Bank develops “governance indicators”

15 September 1999

On 1 July the Bank held an informal Board seminar to discuss “governance indicators”. A background paper for this meeting sets out “what we know about the measurement of governance and its relationship to development outcomes”. For the Bank governance refers broadly to “the role and performance of government in relation to a country’s economic, social and political institutions”. Governance indicators may come from objective or subjective observations, ranging from the frequency of elections and size of government to surveys of citizens or investors about the quality of services. A third source is cross-country assessments based on experts’ ratings of the quality and effectiveness of government institutions. The World Bank has produced indicators on matters such as central bank independence since 1994 and has more recently started a database on “institutions for government decision-making”. This will catalogue data on political-institutional issues such as constitutional checks and balances and electoral processes.

The Bank background paper explains that “the systematic study of the relationship between quantified measures of governance and development outcomes is recent”, and contains an annotated bibliography on the subject. In line with the Bank’s recent studies such as Assessing Aid, the paper argues that it is possible to clearly determine which countries will make best use of World Bank support. Thus

“an important reason for looking at governance indicators is to understand what forces bring good policies and to identify measures that reliably differentiate countries where the institutions of governance may be weak or failing”.

For those interested in the Bank’s tortuous redefinition of its Articles of Agreement which ban decisions based on politics, as well as in the effects of using mathematical economics to examine political questions, there are some fascinating statements. These include:

“The significant empirical effects of improved civil liberties for enhancing the economic rate of return of government and Bank investment projects have also been demonstrated”. “The most recent work at the Bank estimates that an improvement by one standard deviation in governance leads to between a 2.5 fold and a 4-fold increase in per capita income”.

The document recognises that governance indicators may not fully capture complex interrelationships and may be inconsistent, unreliable or biased, but argues that this problem can be solved by aggregating indicators from different sources into average or composite indices. The Bank’s work in this area includes corruption assessments, developing diagnostic toolkits to help understand incentives in specific key public sector institutions, governance analysis for Country Assistance Strategies and Country Performance and Insititutional Assessments. The latter are:

“the Bank’s most systematic effort to evaluate the policy framework of each borrower on 20 dimensions of policies and institutions, including public sector management, policies to promote equity and growth, and macroeconomic management. The results are used to help set IDA lending allocations, and to point out key development constraints and risks.”

A public sector strategy paper will be discussed in the Bank this autumn.

Governance indicators – background note is available from the Bretton Woods Project.