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- Measuring governance and economic development

In an earlier article ('Difficult to measure', The Telegraph, July 19, 2005), I talked about problems of measuring or quantifying governance. Let me now turn to the notion of economic development. It is now recognized that economic development is a more broad-based notion than that of growth. Other indicators of human development and human deprivation have therefore been developed. The standard source for making cross-country comparisons of human development is the Human Development Report of the United Nations development programme.

The argument for publishing something like the HDR is obvious. Conventionally, economists have measured development through indicators like per capita income or even the percentage of population below a designated poverty line. But the percentage of population below a poverty line, known as the poverty ratio or head-count ratio, is also based on income or expenditure.

Income ought to be an input into the human development process. Instead, we should capture tangible improvements in indicators like health or education attainments. Having accepted the argument, problems arise. Data must be available and if cross-country comparisons are to be made, the cross-country data collection must be comparable. That's difficult, even for something as simple as income. Every country has reasonably satisfactory collection systems for aggregate national income through national income statistics. That can be converted into per capita income by dividing by population.

However, that figure will be in national currencies. To use it for cross-country comparisons, there has to be conversion into a common numeraire like the US dollar. Should one use official exchange rates for this conversion' That will be misleading because goods, and certainly services, are often cheaper in developing countries. Therefore, one uses purchasing power parity exchange rates. However, to obtain figures on poverty ratios, one needs data on personal income or expenditure distributions. That's not available through national account statistics and is only available through surveys. To complicate matters further, some countries have surveys of income, others of expenditure. Nor are surveys held every year, and every country suffers from the problem of a mismatch between aggregate consumption expenditure as obtained through surveys and aggregate consumption expenditure as obtained through national accounts, a point that Surjit Bhalla talks about dramatically. Such survey-related data problems also crop up for health and education indicators. In addition, distributions matter. Averages are useful aggregate indicators. But because they are aggregated, they also hide more than they reveal.

Once one has decided on variables and obtained data on the variables, there is the question of constructing an index. This involves weighing the variables before aggregating them, and subjectivity is involved in almost any selection of weights. It would have been better to leave data on the variables as they are, but people love indices. HDR has five such indices ' HDI (human development index), HPI-1 (human poverty index for developing countries), HPI-2 (human poverty index for selected OECD countries), GDI (gender-related development index) and GEM (gender empowerment measure). Of these, HPI-2 is not relevant for developing countries like India.

All of these indicators are attempts at capturing economic development, as opposed to economic growth alone, and some of them can also be accepted as governance indicators. The Millennium Development Goals, adopted as targets to be attained by developing countries by 2015, are also an example of economic development goals. There are eight such goals. 1. Eradicate extreme poverty and hunger; 2. achieve universal primary education; 3. promote gender equality and empower women; 4. reduce child mortality; 5. improve maternal health; 6. combat HIV/AIDS, malaria and other diseases; 7. ensure environmental sustainability; and, 8. develop a global partnership for development. Stated thus, these sound like vague statements. However, it is targets under these goals that make the goals operationally meaningful and enable one to quantify and measure progress towards the MDGs.

There are 18 such targets. Let us also note that broader notions of economic development and human development are also used. In a broad sense, human development is about freedom. In an influential book by Amartya Sen, titled Development as Freedom, five instrumental freedoms are mentioned ' economic facilities, political freedoms, social opportunities, transparency guarantees and protective security. In the subsequent and related rights-based literature, the point is made that development is not only about improvements in outcomes, but also about processes. However, most standard measures of human development concern economic indicators, sometimes spilling over into social-cum-political ones. That is the province of governance also.

In the last article, I talked about problems with governance surveys. Nonetheless, there are several such governance surveys. A listing of such major governance surveys is the following: 1. Afrobarometer Surveys, covering national public attitudes on democracy, markets and civil society in Africa; 2. Freedom House's Annual Survey of Freedom, focussing on political freedom, that is, political rights and civil rights; 3. Transparency International's Bribe Payers Index; 4. Transparency International's Corruption Perceptions Index; 5. European Bank for Reconstruction and Development and World Bank's Business Environment and Enterprise Performance Survey, attempting to gauge the investment climate and competitive environment that firms operate in; 6. The Cingranelli-Richards Human Rights Database, published by the National Science Foundation and the World Bank; 7. Centre for Global Development's Commitment to Development Index, with an emphasis on donor policies; 8. East Asia Barometer, covering politics, reform, democracy and citizen action in East Asia; 9. International Institute for Democracy and Electoral Assistance's Electoral Quotas for Women Database, focusing on quotas and actual seats obtained by women in public elections; 10. the Election Process Information Collection database produced by IDEA and UNDP; 11. European Commission's Eurobarometer, with an emphasis on attitudes towards European integration, EU institutions and policies; 12. International Labour Organization's GAPS in Workers' Rights. 13. One World Trust's Global Accountability Report; 14. University of Strathclyde's Global Barometer Survey, with an emphasis on attitudes towards democracy; 15. The World Bank Institute's Governance Matters set of indicators, with governance measured under six aggregate heads or clusters ' voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and corruption; 16. World Economic Forum's Growth Competitiveness Index, based on three components of economic growth ' a technology index, a public institutions index and a macroeconomic environment index; 17. Danish Centre for Human Right's Human Rights Indicators; 18. Heritage Foundation and Wall Street Journal's Index of Economic Freedom, based on ten broad factors of economic freedom ' trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal market activity; 19. Kurtzman Group's Opacity Index, attempting to measure costs to countries through reduced foreign direct investments; 20) University of Pennsylvania's Political Constraint Index; 21. Purdue University's Political Terror Scale; 22. Freedom House's Press Freedom Survey; 23. Centre for Public Integrity's Public Integrity Index; 24. University of California (San Diego's) Weberian Comparative State Data Project, to capture the impact of bureaucratic structures on economic performance; 25. United Nations University's World Governance Assessment; 26. World Press Freedom Rating, produced by Reporters Without Borders; and, 27. University of Michigan's World Values Survey.

This is by no means a comprehensive list. But these surveys and indicators suggest that pinning down and quantifying governance is by no means an easy task. And it is also understandable, given the focus of different surveys on different aspects of governance, that a country might score well in one survey and not on another. As the listing illustrates, some surveys concentrate on political, social and civil freedoms, others on a narrower dimension of economic freedom. The correlation between economic development and democracy is often debated and the Human Development Report, 2002 explored this in great detail.

Cross-country econometric estimations fail to establish a clear link. While there are countries that have performed well in the absence of democratic rights, there are also countries that have no democratic rights, but have registered appalling economic growth rates. I will conclude this discussion in the next article.

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