Aggregating Governance Indicators

Abstract:     
In recent years, the growing interest of academics and policymakers in governance has been reflected in the proliferation cross-country indices measuring various aspects of governance. In this paper we explain how a simple variant of an unobserved components model can be used to combine the information from these different sources into aggregate governance indicators. The main advantage of this method is that it allows us to quantify the precision of the both individual sources of governance data as well as the aggregate governance indicators. We will illustrate the methodology by constructing aggregate indicators of bureaucratic quality, rule of law, and graft, for a large sample of 160 countries. Although these aggregate governance indicators are more informative about the level of governance than any individual indicator, the standard errors associated with estimates of governance are still large relative to the units in which governance is measured.

JEL Classifications: C1, C3, C42, C43, D8, HO, H4, KO, K2, K4

Working Paper Series