Methodology for Composition of Governance Dimension

As governance is a broad and complicated concept, it is obviously even more difficult to find and agree upon indicators on governance. There is no accepted methodology for quantifying governance indices. Therefore, it could not and should not be standardized or organized around a single deductive logic.

Researchers have used diverse measures to quantify governance dimensions, encompassing political stability, political institutions, quality of institutions and social capital that affect economic performance. The average of six governance indicators of World Bank is used as proxy for institutions in IMF study (2003), while in another study; it is used as quality of governance. Average of the first two dimensions (voice and accountability and political stability) is referred to as political dimension/democratic governance. The economic governance is measured as the average of governance effectiveness and regulatory burden. Rule of law index is used as a proxy for institutional dimensions in some studies, while other studies have used the average of rule of law index and control of corruption for institutions (Chart 1 [ PDF 173.7KB | 25 pages ] ).

As stated earlier, we use the governance indicators constructed by the World Bank with the application of Unobserved Component Model and indicators of competitiveness indices of World Economic Forum to measure our governance dimensions. Both sources provide international comparative indicators. The sub-components of Governance dimensions and Competitiveness are provided in chart 1 of section 2 (see also appendix for section-3). There may appear to be high correlation between the indicators derived from two sources although the survey questions address related but usually different attributes.

Methodology

Principal component analysis (PCA) is utilized for illustrative purposes to identify significant variables though a limited period of data is available. The mathematical technique used in PCA is called eigen analysis. The eigen vector associated with the largest eigen values has the same direction as the first principal component. The eigen vector associated with second largest eigen value determines the direction of second principal component (see appendix for section-3).

The six governance dimensions, Voice and Accountability, Political Instability and Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of corruption are correlated among each other as observed from the correlation matrix (Table 2 [ PDF 173.7KB | 25 pages ]). The Principal Component Analysis (PCA) is applied among six governance dimensions, which finds the principal components as voice and accountability, political stability, government effectiveness and regulatory quality, in order of significance (Table 3 [ PDF 173.7KB | 25 pages ]). But the eigen value for regulatory quality is much less, and hence is not considered as a principal component for the study. When the voice and accountability governance is not considered in the PCA, political stability is the most prominent while the eigen value for regulatory quality marginally improved. The variable voice and accountability is highly correlated with regulatory quality and control of corruption. It is, therefore, worthwhile to make the average of three principal governance dimensions (voice and accountability, political stability, government effectiveness) as political governance. The approach of average provides equal weighting to each index and no excessive weight is given to any single index.

As WEF reports information on sub-components of global competitiveness index as well as of growth competitiveness index, PCA is fitted on subcomponents of both the indices. Principal component analysis in global competitiveness index suggests basic requirements as the first principal component, which contains all institutional subcomponents (Table 4 [ PDF 173.7KB | 25 pages ]). Institutions, heath and primary education, and macro-economy are grouped into basic requirements. For our study, institutional component of basic requirement is of more relevance and important, and hence is selected as a governance dimension for analysis in addition to the political governance.

Applying PCA among sub-components of growth competitiveness, public institutions are found to be the first principal component which has the same direction of higher eigen value associated with eigen vector (Table 5 [ PDF 173.7KB | 25 pages ]). But the eigen value of technology subindex does not have the same direction as of eigen vector even with higher values. The principal components analysis on three sub components of technology index (innovation, ICT sub index and technology transfer subindex), provides the similar result for innovation showing that the eigen vector of innovation sub index does not have the same direction as the eigen value (though the value is higher). This seems to indicate that institutional effort needs to be given to technology transfer (which has high scores 4.10 in 2005/06) but not innovation with low level of scores (1.61 in 2005/06) within technology index. Both ICT sub index and technology transfer index show the same direction of eigen vectors with eigen values but the eigen values for ICT sub-index are much larger than technology transfer sub-index (Table 6 [ PDF 173.7KB | 25 pages ]). When seven sub indices of growth competitiveness indices other than public institutions are used together in the principal Component Analysis, information and communication technology (ICT) and technology transfer indices are also found to have the same direction with the eigen values and these are also second and third principal components following the public institutions index. We choose four significant components for the study based on Principal component analysis applying to the elements of growth competitiveness index and also that the analysis relates to the longer period of five years from 2001/02 to 2005/06 compared to that used for global competitiveness indices.

In short, appearing from the Principal Component Analysis are the followings:

1. Political governance appears as the principal element from governance dimension constructed by averaging three indices: voice and accountability, political stability and government effectiveness. Equal weighing in constructing the composite index means that potential biases or errors do not unduly influence the composite index.
2. Public institutions index emerges as the first principal component in the growth competitiveness index, followed by ICT and Technology transfer sub-index. Within global competitiveness index, basic requirements (which has three sub-components: Institutions, Macro-economy, Infrastructure & Health & Primary Education) are observed to be the first principal component. The institutions sub-component of basic requirements in global competitiveness index includes both private and public institutions while growth competitiveness index reports only on public institutions index as in World Economic Forum. We choose Public Institutions and all institutions for our investigations. The corruption index falls into public institution index as recorded in the global competitiveness report, and it is highly correlated with political governance dimensions.
3. ICT sub-index and technology transfer sub-index appear prominently in the Principal component analysis. We will also analyze technology readiness (pillar 7 in Global competitiveness index), which specifically relates to those factors which facilitate and enable the technological capacity of a country including information and communication technologies (ICT). This includes the general availability of technologies, and the penetration rate of information and communication technologies (ICT), as these tools are seen as critical indicators of the overall technological readiness of a country. Technological readiness (Pillar 7) deals with the stock of technology available in a given economy, regardless of its original source. It is considered one of the main drivers in national competitiveness. Access to ICT is critical, not only for the establishment of an effective and rapid communications system but also for providing an efficient infrastructure for commercial transactions.

Chart 2 [ PDF 173.7KB | 25 pages ] provides the key features of governance dimensions that have emerged for operational purposes. These are: (i) Political Governance, (ii) Institutions: All institutions and public institutions, and (iii) Technology transfer, ICT index and Technological readiness. We will not focus on each of the sub indices of all the three governance dimensions, but will analyze a few of them as much of our focus is on governance. ICT, technology transfer and stock of technology will come up to our discussion as these technology factors facilitate improvement of governance and achieving higher growth. From now, these will be referred to as governance dimensions. The value of political governance varies from -2.5 to +2.5 and it has been rescaled to 0 to 100. The values of other dimensions, institutions, technological readiness, ICT and technological transfer range from 1 to 7.

Some qualifications have to be made in this classification although principal component analysis is applied to identify the variables in order of significance because the concepts political governance, institutions and technological readiness may be inter-related. In particular, governance issues provide a common link to all the categories. But they are distinct notions, and ought not to be regarded as one and the same. It is also a kind of synergy among the components; actions on three fronts are needed to realize the synergy. Better Political Governance affects and leads to stronger institutions and improvements in technological readiness, which will influence the formulation and implementation of policies for promoting macroeconomic stability, private sector development (which determines level and quality of private investment) and human development, resulting in higher economic growth. An important component of the enabling environment for reducing poverty is the macroeconomic sustainability of the growth. Bangladesh was basically able to maintain good macroeconomic management, trade reforms and human development. The area in which Bangladesh is facing a great problem lies in improving governance and fragile institutions. This has caused to a large extent, weak implementation of reforms and worsening of income distribution in the country.

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