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The Efficiency and Inefficiency of Democracy in Making Governments Effective:

Cross-National Evidence

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THE EFFICIENCY AND INEFFICIENCY OF DEMOCRACY IN MAKING
GOVERNMENTS EFFECTIVE: CROSS-NATIONAL EVIDENCE

Andrew B. Whitford
Professor
Department of Public Administration and Policy
The University of Georgia
204 Baldwin Hall
Athens, GA 30602-1615
Phone: 706.542.2898
Fax: 706.583.0610
aw@uga.edu

Soo-Young Lee
Assistant Professor
Department of Public Administration
Hankuk University of Foreign Studies
270 Imun-Dong, Dongdaemun-Gu
Seoul, Korea 130-791
Phone: 1.82.010.4125.3121
soo3121@gmail.com
 2

THE EFFICIENCY AND INEFFICIENCY OF DEMOCRACY IN MAKING

GOVERNMENTS EFFECTIVE: CROSS-NATIONAL EVIDENCE

Abstract

Institutional design balances the costs and benefits of dictatorship and disorder. Democracy can

be efficient if it improves the performance of government. Yet, sometimes authoritarian

governments can be efficient if they reduce disorder. We show that democratization has a

nonlinear effect on income-adjusted perceptions of government effectiveness. These findings

present a new opportunity to revisit the study of government performance for researchers

working in public administration, political science, and economics.

 3

INTRODUCTION

A wide variety of recent studies have centered on the performance or effectiveness of

governance in the public and private sectors (e.g., Wolf 1993, 1997; Provan and Milward 1995;

O’Toole and Meier 1999, 2003; Rainey and Steinbauer 1999; Brewer and Selden 2000; Lynn, et

al. 2000; Boyne 2003; Ingraham, et al. 2003; Kim 2004; Chun and Rainey 2005; Moynihan and

Pandey 2005; Pitts 2005; Walker and Boyne 2006; Meier, et al. 2007; Hicklin, et al. 2008; Lee

and Whitford 2009). The search for government performance or effectiveness by scholars and

practitioners in public administration, public management, and public policy intensified with

widely adopted reforms during the last quarter century (Ingraham and Moynihan 2000). Those

reforms centered on improving government effectiveness as a way of enhancing the

accountability of government organizations (Boschken 1994, 308).

Most studies on organizational effectiveness in the public sector have sought to model or

explain organizational performance. They differ both in their locus of analysis (the place where

the assessment of effectiveness happens) and their focus of analysis (the subject of effectiveness

measurement). Most center on the performance of a specific program or an organization.

Examples of the varieties of focus include the individual employee, the subunit of an

organization, a single organization, multiple (networked) organizations, or the entire

government. With regard to locus, only a few studies have addressed the question of the factors

that influence effectiveness at the level of a country’s entire government (Kirlin 2001; Yang and

Holzer 2006), especially using cross-country analysis (Knack and Keefer 1995; Brewer, et al.

2007). One classic is Putnam’s work on the performance of the Italian government (1993), and a

more recent project is the Pew Center on the States’ Government Performance Project, but both

focus on a single country’s government effectiveness (e.g., Knack 2002). Of course, we have
 4

long recognized that comparative study helps public administration achieve scientific status

(Dahl 1947), and in organization theory “the statement that an organization is effective

necessarily implies a comparison with some other organization or set of organizations” (Pfeffer

1977, 133).

The few cross-national studies of government effectiveness have focused on technical

questions such as the impact of meritocratic recruitment, internal promotion, and career stability

on performance in less developed countries (Rauch and Evans 2000), administrative reform in

the Organization for Economic Co-operation and Development (OECD) countries (Brewer

2004), or corruption in Asian countries (Brewer, et al. 2007). One broad account of the

performance question reviewed performance data from the World Bank, the European Central

Bank’s public sector efficiency study, the Global Competitiveness Report, and the World

Competitiveness Yearbook to develop rankings (Van de Walle 2006). Most studies have a

narrow focus, almost always in terms of both causal mechanism and the type of countries

sampled.

We develop a different line of inquiry by modeling government effectiveness at the level

of a country’s entire government effectiveness to identify the impact of democratization. Our

focus is on perceived government effectiveness; we examine data drawn from the World Bank’s

Governance Indicators dataset, which was measured from 1996 to 2008 across 212 countries,

and adjust those data to develop a new measure. Our new measure is an income-adjusted

perception measure that describes the perceived quality of government given a country’s position

in time and its relative income (measured as gross domestic product, adjusted for purchasing

power parity). This new measure accounts for how perceptions of quality vary with a country’s

income position. Of course, we recognize that perceptions depend on the perceiver; in this case,
 5

we argue that the World Bank measure has a specific embedded interpretation of “good

government” that can be described partly in terms of “predictability”.

We examine the impact of democratization on perceptions of the quality of government,

once relative income position has been taken out of the equation. We argue that the impact of

democratization is likely to be nonlinear: that the highest levels of perceived government

effectiveness will be observed in both autocratic and democratic governments, and that countries

that lie between these “poles” have lower levels of perceived government effectiveness. This

nonlinear pattern has been observed by Montinola and Jackman (2002) in the case of corruption,

although our reasoning is slightly different from theirs. Specifically, we argue that the effect of

democratization depends on two mechanisms. Essentially, the tension is between the costs

associated with “dictatorship” and those associated with “disorder” (Djankov, et al. 2003). For a

country seeking to develop, the costs of disorder provide incentives for authoritarian governance;

examples include certain countries in the Former Soviet Union. Yet, once a country establishes

mechanisms for controlling disorder, it pays to release the hold of the tyrant; over time,

democratic societies tend to pursue efficient institutions that make governments work better

(Wittman 1989). As Djankov, et al. (2003, 613) note, “The substantial rise in the world’s

prosperity in the 20th century may be the best evidence of the virtues of democratic politics.”

Together, these results show how two different cost-benefit calculations drive nations

toward the poles of authoritarian and democratic control. Our model below shows that

perceptions of government effectiveness, once the level of economic development has been

controlled for, are higher at the extremes of the democratization experience (at high and low

levels) than they are for those countries in the mid-range of the democratization experience.

Indeed, the estimated impact of moving from the least democratic to the mid-range is almost a
 6

standard deviation of the dependent variable; moving from the mid-range then to the most

democratized countries has the same effect.

Our focus on the possible nonlinear effect of democratization sets this paper apart from

other research on government effectiveness. For example, La Porta, et al. (1999) examined the

impact of political freedom on a variety of measures of the “quality of government”, but their

data on interference with the private sector, public sector efficiency, public good provision, and

size of public sector are largely cross-sectional. Adsera, et al. (2003) examined different

measures of the quality of government along with those for corruption and rule of law from the

Political Risk Services Group. More recent papers include Bäck and Hademius (2008) and

Charron and Lapuente (forthcoming). Neither study accounts for the relationship between

national income and quality of government through the dependent variable itself. Both studies

potentially conflate the impact of OECD status with that of democratization. Our data are more

exhaustive, more specifically perceptions-based, and in some ways more politically salient given

how the World Bank Governance Matters dataset forms the basis for rankings countries receive

in the Millenium Challenge Account process for allocating foreign aid. More importantly, neither

La Porta, et al. (1999) nor Adsera, et al. (2003) addresses an adjusted measure of quality of

government; they also do not assess the nonlinear impact of democratization.

Our paper proceeds as follows. In the next section, we describe our measure of perceived

government effectiveness as a key way of understanding government performance. We then

provide more details on the nonlinear effect of democratization on perceptions of the quality of

government. In the fourth section, we describe our variables and dataset used for this analysis,

followed by our model estimation and results. Finally, we offer a discussion of the analysis of

effectiveness and how this approach pushes the boundaries of the study of governance.
 7

PERCEIVING GOVERNMENT EFFECTIVENESS

Our dependent variable that measures government effectiveness comes from the World

Bank Governance Matters project. Since 1996, the World Bank has built worldwide governance

indicators due to a belief that governance matters. Specifically, there are strong causal

relationships between good governance and development outcomes such as higher per capita

income, low infant mortality, and higher literacy (Kaufmann, et al. 1999). The Governance

Indicators measure six dimensions of governance: voice and accountability, political stability and

absence of violence, government effectiveness, regulatory quality, rule of law, and control of

corruption. Our data for the dependent variable cover 212 countries from 1996 until 2004. They

were updated every two years between 1996 and 2002; they have been updated annually after

2002.

We center on the dimension of government effectiveness. The idea behind the World

Bank government effectiveness indicator is to capture the capacity of the state to implement

sound policies by measuring the quality of public services, the quality of the civil service and the

degree of its independence from political pressures, the quality of policy formulation and

implementation, and the credibility of the government’s commitment to such policies.

We want to be very clear that this indicator measures subjective perceptions regarding

government effectiveness in different countries. These data come from two types of sources

(Kaufmann, et al. 1999). The first type of source is polls (surveys) of experts, which reflect

country ratings produced by commercial risk rating agencies and other organizations. Surveys of

experts capture the perceptions of country analysts at major multilateral development agencies

(e.g., the European Bank for Reconstruction and Development, the African Development Bank,

the Asian Development Bank, and the World Bank), reflecting these individuals’ in-depth
 8

experience working on the countries they assess (Kaufmann, et al. 2007). The second type is

cross-country surveys of residents carried out by international organizations and other non-

governmental organizations. Surveys of residents are surveys of individuals or domestic firms

(such as the World Bank’s business environment surveys and the World Economic Forum’s

Global Competitiveness Report) with first-hand knowledge of the governance situation in the

country.

The goal of subjective measurement is to account for problems like the difficulty of

obtaining objective data for many issues. Likewise, perceptions may often be as important as

objective differences in institutions across countries. Perhaps most importantly, research shows

that subjective perceptions have significant explanatory power for future economic outcomes

(e.g., through consumer and investor expectations) (see Kaufmann, et al. 1999). We do recognize

that these perceptions of government effectiveness are not a random draw from the total pool of

perceptions that exist in and about a given country. Instead it is likely that the perceptions reflect

what Schattschneider said in reference to the debate over pluralist and elite theories of

governance: “The flaw in the pluralist heaven is that the heavenly chorus sings with a strong

upper-class accent” (1960, 35). We argue that the items described below largely relate to the

kinds of conceptualizations that observers like the World Bank and other actors involved in

direct foreign investment will find most salient (such as predictability and stability).

Our data rely on 47 individual items taken from 18 different sources that measure

different dimensions of government effectiveness. The effectiveness indicator is a latent variable.

It combines many different individual data sources. The aggregation procedure first rescales the

individual indicators from each underlying variable’s source in order to make them comparable

across data sources (Kaufmann, et al. 2007). It then constructs a weighted average of each of
 9

these rescaled data sources to arrive at an aggregate indicator of government effectiveness. The

weights assigned to each data source are in turn based on the estimates of the precision of each

source that are produced by the unobserved components model. Essentially, this is an “item

response theory” model of survey responses. Each measure on the latent scale of “effectiveness”

that underlies these different individual items is associated with an estimate, standard error of the

estimate, and number of sources used to construct the estimate. The number of sources used to

construct an estimate for any country in a given year varies; thus, accordingly estimates of the

country’s position on the latent variable can be noisy.

Table 1 shows the wide variety of descriptions of the individual items, the range of

countries covered, and the years for which specific sources are available. This table shows how

difficult it can be to measure effectiveness at this level of analysis. The range of considerations

shows that in practical terms, different sources and survey houses conceptualize effectiveness

differently. Some measures are only available for the most developed countries; others are

widely available for an array of countries (although perhaps at the cost of offering fewer

measurements per country). We use data for our dependent variable until 2004 due to missing

covariate information.

[Insert Table 1 about here.]

As noted, we have reasons to examine a perceptions-based measure of the quality of

government. The problem is the biases inherent in perceptions-based measures. Using an

aggregate measure based on the estimation of a latent variable of perceived effectiveness helps

overcome those biases in the selection of specific survey instruments carried out in certain

geographic regions. For our indicator, positive values of the index measure reflect positive

assessments of an individual government’s effectiveness by respondents across the multiple

 10

indicators and surveys. The variable is centered on zero, has a standard deviation of roughly one,

and ranges between -2.5 and +2.5.

More importantly, measures such the quality of government inherently depend on the

level of economic development of a country. Part of the World Bank’s argument for addressing

governance failures is that poor governance contributes to lower economic growth and adverse

economic circumstances. This may be so, but we are similarly concerned that countries with

unstable economies or lower tax bases are unable to staff and maintain quality government

infrastructures, processes, and practices – and that those deficiencies become reasons for

evaluators to grade some governments as having lower effectiveness. This possibility is overt in

studies like La Porta, et al. (1999); admittedly, this can be a form of endogeneity. Indeed, the

measure of government effectiveness is correlated with the natural log of per capita gross

domestic product (GDP), adjusted for purchasing power parity (PPP), at 0.81.1 Figure 1 shows

the raw scatter plot of perceived government effectiveness and the natural log of per capita GDP.

A positive relationship is clearly seen, although substantial variation remains in the perceived

government effectiveness measure. The upshot is clear: not accounting for the impact of national

income on the quality of government is problematic. Including it as an exogenous variable is also

problematic, if only because democratization may cause both the quality of government and the

level of national income (as we discuss in more detail below). For this reason we turn to a new

income-adjusted measure of perceived government effectiveness.

1
The GDP data were obtained from the Penn World Table. See http://pwt.econ.upenn.edu/. It is

normal to adjust GDP data with a purchasing power parity (PPP) calculation to account for the

relative cost of living and inflation rates of countries.

 11

[Insert Figure 1 about here.]

Our measure of income-adjusted perceived government effectiveness is obtained by

rescaling the World Bank perceptions measure for quality of government by the measure of ln

per capita GDP that accounts for PPP. At a minimum, this allows us to compare countries’

perceived quality of government while taking into account their income position. Figure 2 shows

the distribution of this new measure as calculated for up to 212 countries through 2004. At the

aggregate level, there appears to be remarkable stability in these measurements. The boxplots

show that the 2006 data have a tighter distribution, although there are a few high outside values

in this time period, too. The medians move slightly upward in 1998 and then downward until

reaching a low in 2003; there is an upward move in 2004. A simple regression of the

effectiveness indicator on a year spline shows no significant intercept shifts over time.

[Insert Figure 2 about here.]

We recognize that not all countries are the same. For instance, as other papers have

shown, the OECD countries are a particular group, to the extent that there may be two types of

countries with high income (those that are members of the OECD and those that are not). Indeed,

OECD status may produce additional benefits in terms of “good governance” strategies in terms

of higher perceptions of government effectiveness, if only because they are probably the most

studied countries in the history of policy studies. Figure 3 shows that for OECD countries, the

highest median perceived effectiveness scores are located in northern Europe; recent admissions

to the OECD are in the bottom half, although the U.S. and Japan also rank in the bottom half.

The mean of the OECD countries is 1.249; the mean for non-OECD countries is -0.371 (t =

32.72, Satterthwaite’s d.f. = 397.44). At a minimum, studies that center on the OECD countries

only concentrate on the extreme top percentile of the dependent variable.

 12

[Insert Figure 3 about here.]

Figure 4 shows the other side of the data (all non-OECD countries). Recall that all but

nine of the OECD countries have median measurements above 1.00. The vast majority of non-

OECD countries have measurements below 1.00, and only Singapore has very high scores. These

measurements are already adjusted for per capita GDP, so other explanations must describe this

variance.

[Insert Figure 4 about here.]

DEMOCRATIZATION AS A PIECE IN THE INSTITUTIONAL PUZZLE

The issue in making government effective is one of designing institutions. Specifically,

“the fundamental problem of institutional design is the conflict between the twin goals of

controlling disorder and dictatorship” (Djankov, et al. 2003, 597). The “new comparative

economics” has centered on the problem of institutional design as a route to solving the problems

of different levels of economic and different paths for countries. As they put the question: “is

democracy the best system for economic reform or is dictatorship efficient when radical change

is required?” (Djankov, et al. 597). The tension is between dictatorship and disorder. Controlling

disorder puts a premium on dictatorship; controlling the state puts a premium on

democratization. The case for democracy as a mechanism is fairly common, so we first turn to

the case for authoritarianism as a mechanism for making governments effective.

The simple reason autocrats might choose to make government effective is that they

prefer unity of command and control over the apparatus of the state. That simple reason masks

the deeper question: what do they do with that control? The answer is surprisingly complex; it

involves the autocrat’s motivation for “protecting” the citizens of the state, and that protection

incentive itself depends on the autocrat’s time horizon. McGuire and Olson (1996) model the
 13

autocrat as a “roving bandit” and show that under fairly general conditions an autocrat with a

“lasting hold on his domain” will prefer public goods for society over redistribution to himself.

The key dividing line between good and bad autocrats is their individual time horizons since they

must expect a lasting connection between themselves and the society they oversee. The unique

situations of individual dictators are likely to be more complicated (e.g., Wintrobe 1998; Bueno

de Mesquita, et al, 2003; Shen 2007), although in general the willingness of a dictator to supply

predictability and stability (at least for himself) is much more supported than often assumed in

the political science literature. We view this as an attractor in the relationship between effective

government and democratization: that at low levels of democratization, the authoritarian

government (the autocrat) is likely to provide stable and effective governance. This suggests a

negative relationship between democratization and perceived government effectiveness.

In contrast, the literature on democratization suggests a positive relationship between

democracy and government effectiveness. This is in large part due to the efforts of Barro (1997,

1999), Kurzman, et al. (2002), and Persson and Tabellini (1994), among many others, to

document the mechanisms relating to the institutions underpinning democracy. Studies noted

above such as La Porta, et al. (1999) and Adsera, et al. (2003) show direct effects of

democratization on different measures of “good governance”. Essentially, the key mechanism is

considered “political accountability”, which flows from a principal-agent conceptualization of

the relationship between politicians and citizens. The public control of politicians reduces the

likelihood that they will pursue their own political agenda or enrich themselves in office. The

mechanism is fairly standard in political science theory, although when applied to the problem of

explaining economic growth the possibility of reverse causation is also relevant (the

“Lipset/Aristotle hypothesis”) (Barro 1999).

 14

Interestingly, recent papers like Acemoglu, et al. (2008) argue specifically that the link

between democracy and growth is tenuous, unless reconsidered as the link between growth and

long-run institutional developments that may be related to democratization. They argue that

studies that demonstrate a strong cross-country correlation between income and democracy are

flawed because they do not control for factors that affect both variables. Their instrumental-

variables estimates reveal no causal effect of income on democracy, and the association between

income and democracy is not robust to the inclusion of country fixed effects.

These two approaches combine to give contradictory predictions. The literature on

autocracy suggests it can produce stability and predictability in government. The literature on

democracy suggests it can reduce the bad incentives autocrats face. The simplest combination is

to return to the tension between dictatorship and disorder. We argue that as one slides up the

democratization axis from authoritarianism, one also moves down the effectiveness frontier; this

happens because increasing disorder reduces the effectiveness of government. As one moves

down the democratization axis from democracy, one also moves down the effectiveness frontier;

this happens because of the benefits democracy brings in terms of improved accountability. As

one moves away from either of these poles – from either democracy or authoritarianism – the

transition brings greater disorder and lower perceived government effectiveness.

Alternative Explanations for Government Effectiveness

We also account for a range of other possible causes for the perceptions of government

effectiveness that are the focus of this study. The locus of our measurement is at the national

level, so our other possible explanations must also map onto mechanisms that operate at the

national level. For example, one possible cause would be geographic location, which is a

convenient way to group countries. Geographic location does not provide a compelling
 15

explanation for the differences, though, and it does not delineate a mechanism that turns an

attribute “input” into an effectiveness “output”. Instead, we center our investigation on broad

categories of causes that are drawn from the literatures on comparative political economy and

development. These categories are admittedly coarse and insufficient for describing the variety

of ways that governments attain effectiveness and obtain positive affect on the part of outside

evaluators. They are also largely structural attributes that are difficult to change in the short-run

if designers are seeking ways to make governments more effective (as the World Bank clearly

is). The advantage of this research strategy is that we can identify the variance across countries

in this index that is due to these types of characteristics, which helps us understand how much

other mechanisms help explain that variation.

The first explanation we assess is based on the idea that the legal origins of a country

support the mechanisms of governance that underlie perceptions of effectiveness. The classic

distinction here is between English origins and those based on other systems. English origins

indicate a compendium of attributes about the relationship between citizen and the state, such as

judicial versus legislative precedent and rights to private property. The literature identifies the

impact these aspects of a legal system have on institutional performance (La Porta et al. 1997,

2000; Acemoglu 2000). We recognize, too, that some countries with certain origins have a

legacy of administrative systems (e.g., French prefectures or Weberian administrative systems).

This is particularly relevant given the Acemoglu, et al. (2008) paper reviewed above.

We next move to structural factors that flow from the constitutional design literature,

namely the effects of presidential versus parliamentary systems, the role of federalism, and

having a proportional representation-based electoral system. First, in separation-of-powers

systems, the president’s “decree power” or the implementability of “law made by the executive
 16

and not subject to congressional review” (Shugart and Carey 1992, 140) may reduce the

perception that government is effective. Presidential systems seem to increase the costs of

decision-making over parliamentary systems given the existence of redundant players (Haggard,

et al. 2001). We argue that parliamentary and weak presidential systems have higher measures of

government effectiveness than do strong presidential systems.

Federal systems may increase representation (increasing perceptions of effectiveness),

but may also reduce accountability (reducing perceptions of effectiveness). Local elections may

provide voice to ignored populations, but monopolization of power at the local level may also

decrease the degree of accountability. There is empirical evidence, however, that federal systems

are generally more corrupt than unitary systems (Treisman 2000; Gerring and Thacker 2004). As

the political pie is divided among more geographic entities, opportunities to generate political

rents increase, thus we can see reductions in perceptions of effectiveness. We recognize that

there are different kinds of federal systems (weak and strong), with weaker systems having

greater roles for the national government than strong systems.

Single member plurality (SMP) electoral systems make it more difficult to make policy

decisions than do systems based on proportional representation (PR) (e.g., Cox and McCubbins

2005). The many political parties that compete within PR systems must be accommodated in

policy formulation; a change in the governing coalition makes policy unstable if deals are

renegotiated. PR systems are thought to be “feeble”. In contrast, SMP systems organize political

competition between individual members of rival parties at the level of a geographic jurisdiction.

We examine whether PR systems have lower perceived effectiveness. At the same time, though,

PR systems are more “representative” in that they do represent minority interests and deliver

power to more than two parties (due to Duverger’s Law).

 17

We also address a set of proposals about aspects of the government in power. Our first

test is whether perceived effectiveness depends on the presence or absence of extra-constitutional

electoral fraud in the last election that affected the outcome. Our variable identifies whether vote

fraud or candidate intimidation was serious enough to affect the outcome of elections. We test

whether governments led by military officers are perceived to be less effective. Our variable

indicates whether the state’s chief executive is a military officer. Interestingly, we note that in

some cases military status of leaders is not related to poor governance practices. For example,

although discoveries of corruption during the Pinochet years have surfaced recently, the extent to

which Chilean officials participated in corrupt practices is generally thought to be low relative to

other military governments in Latin America (Barros 2002).

Large, complex countries are often more difficult to govern. We assess the impact of size

by including a measure of the land area of each country (rescaled by natural log). There is a long

history of studying the impact of land area on administration and efficiency (e.g., Fesler 1949),

although these studies have not been in vogue in recent years.

Finally, for the reasons discussed above, we also account for the effect of OECD member

status.

DATA, MODEL ESTIMATION, AND RESULTS

We first describe the measurement strategies we followed for our independent variables.

We then describe our estimation strategy, and the results of our analyses.

Our measure of democratization comes from Gurr, et al. (2003). The Polity variable is

assigned to each country based on the level of democracy versus autocracy within its political

system. Scores range from -10 (most autocratic) to 10 (most democratic); we rescale this to

range from 0 to 20, and include both the measure and its square.
 18

Our data on legal origins come from La Porta, et al. (1997). Countries with English

origins (mostly former English colonies) appear to have scores in the middle range, and indeed

the distribution for those countries is the most variable. A t-test seems to show that countries

with English origins have relatively higher income-adjusted government effectiveness (t = 2.869,

Satterthwaite’s d.f. = 919).

Our data on the type of political system come from Beck, et al. (2001). We measure three

types: a direct-elected (strong) presidential system, an assembly-elected (weak) presidential

system, and a parliamentary system. The data show that parliamentary systems exhibit higher

perceived government effectiveness than either presidential or weak (assembly-appointed)

presidential systems. A simple regression of the index on the system categories (with presidential

systems omitted) appears to show that governments led by assembly-appointed presidents have

lower perceived effectiveness than do strong presidential systems.

We divide federalism into three categories: those in which both the local executive and

local legislature are directly elected (a strong federalist state), those in which one is directly

elected (a weak federalist state), and those in which neither local executive nor local legislature

is directly elected. The data on federalism is from Beck, et al. (2001). A simple regression of the

index on the types (with unitary systems omitted) suggests that strong federal systems are

perceived to be more effective than mixed or unitary systems.

We also indicate whether the electoral system is proportional representation (PR); these

data are from Beck, et al. (2001). A t-test of the hypothesis shows that PR systems are perceived

more effective (t = 6.374, Satterthwaite’s d.f. = 777).

Our data on the presence or absence of extra-constitutional electoral fraud in the last

election that affected the outcome is from Beck, et al. (2001). The record is a “1” for countries
 19

where opposition parties are officially and constitutionally prohibited or when opposition is

officially legal but suppressed in any way; all others are scored as “0”. States can only remove a

“1” by holding a fair election if the elected government has been toppled. The calculation of this

score occurs independently of local or international complaints regarding electoral malfeasance.

The t-test shows that systems with fraud have lower scores on the perceived effectiveness index

(t = 12.240, Satterthwaite’s d.f. = 818).

The data on military involvement are from Beck, et al. (2001). It codes whether certain

sources (Europa, World Handbook) include a rank in the chief executive’s title. Chief executives

are listed as officers for the duration of their term if they had not formally retired prior to the

assumption of office. If chief executives were formally retired military officers upon taking

office, then this variable is scored as “0”. The data indicate that military governments were

perceived to be less effective (t = 9.468, Satterthwaite’s d.f. = 900).

Of course, these effects are unconditional, and we understand that attributes of

governments and countries are not randomly distributed. At a minimum, legal origins will not

vary randomly with geography. Table 2 provides the descriptive statistics for the dependent

variable and the array of independent variables that we address in this study. Missing data on

these dimensions (especially our measure of federalism) make our sample sizes for the statistical

analysis smaller than the samples for the dependent variable alone.

[Insert Table 2 about here.]

We now turn to our model to assess the impact of democratization on perceptions of

government effectiveness across a variety of countries. We model the causal relationship by

using a version of generalized linear models, specifically generalized estimating equations (GEE)
 20

(Zeger and Liang 1986; Zeger, et al. 1988; Zorn 2001). GEE is appropriate for panel data.2 The

main advantages of the GEE approach are the availability of flexible error correlation structures,

robust standard errors, and alternative distributional assumptions. This procedure is appropriate

for both cross-sectionally or time-series dominant data. More importantly, this procedure yields

parameter estimates that are uncontaminated by the effects of heteroskedastic and autocorrelated

errors. We discuss this estimation approach in more detail in the Appendix.

Table 3 shows the results of a GEE analysis using the effectiveness index as the

dependent variable and including the variables described. The estimate for the autocorrelation

parameter (ρ) is 0.92, which suggests that government effectiveness changes only very slowly.

Recognize, though, that our estimates are uncontaminated by possible autocorrelation. The GEE

model also accounts for the unobservable heterogeneity Acemoglu, et al. (2008) refer to in the

debate about democratization and growth. We find only three basic effects, although the model

fit is sufficient to reject the null hypothesis that we can constrain all coefficients equal to zero.

However, these three effects expressly address the hypotheses described above.

[Insert Table 3 about here.]

First, and most important for this paper, the model reveals a nonlinear effect for

democratization. The linear term is negative and the quadratic term is positive, which suggests a

U-shaped relationship between democratization and income-adjusted perceptions of government

2
Models estimated with pooled cross-sectional time-series frequently involve violations of OLS

assumptions of homoskedasticity and uncorrelated error terms (Kmenta, 1986; Greene, 1993).

While OLS estimates are unbiased in the presence of autocorrelation, these estimates are not

efficient, and the variability of OLS coefficients contaminates tests of statistical significance.
 21

effectiveness. Figure 5 shows the estimated impact of democratization for the range of data with

the predictions for adjusted government effectiveness overlaid with the quadratic relationship.

Essentially, the effect of democratization first declines when it moves from its minimum to mid-

range values, then rises again after it passes through its mid-range on the way to its maximum.

The shift downward is close to a full standard deviation in the dependent variable, and the shift

upward is nearly as large as democratization reaches its maximum values. The estimation

strategy removes concerns that the movement in the relationship is due to reaction of the income-

adjusted dependent variable’s denominator to the democratization variable, and the Acemoglu, et

al. (2008) paper indicates that that reaction is unlikely.

In sum, the impact of democratization is a mixture of two mechanisms. The first reflects

the tension between disorder and dictatorship, and as disorder increases, the level of perceived

government effectiveness falls. The second mechanism reflects the ability of democracy to

reduce the power of autocrats, and for higher levels of democratization, the level of perceived

government effectiveness rises. Note that the effect of the first mechanism appears stronger than

that for the second, given that the second half of the U-shaped curve is flatter than the first half.3

[Insert Figure 5 about here.]

3
The results presented here are robust to alternative specifications. We also estimated the model

year-by-year for all years included in the panel analysis. The results hold with shape of the

relationship, coefficient magnitude, and statistical significance intact. The only small difference

is that coefficients in the 1996 model are different from zero only at the 0.10 level (one-tailed

test) (but the model is small); in all other cases, statistical significance is about the same as

reported in the panel model here. Full details are available from the authors.
 22

Second, the cloud of data tracks the curve closely – except for a cluster of predictions in

the upper right-hand quadrant. These observations are the OECD countries, and as Table 3

suggests, OECD countries have scores 1.346 points higher (on average) than are others. This is

almost two standard deviations higher than that for the average country, which is remarkable

given that the dependent variable controls directly for each country’s per capita GDP. OECD

status has real impact on income-adjusted perceived government effectiveness. This impact

probably has two sources, one due to an availability bias when respondents are asked to grade

these countries, and another due to changes in governance mechanisms brought about due to

OECD membership. In any case, it is important to recognize that papers like those reviewed

above that examine the causation of government performance only in the case of OECD

countries run the risk of drawing cases from a biased sample since OECD countries are well-

regarded in ways that are structurally different from other non-OECD countries.

Finally, we find evidence that strong presidential systems have lower income-adjusted

perceived government effectiveness measures. This is not surprising, given the theoretical

expectations found in the literature on comparative political institutions. Presidential systems are

unable to garner the same credibility of action that parliamentary systems garner. Yet, it is

remarkable that the impact is seen in the case of strong and not weak presidential systems. This

suggests that these are structurally different institutional choices that warrant additional study

and assessment.

Where does this leave the study of government effectiveness if over 80 percent of the

variance in this subjective measure of effectiveness is associated with the country’s placement in

the world income distribution? The finding at the beginning of this paper noted that inferences

about government effectiveness drawn from developed nations do not provide clear information
 23

about whether those innovations are transplantable to lesser-developed nations (e.g., Djankov, et

al. 2003). The model here moves beyond this problem to show how much of an impact there is

on perceived effectiveness as one moves across different combinations of political institutions

after one has adjusted the effectiveness measure to control for each country’s income.

The relevant question is whether we can identify countries that across the board do better

(or worse) than they should given the results shown from the model reported in Table 3. Figure 5

shows the plots of the distribution of the predictions for countries. The OECD countries are

surely different, and as we argued above, papers that focus solely on OECD countries run the

risk of making judgments that cannot be transplanted to other, non-OECD countries. So, too, are

inferences drawn from Figure 5. Figure 6 plots the data from Figure 5 without including the

OECD countries. In this case, the impact of democratization on income-adjusted perceived

government effectiveness is placed in clear relief by removing the focal point in Figure 5’s upper

right-hand quadrant. Now we see the true shape of the relationship and the mixing of the two

mechanisms.

[Insert Figure 6 about here.]

DISCUSSION

The purpose of our paper is to examine the impact of democratization on government

effectiveness. Democracy can be an efficient solution in the search for institutions that support

the kind of economic growth the World Bank focused on when it started the Governance Matters

project. Yet, there are strong theoretical reasons to believe that democracy can be inefficient –

that it is not a useful solution to the “dictator/disorder” dilemma some countries must navigate.

To that end, we focus on government effectiveness to investigate the variation in

government effectiveness across not only countries but also time, and test the role of specific
 24

factors in explaining the variation in government effectiveness. This study uses data from the

World Bank – data that are used by decision makers around the world to form inferences about

the performance of other governments – that are drawn from thousands of respondents polled by

multiple survey houses about a number of key attributes of government effectiveness. We first

show that the use of these data fill a significant gap in our understanding of effectiveness in a

comparative perspective. Based on a number of data vignettes, we then show that a number of

standard explanations for government effectiveness are unable to characterize much of what we

observe in these data.

We recognize that much of the variance is explained by the relative position of countries

in the worldwide income distribution, with wealthier countries experiencing greater perceptions

of effectiveness and those in the lower parts of the distribution being perceived as less effective.

We argue that not accounting for the impact of national income on the quality of government is

problematic. Including national income as an exogenous variable is also problematic, in part

because democratization can cause both the quality of government and the level of national

income (as we discuss in more detail below). For this reason we turn to a new income-adjusted

measure of perceived government effectiveness.

Yet, we also show that once this relationship is accounted for, we can identify the

nonlinear effect of democratization on these perceptions. We show with data that two

mechanisms operate: that both democracy and autocracy support the judgments about “effective

government” we see in the data. These are judgments that World Bank has shown great interest

in collecting. Perhaps the most compelling inference is that the comparative study of

effectiveness reveals the limitations in what an already limited literature can say about

governments, their effectiveness, and the role of the public sector around the globe.
 25

APPENDIX

Estimation Method Our data analysis strategy is to model the causal relationships by using a

version of generalized linear models, specifically generalized estimating equations (GEE) (Liang

and Zeger 1986; Zeger and Liang 1986). GEE is appropriate for situations such as this, when we

have created a panel data set covering the countries over a series of years. The primary

advantages of the GEE approach are the availability of flexible error correlation structures,

robust standard errors, and alternative distributional assumptions. This procedure is appropriate

for the case of cross-sectionally or time-series dominant data sets. Most importantly, this

procedure yields parameter estimates that are uncontaminated by the effects of heteroskedastic

and autocorrelated errors. Since we have repeated measures on the units of analysis, underlying

(immeasurable or unmeasured) panel-specific effects can complicate the estimation of the

common coefficients. Heteroskedasticity is also likely because each panel’s variance may differ

and there may be variation of scale among the units. The model here includes the calculation of

the robust estimate of the variance to address this and also relaxes the independence of

observations assumption for common units of analysis. Specifically, because GEE is a

population-averaged estimator it is similar to a random-effects approach, but population-

averaged estimators specify a marginal distribution, so estimates are an average of the cluster-

specific estimates. We also calculate Huber-White standard errors to address the population-

averaged estimate’s robustness.

The dependent variable may shift slowly in time if adjoining observations may be

serially-correlated. Specifically, in GEE estimation, ni is the number of observations for a group,

R is the within-group working correlation matrix (a square max{ni} × max{ni} matrix) for

modeling the within-group correlation; Rt,s denotes the t,s element. For the GEE equivalent
 26

(population-averaged) of a random effects structure, Rt,s = 1 if t = s; otherwise, Rt,s = ρ. For an

AR(1) structure, Rt,s = 1 if t = s; otherwise, Rt,s = ρ|t-s|. A third option is that each model assumes

that the error correlation structure is “unstructured”, which simultaneously accounts for possible

“stickiness” in the dependent variable and immeasurable effects by making no specific

assumption about the form of the error correlation structure. The only constraint is that the

matrix’s diagonal elements are 1: Rt,s = 1 if t = s; otherwise, Rt,s = ρts (where ρts=ρst). In the

model here, the GEE specification includes a Gaussian distribution for the dependent variable

and an identity link function (the canonical link for the Gaussian distribution).
 27

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 32

Table 1: Sources and Measurements of Perceived Government Effectiveness Indicator

Sources Items or Concepts Measured Data availability by year
(Country 96 98 00 02 03 04
coverage)
African Management of public debt √ √ √ √
Development Bank Policies to improve efficiency of public sector √ √ √ √
Country Policy and Efficiency of Public Expenditures (Revenue √ √ √ √
Institutional Mobilization) √ √ √ √
Assessments (52) Budget Management

Afrobarometer (18) What proportion of the country's problems do √ √ √

you think the government can solve?
Based on your experiences, how easy or √ √ √
difficult is it to obtain household services (like
electricity or telephone)? √ √ √
Based on your experiences, how easy or
difficult is it to obtain an identity document
(like birth certificate, passport)?
Government handling of health services
Government handling of education

Asian Development Competence of Civil Service √ √ √ √

Bank Country Budget Management √ √ √ √
Policy and Efficiency of Public Expenditures (Revenue √ √ √ √
Institutional Mobilization) √ √ √ √
Assessments Management of public debt
(25)

Bertelsmann Consensus Building √

Transformation Governance Capability √
Index (120) Effective Use of Resources √

Business How problematic are telecommunications for √ √ √

Environment & the growth of your business
Enterprise How problematic is electricity for the growth √ √ √
Performance of your business. √ √ √
Survey (27) How problematic is transportation for the
growth of your business.

Business Operation Risk Index: Bureaucratic delays √ √ √ √ √ √

Environment Risk
Intelligence (50)

Economist Quality of bureaucracy / Institutional √ √ √ √ √ √

Intelligence Unit effectiveness √ √ √ √ √ √
 33

(154) Excessive bureaucracy / red tape

Gallup World Poll Satisfaction with public transportation system √

(130) Satisfaction with roads and highways √
Satisfaction with education system √

Global E- Global E-governance Index √ √ √

Government Index
(196)

Global Insight Bureaucracy: An assessment of the quality of

Business Risk and the country’s bureaucracy. The better the √ √ √ √ √
Conditions (202) bureaucracy the quicker decisions are made
and the more easily foreign investors can go
about their business.
Policy consistency and forward planning: √ √ √ √ √
How confident businesses can be of the
continuity of economic policy stance -
whether a change of government will entail
major policy disruption, and whether the
current government has pursued a coherent
strategy. This factor also looks at the extent to
which policy-making is far-sighted, or
conversely aimed at short-term economic
advantage.

Global Insight Government Instability: An increase in √ √ √ √ √ √

Global Risk government personnel turnover rate at senior
Service (142) levels that reduces the GDP growth rate by 2%
during any 12-month period. √ √ √ √ √ √
Government Ineffectiveness: A decline in
government personnel quality at any level that
reduces the GDP growth rate by 1% during √ √ √ √ √ √
any 12-month period.
Institutional Failure: A deterioration of
government capacity to cope with national
problems as a result of institutional rigidity
that reduces the GDP growth rate by 1%
during any 12-month period.

IFAD Rural Sector Allocation & management of public resources √

Performance for rural
Assessments (100) development

Institute for Government economic policies do not adapt √ √ √ √ √

Management quickly to changes in the economy
 34

Development The public service is not independent from √ √ √ √ √

World political interference √ √ √ √ √
Competitiveness Government decisions are not effectively √ √ √ √ √ √
Yearbook (53) implemented √ √ √ √ √
Bureaucracy hinders business activity
The distribution infrastructure of goods and √ √
services is generally inefficient √
Political System is not adapted to today’s
economic challenges
Policy direction is not consistent

Latinobarometro Trust in Government √ √

(18)
Merchant Quality of Bureaucracy √ √ √
International Group
Gray Area
Dynamics (156)

Political Risk Bureaucratic Quality. Measures institutional

Services strength and quality of the civil service, assess
International how much strength and expertise bureaucrats √ √ √ √ √ √
Country Risk have and how able they are to manage
Guide (140) political alternations without drastic
interruptions in government services, or policy
changes. Good performers have somewhat
autonomous bureaucracies, free from political
pressures, and an established mechanism for
recruitment and training.

World Bank Management of external debt √ √ √ √ √ √

Country Policy and Management of development programs √ √ √ √ √
Institutional Quality public Administration √ √ √ √
Assessments Efficiency of Revenue Mobilization / Public √ √ √ √ √ √
(136) expenditures √ √ √ √ √ √
Budget Management

World Economic Competence of public sector personnel √ √ √ √ √ √

Forum Global Quality of general infrastructure √ √ √ √ √ √
Competitiveness Quality of public schools √ √ √ √ √ √
Survey Time spent by senior management dealing √ √ √ √ √ √
(125) with government officials
Public Service vulnerability to political √ √
pressure √ √ √
Wasteful government expenditure
 35

Table 2: Descriptive Statistics

Variable N Mean Std. Dev.

Adjusted Perceived Government Effectiveness 479 0.176 0.995
Polity 479 15.649 5.320
Polity – quadratic 479 273.148 135.635
English Origins 479 0.273 0.446
Land Area 479 11.499 1.245
Strong Presidential System 479 0.541 0.499
Weak Presidential System 479 0.063 0.243
Strong Federal System 479 0.336 0.473
Weak Federal System 479 0.303 0.459
Proportional Representation 479 0.639 0.481
Military Government 479 0.113 0.317
Fraud in Last National Election 479 0.144 0.352
OECD member 479 0.300 0.459
 36

Table 3: GEE Population-Averaged Model Results

Variable Estimate SE
Polity -0.116 0.031 ***
Polity – quadratic 0.005 0.001 ***
English Origins 0.203 0.141
Land Area -0.010 0.047
Strong Presidential System -0.314 0.105 **
Weak Presidential System -0.168 0.176
Strong Federal System 0.102 0.152
Weak Federal System 0.157 0.122
Proportional Representation 0.062 0.106
Military Government 0.026 0.071
Fraud in Last National Election -0.030 0.067
OECD member 1.346 0.162 ***
Constant 0.333 0.583
Observations 479
Groups 89
Link function Identity
Family Gaussian
Correlation matrix AR(1)
Wald chi2(12) 214.59 ***
Scale parameter 0.3388

* indicates significance at the 0.05 level (two-tailed test)

** indicates significance at the 0.01 level (two-tailed test)
*** indicates significance at the 0.001 level (two-tailed test)
 37

Figure 1: Perceived Government Effectiveness and Per Capita GDP

 38

Figure 2: Income-adjusted Perceived Government Effectiveness over Time

 39

Figure 3: Income-adjusted Perceived Government Effectiveness, OECD

 40

Figure 4: Income-adjusted Perceived Government Effectiveness, Non-OECD

 41

Figure 5: Estimated Impact of Democratization

 42

Figure 6: Estimated Impact of Democratization, non-OECD Countries

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