAMPU continued and expanded its role,reinforcing administrative changes and seeking tofurther modernize the civil service. This period ofadministrative reforms marked the beginning of thethird phase of Malaysia�s administrative reforms,which highlight the leadership dynamism andvisionary perception of Dr. Mahathir.

Political Leadership and AdministrativeReforms � The Third Phase

Dr. Mahathir�s tenure as Malaysia�s fourth PrimeMinister since 1981 signaled dynamic change inGovernment administration. Under Dr. Mahathir, aseries of policies and actions started a new dimensionin Malaysia�s political and socioeconomic develop-ment. It also highlighted the necessity of a civilservice that works closely and in tune with thepolitical leadership in every aspect of Governmentoperations. To achieve success, the dynamism ofleadership has to be transmitted to the bureaucracy.


To achievesuccess, thedynamism ofleadership has tobe transmitted tothe bureaucracy.

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Given the opportunity and the right political sup-port, the public sector can accept the challenges ofchange and reform. The administrative reformmovements of the 1980s and the present economicand business management era have shown thatadministrative reform and political leadershippriorities are intersupportive and complementary.

During this phase of administrative reforms,major innovations and ideas were introduced andencouraged by the present top leadership. For instance,the Government began to liaise with the privatesector under the concept of Malaysia Incorporated.This means that Malaysia under Mahathir should beviewed as a company in which the Government andthe private sector are both owners and workers.Mahathir also believes firmly in �leadership byexample� which became the slogan of his adminis-tration. Another drastic change in his administrationis the Look East Policy. Under the policy, the peopleof Malaysia were encouraged to change theirtraditional views of Western countries as role modelsand to look instead towards Japan and South Koreaas the Asian blueprint for economic success.

A clean, efficient, and trustworthy concept ofGovernment emerged from the Look East Policy.New systems, techniques, and procedures of admin-istration were introduced in search of increasingefficiency and effectiveness in public service. Mattersof reexamination included diligence and discipline atwork, loyalty to the nation and to the enterprise,emphasis on quality, productivity, and managementsystems that concentrate on long-term achievementrather than short-term increases in dividend.

The management of the nation was gearedtoward more efficiency so as to achieve politicalstability and development. Work manuals and filingsystems were introduced. Civil servants were encour-aged to be more punctual and efficient. Name tagswere worn by all civil servants to make them more

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personally accountable to the general public. Timeclocks were installed at every Government office toensure that the stated working hours were strictlyadhered to. The shift in attitude towards the Eastwas accompanied by a greater emphasis in Islamicvalues within the administration itself. A fresh moveagainst corruption and mismanagement waslaunched, and steps were taken to weed out corruptofficials. Some civil servants resigned immediatelyon hearing that the new Prime Minister was planningto remove them from office.5

In each of the areas of reform efforts, Mahathirhas shown his interest and commitment in achievingthe expressed goals of his policies. Administrativereform is a continuing process, and political leader-ship is vital in determining the fate of any reform atany given time. In the absence of strong leadershiptraits, reforms are often doomed to failure. Mahathir�semergence in the midst of bureaucratic inertia had aprofound effect on policy reforms.

Reforms Towards Improvements In theMalaysian Civil Service

The civil service in any country is the backbone ofits Government. The continuous succession ofinnovative programs and policies of Malaysia�s civilservice have culminated in an economy of high growthand achievement. Importantly, this symbiotic partner-ship between political leaders and civil administratorsmust be perpetuated; otherwise the progression willsimply halt. In any developing country, the implemen-tation of policies and action plans of the nation as awhole is carried out mainly through the civil service.It is the strongest agent of the Government.


The civil servicein any country isthe backbone ofits Government.

5 Tilman, Robert and Tilman, Jo H. 1977. Malaysia and Singapore 1976; AYear of Challenge, A Year of Change, in Asian Survey, February 1997,Vol. Xvii, No. 2.

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Hence, in perpetuating economic growth andnational development, administrative reform in thecivil service and the building of a positive partner-ship with the political leadership are basic funda-mentals to a developing nation�s growth and success.The Malaysian civil service, through the variousstages of administrative reform, has emerged ahighly improved and versatile organization, spear-heading the country�s course into the twenty-firstcentury. As Dr. Mahathir said: �We should begrateful because we have an administrative machinerywhich we can be proud of. It is not only efficient,disciplined and productive, but also provides qualityservice and is comparable to the administrativemachinery found in more developed nations. Thishas enabled our nation to implement the develop-ment process in a smooth and effective manner.�6

It is imperative at this juncture to summarize theachievements and improvements made by theMalaysian civil service.

Administrative Programs for Improvements

The Malaysian civil service has undergone majorchanges in its adaptation to the transformationalagenda for national development encapsulated in thenation�s Vision 2020 policy (the year in whichMalaysia will achieve the status of a developednation). The process of transforming the Malaysiancivil service into a culture of excellence involvedmaking incremental but significant changes �changes that encompassed not only structural andsystem adjustments but shifts in the values and themindset of civil servants. The core values inculcatedthrough a paradigm shift included quality, productivity,

6 Government of Malaysia 1994. The Civil Service of Malaysia: AParadigm Shift, Kuala Lumpur: Government Printers.

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innovation, integrity, discipline, accountability, andprofessionalism. To enable the implementation andcoordination of administrative improvement programsin the civil service, a permanent committee calledthe Panel on Administrative improvements to theCivil Service was established and chaired by theChief Secretary to the Government. The Panel hasthe role of ensuring that administrative improve-ment efforts are undertaken throughout the civilservice on an ongoing basis. The overall objectives ofthe Panel are to

(i) to generate ideas and programs to furtherimprove the system of public administra-tion, and

(ii) to identify concrete measures to bring aboutimprovements in public administration.

Quality and Productivity Management

Quality management is an important area ofemphasis in the civil service, where it providesthe foundation for the inculcation of quality in allpublic organizations and service. Since 1991 thecivil service issued a number of guidelines toassist Government agencies in implementingquality management programs through the TotalQuality Management concept.

The involvement of supporting staff wasactively encouraged through Quality Control Circles(QCCs). Through this process supporting staff wereprovided the opportunity to utilize their skills andtalents in initiating innovative ideas to increase thequality of services provided. In 1994, MAMPU wasgiven the responsibility of promoting and monitoringthe progress in the implementation of QCCs at alllevels, while the National Institute of Public Admin-istration concentrated on the training aspect. The


72


policy of setting standards according to ISO 9000and ISO 14000 is seen as a serious attempt toimprove standards and quality, not only in servicebut in products of international acceptance.

Client Charter

The client charter is basically an assurance on thepart of the department concerned as to the quality,features, and standards of the products or serviceproduced for its customers. This represents a majornew initiative on the part of the civil service to bemore efficient and customer-focused. The concept ofa client charter was introduced by the civil service inJune 1993 and has since been implemented by 318Government agencies and departments. This charterhas improved the quality of Government services,especially in speeding up the delivery process. Theclient charter operates in tandem with QCCs, wherethe continuous monitoring and work improvementsform the basic principles of civil servants.

Counter Services

In the past, the general consensus concerningcounter services operated by Government agenciesand departments was that these services were slow,indifferent, and cumbersome. Bearing in mind thatcounter services are actually the front line service(since the public�s first contact with the departmentis with the counter staff), effective and efficientcounter services cannot but enhance the image ofany organization. Towards this end, the civil servicedevised a strategy to reform the culture of counterservice staff to become more perceptive to the needsof the public, who are now termed customers and/orclients. Counter service improvements which were

The concept of aclient charter

was introducedby the civil

service in June1993 and has

since beenimplemented by318 Government

agencies anddepartments.

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initiated in 1991 can be used as a barometer forevaluating Government services.

The measures undertaken to improve counterservice include reducing waiting time; establishingdifferent types of counters such as one-stop countersor drive-in counters; and enhancing the level ofcomfort of waiting customers by providing morecomfortable chairs, airconditioning, piped music, andtelevision. The initial response from the public wasone of skepticism, but when the effects of theimproved counter services began to be realized,especially in the critical departments (immigration,land office, transport department, local authorities),the public was delighted at the reduction in red tape,and the improvements of counter staff services.

Malaysia Incorporated

The Malaysian Incorporated Policy was launched in1983 in an effort to realize greater national economicdevelopment goals through close cooperation andcollaboration between the public and private sectors.As partners under this concept, each sector adheresto the perception of the nation as a corporate orbusiness entity jointly owned by both sectors.Malaysia Incorporated is based on the precept thatthe public sector is the facilitator, fulfilling the needs ofthe private sector; and the private sector, havingsecured the cooperation of the public sector, becomesthe engine of growth for the nation as a whole.

Privatization

The Privatization Policy was introduced in Malaysiain 1983. It complements the Malaysia IncorporatedPolicy and encourages private sector participationin Government. Through this policy, activities of

The public sectoris the facilitatorfulfilling theneeds of theprivate sector;and the privatesector is theengine of growthfor the nation asa whole.


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the public sector can be transferred to the privatesector. Privatization is two-prong strategy inMalaysia. Firstly, it reduces the Government�spresence in the economy, thereby decreasingpublic spending; secondly, through privatization,market forces are allowed to determine economicactivities. Since the implementation of thePrivatization Policy, 116 projects have beenprivatized (of which 88 are existing projectsinvolving the taking over of Government functionsby the private sector, and 28 new projectsinvolving the construction of infrastructure andutility projects that have been privatized). Indeed,privatization has reduced the size of the publicsector and succeeded in relieving the financialburden of the Government though savings madein terms of operating expenditure and develop-ment. On the whole, the benefits to the publichave been immense. The creation of newcompanies provides a significant source of newlistings in the stock exchange. Efficiency andinnovation have improved because of the need tocompete in the open market; and the transfer oftechnology an upgrading of skills of the staffinvolved have opened up more opportunities andavenues for them.

Performance Appraisal at the Individual Level

While quality performance can be measured byperceiving the organization as a whole, however, thecontribution of each individual to the enhancementof the organization should not be overlooked. In thisregard, the civil service implemented a new systemof performance appraisal to measure and evaluatethe annual performance of civil servants individually.The purpose is to eventually reward an individualwho has been recognized as an excellent worker

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with promotion and salary progressions. Evaluationsare based on achievements of annual work targetsand other criteria by the superior officer. Theconcept of performance appraisal for the individualis in line with the civil service�s overall notion ofmanaging for results. By rewarding individuals whohave performed well, other workers will be influencedand encouraged to improve themselves. Ultimately,the organization as a whole benefits throughincreased efficiency and productivity.

Moving Into Information Technology

With the emphasis on increasing quality, efficiency,and productivity in the public sector, the develop-ment of sophisticated machinery and equipment isinevitable. The public and private sectors need todevelop information technology (IT) infrastructurethat can support and sustain Malaysia�s Vision 2020.Within the public sector IT can no longer be viewedsolely in the context of transaction processing ormanagement information systems, but in terms ofthe capability of improving performance ofindividuals in organizations.

As Malaysia gears up for a culture of a paperlessadministration in the civil service, all Governmentdepartments will be computerized. A strategicinvestment in IT was introduced with this goal inmind. Under the auspices of the Government, MAMPUset up an IT Division which comprised the ITDepartment and the Civil Service Link in 1994. Themain task of the IT department is to oversee thecomputerization of government ministries andagencies, while the Civil Service Link is a one-stopresource center that serves as repository ordatabase where users, particularly the privatesector, can be linked up to obtain information onthe public sector.


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The Government�s seriousness of purpose inpursuing the IT agenda was strengthened recentlywhen Dr. Mahathir launched the National InformationTechnology Agenda, which will transform the nationinto a center of excellence for multimedia technology.The most important tasks of the agenda are thecreation of the Multimedia Super Corridor andutilizing IT to create a balanced development for thecountry in the areas of people, infrastructure, andapplications. Positive actions have also been under-taken on the ground with the establishment of aMultimedia University, the setting up of �smartschools,� and a futuristic administrative center forthe Government at Putra Jaya along the MultimediaSuper Corridor. In propelling the nation towards apaperless administration, both the political leader-ship and the civil service need to nurture a cultureof IT literacy and usage in Malaysian society.

Conclusion

This paper has outlined some of the successfulprograms that have been launched and practicedby the Malaysian civil administration. Eventhough administrative reform and transformationin Malaysia began more than a quarter of a centuryago, it remains an ongoing process, for it is ourbelief that the path to excellence is fluid and hasno end.

Within the Malaysian context, administrativereforms that have been undertaken successfullyare even more significant in view of the fact theours is a multiracial society. Although there areother variables that determine the success ofadministrative reform, at least in a developingcountry like Malaysia, political stability is one keyvariable that can ensure progress and achievementin civil service transformation.

In developingnations, the civil

service plays acrucial role and

must be bothefficient and

effective.

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In developing nations, the civil service plays acrucial role and must be both efficient and effective.Hence, a successful transformation of the civilservice will serve to enhance the country�s vision, itsmission, and its plan. In this respect, the experienceof administrative reform in Malaysia has illuminatedthe fact that a well-planned civil service reformationcan culminate in greater national and economicgrowth to the benefit of its citizens.

As aptly stated by the Malaysian Premier,�Malaysia should be proud of its success and itsefficient administrative system. Because of oursuccess in the administrative system we have earnedthe respect of the others and are able to stand talleven amongst the developed countries.�


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SRI LANKA:Reforming PublicAdministrationLal JayawardenaEconomic Adviser to the President of Sri Lanka

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Lal Jayawardena currently serves as Economic Adviser tothe President of Sri Lanka. Previously, he has also servedas Secretary to the Treasury and Economic Adviser to thePrime Minister. At the age of 41, Dr Jayawardena becameSri Lanka�s youngest Secretary of Finance and Planning.He is a seasoned diplomat, having served as Ambassadorto Belgium, the Netherlands, and Luxembourg, and to theEuropean Community. Dr Jayawardena�s internationalrecord also includes serving as Assistant Secretary Generalof the United Nations, in which capacity he became thefirst Director of the United Nations University�s WorldInstitute for Development Economics Research (UNU/WIDER) in Helsinki, Finland (1985�1993). He is anHonorary Fellow of King�s College, Cambridge, where hetook his PhD in Economics in 1963.

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The Sri Lankan Government is firmly commit-ted to the pursuit of �market friendly policieswhere the private sector becomes the principal

engine of growth.�7 However, as indicated in theAsian Development Bank�s Board Paper on Governance,governments have a vital supporting role to play inperforming certain key functions, namely: (i) main-taining macroeconomic stability, (ii) developinginfrastructure, (iii) providing public goods, (iv) prevent-ing market failures, and (v) promoting equity.8

An essential element in discharging thesefunctions � indeed possibly the most importantpublic good governments can provide is an efficient,motivated, results-oriented, and in Sri Lanka�s case,a vastly slimmed down public administration. This isthe goal that the Government is presently pursuingwith support from the ADB, the World Bank, and theinternational donor community.

This paper focuses on three issues:

■ the linkage between the Government�smedium-term economic reform agenda andthe reform of the public sector, especiallypublic administration;

■ the nature of the administrative reformenvisaged; and

■ the longer-term development challenge thatthis reform seeks to meet.

A. The Relationship between the EconomicReform Agenda and Public Sector Reform

Sri Lanka�s economic reform agenda can be simplystated. It is the need to reduce, and eliminate as

7 Hon. Chandrika Bandaranaike Kumaratunga, Policy Statement of theGovernment of Sri Lanka, Colombo, 6 January 1995.

8 Asian Development Bank, Governance: Sound DevelopmentManagement, 1995.

Sri Lanka: Reforming Public Administration

The mostimportantpublic goodgovernments canprovide is anefficient,motivated,results-oriented,and inSri Lanka�s case,a vastly slimmeddown publicadministration.

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rapidly as possible, overall budget deficits whichsince 1993 have ranged between 9 and 10 percent ofgross domestic product (GDP). These deficits werefinanced by substantial net domestic borrowingaveraging 5-7 percent of GDP, principally fromcaptive Employees Provident Fund sources. Sincenational savings have been about 19-20 percent ofGDP, the Government has been preempting betweenone quarter and one third of these savings for itsbudget, and denying them to the private sector. Thisphenomenon, which economists term �crowdingout� the private sector, has led to the high cost offinance identified by the World Bank on the basis offirm level surveys as the principal obstacle to theexpansion of private investment in Sri Lanka.During the early 1990s, nominal prime interest ratesreached 20 percent, and real prime rates havefluctuated since 1985 between 5 and 8 percent, arelatively high figure by international standards.

The more recent macroeconomic situation, itshould be noted, is a distinct improvement over thatof the preceding decade. Over the period 1978-1993,the overall budget deficit averaged as much as 14percent of GDP, financed by a combination of moneyprinting, concessional foreign borrowing for develop-ment projects, and net domestic borrowing. Thelatter averaged 7 percent of GDP, swallowing up halfthe national savings which averaged around 14percent of GDP. Large budget deficits, in turn, meantsubstantial inflationary pressures on the economy.The budget deficits were the inevitable result of SriLanka�s unique combination of high human develop-ment and high unemployment, averaging 12-16percent of the labor force over three decades. In theabsence of rapid private sector growth, these circum-stances created enormous pressure on the State tobecome the employer of first resort, resulting in aswollen public service; and to embark on grandiosemegaprojects, the costs of which have a habit of

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ballooning out of control. The inevitable failure tomeet popular expectations in this way was punishedby periodic bursts of youth unrest which, in turn,slowed down the growth process itself. While growthwas 6 percent over the 1978-1982 period, the averagefor the period 1978-1993 fell to 4 percent as a resultof the unrest during the late 1980s.

The principal short-term goal of the Government�seconomic reform agenda is the elimination, no laterthan 2000, of net domestic borrowing altogether, sothat the crowding-out phenomenon is ended, andthe budget is financed solely by a sustainable levelof concessional finance. The five percentage pointsor so in relation to GDP that the Government willcease to preempt for the budget can then be addedto private investment, enabling the private sector totruly become the engine of growth. This will raisetotal gross investment in the economy from lastyear�s level of 25 percent of GDP to at least 30percent. Gross investment needs to rise by at leastanother five percentage points to 35 percent of GDP� to realize GDP growth of at least 8 percent in thenext decade. The additional steps needed are exploredin the concluding section of this paper.

The linkage between public sector reform andthe elimination of both crowding out and the overallbudget deficit is straightforward and easily stated. Ifnet domestic borrowing is to be eliminated and theamount saved added to private investment, a corre-sponding reduction in the Government�s budgetaryexpenditures will be required. Government capitalexpenditure, at around 7 percent of GDP comparedwith 15 percent in the mid-1980s, has already beencut to the bone, and Government revenues at around20 percent of GDP are in line with countries of asimilar per capita income and can be expanded onlywith rapid economic growth. The cuts needed toeliminate domestic borrowing must therefore fall oncurrent expenditure.


The linkagebetween publicsector reformand theelimination ofthe overallbudget deficit isstraightforward.

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Three categories of current expenditurecommitments are fixed and immutable in the shortterm, and swallow up 70-80 percent of our revenue,equivalent in recent years to around 15 percent ofGDP. These are, first, military expenditure; second,the interest cost of domestic debt incurred as thelegacy of financing the large deficits of the pastthrough borrowing; and third, transfers to house-holds representing the irreducible minimumcommitments on targeted poverty alleviation,welfare programs, and pensions. Each of thesecategories accounts for roughly 25 percent of revenueand 5 percent of GDP.

The balance of revenue available for meetingthe remaining current expenditure has thereforebeen 20-30 percent of revenue, equivalent to 4-6percent of GDP. This has consistently fallen short ofthe residual current expenditure needing to befinanced, equivalent to 36-38 percent of revenue,and 7-8 percent of GDP. This shortfall represents theGovernment�s current account fiscal deficit ordissavings, ranging between 1 and 3 percent of GDP,and has had to be financed by recourse to nonrev-enue sources, i.e., net domestic borrowing. This alsomeans that the capital budget too has been entirelydependent on foreign loans and grants and domesticborrowing for its financing.

In the short term, therefore, with revenuebeing inflexible upwards and capital expenditureinflexible downwards, the burden of fiscal adjust-ment must necessarily fall on the residual currentexpenditure, running in recent years, as mentioned,at 7-8 percent of GDP. Since it is nonbank netdomestic borrowing which has in effect been financ-ing much of this expenditure in recent years to thetune of 5-6 percent of GDP, (and 5 percent of GDP in1996) the room for manoeuvering in an effort to endcrowding out overnight is small. This initiative musttherefore occur in a phased fashion. This means

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eliminating loss-making enterprises throughcorporatization and/or privatization, reducing othersubsidies, and reducing the civilian public servicewage bill in the aggregate, (it presently amounts tomore than 5 percent of GDP). The pension burden,(more than 2 percent of GDP), while inflexible in theshort term, is amenable to medium-term reform.The latter two areas, through appropriate publicservice and pension reforms, involve slimmingdown the public service and introducing contribu-tory pensions. The privatization of public enterprisescan provide additional fiscal space on an enduringbasis only to the extent to which it is used toretire outstanding public debt, and reduce itsdomestic interest cost, rather than to finance thecurrent budget.

This underlines the importance of public sectorand pension reform in establishing a stable macro-economic framework conducive to private sectorgrowth in Sri Lanka�s constrained fiscal situation. Italso explains why there is no free lunch when itcomes to reducing � and eventually eliminating �net domestic borrowing; and in due course thebudget deficit, in order to enable the private sectorto become a truly effective engine of growth. Thereis simply no alternative to slashing current budgetaryexpenditures.

Sri Lanka�s 1997 budget made a credible movein this direction by seeking progressively to reducethe overall budget deficit within a three-year frame-work to 7.3 percent of GDP in 1997, 5.2 percent in1998, and 4.5 percent in 1999. Significant consequen-tial reductions in net domestic borrowing wereprojected, falling in easy stages from 4.5 percent ofGDP in 1997 to 2.5 percent in 1998 and 1.7 percentin 1999. Crucial to reaching these targets is a reductionin current expenditure by nearly 2.5 percentagepoints in relation to GDP, from nearly 20 percent in1997 to 17.5 percent in 1999.


There is no freelunch when itcomes toreducing �and eventuallyeliminating �net domesticborrowing.

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In the context of the tough fiscal decisionstaken in 1996 to contain the overall deficit for theyear at 9 percent of GDP by, for example, eliminatinga subsidy on flour, the 1997 budget has been widelyacclaimed as involving a renewed and irreversibleGovernment commitment to economic reform. Thekey elements that have elicited this acclaim arethreefold.

■ The investment incentive package containedin the 1997 budget.

■ The announcement of an intention to reduceboth corporate tax rates and maximumpersonal income tax rates from 35 to 25percent by 1999.

■ The budget�s targets for reducing both theoverall deficit and net domestic borrowing.

The budget has unambiguously signaled thatthe Government is serious about implementing itsannounced intention to make the private sector theprincipal engine of economic growth by endingcrowding out once and for all.

One indication of the positive impact of thebudget is that the usually conservative EconomistIntelligence Unit, in its country forecast for Sri Lankafor the first quarter of 1997,9 has revised its estimateof economic growth for the 1997-2001 periodupwards by nearly one percentage point, i.e., to5.5 percent per year compared with its previousestimate of 4.6 percent. The survey concludes that�by 2001 the stage will be set for a period ofsustained growth and annual GDP growth rates of7-7.5 percent will be well within reach. Growthwill still be led by exports but the export base willhave shifted into non traditional high value added

9 The Economist Intelligence Unit, Sri Lanka Country Forecast, 1stQuarter 1997 Main Report, London 1997.

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industrial exports.� This is clear internationalrecognition that the growth momentum set by the1997 budget is irreversible. We nevertheless needto do significantly better than 7-7.5 percentgrowth, as explained in the concluding section ofthis paper.

B. The Nature of Sri Lanka�s AdministrativeReform

As explained, public sector reform, including pensionreform, has become crucial in Sri Lanka�s constrainedfiscal situation for releasing the resources needed toeliminate the dependence of the budget on netdomestic borrowing for its financing, and theresulting crowding out of the private sector. Ittherefore constitutes the necessary conditions forexpansion in private investment, enabling theprivate sector to become the true engine of economicgrowth. No less important is the nature of the publicsector reform itself, with its overriding objective ofcreating an administrative framework for sounddevelopment management, such as the dischargingof the several supporting functions identified in theADB Board Paper on Governance.

The nature of the public administrationreform being envisaged is outlined in the SummaryReport on the topic presented to Her ExcellencyChandrika Bandaranaike Kumaratunga, Presidentof Sri Lanka, by an ADB Team (which includedconsultants from New Zealand and Malaysia)toward the end of last year. The summary has beenadopted by Sri Lanka�s Cabinet, and steps toimplement it are now under way. The ADB reportrepresents, in my view, the first cautious steptoward adapting New Zealand�s RemarkableReforms, the title of last year�s Fifth Hayek MemorialLecture by New Zealand�s Central Bank Governor,


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Dr. Donald T. Brash.10 He cites a description of NewZealand �as a country reformed by Hayekians, runby pragmatists, and populated by socialists.� As oneof the principal architects of the reforms, he confessesto having been totally innocent of Hayekian influ-ences �having like many of [his] peers been broughtup on an undiluted diet of Keynesian economics andan almost undiluted diet of Fabian socialist politics.�This description of New Zealand, together with Dr.Brash�s qualification, is applicable to much of SouthAsia, and certainly to Sri Lanka and to my generationof economic reformers.

Its reforms have caused New Zealand to beranked first for its quality of Government in 1993 bythe World Competitiveness Report of the Geneva-based World Economic Forum. Since that time,Singapore has looked to New Zealand as a model forits public sector reforms. In mid-April, Singaporeannounced the implementation of its adaptation ofthe New Zealand model. Sri Lanka is therefore invery good company indeed, in seeking as its eventualgoal to travel along the same road with the supportof the ADB. To summarize it in a phrase, the goalwhich the Government intends to pursue is that ofcreating a results-oriented public service aimed atensuring that public sector organizations behave likethose in the private sector, and the ADB reportrepresents the first step in this direction.

The administrative reform currently under wayhas six key components:

■ Adaptation of strategic policy formulationand policy coordination to more effectivelyachieve policy outcomes.

■ Adoption of a result-oriented philosophy asthe guiding management principle.

10 Donald T Brash, New Zealand�s Remarkable Reforms, Fifth IEA AnnualHayek Memorial Lecture, given in London on Tuesday, 4 June 1996,published by The Institute of Economic Affairs, 1996.

The goal whichthe Government

intends topursue is that of

creating aresults-oriented

public serviceaimed at

ensuring thatpublic sectororganizations

behave likethose in the

private sector.

89


■ Separation of policymaking, service delivery,and regulatory functions of government.

■ Realignment of responsibilities to moreeffectively support the goals of government.

■ Training staff to more effectively respond tothe new environment and thereby realizetheir potential.

■ Redeployment of surplus staff, if any, to newfunctions within Government or to newopportunities in the private sector.

There are two main instruments of reform.These are an Administrative Reforms ManagementDivision (ARMD) within the Presidential Secretariat,charged with designing the detail of the reformprogram and overseeing effective implementation ofall its elements; and a Management Council, chairedby the President of Sri Lanka, which provides thecritical component in a mechanism to ensure devel-opment and implementation of strategic policy.

Of the two instruments of reform, ARMD is atotally new entity charged with, as mentioned, theoversight of the reform process. Its supervision isvested in an Advisory Board on AdministrativeReform, which, in addition to an existing ex officioCommittee of Secretaries of Government, includesthree nonofficial members to provide intellectualand professional diversity. One of them is drawnfrom Sri Lanka�s private sector, the second hasprofessional experience in the process of reform,and the third has respected professional credentials.

The second instrument of reform, the Manage-ment Council, represents a rationalization of processesalready in train to help with strategic policy formula-tion. The institutional mechanisms already in placeprior to the ADB mission included the NationalDevelopment Council (NDC) and the Department ofNational Planning within the Ministry of Finance.Operational authority on fiscal policy was vested in


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the Ministry of Finance, while authority on mon-etary policy was vested in the Central Bank. Theprincipal objective of NDC was to initiate a dialogwith the private sector on policy formulation of thekind pioneered and developed in East Asia, but byand large conspicuously absent (except perhaps in aritualistic sense) in much of South Asia. NDCcurrently comprises 14 members under the chair-manship of the President. It includes 4 CabinetMinisters, 3 persons representative of the two keyprivate sector chambers of commerce and industry,the Governor of the Central Bank, and the Secretaryof Finance (as ex officio members), two academicrepresentatives, a Deputy Chairperson, and anExecutive Secretary who is concurrently DirectorGeneral of the National Planning Department onwhose staff the NDC is expected to draw. The NDCitself has a small nucleus of professional staffdirectly reporting to the Deputy Chairman, currentlycomprising three persons.

This structure has so far engaged in several adhoc policy exercises through the medium of Inter-Ministerial Task Forces/Working Groups, all withprivate sector representation. A Presidential TaskForce on Employment Policies and Strategies hasreported to the President on a revised labor relationsregime which is being considered by a CabinetSub-Committee. A Working Group on AgriculturalPolicy has reported to the President, and itsrecommendations are in process of implementation.NDC Working Groups on Health Policy and onInformation Technology have been the workhorsesof Presidential Task Forces on these subjects. AWorking Group on Fiscal Policy involving theprivate sector, the Ministry of Finance, and theDepartment of Inland Revenue was instrumentalin providing an input into the 1997 budget, whichculminated in the introduction of a Malaysianstyle investment tax allowance.

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The crucial contribution of the ADB team incoming up with the Management Council conceptwas to rationalize and make more coherent whatwas previously an ad hoc policy formulation mecha-nism. The ADB team identified the need to groupthe functions of Government Ministries into threesector areas dealing with the economic sector, theinfrastructure sector, and the social sector. It issuggested that a fourth sector area dealing withcross-sectoral issues be added. Ministers could beassigned to chair sector committees covering each ofthese four areas. The Management Council, accordingly,is made up of the Ministers chairing these sectorcommittees, plus the Ministerial members of theNDC. The officials who attend the meetings of theManagement Council comprise the official membershipof the NDC along with others. They would includethe Deputy Chairperson of the National DevelopmentCouncil, the Head of the Management CouncilSecretariat, the Governor of the Central Bank, theSecretary of Finance, the Secretary to the President,the Secretary of Plan Implementation, the Secretaryof Public Administration, the Director General ofNational Planning, and other relevant officials.

The role of the Management Council is toprovide the single, central focus for drawing togetherall strategic policy initiatives, and to ensure overallcoordination of policy development.

The Council�s responsibilities include:

■ preparing strategic policies for presentationto the Cabinet,

■ reaching agreement on key sector imperatives,■ ensuring that sector committees pursue

imperatives and subsequently review progress,■ proposing outputs to be included in the

budget to the Cabinet, and■ consulting regularly with the private sector

through the NDC.


The role of theManagementCouncil is toprovide thesingle, centralfocus for drawingtogether allstrategic policyinitiatives, andto ensure overallcoordination ofpolicydevelopment.

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An urgent task for the Management is toprepare a concise strategic policy position for discus-sion and adoption by Cabinet, which in turn mustdelineate the rest of the policy process and theadministrative reforms. This process builds on andclarifies existing statements.

Specific decisions and priorities recommendedby the Council to Cabinet determine the allocationof operational and capital resources in the budget.

Ministers attend on Council where theirportfolio issues were under consideration.

The Management Council is thus conceived ofas the Governmental subset, as it were, of the NDC,reinforced by additional Ministerial and officialrepresentation. The ADB team has recommendedthat the Management Council, in order to benefitfrom private sector viewpoints, should combine withthe NDC on at least a bimonthly basis. In theinterests of avoiding �multilateral monologue� itwould be wise for the membership of these jointmeetings not to exceed 20 persons.

Since the ADB recommendation is essentially arationalization of existing arrangements, a dedicatedSecretariat to service the Management Council isessential. Thought is currently being given as to howbest this Secretariat can be put together, drawing onstaff involved in sector policy development, bothwithin the Department of National Planning andelsewhere, and in the NDC.

Two additional elements of the reform processneed to be mentioned to round out the picture.These are, first, the vesting of public service appoint-ments under the authority of an independent andrevitalized Public Service Commission. This harksback to a long-standing tradition Sri Lanka inheritedwhen it attained independence, but which has sincebeen allowed to lapse. The second element is theidentification of redundant departments and institu-tions as candidates for euthanasia as a vital part of

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the process of slimming down the public service inthe interests both of efficiency and of prudent fiscalmanagement.

C. Sri Lanka�s Longer-term DevelopmentChallenge, 1997�2011

To recapitulate, administrative reform focused onslimming down the public sector is a necessarycondition for creating the fiscal space needed foreliminating net domestic borrowing and ending thecrowding out of the private sector. Given Sri Lanka�sconstrained fiscal situation, the adjustment needs tooccur in a phased fashion, but no later than 2000, inview of the enormous development challenge thecountry faces. Public sector reform is also necessaryto enable the Government to provide the supportingfunctions needed for sound development administra-tion, and its nature has been briefly summarized.Both these exercises � the medium-term economicreform agenda and gearing the public service fordevelopment � complement each other in enablingSri Lanka to meet the development challenge thatlies ahead in the first decade of the 21st century.This challenge has two principal components.

First, the large budget deficits of the 1980scould only have been accommodated by heavycutbacks in expenditures on the social sector �education, health, and basic nutrition � and oninfrastructure that was not foreign financed. Socialsector expenditures fell by nearly one half, inrelation both to GDP and the budget, to 6 percent ofGDP and to 17 percent of budgetary expenditure,compared with the 1960s and 1970s. Expendituresduring the 1960s and 1970s had averaged annuallyaround 9-10 percent of GDP, and accounted forbetween 30 and 35 percent of budgetary expenditure.In particular, a food subsidy and related services


Slimming downthe public sectoris a necessarycondition forcreating thefiscal spaceneeded foreliminating netdomesticborrowing andending thecrowding out ofthe privatesector.

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accounted for as much as 4 percent of GDP and 14percent of budgetary expenditure. Expenditure oncore infrastructure � energy, water (excludingirrigation), transport and communications � muchof it foreign financed, averaged barely over 4 percentof GDP during the 1980s, falling to 3.4 percent inthe 1990s in contrast to several East Asian countries� Indonesia, Malaysia, the Philippines, and Thai-land � whose infrastructure expenditures were inthe range of 6-8 percent of GDP. The World Bank�sfirm level surveys in fact rank inadequate infrastruc-ture in the areas of telecommunications, roadcapacity, and electric power, as third in the hierarchyof obstacles to expanded private sector investmentin Sri Lanka (after the high cost of finance and thetax level).

Second, Sri Lanka�s high level of human resourcedevelopment has enabled it to make the demographictransition relatively rapidly. The combination of highfemale literacy and low infant mortality means thatthere is no need for parents to produce children asinsurance for their old age. The resulting fall infertility means that Sri Lanka�s population willstabilize at 23 million by 2025 as against today�s18 million. This has four implications.

■ Our labor force growth will dwindle rapidlyafter 2010 and stabilize by 2016 at 14 million.We will by then be short of labor like Malay-sia and Singapore are today.

■ Sri Lanka�s population will be growingolder faster than any other country inrecorded history. It took France 130 yearsfor the population over the age of 65 todouble from 7 to 14 percent, the US 70years, and Japan 25 years. In Sri Lanka�scase this will happen in the next 20 years� between now and 2016.

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■ Most countries have achieved this transitionin the past at per capita incomes in excess ofUS$20,000, by and large adequate for thoseat work to support those in retirement. If SriLanka were to grow at 7 percent per capita, sothat overall GDP grows at 8 percent (allowingfor 1 percent population growth), income percapita would double every 10 years. Since ourstarting point is US$700 per capita in 1996,this means that we will still be somewhatshort of Malaysia�s 1993 per capita income ofUS$3000 by 2016. Even if per capita incomegrows at 10 percent so that it doubles everyseven years, with overall GDP growing at 11percent, it will still fall short of Malaysia�s1993 per capita income by 2011. It will not atthis rate exceed US$20,000 until the year2030. Double digit growth rates have neverbeen sustained (except for relatively shortperiods and only in a few countries, notablyChina in the last decade, and Japan andSingapore between 1966 and 1973).

■ By 2025, 20 percent of Sri Lanka�s populationwill be over 60 years old, and one third of thepopulation will be pensioners, assuming thecurrent pension age limits hold.

The challenge Sri Lanka faces in the future isnothing less than compressing the kind of develop-ment achieved by East Asia over a 30-35 year periodinto a 15-20 years. It should be borne in mind thatin 1960 Sri Lanka�s per capita income was US$150 �the same as Korea�s and Taipei,China�s � admittedlyless than Singapore�s and Malaysia�s, but signifi-cantly higher than Indonesia�s or Thailand�s. By nowof course all these countries have forged ahead. SriLanka has only grown 4 percent in terms of GDPbetween 1960 and 1995, while East Asia has averaged


The challenge SriLanka faces isnothing less thancompressing thekind of develop-ment achievedby East Asia overa 30-35 yearperiod into a 15-20 years.

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about 8 percent. This means that Sri Lanka mustaim for the maximum feasible rate of overall GDPgrowth in the range of 8-11 percent by 2011 whenour labor force growth drops off sharply, andcertainly by 2016 when it ceases to grow at all. Sucha high growth strategy has several implications fordevelopment policy, even if crowding out has beeneliminated in the medium term, (i.e., by 2000), andif the public sector reform is fully completed by then.

Rapid growth requires the elimination of thetwin constraints of inadequate skills and inadequateinfrastructure which East Asia has so successfullydealt with. The expanded investment in educationand skill development, and in ensuring literacy inEnglish, that Sri Lanka needs to equip itself for theinformation technology age can only be undertakenby the public sector. There will be a similar need toexpand the health budget of the country to copewith the needs of an aging population, in addition tovarious kinds of insurance arrangements. Both willrequire a reallocation of resources in the Govern-ment budget in favor of the social sectors, especiallyin the context of the cutbacks of the 1980s. Bothhealth and education expenditures, are publicgoods par excellence, typically involving areas ofmarket failure which could be adequately addressedonly by public provisioning, and requiring a publicservice geared to sound development administration.This leaves little choice consistent with reducingand eliminating the overall budget deficit, endingcrowding out, thus unshackling the private sector,other than to entrust the infrastructure investmenteffort, wherever possible, to the private sector. Inorder to facilitate this process, and to provide20-year loan financing for private sector projects, aPrivate Sector Infrastructure Development Companywith support from the World Bank and theKreditanstalt für Wiederaufbau was formallylaunched in early April.

Rapid growthrequires the

elimination ofthe twin

constraints ofinadequate skills

and inadequateinfrastructure

which East Asiahas so

successfullydealt with.

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Rapid GDP growth of at least 8 percent overallin the next decade calls for increasing, by at least 10percentage points, today�s investment rate of 25percent of GDP to the 35 percent average characteristicof East Asia in 1990. Half this amount, or 5 percentagepoints, can be realized by eliminating domesticborrowing altogether (also about 5 percent of GDP),and ending crowding out as soon as possible, but nolater than 2000. The amounts saved will then beadded to private investment. This leaves another 5percentage points in relation to GDP to be added toinvestment. At least 2 percentage points of this couldbe realized much sooner by savings resulting fromthe negotiated cessation of hostilities in Sri Lanka inrelation to the 5 percent of GDP currently spent onthe defence budget. The bipartisan agreement betweenthe Leaders of the Government and the Oppositionannounced in April on the modus operandi govern-ing such a negotiation constitutes an importantbreakthrough and provides ground for optimism.Coming on top of the 1997 budget, the news sparkedoff a bull run on Sri Lanka�s stock exchange.

This leaves an additional foreign investmenteffort of about 3 percent of GDP needed to raiseinvestment rates to the critical threshold of the 35percent required for an East Asian style economictake-off. Last year�s net foreign direct investment inSri Lanka was nearly 0.5 percent of GDP, peaking ataround 2 percent in 1993. The largest recipient offoreign investment in relation to GDP among devel-oping countries in 1993 was Malaysia at 7 percent.Against that background, Sri Lanka should have littledifficulty (assuming a climate of internal peace andharmony) in attracting the additional requiredforeign investment equivalent to 3 percent of GDP.It goes without saying that a substantial proportionof that foreign investment will have to be in infra-structure development if this key constraint to rapideconomic growth is to be overcome in Sri Lanka.


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Sri Lanka has quite distinct advantages as avenue for foreign investment.

First, it was foreign investment which trans-formed our economy from one dependent onprimary product exports (principally tea, rubber, andcoconut) to the tune of 85 percent of total exports inthe 1970s, to the structure we have today wheremanufactures account for no less than 73 percent oftotal exports, and garments and textiles for 50percent. Foreign firms accounted for a large part ofthis diversification effort � 74 percent of Sri Lanka�smanufactured exports in 1992. Sri Lanka is now thelargest exporter of manufactures per capita amongthe low-income countries.

Second, the primary motive for foreign investorsto locate in Sri Lanka is the quality and productivityof our labor force. As far back as 1980, a study bythe European Commission found that Sri Lankanlabor, then costing a dollar a day in our free tradezone, was as productive as German labor after sixmonths training. Surveys conducted by Japan�sExternal Trade Organisation a decade or so later, in1993, and by the Embassy of Japan in 1995, con-cluded that almost 85 percent of Japanese investorswere satisfied with their investments in Sri Lanka.Around two thirds of the companies surveyedindicated the availability of high quality labor at avery competitive cost, and of liberal fiscal incentives,as the primary reasons for investing in Sri Lanka.With a monthly wage for a worker averaging stillaround US$1 per day at the current exchange rate,many Japanese and other investors have expressedthe view that Sri Lanka labor demonstrates levels ofmanual dexterity and hand-eye coordination as thebest available anywhere at this wage level. Theseattributes are ideally suited for precision productiontechniques required for industries such as electron-ics. For example, a leading Japanese investor in Sri

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Lanka, the FDK Corporation, which manufacturesmagnetic heads for floppy disks, claims that itsplants in Sri Lanka have achieved levels of outputper worker productivity equal to the Company�sfactories in Japan and Taipei,China.

Third, Sri Lanka is geographically an idealposition to serve as a hub for accessing the SouthAsian market in much the same way as Hong Kongserves the People�s Republic of China and Singaporeserves East Asia. What has come to be known as theGujral Doctrine, articulated by India�s former ForeignMinister and current Prime Minister, wherebyneighboring countries are granted access to theIndian market on a nonreciprocal basis, carries withit considerable promise for foreign investors today inSri Lanka.

Meeting Sri Lanka�s development challenge inthe first decade of the 21st century requires thecoordination of policies on a broad front. It demandspolitical and administrative leadership of the highestcaliber, for the task is nothing less than the com-pression of East Asia�s development achievementsinto about half the time it took East Asia to realizethem. A public service geared to rapid development,and a policy formulation mechanism that can harnessits talents to the best advantage, are the essentialprerequisites. The reforms initiated by the ADB teamare vital first steps towards reaching these goals.


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101


GUJARAT PUBLIC SECTORRESOURCE MANAGEMENTS.K. ShelatChief Secretary, Government of Gujarat

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S. K. Shelat has served as Chief Secretary to the Governmentof Gujarat State, India, since 1995. Prior appointments inhis civil service career, which began in 1961, includethree posts at the Principal Secretary rank: Finance (1993�1995), Agriculture and Rural Development Department(1993), and General Administration (Planning) (1992�1993). In addition, Mr. Shelat has held numerous othersenior management positions, ranging from Secretary ofIndustries, Mines, and Energy to Commissioner of Trainingand Director, Sardar Patel Institute of Public Administration.

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Gujarat is one of the 26 States of India, occupy-ing 196,024 sq. km. and having a population of41.3 million.

Since its formation in 1960, Gujarat hasachieved remarkable progress in economic develop-ment, and especially in industrialization. Followingthe economic liberalization policy initiated by theGovernment of India in 1991, Gujarat has been thenumber one State in attracting investment, and hasprojects worth US$31 billion in the pipeline. How-ever, despite all this, Gujarat�s public sector ischaracterized by a structurally weak fiscal position, alarge and inefficient State enterprise sector, andinadequate provision of basic infrastructure servicessuch as ports, roads, and power.

The state�s fiscal position weakened because ofthe lack of fiscal discipline and stagnation in taxrevenues. State finances were also squeezed by slowgrowth in Central transfers, because of fiscalconsolidation at the Central Government level, andrestrictions on overdraft facility from the CentralBank, which forced the State to borrow increasinglyat market-determined rates. Since 1991 the Govern-ment of Gujarat has adopted a cautious fiscal policyand was initially successful in curtailing the overallbudget deficit from over 7 percent of the state�sdomestic product (SDP) in the early 1990s to 2.6percent in 1993/94. But the Government was unableto sustain this fiscal adjustment, and the overallbudget deficit rose again, reaching 4 percent of SDPin 1995/96. The reversal in fiscal consolidation inGujarat is attributable to factors such as (i) stagnationin public revenues, (ii) inadequate control overpublic expenditures, and (iii) generally poor manage-ment of public resources.

The Government of Gujarat owns 54 State-ownedEnterprises (SOEs), of which 37 are registered ascompanies and 17 as statutory corporations set upby State or Central legislation. SOEs are active in

Gujarat Public Sector Resource Management

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most sectors of the economy, having a virtualmonopoly in the mining, power, transport, andwater sectors, and a dominant position in housing,finance, and social sectors. SOEs have been used toachieve a number of objectives, including employmentcreation, provision of subsidized services (such aspower and transport), development of backwardregions, and welfare of the weaker sections of thepopulation. SOEs are vulnerable to politicalinterference and suffer from the lack of commercialorientation, nonmerit-based managerial appointments,and inadequate reporting, accounting, and financialcontrol systems.

Infrastructure in Gujarat is overextended andcannot meet the growing demand of industrialization.The Government has estimated infrastructureinvestment requirements at over $23 billion, whichfar exceeds the availability of public resources. Thegrowing demand for infrastructure, the sharpeningresource and implementation constraints, and thepoor efficiency in delivery of services by the publicsector have changed the Government�s approach toinfrastructure development. The Government hasopened up all key infrastructure sectors to theprivate sector and is in the process of evolving anenabling policy environment that is transparent andprovides adequate incentives to attract the requiredprivate investment.

Public Sector Resource Management Program

The Gujarat Government set up a State FinanceCommission in October 1992 to look at some of theseissues, and the Commission submitted its report inMay 1994. Also in 1994, the Asian DevelopmentBank (ADB) initiated a process of dialogue with theGovernment of Gujarat which resulted in theapproval of a loan of US$250 million for the Gujarat

The Governmenthas opened up

all keyinfrastructuresectors to theprivate sectorand is in the

process ofevolving an

enabling policyenvironment.

105


Public Sector Resource Management Program in1996. The Government initiated a review of recom-mendations of the Finance Commission in 1994.Drawing on the recommendations of the Commis-sion Report, the ADB simultaneously initiated apolicy dialog in order to support implementation ofthe policy and institutional changes. Thus the PublicSector Resource Management Program is the continu-ation of a process of reform begun in 1994, in whichthe Gujarat Government and ADB have been partnersfrom the very beginning.

The Resource Management Program is aimed ataugmenting domestic resource mobilization,improving allocation and efficiency of the publicsector, reducing the State�s role in commercialactivities, and promoting market-oriented policies toenhance private sector participation in the economy,particularly in the infrastructure sector. Theseobjective are to be achieved by three initiatives:

■ improving the management of the State�spublic finances;

■ privatizing, divesting, or restructuring theSOEs; and

■ strengthening the policy, regulatory, andinstitutional frameworks for the infrastruc-ture sector.

1. Improving the Management of theState�s Public Finances


The Program supports the formulation, adoption,and implementation of the Medium-term FiscalPolicy Framework for the period 1997/98 to 1999/2000, under which the overall fiscal deficit will bereduced from 4 per cent of SDP in 1996/97 to about2 percent in 1999/2000. The reduction in the fiscaldeficit will take place despite the substantive cost ofstructural reforms included in the Program, such as

The Programsupports thecreation of anenabling policy,regulatory, andinstitutionalenvironment forprivate sectorparticipation inthe power, ports,and roadssubsectors.

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the rationalization of taxes and restructuring ofSOEs. The key elements of tax reforms envisagedinclude the simplification and rationalization of thesales tax structure to improve its transparency andefficiency. The reforms of the sales tax have beendesigned to facilitate eventual introduction of avalue added tax in line with the adoption of VAT byneighboring states. The Program supports rationaliza-tion of the rate structure of stamp duty, entertain-ment tax, and motor vehicle tax. An importantelement of the expenditure reform is the introductionof the Core Investment Program at aggregate andsector level.

2. Privatizing, Divesting or Restructuring the SOEs

The Program focuses on privatization, divest-ment and restructuring of 23 of the 54 SOEs. Thesubset of SOEs targeted under the Program includesa mix of strategic enterprises, key state financialintermediaries, and SOEs that perform overlappingdevelopmental and social functions. The SOEsinclude a combination of both profit-making andloss-incurring enterprises.

The SOE reform program in Gujarat is the firstcomprehensive attempt towards privatization. Indesigning this Program appropriate institutionalframework and policies have been put in place inadvance to insulate the reforms from politicaldisruption. The Government, for example, set up ahigh-level subcommittee headed by the ChiefMinister to approve proposals of SOE reform. Thetechnical work of privatization and restructuring isbeing handled by a Technical Secretariat and thePrice Waterhouse International Group supportedthrough a Bank technical assistance.

To facilitate privatization/restructuring, theGovernment set up a State Renewal Fund to financethe debt and labor liabilities of the SOEs.

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3. Strengthening the Policy, Regulatory, andInstitutional Frameworks for theInfrastructure Sector

The Program supports the creation of anenabling policy, regulatory, and institutionalenvironment for private sector participation in thepower, ports, and roads subsectors. The keyobjective of infrastructure reform is to evolvegreater transparency and stability in the policyenvironment. This involves (i) introducingguidelines for transparent competitive biddingprocedures and internationally accepted terms forfinancing of infrastructure projects, (ii) restructur-ing of public sector agencies that handle theinfrastructure sector with a view to promotingcommercial orientation and an effective partnershipfor public and private sector development, and(iii) a sound regulatory mechanism in the post-privatization era that serves both efficiency andequity goals.

The Program loan from the Bank will assist theGovernment in carrying out the structural reforms asit will enable the State to

■ bear the cost of restructuring the PublicEnterprise Sector which would involve theclosure of nonviable units, such as theGujarat State Textile Corporation, and thesale, merger, or downsizing of others;

■ absorb the impact of the initial decline inGovernment revenues likely to result fromthe tax reforms and rationalization;

■ protect a core investment program from adhoc budget cuts; and

■ enable the release of funds for social sectorsby transferring some areas from public toprivate sector funding.


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Institutional Strengthening

As part of the Program, the Government will set upthe Gujarat Infrastructure Development Body whichwill be responsible for the following functions:

■ rationalization of sector development/masterplans into a single intersectoral developmentplan;

■ prioritization of specific projects withinsectors and between sectors;

■ assistance to private sector project proponentsregarding project financial packaging; and

■ administration of a project developmentassistance fund.

In this regard the Bank has provided a technicalassistance to build capacity of the Gujarat Infrastruc-ture Development Body to advise on policy, legal,and regulatory frameworks of key infrastructuresectors, as well as in the area of assessing, financing,and promoting infrastructure projects, includingbuild-own-operate and build-own-transfer projects.

Additionally, institutional strengthening of thevarious Government departments for the effectiveimplementation of reforms is planned under theProgram. This includes the strengthening of theFinance Department, for which a Bank technicalassistance will support the development of skills in

■ budget policy formulation and projections,■ expenditure management and control,■ formulation of tax reforms, and■ treasury and debt management operations.

The Finance Department will be assisted by aState Public Finance Reform committee and workinggroups on tax reforms, expenditure management andcontrol, and computerization and training. The

109


computerization of tax, expenditure, and debtrecords will upgrade the overall budgetary manage-ment and control systems. The Program will alsosupport the reorganization, streamlining, andstrengthening of the State tax administration withthe establishment of a Directorate of Taxation.

Finally, the Bank is providing a technicalassistance to train and advise policymakers andheads of SOEs in the modalities and techniques ofprivatization. To start off, some key officials closelyinvolved in the process of privatization have at-tended courses on privatization and restructuring,and a workshop is scheduled to be held later in theyear to provide greater exposure to officials on theprivatization program and its techniques.

Future Developments

Once the Program is completed, it is expected thatGujarat will be on the road to self-reliance in termsof resource mobilization, coupled with improvementin the quality of life resulting from the increasedinvestment in social infrastructure.

In the Power sector, the most crucial for theState, the present capacity will be raised from 6000MW to 15000 MW in five years, of which 8330 MWwill be through private sector initiative. Also, for thefirst time, it is proposed to invite the private sectorinto power distribution. This initiative should instillfurther confidence among the independent powerproducers. Privatization of distribution should alsohelp free the Government from the subsidy culturein the agriculture sector and reduce current excessiveline losses.

In future, it is expected that private sectorinvestment will grow not only in the ports, power,and roads sectors, but also in the social sectors. Forinstance, it is expected that secondary and tertiary


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education, on which the State spends nearly US$20million per annum, could be gradually privatized byeliminating controls over fees. The public funds soreleased could then be used for the improvement ofprimary education. Similarly, in the health field it isproposed to involve private donors and institutionsto supplement the infrastructure of GovernmentHospitals, thereby augmenting and improving theservices for the poorest sections of the society. Also,private doctors will be allowed to use the facilities atGovernment Hospitals and Dispensaries, thusreducing their costs and fees.

A separate State Finance Commission for Localand Municipal Bodies has been set up and its reportis expected by June 1997, covering a wide range ofreforms and devolution of resources from the Stateto the local authorities, that will link reward toperformance.

State Government would vacate areas that canbe successfully operated by the private sector andwould become more lean and clean, to perform itsbasic task of maintaining law and order and providingbasic social services and thus making povertyalleviation easier.

To conclude, Gujarat is now on the threshold ofboth economic resurgence and social upliftment. Infive years it will be able to compete with some ofthe Asian tigers, such as Indonesia; Malaysia;Singapore; and Taipei,China. In this transformationthe Bank�s assistance will have played a significant role.

Gujarat is nowon the thresholdof both economic

resurgence andsocial upliftment.

In five years itwill be able tocompete with

some of theAsian tigers.

111


MONGOLIA:Legal Reforms for aMarket EconomyJ. UnenbatGovernor, Bank of Mongolia

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Jigjid Unenbat, Governor of the Bank of Mongolia,received his first degree from the University of Economicsand Statistics in Moscow in 1986, and took his Master ofInternational Affairs degree from Columbia University in1995. Mr. Unenbat has served the Bank of Mongolia invarious posts since 1986.

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This paper is a description of the Asian Devel-opment Bank�s contribution to good governancein Mongolia through its assistance in the

development of the Mongolian legal system.Since the pro-democracy demonstrations in

1990 and the 1991 breakdown of the Council forMutual Economic Assistance, whose member stateswere our main trading partners, Mongolia has movedrapidly to establish the legal framework necessaryfor a market economy. The basic elements � lawson property, the creation and winding-up of businessentities, and a fair marketplace � are in place, aswell as laws governing the complex areas of banking,securities, tax, bankruptcy, and accounting. Many ofthese laws, however, need to be reinforced bydetailed regulations. Equally important, capacitybuilding and training are necessary so that these lawsand regulations can be implemented and enforced.

The ADB�s Law and Development Activities

In this regard, we have been grateful for the ADB�sleadership and assistance in (i) reviewing the Mongo-lian legal system and formulating an action plan forthe coordination of foreign assistance in law anddevelopment, (ii) drafting and preparing certain keylaws and regulations required for a market economy,and (iii) providing training for the implementationand enforcement of these laws and regulations.

1. Industrial Sector Program Loan

The ADB�s first substantial law and develop-ment activities in Mongolia began in August 1993 inconnection with a US$30 million loan for an indus-try sector program. One of the conditions for therelease of the second tranche of the loan was acondition requiring the Government to undertake a

Mongolia: Legal Reforms for a Market Economy

Mongolia hasmoved rapidly toestablish thelegal frameworknecessary for amarket economy.

114


review of existing and pending laws affecting theindustry sector, including laws relating to businessentities, contracts, secured transactions, bankruptcy,and foreign investment. It was clear that market-friendly economic reform had to be matched withlaws suited to the purpose.

2. Technical Assistance for Developing Mongolia�sLegal Framework

In order to assist the Government with thisreview, the ADB provided a technical assistance grantof US$500,000 for developing Mongolia�s legalframework. The major accomplishments of theassistance were fourfold.

■ First, the publication in October 1995 of aneeds analysis report on the Mongolian legalsector and a two-day conference to discussthe report�s findings with members of theMongolian legal community and representa-tives of interested donor institutions. TheLegal Needs Analysis Report was the firstcomprehensive assessment of Mongolianlaws with an action plan identifying areaswhere assistance was required. The conferencewas the first organized meeting of donors todiscuss assistance in the legal sector toMongolia.

■ Second, legal training. Lawyers were trainedin three provinces in Mongolia; sevenMongolian lawyers received training overseasat Duke Law School�s Asia-America Institutein Transnational Law in Hong Kong; and asenior Ministry of Justice official participatedin a three-month internship program at aprivate law firm in New Zealand.

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■ Third, four United Nations Volunteer legaladvisors and a commercial law expert providedlegal advice on commercial legislation andassisted with the translation of Mongolia�sCivil Code into English.

■ Fourth, a compendium of authorized Englishtranslations of the principal commercial andeconomic laws enacted since 1990 wasprepared. This compendium is expected to bepublished later this month.

3. Technical Assistance for InstitutionalStrengthening of the Financial Sector

From 1993 to the end of 1996, the ADBprovided six technical assistance grants totalingapproximately US$2.3 million for Mongolia�sfinancial sector. This technical assistance wasprimarily in support of institutional strengtheningof agricultural banking services, the commercialbanking system, and financial intermediaries. Twoof these six technical assistance projects includedlegal components.

The first was a technical assistance grant in1993 for institutional strengthening of the financialsector. Under this grant, the ADB assisted ourGovernment in the drafting and implementationof a Securities Law which came into effect on1 January 1995. Prior to enactment of the SecuritiesLaw, only procedural rules covering trading opera-tions of the Mongolian Stock Exchange, which wasestablished in February 1992, existed. The grantalso assisted in (i) the establishment of theSecurities Commission as an independent body tosupervise the operations of the Stock Exchange,and (ii) the drafting of rules and procedures forthe Commission.


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4. Technical Assistance for Development ofProcedures for the Reconstruction andLiquidation of Insolvent Banks

The second technical assistance project was agrant approved last year for the development ofprocedures for the reconstruction and liquidationof insolvent banks. This assistance could not havebeen more timely in light of the banking sectorcrisis and closure of the Central Asia Bank, theArdyn Bank, and the Insurance Bank last year.Although monetary targets were achieved during1995 and the first half of 1996, most banksviolated credit ceilings and minimum reserverequirements, and the Bank of Mongolia wasunable to enforce regulatory discipline due toweaknesses in legal authority.

Under the technical assistance, a legal advisor(i) reviewed the legal framework for restructuringand liquidating commercial banks, including thebankruptcy law, contract law provisions under thecivil code, and the banking law and regulations;(ii) reviewed amendments to the banking law andstatutes of the Bank of Mongolia and recommendedappropriate changes; and (iii) advised the Bank ofMongolia on legal aspects pertaining to the revisionof its regulations and procedures for dealing withthe liquidation of insolvent commercial banks.

Thanks to the combined efforts and recom-mendations of the ADB, the World Bank, and theInternational Monetary Fund, the legal frameworkcovering the commercial banking sector wasstrengthened in September last year with theseparation of provisions on central and commer-cial banking through the enactment of two laws� the Banking Law and the Central Bank Law.Under the Central Bank Law, the Bank of Mongolianow has the clear power to issue regulations tocarry out its functions as supervisor of banks.

The Bank ofMongolia now

has the clearpower to issueregulations to

carry out itsfunctions as

supervisor ofbanks.

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Provisions on the restructuring and liquidation ofcommercial banks are included in the newBanking Law. We expect that the stronger legalframework will help increase confidence in thebanking system.

5. Financial Sector Program Loan

The ADB�s assistance to Mongolia�s financialsector culminated in the Financial Sector ProgramLoan approved in 1996. To support further legalreforms in the financial sector, approval by the ADB�sBoard of Directors of the Program Loan was conditionalon a number of actions, including the enactment ofthe new Banking Law and Central Bank Law.

Release of the second tranche of the ProgramLoan is subject to satisfaction of a number of law-related conditions, including (i) submission of adraft Law on Secured Transactions (for movables)to Parliament; and (ii) strengthening bankruptcylegislation to facilitate debt recovery � in particu-lar, giving preferred status to secured creditors.

In order to assist the Bank of Mongolia infulfilling several of the other conditions specified forthe release of the second tranche, the ADB isproviding a technical assistance grant of US$1 millionfor strengthening the supervisory and restructuringcapacity of the Bank of Mongolia. This technicalassistance includes the services of a legal advisor to(i) advise the Bank of Mongolia on legal issuespertaining to the conservatorship and receivership ofcommercial banks; (ii) assist the Bank of Mongolia inthe liquidation of banks; and (iii) assist the Bank ofMongolia in the preparation of regulations on bankingsupervision, bank licensing, and conservatorship.

I would now like to move to a critical area ofgood governance where the ADB has providedinvaluable assistance: public sector management andcapacity building through training.


118


6. Technical Assistance for Restructuring andCapacity Building in the Ministry of Justice

Early this year, the ADB�s law and developmentactivities included a technical assistance to theMinistry of Justice for restructuring and capacitybuilding. The primary focus of the assistance wasto help the Ministry prepare its business plan inaccordance with the Government�s policy onreforming government processes and the generalsystem of structure. The purpose of the policy isto �redefine directions of Government processes,streamline its general system of structure throughre-engineering, introduce management methodssuited to market economy relations in a demo-cratic society, reduce budget costs of publicentities and raise their efficiency by enhancingthe leadership role of the Government.�

The Ministry of Justice�s Business Plancontains three key recommendations: (i) toenhance the policy and planning capacity of theMinistry; (ii) to strengthen the legal draftingcapability of the Ministry by creating a specializedlegal drafting department; and (iii) to transferimplementing responsibilities to the Ministry�sagencies, while having the Ministry retain theappropriate policy development and coordinationfunctions.

7. Technical Assistance for Legal Training

Finally, I would like to turn to capacitybuilding through training. One of the majorconclusions of the Legal Needs Analysis Reportwas the need to establish a training program forMongolia�s legal professionals. The ADB�s assis-tance commenced with training in skills requiredfor international sales contracts. A second technicalassistance project was designed to address the ad

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The Bank�s Governance PolicyMongolia: Legal Reforms for a Market Economy

hoc nature of the many training programs thathad been offered for Mongolian legal professionalsby supporting a working group to prepare aprogram to institutionalize legal training.

8. Proposed TA for the Retraining ofLegal Professionals for Market Economy

As a result of the recommendations of theworking group, which consists of representatives ofthe major legal institutions in Mongolia, includingthe Ministry of Justice, the Judiciary, the GeneralProsecutor�s Office, and the Institute of Law, and atthe request of the Mongolian Government, the ADBis currently preparing a technical assistance projectto establish a retraining center for legal professionalsin Mongolia. The proposed project will be providedon a grant basis over three years, and will be executedby the Ministry of Justice.

The objective of the technical assistance is toestablish a retraining center where Mongolian lawyerswill be taught how to apply market economy-basedlegal principles in recently enacted commercial lawsand regulations such as the Banking Law, Civil Codeand Bankruptcy Law. The Retraining Center will alsoprovide training in lawyering skills such as negotiatingand drafting legal agreements and regulations.

The Retraining Center will offer training forabout 200 lawyers each year through six three-month programs, and will be located within theInstitute of Administration and ManagementDevelopment, Mongolia�s central organization forretraining and upgrading the skills of publicadministrators and business managers in publicand business administration.

The Center will be twinned with an interna-tional legal training institution throughout theduration of the technical assistance. This long-termrelationship will start even before the Retraining

Center opens when the Center�s instructors receivetraining at the international institution in commerciallegal principles, lawyering skills, and effectiveteaching techniques. It is expected that the RetrainingCenter will open early next year.

Conclusion

It has been an honor to participate in this confer-ence and to learn more about the experiences andsuccesses achieved in promoting sound developmentmanagement. On behalf of the Government ofMongolia, I would like to express our sincere appre-ciation to the ADB for the assistance it has providedin developing Mongolia�s legal system, and ourhearty congratulations on the ADB�s achievementsduring the past 30 years.

CONTENTS

1 Overview

7 Opening Remarks:The Bank�s Governance PolicyShoji NishimotoChief, Strategy and Policy Office, ADB

13 Law and Development: An Essential Dimension of GovernanceBarry MetzgerGeneral Counsel, ADB

21 Keynote Address:Governance: Promoting Sound Development

Management Lessons from New ZealandRuth RichardsonFormer Finance Minister of New Zealand

45 The Role of the Government in Dynamic EconomicDevelopment Process

Isao KubotaDirector-General, Customs and Tariff Bureau, Ministry of Finance

57 Public Administration Reforms in Malaysia:A Developing Country Perspective

Abdullah Sanusi B. AhmadVice Chancellor, University of Malaya

79 Sri Lanka: Reforming Public AdministrationLal JayawardenaEconomic Adviser to the President of Sri Lanka

101 Gujarat Public Sector Resource ManagementS. K. ShelatChief Secretary, Government of Gujarat

111 Mongolia: Legal Reforms for a Market EconomyJ. UnenbatGovernor, Bank of Mongolia

The seminar was coordinated by Naved Hamid and Hamid Sharif. Eric McGawprovided editing and design services, and the word processing was under-taken by Rosario R. Belen.

© Asian Development Bank 1997

All rights reserved

First published December 1997

This publication was prepared by Asian Development Bank staff. The findings,interpretations, and conclusions expressed in it do not necessarily represent theviews of the Bank or those of its member governments. The Asian DevelopmentBank does not guarantee the accuracy of the data included in this publicationand accepts no responsibility whatsoever for any consequences of their use.

ISBN 971-561-141-9Publication Stock No. 110397

Published by the Asian Development BankP.O. Box 789, 0980 Manila, Philippines

GOVERNANCEPromoting Sound

Development Management

A record of the proceedings of a seminarin Fukuoka, Japan on 10 May 1997

During the 30th Annual Meetingof the Board of Governors

Asian Development Bank

Documents

OVERVIEW - AsianLII · publication is a summary of these eight presentations. The focus of the seminar was on public admin-istration and legal system reforms. First, Messrs. Shoji