State Capability Matters

written by Lant Pritchett

The Social Progress Index is a new attempt to gauge human well-being across countries that does not rely on standard measures like GDP per capita but rather builds and index of Social Progress from the ground up.  The Social Progress Index is an overall measure and then is divided into three measures:  Basic Human Needs, Foundations of Well-being, and Opportunity. 

The Building State Capability program focuses on new approaches to build the capability of governments and its organizations to carry out its functions—from making and implementing a budget to regulating the environment to maintaining law and order to educating children.

A set of natural questions to ask are:

• Do countries with more government capability have higher levels of social progress?
• Does the positive association of government capability and the various measures persist after also controlling for a countries GDP per capita and the extent of democracy?
• How big is this connection?

The answers are:

• Yes.
• Yes.
• Very big.

Table 1 reports a simple OLS multi-variate regression of the Social Progress Index and its three main components on (natural log) GDP per capita, one measure of state capability, the World Governance Indicator measure of Government Effectiveness, and the Polity IV measure of autocracy to democracy.  All of these are rescaled to 0 (the lowest country) to 100 (the highest country) so that the coefficients across the indicators can be compared.  In this scaling the regression coefficients say that a 1 unit change in say, WGI Government Effectiveness, is associated with a .39 unit change in the Social Progress Index or a .53 point change in the Opportunity index.

Table 1:  State capability matters for well-being
Main indices of Social Progress Index and its three components (all rescaled to 0 to 100)		ln(GDPPC) (rescaled)	World Governance Indicators Gov’t Effectiveness (rescaled)	Polity (rescaled)	R2
Social Progress Index	Coefficients	0.50	0.39	0.13	0.92
	t-stats	12.26	7.96	5.41
Basic Human Needs	Coefficients	0.69	0.26	0.00	0.82
	t-stats	11.06	3.48	0.05
Foundations of Wellbeing	Coefficients	0.56	0.38	0.18	0.86
	t-stats	8.46	5.81	5.90
Opportunity	Coefficients	0.29	0.53	0.25	0.87
	t-stats	4.68	8.91	8.67

The two questions are answered in Table 1 as these regressions say that, for a country of the same GDP per capita and with the same rating on democracy, an improvement in state capability is associated with large improvements in all four indicators of well-being (And these estimates are precise so that we can confidently reject that any of them are zero).

These affects are big, which can be illustrated in two ways.

• First, there is a massive literature on the connection between GDP per capita (which measures average productivity of a country and hence is a crude indicator of the material basis available) and various indicators of well-being.  This literature tends to find very powerful correlations.  So it is interesting that improvements in government effectiveness are nearly as large as those in GDP per capita.  A one unit improvement in (ln) GDPPC is associated with SPI higher by .5 points and WGI-GE with .39 points (so 80 percent as large).  Interestingly, the impact of state capability is consistently and substantially larger than of POLITY’s rating of democracy.
• Second, Figure 1 shows the association between the WGI government effectiveness measure and SPI, after controlling for GDP per capita and the POLITY rating of democracy.  This says “for countries with the same GDPC and POLITY how much higher would be expect SPI to be if government effectiveness were higher?”  As the graph shows moving from Venezuela’s capability (which is low for its GDP and POLITY) to Rwanda (which is high for its GDPPC and POLITY) would improve the Social Progress Index by over 20 points (which is the raw gap between say, Bangladesh (37) and the Dominican Republic (59) or between Indonesia (53) and Israel (75).

Of course this kind of data cannot resolve questions of cause and effect (as perhaps social progress or its components lead to greater state capability) but, to the extent these associations reflect a causal impact of state capability on well-being these are impressively large impacts and highlight the need for more attention to understanding not just how to promote economic growth but also how to build the capability of the state and its organizations.