Prosperity-Enhancing Institutions: Towards a Comprehensive Composite Index

Helfer, Helena

Abstract
Institutions that potentially have a positive impact on economic performancerarely exist outside of a system of institutions; rather they are embedded in the institutionalorder of a country. It is thus imperative to investigate the composition of such prosperityenhancinginstitutional orders. This paper proposes a measurement of bundles of institutionsthat channel the positive effect of democratic institutions on economic prosperity. Weconstruct composite sub-indices measuring the political, economic and societal institutionalquality as well as an overall index combining these bundles of institutions. Indexdata is available for 148 countries between 1995 and 2010. We obtain scores summarizingthe level of prosperity-enhancing institutions that the respective countries exhibit withregard to their overall institutional setting and to the three bundles of institutions, and wegrade the countries accordingly. Since the indices allow for inter-temporal comparisons,we can highlight a country's achievements in institutional development, amongst otheraspects of country comparisons, and we show their value as a tool in the analysis ofdeterminants of economic prosperity. The proposed indices are a step towards a moresystematic international comparison of democratic institutional settings.

Keywords
Composite index construction; Democracy; Institutions; Economic prosperity