Governance Indicators

Supply of Indicators

The production of governance indicators precedes the recent explosion of interest in governance. Freedom House, created in the United States in the 1940s to promote democracy around the world, has provided ratings of political rights and civil liberties in most countries since the 1970s. The private for-profit International Country Risk Guide was created in 1980, following the fall of the Shah of Iran and the large unforeseen costs it imposed on international investors, to help international investors assess the financial, economic, and political risks in and across countries. The explosive growth of financial flows to “emerging-market” economies in the 1990s and investors' correspondingly greater exposure to risk in those countries since then have driven growth of such commercial political-risk services that both use and produce governance indicators. Equally important were the launch in1995 of Transparency International, which produces the widely recognized annual Corruption Perceptions Index, and the 1996 World Bank decision to radically reverse its policy of ignoring the high cost of corruption for economic development.

Governance indicators are either perceptions-based or facts-based. The former are constructed from data quantifying the subjective perceptions of individuals (mainly on the basic surveys of experts, business managers, or households) and commonly focus on the quality of government bureaucracy, the protection of individuals' political and civil rights, and levels of corruption. A further distinction among perceptions-based indicators is between those based on generic questions (e.g., “experts” are instructed to rate the level of corruption in a country on a scale of 1 to 7) and those calling for perceptions founded on people's concrete experience (e.g., business managers are asked, “In 2006, what do you believe is the total percentage of profits, on average, that a business like yours spends on bribes, favors, meals, parties, et cetera for public officials?”).

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