We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions “trumps” everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the “wrong” (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.

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Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development

https://www.sscnet.ucla.edu/polisci/faculty/treisman/Papers/causes.pdf

The causes of corruption: a cross-national study

This Handbook aims to provide a guide for constructing and using composite indicators for policy makers, academics, the media and other interested parties. While there are several types of composite indicators, this Handbook is concerned with those which compare and rank country performance in areas such as industrial competitiveness, sustainable development, globalisation and innovation. The Handbook aims to contribute to a better understanding of the complexity of composite indicators and to an improvement of the techniques currently used to build them. In particular, it contains a set of technical guidelines that can help constructors of composite indicators to improve the quality of their outputs. It has been prepared jointly by the OECD (the Statistics Directorate and the Directorate for Science, Technology and Industry) and the Applied Statistics and Econometrics Unit of the Joint Research Centre of the European Commission in Ispra, Italy. Primary authors from the JRC are Michela Nardo, Michaela Saisana, Andrea Saltelli and Stefano Tarantola. Primary authors from the OECD are Anders Hoffmann and Enrico Giovannini. Editorial assistance was provided by Candice Stevens, Gunseli Baygan and Karsten Olsen. The research is partly funded by the European Commission, Research Directorate, under the project KEI (Knowledge Economy Indicators), Contract FP6 No. 502529. In the OECD context, the work has benefitted from a grant from the Danish government. The views expressed are those of the authors and should not be regarded as stating an official position of either the European Commission or the OECD.

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Handbook on Constructing Composite Indicators: Methodology and User Guide

Using various methods, the size of the shadow economy in 76 developing, transition, and OECD countries is estimated. Average size varies from 12 percent of GDP for OECD countries, to 23 percent for transition countries and 39 percent for developing countries. Increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy, especially in OECD countries. According to some findings, corruption has a positive impact on the size of the shadow economy, and a growing shadow economy has a negative effect on official GDP growth.

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Shadow Economies: Size, Causes, and Consequences

The authors present the latest update of their aggregate governance indicators, together with new analysis of several issues related to the use of these measures. The governance indicators measure the following six dimensions of governance: (1) voice and accountability; (2) political instability and violence; (3) government effectiveness; (4) regulatory quality; (5) rule of law, and (6) control of corruption. They cover 209 countries and territories for 1996, 1998, 2000, 2002, and 2004. They are based on several hundred individual variables measuring perceptions of governance, drawn from 37 separate data sources constructed by 31 organizations. The authors present estimates of the six dimensions of governance for each period, as well as margins of error capturing the range of likely values for each country. These margins of error are not unique to perceptions-based measures of governance, but are an important feature of all efforts to measure governance, including objective indicators. In fact, the authors give examples of how individual objective measures provide an incomplete picture of even the quite particular dimensions of governance that they are intended to measure. The authors also analyze in detail changes over time in their estimates of governance; provide a framework for assessing the statistical significance of changes in governance; and suggest a simple rule of thumb for identifying statistically significant changes in country governance over time. The ability to identify significant changes in governance over time is much higher for aggregate indicators than for any individual indicator. While the authors find that the quality of governance in a number of countries has changed significantly (in both directions), they also provide evidence suggesting that there are no trends, for better or worse, in global averages of governance. Finally, they interpret the strong observed correlation between income and governance, and argue against recent efforts to apply a discount to governance performance in low-income countries.

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Governance matters IV : governance indicators for 1996-2004

In recent years the growing interest of academics and policymakers in governance has been reflected in the proliferation of cross-country indices measuring various aspects of governance. The authors 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 us that it allows quantification of the precision of both individual sources of governance data and country-specific aggregate governance indicators. The authors illustrate the methodology by constructing aggregate indicators of bureaucratic quality, rule of law, and graft for a sample of 160 countries. Although these aggregate governance indicators are more informative about the level of governance than any single indicator, the standard errors associated with estimates of governance are still large relative to the units in which governance is measured. In light of these margins of error, it is misleading to offer very precise rankings of countries according to their level of governance: small differences in country rankings are unlikely to be statistically - let alone practically - significant. Nevertheless, these aggregate governance indicators are useful because they allow countries to be sorted into broad groupings according to levels of governance, and they can be used to study the causes and consequences of governance in a much larger sample of countries than previously used (see for example the companion paper by the authors,"Governance matters", Policy Research Working Paper no. 2196).

Aggregating governance indicators

Johnson, Kaufmann, and Shleifer (1997) find that the share of the unofficial economy in GDP is determined by the extent of control rights held by politicians and bureaucrats in post-communist economies. Exploring in more detail the role of bribes and using a broader data set from the OECD, Latin America, and transition economies, we find that the unofficial economy accounts for a larger share of GDP when there is more corruption and when the rule of law is weaker. While these findings are consistent with the earlier results for transition economies, in the larger country sample we find it is not necessarily the case that more regulation or higher taxes directly increases the size of the unofficial economy. The problem appears to be not regulation or taxation per se, but whether the state administrative system can operate without corruption. A high level of regulatory discretion helps create the potential for corruption and drive firms into the unofficial economy.

Regulatory Discretion and the Unofficial Economy

The authors construct aggregate governance indicators for six dimensions of governance, covering 175 countries in 2000-01. They apply the methodology developed in Kaufmann, Kraay, and Zoido-Lobaton ("Aggregating Governance Indicators", Policy Research Working Paper 2195, and"Governance Matters", Policy Research Working Paper 2196, October 1999) to newly available data at governance indicators comparable with those constructed for 1997-98. The data is presented I the appendix, and accessible through an interactive Web-interface at http://www.worldbank.org/wbi/governance/govdata2001.htm.

Governance matters II - updated indicators for 2000-01

In this sample of 49 Latin American, OECD, and transition economies, it is the ineffective and discretionary administration of tax and regulatory regimes--not higher tax rates alone--as well as corruption, that increases the size of the unofficial economy. And countries with a larger unofficial economy tend to grow more slowly. Johnson, Kaufmann, and Shleifer (1997) found that, in post-communist economies, the unofficial economy's share of GDP is determined by the extent of control rights held by bureaucrats and politicians. Exploring in detail the role of taxation and bribery, and using data from an expanded data set of 49 Latin American, OECD, and transition economies, Johnson, Kaufmann, and Zoido-Lobaton find that the unofficial economy accounts for a larger share of GDP where there is great bureaucratic inefficiency and discretion, and where firms experience a greater tax and regulatory burden, as well as more bribery and corruption. The unofficial economy is also much larger where there is less state revenue and where the rule of law is weak. They also find that countries with a larger unofficial economy tend to grow more slowly. Thus, this framework suggests an additional channel whereby corruption and ineffective regulatory and tax administration can result in lower growth: the unofficial economy. Wealthy OECD economies and some Eastern European economies find themselves in the "good equilibrium" of relatively low regulatory and tax burden (not necessarily low statutory tax rates), sizable revenue mobilization, good rule of law and control of corruption, and a small unofficial economy. Several countries in Latin America and the former Soviet Union exhibit characteristics consistent with a "bad equilibrium": the discretionary application of heavy regulatory and tax burdens, the weak rule of law, heavy bribery, and an active unofficial economy. In this large country sample (unlike in the earlier framework for transition economies only), the authors find that it is the ineffective and discretionary application of regulatory and tax regimes in many countries--not higher tax rates by itself--that increase the size of the unofficial economy. The tax burden reported by firms appears to be more a function of regulatory and bureaucratic inefficiency and discretion rather than of tax rates alone. This paper - a product of the Governance, Regulation, and Finance Group, World Bank Institute - is part of a larger effort in the institute to improve our understanding of institutional issues and their effects on development and of building a major new database on institutional indicators.

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Pablo Zoido-Lobatón

Papers

Aggregating governance indicators

Regulatory Discretion and the Unofficial Economy

Governance matters II - updated indicators for 2000-01

Corruption, public finances, and the unofficial economy

Governance Matters From Measurement to Action