Governance and growth: measurement and evidence

An emerging consensus among development and growth economists views good governance as a prerequisite to sustained increases in living standards. However measuring the impact of institutions and the quality of governance upon economic performance is complicated by the difficulty in seeing and measuring institutions.

The paper describes the gradual accumulation of indicators (including ICRG and TI indexes) and evidence, focusing on broad cross-country analyses. The indicators have been instrumental in putting governance at the top of donors’ agendas, however, they are less useful in telling governments or donors what they can do to improve the quality of governance:

• they are not specific enough to implicate particular institutional arrangements that donors can do anything about, so donors can only guess which reforms might have the largest payoffs in improving the quality of governance
• the subjectivity of most of these indicators leads many developing country governments to view them with suspicion

The paper argues that there is a need for more institutionally-specific and transparently constructed governance indicators, that move towards:

• greater specificity in measuring performance
• increased transparency and replicability in their construction
• greater attention to measuring governmental processes or institutions and not only performance

It summarises progress in identifying and collecting these “second generation” indicators that may be used to determine what institutions are associated with particular dimensions of public sector performance.