How to measure governance

There is now a cottage industry trying to measure how well countries are governed, in particular how bad corruption is, or how well the rule of law is imposed. These indicators are important, they can determine where foreign direct investment is taking place, whether development aid is disbursed, or whether policy reform has been successful. Thus, it is critical that governance be well measured.

Charles Oman and Christiane Arndt point out that most measures are based on perceptions, which are notoriously biased and difficult to change in the face of hard facts. But their is also substantial danger in that users tend to misread these indicators. For one, they are not precise and should only be interpreted as giving a rough picture. Even when intervals of error are provided, they are often ignored by users. Second, international comparison is difficult because the sources used to construct the index differ widely from one country to the next. Third, a single index is used for many different purposes, and each of those purposes should weigh differently the components of the index. Finally, there is no theory that tells us how to scale the measured before or during the determination of a governance index. And let us not forget most measures are subjective, as they are based on opinions. It frightens me when such an index is used in a regression, especially without any robustness test.