Study their behaviors. Observe their territorial boundaries. Leave their habitat as you found it. Report any signs of intelligence.

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Saturday, December 01, 2007

Institutional Foundations of Total Planetary Wealth

Ronald Bailey reported in Reason a couple months back on an important 2005 study by the World Bank: Where Is The Wealth Of Nations?: Measuring Capital for the 21st Century. The study aspires to be nothing less than a "millennium capital assessment" -- a "comprehensive snapshot of wealth for 120 countries at the turn of the millennium", giving "monetary estimates of the range of assets—produced, natural and intangible—upon which development depends". The study echoes the idea of Hernando De Soto's Mystery of Capital, that the wealth of a nation derives largely from culturally-dependent institutions for protecting property rights. The lesson is an ambivalent one, since while it confirms the prescription that we libertarians offer, it suggests that following the prescription is harder than it might look. The study concludes that on Earth at the turn of the millennium, "natural capital accounts for 5 percent of total wealth, produced capital for 18 percent, and intangible capital 77 percent." (I'll overlook the egregious mis-use of the word 'capital' instead of 'land' to describe natural resources.)

Any libertarian concerned with the institutional design of government will want to dig into the details of the what the study says are the institutions in which that 77 percent of planetary wealth is bound up. For that, we have to follow this reference, from which I'll just give the relevant excerpt as I haven't yet digested it:

We construct measures of six dimensions of governance:
  1. Voice and Accountability – measuring political, civil and human rights
  2. Political Instability and Violence – measuring the likelihood of violent threats to, or changes in, government, including terrorism
  3. Government Effectiveness – measuring the competence of the bureaucracy and the quality of public service delivery
  4. Regulatory Burden – measuring the incidence of market-unfriendly policies
  5. Rule of Law – measuring the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence
  6. Control of Corruption – measuring the exercise of public power for private gain, including both petty and grand corruption and state capture

We construct six aggregate governance indicators, motivated by a broad definition of governance as the traditions and institutions by which authority in a country is exercised. This includes (1) the process by which governments are selected, monitored and replaced, (2) the capacity of the government to effectively formulate and implement sound policies, and (3) the respect of citizens and the state for the institutions that govern economic and social interactions among them. This classification of indicators into clusters corresponding to this definition of governance is not intended to be definitive. Rather, it simply reflects our views of what constitutes a consistent and useful organization of the data that is concordant with prevailing notions of governance.

The first two governance clusters are intended to capture the first part of our definition of governance: the process by which those in authority are selected and replaced. We refer to the first of these as “Voice and Accountability”, and include in it a number of indicators measuring various aspects of the political process, civil liberties and political rights. These indicators measure the extent to which citizens of a country are able to participate in the selection of governments. We also include in this category indicators measuring the independence of the media, which serves an important role in holding monitoring those in authority and holding them accountable for their actions.

The second governance cluster is labeled “Political Stability and Absence of Violence”. In this index we combine several indicators which measure perceptions of the likelihood that the government in power will be destabilized or overthrown by possibly unconstitutional and/or violent means, including domestic violence and terrorism. This index captures the idea that the quality of governance in a country is compromised by the likelihood of wrenching changes in government, which not only has a direct effect on the continuity of policies, but also at a deeper level undermines the ability of all citizens to peacefully select and replace those in power.

The next two clusters summarize various indicators of the ability of the government to formulate and implement sound policies. In “Government Effectiveness” we combine responses on the quality of public service provision, the quality of the bureaucracy, the competence of civil servants, the independence of the civil service from political pressures, and the credibility of the government’s commitment to policies. The main focus of this index is on “inputs” required for the government to be able to produce and implement good policies and deliver public goods.

The second cluster, which we refer to as “Regulatory Quality”, is more focused on the policies themselves. It includes measures of the incidence of market-unfriendly policies such as price controls or inadequate bank supervision, as well as perceptions of the burdens imposed by excessive regulation in areas such as foreign trade and business development.

The last two clusters summarize in broad terms the respect of citizens and the state for the institutions which govern their interactions. In “Rule of Law” we include several indicators which measure the extent to which agents have confidence in and abide by the rules of society. These include perceptions of the incidence of crime, the effectiveness and predictability of the judiciary, and the enforceability of contracts. Together, these indicators measure the success of a society in developing an environment in which fair and predictable rules form the basis for economic and social interactions, and importantly, the extent to which property rights are protected.

The final cluster, which we refer to as Control of Corruption, measures perceptions of corruption, conventionally defined as the exercise of public power for private gain. Despite this straightforward focus, the particular aspect of corruption measured by the various sources differs somewhat, ranging from the frequency of “additional payments to get things done,” to the effects of corruption on the business environment, to measuring “grand corruption” in the political arena or in the tendency of elite forms to engage in “state capture”. The presence of corruption is often a manifestation of a lack of respect of both the corrupter (typically a private citizen or firm) and the corrupted (typically a public official or politician) for the rules which govern their interactions, and hence represents a failure of governance according to our definition.

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