Concepts on Governance Dimensions and Sources of Data

Concept on Governance

The topic of governance is very broad and of great complexity. It is referred to as “study of good order and workable arrangement,” (Williamson, 2005). In the broadest sense, governance concerns performance of the government including public and private sectors, global and local arrangements, formal structures and informal norms and practices, spontaneous and intentional systems of control. In the simplest sense, governance means the process of decision-making and the process by which decisions are implemented (or not implemented). In the empirical analysis of public policies, governance is considered to encompass all aspects of the exercise of authority in the management of the resource endowment of a state and the manner in which the power is exercised. The quality of governance is determined by the impact of this exercise of power on the quality of life enjoyed by the citizens.

Governance can be used in several contexts such as corporate governance, international governance, national governance and local governance. This study is confined to only national governance. Government is one of the actors in governance. All other actors except the military are grouped together as part of the "civil society" (see appendix for section-2).

Asian Development Bank (1995) identifies four basic elements of good governance (which McCawley calls democratic governance) such as accountability, participation, predictability and transparency. According to McCawley, the most important elements of governance are the following:

1. The processes by which governments are chosen, monitored and changed
2. The systems of interaction between the administration, the legislature, and the judiciary
3. The ability of government to create and to implement public policy
4. The mechanism by which citizens and groups define their interests and interact with institutions of authority and with each other.

Within national governance, McCawley (2004) categorizes governance issues at the macro and micro level. The macro level includes constitution, the overall rule of government itself (size and resources) and relationship between legislature, the judiciary and the military, while micro issues of governance are on government departments, commercial firms, social institutions and civil society affairs (such as the media, think tanks, and non-government organizations). The major contribution of McCawley’s paper (2005) in the governance literature lies in explaining the political process within the framework of structure-conduct-performance paradigm. The political process might be seen as an “industry”. Political leaders as entrepreneurs take risks and lead the parties (firms) in the national political industry. Political process will maintain acceptable and effective balances of power among the administration, the legislature, and the judiciary. Domestic political industries must be efficient and productive to realize outcomes. Political markets could benefit from competitive arrangements, selection of the chief executives of the organizations, and regulatory controls.

Imperfections in political markets will create high distortions and impede good national governance. Low-income voters make up a large share of the electorate in many poor developing countries and democratization might be expected to benefit them. Imperfections in political markets are greater in some countries than in others with respect to diverting resources by politicians to political rents and private transfers. Keefer and Khemani (2005) identify three political market imperfections that undermine the role of elections in guaranteeing accountable and responsive government. The distortions are generated due to information asymmetries, social polarization and non-credibility of political promises. There is some evidence for the role of mass media in spreading and coordinating information among the electorate and thereby improving political accountability.

Dreze and Sen (1996, reprinted in Keefer and Khemani, 2005) have examined the contrasts of outcome in basic health and education between the northern state of Uttar Pradesh and southern state of Kerala in India. The two states have almost identical per capita income and poverty rates, but dramatically different outcomes in health and education. One important part of the answer would seem to lie in the dynamics of political competition rather than in differences in the political institutions themselves. In states like Uttar Pradesh, the Congress party did not confront vigorous competition from other credible and well-organized parties. In Kerala, competition was between two credible parties, the Congress and the Communists. Both parties make promises to serve high quality social services. Among three parties in U.P., BJP appeals to upper class Hindus, Samaj party to backward castes, Samawadi party to marginalized religious groups and castes. The contrast between Kerala and Uttar Pradesh demonstrates that the sheer endurance of democracy is no guarantee that political market imperfections will disappear.

Sources of Data

The data on governance is inherently subjective. It is useful to collect data on governance perceptions, because for example, perceptions may often be more meaningful than objective data, especially when it measures public faith in institutions (Kaufmann et al., 1999).

Several Organizations such as the Economist Intelligence Unit (EIU), the world governance survey (WGS), International Country Risk Guide (ICRG), the Freedom House Index (FHI), World Economic Forum (WEF), World Bank (WB), Transparency International (TI), Polity data Base, and The Wall Street Journal and the Heritage Foundation (WSJ-Heritage 1997) have attempted to quantitatively “measure” the overall “quality” of governance in individual countries. The variables used to measure indicators as a proxy for governance, are not uniform (Chart 1 [ PDF 173.7KB | 25 pages ] and appendix for section-2).

The Economist Intelligence Unit is primarily concerned with indicators related to economic development. The Global Competitiveness Survey of the World Economic Forum presents a competitiveness index incorporating institutional, technology and macro-economy dimensions. International Country Risk Guide deals with the issues of interest to business corporations and potential investors. Scholars and practitioners frequently use the Freedom House Index (FHI) and Polity datasets to measure the level of democracy in a given country, but these deal only with a specific set of civil freedoms and political rights. Transparency International constructed numeric indices of the extent of corruption in the private sector and state. The indices range from a value of zero for a country perceived to be totally corrupt to a value of 10 for a country perceived to be totally clean.

World Bank reports perceptions of governance based on several hundred variables for a large number of countries (Kaufmann et al., 1999, 2005). A total of six dimensions of governance indicators was constructed based on 352 individual variables taken from 37 different sources, produced by 31 different organizations (Kaufmann et. al.). These are now recognized as worldwide governance indicators. The aggregate indicators are oriented such that higher scores correspond to better governance outcomes.

The world governance survey (WGS) constructed indicators of governance based on thirty indicators using a five point response scale: as either very high, high, moderate, low or very low, but their scores are highly correlated with World Bank indicators. The Wall Street Journal and the Heritage Foundation (WSJ-Heritage 1997) compiled indices of the overall economic policy environment pertaining to ten indicators. The index 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-2).

There are some economists such as Paul Krugman, Sanjaya Lall, and John Weiss who differ with World Economic Forum on the concept of competitiveness index. To them, competitiveness means essentially the capability (in a broader concept) of firms, which can compete at the international level. But firms do not act in isolation. So competitiveness lies in the effectiveness with which countries promote the development of technological and managerial capabilities. Market imperfections are common in technology and innovation, the main drivers of national competitiveness. In this context, they do not differ from a national competitiveness index.

We use two sources of information provided by World Bank and World Economic Forum to compose governance indices. World Bank provides six governance dimensions while World Economic Forum reports on Institution and technology dimension along with other indicators in its competitiveness indices.

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