Measuring Governance in Institutions: Cross-country Comparisons

There are two dimensions to measuring any governance system (Kaufmann, Kraay, and Mastruzzi 2007): regulatory governance and regulatory substance.

• Regulatory governance is measured using rules-based or de jure indicators. These indicators look at whether the requisite legislations or regulatory entities for facilitating investments in infrastructure are in place (the how of governance/rules in the book).
• Regulatory substance is measured using outcome -based or de facto indicators. These indicators look at whether de jure rules are enforced in practice as intended by law (the what of governance/rules on the ground).

As noted by Kaufmann, Kraay, and Mastruzzi (2008), a rules-based indicator of corruption might measure the extent to which countries have legislation prohibiting corruption, or simply reflect whether an anticorruption agency exists. An outcome -based measure, on the other hand, could assess whether the laws are enforced, or whether the anticorruption agency is undermined by political influence.

Following Kaufmann, Kraay, and Mastruzzi (2007), I considered both de jure and de facto indicators of governance. The governance index (GI) for each country was constructed by taking the mean of six governance indicators: (i) voice and accountability; (ii) political stability and absence of violence/terrorism; (iii) government effectiveness; (iv) regulatory quality; (v) rule of law; and (vi) control of corruption.¹⁵

Although good governance measures are perception -based indicators, I have used them in this study since they are the only comparable figures available for a very large number of countries, including most of the Asian countries. No other source of information on governance and institutional quality covers the Asian region in such a comprehensive manner.

I calculated the GI for 174 countries for the period 1996 to 2007. Table 1a [ PDF 16.5KB | 1 page ] and Table 1b [ PDF 16.5KB | 1 page ] present a global ranking of the ten best and worst performing countries based on the GI. Table 2 [ PDF 16.5KB | 1 page ] presents the same for the East Asia Summit (EAS) countries¹⁶. A correlation matrix for good governance indicators is presented in Table 3 [ PDF 13.2KB | 1 page ].

A number of results are worth highlighting. First, with the exception of New Zealand, the best performers in the GI in 2007 were from Europe; in contrast, most of the bottom 10 countries were from Africa. At the same time, the correlations suggest that there has been very little change in the ranking of countries in the top and bottom 10 positions. This suggests a high degree of stickiness in the relative rankings of the countries in terms of the GI.

Second, smaller countries seem to have made bigger strides in improving governance than bigger countries; Iceland's performance has been most impressive, with its global rank improving from 21 in 1996 to 2 in 2007.¹⁷ In contrast, Somalia has consistently ranked last in the global league table.¹⁸

Third, the performance of EAS countries in the GI has been mixed. While some countries such as Japan, Republic of Korea, India, Hong Kong, China, Viet Nam and Cambodia have improved their global ranking, many EAS countries have actually experienced a deterioration in their rankings between 1996 and 2007. Wide variations likewise exist: while New Zealand garnered a spot in the top 10, Myanmar appeared in the bottom 10 countries in 2007. In relative terms, governance in Asian countries such as the Philippines, Cambodia, Lao PDR, the People's Republic of China (PRC), Viet Nam, and Indonesia has remained unsatisfactory.

Fourth, given that the GI components are perception-based indicators, it is not surprising that all six indicators are closely associated with the log of GDP per capita. The partial correlations fall within the range of 0.66 to 0.89, indicating a very close linkage with per capita income (Table 3). Most of the indicators are likewise closely related to one another, with partial correlations consistently at or above 0.65. Per capita income and aggregate governance are also highly correlated (Figure 2 [ PDF 35.2KB | 1 page ]). The scatter diagrams drawn separately for 1996 and 2007 in Figure 2 do not only indicate a positive association between governance and per capita income, but also reveal a relative change in levels between 1996 and 2007.¹⁹

Quite clearly, the ordinal measures adopted in this paper evince the lack of significant change in the relative rankings of countries in terms of governance between 1996 and 2007. Meanwhile, the correlations suggest that countries with better governance also tend to have higher per capita income.²⁰

Do countries with higher per capita income and better governance also have higher levels of regional infrastructure? To answer this question, I look at the relationship between infrastructure and governance, using the same set of countries.

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