Appendix

Appendix 1 Table [ PDF 173.7KB | 25 pages ]

Appendix 2 Table [ PDF 173.7KB | 25 pages ]

Appendix for Section 2:

2.1 Actors of Governance other than Government:

The other actors, in rural areas, may include influential land lords, associations of peasant farmers, cooperatives, NGOs, research institutes, religious leaders, finance institutions political parties, the military. At the national level, in addition to the above actors, media, lobbyists, international donors, multi-national corporations may play a role in decision-making or in influencing the decision-making process.

2.2 Governance Measurement:

Many believe current indicators provide poor measures of key governance processes. But there have been significant improvements in measuring governance indicators.

2.3 Ten indicators of WSJ-Heritage Index:

The Wall Street Journal and the Heritage Foundation (WSJ-Heritage 1997) compiled indices of the overall economic policy environment relating to ten underlying factors, namely, the extent and severity of trade controls, the overall level of taxation and its impact of economic incentives, the extent and severity of government interventions in the economy, the appropriateness of national monetary policy and its contribution to inflation, the extent to which restrictions were placed on capital flows and their impact on foreign investment, the restrictive ness of government controls on banking, the extent of government imposed wage and price controls, the security of property rights and the degree to which they were protected by the government, the extent of government regulation of industry, and the size of black market. The WSJ-Heritage index for each of the variables takes a value from one to five with lower values indicating a policy environment more conducive to economic growth. An overall index of the quality of the national economic environment was derived from the average of the ten WSI-Heritage policy index.

Appendix for Section 3:

3.1 World Bank Indices for Governance:

World Bank Team led by Daniel Kaufmann (1999, 2005), conducted a pioneer study to estimate governance indices comprehensively and measured perceptions of governance based on several hundred variables for a large number of countries. A total of six dimensions of governance indicators has been constructed based on 352 individual variables taken from 37 different sources, produced by 31 different organizations (Kaufmann et. al., WB, June 2005). These are now recognized as worldwide governance indicators. The aggregate indicators are oriented as such that higher scores correspond to better governance outcomes.

The six dimensions of governance indications with brief description are presented below:

1. Voice and Accountability: It measures political, civil and human rights and independence of the media. It includes the process by which those in authority are selected and replaced. It includes a number of indicators measuring various aspects of the political process, civil liberties and political rights. It measures the extent to which citizens of a country are able to participate in the selection of government.
2. Political Instability and violence: It measures perceptions of the likelihood that the government in power will be destabilized or overthrown by possibly unconstitutional or violent means, including terrorism. It has not only a direct effect on the continuity of policies, but also undermines the ability of all citizens to peacefully select and replace those in power.
3. Government Effectiveness: measuring the competence of the bureaucracy and the quality of public service delivery, independence of civil service from political pressure to be able to produce and implement policies and deliver public goods. (To provide efficient and effective public services.)
4. Regulatory Quality: measuring the incidence of market-unfriendly policies such as price controls or inadequate bank supervision, as well as perceptions of the burdens imposed by excessive regulation in areas such as foreign trade and business development.
5. Rule of Law: measuring the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence. The environment in which fair and predictable rules form the basis for economic and social interactions.
6. Control of corruption: measuring the exercise of public power for private gain, including both petty and grand corruption and state picture.

The method used to calculate each sub index gives it approximately a unit normal distribution, with an increase always meaning better outcomes. These measures are based on unobserved components model that aggregates over 300 indicators, ranging from ratings by country experts to survey results. A significance advantage of the aggregation method (such as the UCL) is that the model can estimate margins of error and the margins of error is reduced significantly to a half when information relies on five or more sources. Some of the components that comprise the index include policy factors. More important, given the subjective nature of the underlying polls and surveys, it is possible that the respondents’ answers to questions are influenced by their perception of policies.

The measurement challenges continue to remain, and one has to take caution in interpreting the results in terms of ranking. But the margins of errors have declined over the years, and are now substantially lower. As a result, these governance indicators are used worldwide for monitoring performance, country assessment, and research. In the very long run, there is a strong casual impact of institutional quality on per capita incomes worldwide. These estimates suggest that a realistic one-standard –deviation improvement in governance would raise incomes in the long run by about two-tothreefold. Such improvement in governance by one standard deviation is feasible, since it is only a fraction of the difference between the worst and best performers. A few empirical studies consider the average of six governance indicators to capture institutional quality, while few others classify the governance indicators into the political, economic, and institutional dimensions of governance with two indicators in each group.

• Political Dimension: Voice and accountability and Political instability and violence
• Economic Dimension: Government Effectiveness and Regulatory burden
• Institutional respect dimensions: Rule of Law and Control of corruption

3.2 Competitiveness as Complimentary to Governance:

The concept of competitiveness remains multifaceted and always needs simplification and judgment. Competitiveness is used in the literature in different ways. A country’s real exchange rate (i.e. relative price and/ or cost indices expressed in some common currency) is used to assess external competitiveness. Intuitively, it is defined as a country’s share of world market for its products. This makes world economy a zero sum game because one country gains at the expense of others.

The productivity of the entire economy matters for the standard of living, not just the traded sector. Many nations can improve their prosperity if they can improve productivity. That is why, World Economic Forum (WEF) uses a broader definition of ‘Competitiveness’ that links to the concept of productivity. It is stated as “We think of competitiveness as that collection of factors, policies, and institutions which determine the level of productivity of a country and that, therefore, determine the level of prosperity that can be attained by an economy” (page 3, chapter 1.1, Global Competitiveness Report, 2005-2006). If the assumptions of Hecksher-Ohlin model are relaxed to allow for greater realism with respect to such as scale economies, differentiated products, technological gaps, uncertainty, large firm with market power etc., trade become a nonzero sum game, where all parties gain from trade specialization. The country has to achieve competitive capabilities (competitiveness) to realize that benefits. Competitiveness indices can be used to benchmark national performance and to evaluate the shortcomings of their economies.

The methodology to estimate competitiveness index was first developed in 2001 by Jeffrey Sachs and John McArthur and the index is called the Growth Competitiveness Index. There is an improvement in the methodology in the construction of competitiveness index over the years since Jeffrey Sachs and John McArthur developed in 2001. Since then, the World Economic Forum has been publishing (i) Growth Competitiveness Index (GCI) which refers to the aggregate or macroeconomic determinants of productivity, (ii) Business Competitiveness Index (BCI) captures the microeconomic components of productivity. There is another difference between the BCI and GCI. BCI captures the “static” or “level” determinants of productivity of a country, while the GCI is supposed to capture its “dynamic” or “growth”.

WEF followed a unified approach 2004-05 that captures both the microeconomic and macroeconomic foundations of competitiveness in a single index, called Global Competitiveness Index. The ability of firms to prosper depends, among other things, on the efficiency of the public institutions, the excellence of the education system, and the overall macroeconomic stability of the country in which they operate. On the other hand, an excellent macro environment does not guarantee national prosperity unless firms create valuable goods and services using efficient methods and processes at the microeconomic level.

The Global CI uses a combination of hard data (e.g. university enrollment rates, inflation performance, the state of the public finances, the level of penetration of new technologies such as mobile telephones and the internet) and data drawn from the World Economic Forum’s Executive opinion Survey. World Bank data on corruption, regulatory quality, and the rule of law overlap with some of the areas covered in the competitiveness survey. The correlation between WEF’s competitiveness indicators and the World Bank data are high.

Basic requirements sub index (stage 1: factor-driven)

• Institution (pillar 1)
• Infrastructure (pillar 2)
• Macro economy (pillar 3)
• Health and basic education (pillar 4)

Efficiency enhancers sub index (stage 2: efficiency driven)

• Higher education and training (pillar 5)
• Market efficiency (pillar 6)
• Technology readiness (pillar 7)

Innovation and sophistication factor sub index (stage 3: innovation-driven)

• Business sophistication (pillar 8)
• Innovation (pillar 9)

It is observed that institution sub-index exists in both Growth and Global Competitiveness indexes, which are of more relevant to our Governance concept. The nine pillars and stages of development are defined in the section appendix.

3.3 Nine pillars in Global Competitiveness Index (WEF, 2005-06):

Pillar 1: Institution: Lack of transparency in government operations and evidence of corruptions undermine business confidence and lead to misallocation of resources hindering economic growth and competitiveness.

Pillar 2: Infrastructure: Effective modes of transport for goods, people and services such as rail roads, ports, and air transport in a cost-effective manner facilitates growth.

Pillar 3: Macro-economy: Macroeconomic stability such as inflation, budget constraint etc. are ingredients of sustainable growth.

Pillar 4: Health and Primary Education: A healthy workforce and basic education increases the efficiency of each individual worker making the economy more competitiveness and productive.

Pillar 5: Higher Education and Training: Quantity and quality of higher education within an economy are critical for competitiveness for production, R & D, marketing and management, and for technological adaptation in a fast changing globalizing economy. On the job training has become an important of upgrading an economy’s human resources.

Pillar 6: Market Efficiency: Market efficiency of various factor markets such as goods market, labor markets and financial markets are crucial for underlying productivity and competitiveness. Labor market efficiency: Flexibility of labor market is a leading determinant of competitiveness. Financial market efficiency: Allocation of resources saved by nation’s citizens to its most productive uses.

Pillar 7: Technological Readiness: Benefit from new technologies and availability of technologies help to sustain rates of growth and productivity.

Pillar 8: Business Sophistication: Quality of individual firm’s operations and strategies

Pillar 9: Innovation: capacity to generate new technologies internally and endogenous generation of knowledge and new products.

3.4 Stages of Development and transitions:

Stages of Development are set out as follows (WEF, 2005-06):

• Stage 1: Income of less than US $ 2000
• Transition from 1 to 2: Income $ 2000- $ 3000
• Stage 2: Income $ 3000 - $ 9000
• Stage 2 to 3: Income $ 9000 – 17000
• Stage 3: Income more than $ 17000

Economic development is a dynamic process of successive improvement in which economies find increasingly sophisticated ways of producing and competing. In other words, the process of economic development evolves stages. In the most basic stage, called the factor-driven stage, firms compete in price. In the second stage, which we call the efficiency-driven stage, efficient production practices (quality of products) become the main source of competitiveness. Finally in the third stage, which we call innovationdriven stage, successful economies can no longer compete in price or even quality. It is more important for advanced countries than for economies in the early stages of development.

Principal component analysis (PCA) involves a mathematical procedure that transforms a number of (possibly) correlated variables into a (smaller) number of uncorrelated variables called principal components. The first principal component accounts for as much of the variability in the data as possible, and each succeeding component accounts for as much of the remaining variability as possible.

(http://www.fon.hum.uva.nl/praat/manual/Principal_component_analysis.html)

3.6 Global Competitiveness:

As reported in World Economic Forum (WEF), Global competitiveness index (Globcomp) is an improved version of Growth Competitiveness index (Gr-comp), constructed incorporating both macro and micro level data and some elements of governance dimensions. Information on Global competitiveness index is available only for two years. As can be seen in section 2, it has three components: basic requirements, efficiency requirements and innovation.

3.7 Growth Competitiveness:

World Economic Forum provides information on Growth Competitiveness index (Grcomp) pertaining to the period of five years from 2001/02 to 2005/2006. The elements of Growth competitiveness indices are technology, public institution and macroeconomic environment index. Each component of growth competitiveness index has two or more sub-indices. Technology components comprise of three sub-indices: technology subindex (innovation), ICT sub-index and technology transfer sub-index, while public institution index has two sub-components such as contracts and law sub-index and corruption sub-index, built on twenty seven related activities. Macroeconomic environment index consists of three sub-indices: macroeconomic stability index, government waste and country credit rating. Principal component analysis is applied to identify the components in order of significance.

3.8 Country Competitiveness and Sophistication Index:

Recently, Sanjaya Lall and John Weiss (2006) advocate sophistication index to use for country’s competitiveness analysis (page 236) to judge whether a country is gaining or losing competitiveness in goods. An export is more sophisticated the higher the average income of its exporter. A simple comparison of the sophistication index scores with the technology classification suggests a broad link between them. There is no attempt to examine the causal relationship between sophistication index and economic growth. All components of governance and competitiveness are also relevant for export competitiveness. From the governance point of view, export competitiveness may relate particularly with economic governance. Out of six dimensions in governance indicators, two dimensions, Government competitiveness and Regulatory are referred to as economic dimensions of governance indicators. We will bring sophistication index in our analysis.

Appendix for Section 4:

For Section 4.2:

Institutions are defined extensively in the literature. At one end, the notion of institution is to establish the “rules of the game. North defined it as “the formal and informal constraints on political, economic, and social interactions” (North’s, 1990, reprinted in IMF 2003). From this perspective, “good” institutions are viewed as establishing an incentive structure that reduces uncertainty and promotes efficiency – hence contributing to stronger economic performance. Institutions are also defined as the “humanly devised constraints that structure human interactions”. In that context, the institutional hypothesis is about human influences. According to this view, some societies have good institutions that encourage investment in machinery, human capital, and better technologies, and consequently, achieve economic prosperity (Acemoglu et al, 2003). The interaction between institutions and the opportunity to industrialize during the nineteenth century played a central role in the long run development. A country’s institution may be deeply rooted in its history and culture. Acemoglu et al (2001) argued that current institutions are basically manifestations of past institutions, which prevailed over time. But current institutions significantly affect development.

For Section 4.3:

Technology refers to the body of know-how about the means and methods of producing goods and services. Modern technology is increasingly science-based, but also includes methods of organization as well as physical technique. The application of new technologies, particularly computers and software applications, has been a major factor driving productivity growth in recent decades.

www.smartstate.qld.gov.au/strategy/strategy05_15/glossary.shtm

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