Data and Methodology

3.1 Measuring Governance

In this paper, I use a comprehensive set of disaggregated indicators to measure governance. I identify those components of governance and institutions that matter most for the successful development of regional infrastructure. I construct a composite governance index (GI) based on the six governance indicators taken from the Worldwide Governance Indicators (WGI) database⁴ of the World Bank Institute (WBI). Following the definition provided in the WGI (Kaufmann, Kraay, and Mastruzzi 2008: 7):

Governance consists of the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them.

The GI is averaged using the following governance indicators: (i) voice and accountability; (ii) political stability and absence of violence/terrorism; (iii) government effectiveness; (iv) regula tory quality; (v) rule of law; and (vi) control of corruption. The GI represents the economic and political governance environment in 174 countries for the period 1996 to 2007. Appendix 1 [ PDF 13.4KB | 1 page ] provides a definition of the GI components, and explains the WBI's methodology for deriving them.

3.2 Measuring Regional Infrastructure

Following the definition adopted in ADB/ADBI's “Infrastructure for a Seamless Asia” study (ADB/ADBI, 2009), regional infrastructure in this paper is defined as: (i) infrastructure facilities that involve physical infrastructure, and/or coordinated policies and procedures spanning two or more neighboring countries; (ii) national infrastructure projects that have a significant cross-border impact, in that their planning and implementation involve cooperation or coordination with one or more neighboring governments; and (iii) infrastructure facilities that aim to stimulate significant amounts of regional trade, or are designed to connect to the network of a neighboring or third country.

In this paper, regional infrastructure is represented by the Physical Infrastructure Index (PII), a composite index based on six physical infrastructure indicators representing regional and international infrastructure stocks of (i) roadways; (ii) railways; (iii) telecommunications; (iv) ports; (v) airports; and (vi) electricity. The PII covers the period 1991 to 2006, for 124 countries where regional, national, and subnational authorities have a direct role either in the provision or regulation of these infrastructure facilities.⁵ These indicators individually and/or jointly represent a region's physical infrastructure stock.

Infrastructure quality and stock represent the relative income -generating capacity of each individual country. By including the infrastructure facilities enumerated in (i) to (v) in the PII, regional infrastructure components are also relatively well captured. The PII was obtained using Principal Component Analysis (PCA).⁶ Appendix 2 [ PDF 15.2KB | 1 page ] presents the weights derived from PCA and the indexing methodology. To check the relative robustness of PII, I also used the infrastructure index of the World Economic Forum (WEF), constructed using a perception survey (qualitative data) on 131 countries for the period 2001 to 2008 (WEF 2009).

Finally, I measured the empirical relationship between governance and infrastructure using both cross-section and pooled data. Allowing for the complex relationship between regional infrastructure and governance in institutions, I used both the Generalized Method of Moments (GMM) and Instrumental Variable (IV) regressions to account for endogeneity of the variables. The model and its specifications are discussed in Section 7.

Governance indicators were derived from the Worldwide Governance Indicators (WGI) database, published by the World Bank Institute (WBI 2008). For the infrastructure indicators, I used multiple sources such as various issues of the World Competitiveness Report (WCR), published by the World Economic Forum (WEF), and various issues of World Development Indicators (WDI), published by the World Bank (World Bank 2008). The infrastructure indicators have been supplemented by the author's own cross-country infrastructure database.⁷

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