Governance Matters: From Measurement to Action

• Author: Daniel Kaufmann, Aart Kraay, and Pablo Zoido-Lobatón
• Position: Senior Manager of the World Bank Institute's Governance, Regulation, and Finance Group/Senior Economist in the Development Research Group of the World Bank's Development Economics Vice Presidency/Economist in the World Bank Institute's Governance, Regulation, and Finance Group

Policymakers generally rely on anecdotal evidence to assess the quality of governance, but this information is often misleading and incomplete. How can governments and civil society best encourage institutional change by developing and applying a systematic approach to measuring governance, its determinants, and its consequences?

Ukraine's living standards steadily declined during the 1990s. Much of this decline has been ascribed to weak governance in the form of ineffective rule of law, inadequate protection of property rights, widespread corruption, and ill-advised policymaking serving special interests. Countries like Ukraine and Russia are far from unique in facing a serious governance challenge (which their newly elected governments may try to address). Practical experience in many countries suggests that weak governance and slow economic development go hand in hand, while improved governance fosters development success. The same is true at the subnational level. In Argentina, corruption in procurement and budget allocation was found to be common in the province of Corrientes. In contrast, in the city of Buenos Aires, a participatory program to enhance transparency in procurement is bringing about major improvements. And in Campo Elias, Venezuela, far-reaching municipal reforms cut corruption in half and improved efficiency .

These examples suggest that while governance failures are widespread and costly, good governance provides significant benefits. They also pose two challenges:

* moving beyond suggestive anecdotes to a systematic approach for measuring governance, its determinants, and its consequences for economic and social development; and

* using data and rigorous analysis to support countries' institutional reforms to curb corruption and improve governance.

Measuring governance

We define governance as the traditions and institutions that determine how authority is exercised in a particular country. This includes (1) the process by which governments are selected, held accountable, monitored, and replaced; (2) the capacity of governments to manage resources efficiently and formulate, implement, and enforce sound policies and regulations; and (3) the respect of citizens and the state for the institutions that govern economic and social interactions among them. A wide variety of cross-country indicators shed light on the various dimensions of governance. In our work, we have identified several hundred such indicators. (See Kaufmann, Kraay, and Zoido-Lobatón, 1999 a and b for details.) Primarily measured in qualitative units, these indicators are produced by a range of organizations (commercial-risk-rating agencies, multilateral organizations, think tanks, and other nongovernmental organizations). They include the perspectives of diverse observers (experts, businesses, and private citizens) and cover a wide range of topics (political stability and the business climate, the efficacy of public service provision, experiences with corruption, and so on).

These qualitative data are relevant for measuring governance. For some aspects of governance-for example, corruption-only qualitative data are generally available, although, as we will see below, new types of surveys are beginning to provide improved quantitative governance indicators. Moreover, stakeholders' perceptions of the quality of governance-as reflected in these qualitative ratings-matter at least as much as objective data (from official statistics) and often more accurately reflect actual outcomes. For instance, property rights are legally guaranteed in virtually all countries. Yet effective enforcement of those rights by the courts varies widely. When enterprises perceive that courts do not enforce these rights, the enterprises will look for other, less efficient ways of enforcing contracts.

Being precise about imprecision

Sifting through this wealth of qualitative...