Daniel Kaufmann and Aart Kraay, Natural Resource Governance Institute.
The concept of governance is not a new one. Early discussions go back to at least 400 BCE, to the Arthashastra, a treatise on governance attributed to Kautilya, thought to be the chief minister to the king of India. Kautilya presents key pillars of the “art of governance,” emphasizing justice, ethics, and anti-autocratic tendencies. He identifies the duty of the king to protect the wealth of the state and its subjects and to enhance, maintain, and safeguard this wealth as well as the interests of the kingdom’s subjects.
Despite the long provenance of the concept, no strong consensus has formed around a single definition of governance or institutional quality. For this reason, throughout this article the terms governance, institutions, and institutional quality are used interchangeably, if somewhat imprecisely. Researchers and organizations have produced a wide array of definitions. Some definitions are so broad that they cover almost anything (such as the definition “rules, enforcement mechanisms, and organizations” offered in the World Bank’s World Development Report 2002: Building Institutions for Markets). Others, like the definition suggested by North (2000), are not only broad but risk making the links from good governance to development almost tautological: “How do we account for poverty in the midst of plenty? . . . We must create incentives for people to invest in more efficient technology, increase their skills, and organize efficient markets …. Such incentives are embodied in institutions.”
Some of the governance indicators surveyed capture a wide range of development outcomes. While it is difficult to draw a line between governance and the ultimate development outcomes of interest, it is useful at both the definitional and measurement stages to emphasize concepts of governance that are at least somewhat removed from development outcomes themselves. An early and narrower definition of public sector governance proposed by the World Bank is that “governance is the manner in which power is exercised in the management of a country’s economic and social resources for development” (World Bank 1992, p. 1). This definition remains almost unchanged in the Bank’s 2007 governance and anticorruption strategy, with governance defined as “the manner in which public officials and institutions acquire and exercise the authority to shape public policy and provide public goods and services” (World Bank 2007, p. 1)
Kaufmann, Kraay, and Zoido-Lobato´n (1999a, p. 1) define governance as “the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them.”
Although the number of definitions of governance is large, there is some consensus. Most definitions agree on the importance of a capable state operating under the rule of law. Interestingly, comparing the last three definitions cited above, the one substantive difference has to do with the explicit degree of emphasis on the role of democratic accountability of governments to their citizens. Even these narrower definitions remain sufficiently broad that there is scope for a wide diversity of empirical measures of various dimensions of good governance.
The gravity of the issues dealt with in these definitions of governance suggests that measurement is important. In recent years there has been debate over whether such broad notions of governance can be usefully measured. Many indicators can shed light on various dimensions of governance. However, given the breadth of the concepts, and in many cases their inherent unobservability, no single indicator or combination of indicators can provide a completely reliable measure of any of these dimensions of governance. Rather, it is useful to think of the various specific indicators discussed below as all providing imperfect signals of fundamentally unobservable concepts of governance. This interpretation emphasizes the importance of taking into account as explicitly as possible the inevitable resulting measurement error in all indicators of governance when analyzing and interpreting any such measure.