The quality of governance in developing and emerging-market economies has recently moved into the spotlight of international investors and official OECD development co-operation agencies, both national and multilateral, for a combination of reasons: i) the spectacular increase in international investment in developing countries; ii) the end of the Cold War; iii) failed development policy reforms in the 1980s and 1990s; and iv) a new awareness of the importance of politics in economic development and policy reform.
Chapter 2. Sources of Governance Indicators
Users of governance indicators easily get lost in the jungle of hundreds of existing indicators. This chapter explains the most widely used governance indicators, which are composite perceptions-based indicators, and where to find additional information on the supply of governance indicators.
Chapter 3. Uses of Governance Indicators
User groups - mainly international investors, official national and multilateral aid agencies, and development analysts and academics (i.e. mostly people located outside developing countries) - tend to use - and widely misuse - governance indicators to compare the quality of governance both among countries and over time in their decision-making processes.
Chapter 4. In-Depth Analysis of KKZ Composite Indicators
Probably the most carefully constructed and certainly among the most widely used governance indicators are those produced by Daniel Kaufmann, Aart Kraay and their team at the World Bank Institute. We therefore take an in-depth look at the strengths and weaknesses of these particular indicators. Problems associated with their construction or use, of which users seem widely unaware, include: i) the likelihood of correlation of errors among the 37 sources from which the composite WBI indicators are constructed, which significantly limits the statistical legitimacy of using them to compare countries’ scores; ii) their lack of comparability over time; iii) sample bias; and iv) insufficient transparency.
Chapter 5. Governance and Growth
Current governance indicators are highly positively correlated with measures of current national per capita income. The challenge is to identify the direction(s) of causality in the relationship between the quality of governance and the level of income in a country. We find that beyond the limitations inherent in the construction of most governance indicators used for such analysis, research based on those indicators often produces results that are very sensitive to changes in the econometric model used - the variables in the model and its underlying assumptions - as shown in this chapter.
Chapter 6. Moving Forward
Building on findings of previous chapters - including that most governance indicators lack transparency and are not well suited to help developing countries identify how to improve the quality of local governance - this chapter briefly looks at promising new developments in the “market” for governance indicators. It argues that while there will never be one perfect governance indicator, the production and use of more transparent governance indicators will better serve the needs of both external users and developing countries seeking to improve the quality of local governance.
Appendix I. Aggregation Methodology for the KKZ Composite Indicators
Appendix II. Governance and Growth
Development Centre Studies
Uses and Abuses of Governance Indicators
By Christiane Arndt and Charles Oman
Publication Date: August 2006