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POLICY RESEARCH WORKING PAPER 2 195

Aggregating Governance With the right method,


aggregate indicators can
Indicators provide useful estimates of
basic governance concepts
as well as measures of the
Daniel Kaufmann imprecision of these
Aart Kraay aggregate estimates and
Pablo Zoido-Lobatón
their components.

The World Bank


Development Research Group
Macroeconomics and Growth
and
World Bank Institute
Governance, Regulation and Finance
October 1999
P O L I C Y R E S E A R C H W O R K I N G P A P E R 2195

Summary findings
In recent years the growing interest of academics and governance than any single indicator, the standard
policymakers in governance has been reflected in the errors associated with estimates of governance are still
proliferation of cross-country indices measuring large relative to the units in which governance is
various aspects of governance. measured. In light of these margins of error, it is
Kaufmann, Kraay, and Zoido-Lobatón explain how a misleading to offer very precise rankings of countries
simple variant of an unobserved components model according to their level of governance: small differences
can be used to combine the information from these in country rankings are unlikely to be statistically—let
different sources into aggregate governance indicators. alone practically—significant. Nevertheless, these
The main advantage of this method is that it allows aggregate governance indicators are useful because they
quantification of the precision of both individual allow countries to be sorted into broad groupings
sources of governance data and country-specific according to levels of governance, and they can be used
aggregate governance indicators. to study the causes and consequences of governance in
Kaufmann, Kraay, and Zoido-Lobatón illustrate the a much larger sample countries than previously used
methodology by constructing aggregate indicators of (see for example the companion paper by Kaufmann,
bureaucratic quality, rule of law, and graft for a sample Kraay, and Zoido-Lobatón, “Governance Matters,”
of 160 countries. Although these aggregate governance Policy Research Working Paper 2196).
indicators are more informative about the level of

This paper—a joint product of Macroeconomics and Growth, Development Research Group; and Governance, Regulation,
and Finance, World Bank Institute—is part of a larger effort in the Bank to study the causes and consequences of governance
for development. Copies of this paper are available free from the World Bank, 1818 H Street, N.W., Washington, DC 20433.
Please contact Diane Bouvet, Room J3-273, telephone 202-473-5818, fax 202-334-8350, email dbouvet@worldbank.org. This
paper is also available on the Web at http://www.worldbank.org/wbi/governance/working_papers.htm. The authors may be
contacted at dkaufmann@worldbank.org, akraay@worldbank.org, or pzoidolobaton@worldbank.org. October 1999. (39 pages)

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely
those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.

Produced by the Policy Research Dissemination Center


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