The State Economic Modernity Index: An Index of State Building, State Size and Scope, and State Economic Power

Abstract

One line of thought in development economics and political science emphasizes the need for state building to achieve economic growth and better outcomes throughout the developing world. Conventionally, this has been conceptualized in terms of “state capacity,” sometimes operationalized via the Worldwide Governance Indicators report. This paper proposes a simple alternative using two of the five components of the Economic Freedom of the World report. This alternative measure, here called the “State Economic Modernity” index (SEM) is a combination of various measures of different states’ willingness and ability to perform its core public goods functions, and the state’s size relative to the economy. It is shown that the SEM index, in combination with the Economic Freedom of the World report, creates intuitive categorizations of economic institutions across countries. The SEM index is shown to relate to various measures of social capital and may be determined by them. Finally, while the SEM index is closely related to economic growth and output as seen in raw correlations, it appears to cause neither upon the inclusion of fixed effects. The paper concludes with some speculation regarding its implications for reform.

Keywords: State Building, State Capacity, Economic Freedom, Economic Institutions, Governance, Social Capital

JEL Classification: O43, H10