Prosperity-Enhancing Institutions: Towards a Comprehensive Composite Index

Institutions that potentially have a positive impact on economic performance rarely exist outside of a system of institutions; rather they are embedded in the institutional order of a country. It is thus imperative to investigate the composition of such prosperity-enhancing institutional orders. This paper proposes a measurement of bundles of institutions that channel the positive effect of democratic institutions on economic prosperity. We construct composite sub-indices measuring the political, economic and societal institutional quality as well as an overall index combining these bundles of institutions. Index data is available for 148 countries between 1995 and 2010. We obtain scores summarizing the level of prosperity-enhancing institutions that the respective countries exhibit with regard to their overall institutional setting and to the three bundles of institutions, and we grade the countries accordingly. Since the indices allow for inter-temporal comparisons, we can highlight a country’s achievements in institutional development, amongst other aspects of country comparisons, and we show their value as a tool in the analysis of determinants of economic prosperity. The proposed indices are a step towards a more systematic international comparison of democratic institutional settings.