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Social Indicators Research

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17.10.2016

Prosperity-Enhancing Institutions: Towards a Comprehensive Composite Index

verfasst von: Helena Helfer

Erschienen in: Social Indicators Research | Ausgabe 3/2017

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Abstract

Institutions that potentially have a positive impact on economic performance rarely exist outside of a system of institutions; rather they are embedded in the institutional order of a country. It is thus imperative to investigate the composition of such prosperity-enhancing institutional orders. This paper proposes a measurement of bundles of institutions that channel the positive effect of democratic institutions on economic prosperity. We construct composite sub-indices measuring the political, economic and societal institutional quality as well as an overall index combining these bundles of institutions. Index data is available for 148 countries between 1995 and 2010. We obtain scores summarizing the level of prosperity-enhancing institutions that the respective countries exhibit with regard to their overall institutional setting and to the three bundles of institutions, and we grade the countries accordingly. Since the indices allow for inter-temporal comparisons, we can highlight a country’s achievements in institutional development, amongst other aspects of country comparisons, and we show their value as a tool in the analysis of determinants of economic prosperity. The proposed indices are a step towards a more systematic international comparison of democratic institutional settings.

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There is one other study that presents an index of a similar name but of a different purpose, since it is aimed at specifically measuring the incidence of Social Market Economy. In 2012, Van Suntum et al. published an explorative study in partnership with the Bertelsmann Foundation. The authors categorize Walter Eucken’s (1952) classic market economy principles into four index dimensions and derive all their 44 single indicators directly from Eucken’s principles. Van Suntum et al. analyze eight OECD countries from the mid-nineties until 2011. They use different data series, they mix preexisting data with survey research conducted by themselves, they do not aggregate their index-dimensions into one single index-value in the end, but calculate compound index values for their respective dimensions. They find that Sweden is the country that best fits their model of a social market economy. Theirs in an impressive project that yields interesting findings for OECD countries and they propose to expand it to all EU member countries.

For classic definitions of the rule of law, cf. Shklar (1987).

Cf. Andvig and Moene (1990) or Blackburn et al. (2006, 2010) for the “sanders” and cf. Leff (1964) and Huntington (1968) for the “greasers”.

Size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, regulation of credit, labor and business.

See Appendix 1 for a brief description of the data.

See Booysen (2012, 120, 144) for a detailed summary of this particular discussion.

Since literature on missing data imputation is vast, only the method used for the SMEI will be presented in greater detail. For extensive surveys on the ever-developing literature, see for example Little and Schenker (1995), Little (1997) or Little and Rubin (2002). There is no heuristic that will provide the perfect method of imputation that is applicable in all cases. The appropriate method highly depends on the dataset, on the scale of the data, since some methods of imputation specifically require a metric scale, on the number of missings in relation to size of the dataset and on the country as well as on the indicator for which the data is missing (cf. OECD 2008, 62).

See OECD (2008, 83–88) for an overview of normalization methods.

For an overview of issues regarding the sensitivity to the normalization of the indicators in linear aggregation, see work by Herrero for a detailed explanation (cf. Herrero et al. 2010, 9).

The HDI was proposed in 1990 by the UN in order to compare the developmental state of countries, based on Amartya Sen’s (1985) work on functioning and capabilities. Until today, it remains one of the most impactful multidimensional indices (cf. Herrero et al. 2010, 3).

Detailed summary statistics and correlation tables for the SMEI and for the PIQ, EIQ and SIQ indices can be found in Appendix 2.

All corresponding tables of this section can be found in Appendix 4.

Low-income countries have a GNI per capita of $1045 or less, lower-middle income countries have a GNI per capita between $1046 and $4125, upper-middle income countries have a GNI per capita between $4126 and $12,745 and lastly, high-income countries have a GNI per capita of $12,746 and above. See Appendix 3 for the income groupings.

For a more detailed discussion of index construction-specific concerns, see for example Grupp and Mogee (2004) or Booysen (2012).

The equations used in the creation of each of the Heritage indices can be found in the document mentioned in the references.

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Titel: Prosperity-Enhancing Institutions: Towards a Comprehensive Composite Index
verfasst von: Helena Helfer
Publikationsdatum: 17.10.2016
Verlag: Springer Netherlands
Erschienen in: Social Indicators Research / Ausgabe 3/2017
Print ISSN: 0303-8300
Elektronische ISSN: 1573-0921
DOI: https://doi.org/10.1007/s11205-016-1466-3

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