Measuring Governance: The Application of Grey Relational Analysis on World Governance Indicators

Introduction

In recent years, we have witnessed a growing interest of both academics and policy-makers in defining “good governance” and measuring the quality of governance, which especially accounts for developing countries. Since the mid-1990’s, a large number of quantitative governance indicators have been developed for the purpose of decision-making and policy recommendations.

Significant effort has been invested in defining the concept of governance. Broadly speaking, governance could be defined as group decision-making about resolving shared problems. Governance reflects how governments make important decisions, how they relate to the citizens and determine whom to involve in the decision-making process, as well as how the governments render account (Graham et al, 2003). World Bank’s definition of good governance accentuates the manner in which power is exercised in the management of a country’s economic and social resources for development (World Bank, 1992). Kaufman, Kraay, & Mastruzzi (2010), offer a definition between too broad and too narrow explanations, defining governance as the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced, the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them.

There are several reasons for the popularity of governance concept in recent decades and for the growing interest in measuring its quality: the increase of international investment flows to developing and “emerging” economies (in other words, the increase of risk exposure of the investors’ assets); end of the Cold War, followed by a growing interest of developed countries’ governments and aid agencies to promote economic and social development in developing countries; failed policy reform (the so-called “Washington Consensus”), promoted through conditional lending by financial organizations to developing countries; and the recognition of the importance of formal and informal institutions for economic growth and development, as suggested by new institutional economics (Oman & Arndt, 2010).

The most widely used measures of governance are World Governance Indicators (hereafter WGI), which represent composite perceptions-based indicators, published by World Bank Institute¹. The aggregate indicators are based on several hundreds of cross-country indices that measure different aspects of governance. There are six composite indicators covering 215 economies for the period 1996-2013 (Kaufmann, Kraay, & Mastruzzi, 2010):

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  Voice and Accountability: The indicator that captures the extent to which citizens participate in selecting governments, as well as basic citizen rights and freedoms – freedom of association, expression and media;

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  Political Stability and Absence of Violence: Includes measures of likelihood that governments will be violently overthrown;

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  Government Effectiveness: A dimension that reflects the quality of public services as well as government credibility in public policy implementation;

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  Regulatory Quality: Relates to the ability of governments to create and implement sound policies;

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  Rule of Law: Indicates the quality of contract enforcement, property rights and formal institutions in a country; and

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  Control of Corruption: Captures the agents’ perceptions of different forms of corruption and state-capture.