Relationships Among World Governance Indictors and National Per Capital Income Weighted by Environmental Sustainability

Relationships among World Governance Indictors and National Per Capital Income Weighted by Environmental Sustainability Barry A. Friedman, Pamela L. Cox, Thomas Tribunella Governance consists of the “processes by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them” (World Bank, 2006). We hypothesize that the World Governance Indictors (WGI) of voice and accountability, political stability, government effectiveness, regulatory effectiveness, rule of law and control of corruption contribute to National Per Capita Income (NCPI) weighted by the nation’s ability to maintain environmental sustainability (weighted NPCI). Weighted NPCI is a new dependent variable intended to measure a nation’s ability to co-manage economic concerns with efforts to maintain their environment. In a study of 142 nations, we found that WGI dimensions consistently predicted weighted NPCI from 2003 to 2005. We discuss implications of these fi ndings and future research. Keywords: environmental sustainability, national per capita income, world governance indictors. During the last two decades, there has been more emphasis placed on a nation ability to increase wealth and increase effectiveness. Arndt and Oman (2006) propose that this increased emphasis is driven by increased foreign investment in developing countries (e.g., minimize risk by invest- ing in countries that are politically stable and effective) and the decision by the World Bank to provide aid to countries with effective governments. Barry A. Friedman, Pamela L. Cox, Thomas Tribunella, State University of New York at Oswego. 38 THE BRC JOURNAL OF ADVANCES IN BUSINESS During the same time period, environmental sustainability increased in importance as issues of environmental degradation, global warming and pollution and waste gained prominence (Melville, 2010; Dangelico & Pujari, 2010; Haines & Reichman, 2008). Clearly, effective government is needed to improve the quality of life of a country’s citizens with environmental sustainability required for long term survival. The importance of a nation’s ability to prosper and protect the environment increases the need to develop governance indictors that differentiate among nations. Gover- nance consists of the “processes by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them” (World Bank, 2006). We hypothesize that effective governance of political, natural, economic, and human resources contribute to a country’s economic performance and its ability to protect its environment. Huynh and Jacho-Chávez (2009) and Malik (2002) each found signifi - cant relationships between effective governance and economic growth. Meon and Sekkat (2004) found that the effectiveness of a country’s institutions is related to the participation of Middle East and North African countries in the world economy. Kaufmann and Kraay (2002) found that per capita income and governance quality are positively related. On a corporate level, Klapper and Love (2004) found that better governance is correlated with better operating results and market valuation. Countries’ WGI scores constitute the aggregate views of think tanks, non-governmental organizations, international organizations, and citizen and expert survey respondents in both industrial and developing countries (World Bank, 2006). From 1996 to 2007, the World Bank has collected data on 212 countries drawn from 35 independent data sources and 32 organizations around the world (Kaufmann, Kraay & Mastruzzi, 2008). Research associated with the World Bank Project has identifi ed six world governance indictors (Kaufmann et al., 2008): 1. Voice and Accountability (VA): measuring perceptions of the extent to which a country’s citizens are able to participate in World Governance, National Productivity and Environmental 39 selecting their government, as well as freedom of expression, freedom of association and a free media. 2. Political Stability and Absence of Violence (PS): measuring perceptions of the likelihood that the government will be destabi- lized or overthrown by unconstitutional or violent means, including politically motivated violence or terrorism. 3. Government Effectiveness (GE): measuring perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, and the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. 4. Regulatory Quality (RQ): measuring perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. 5. Rule of Law (RL): measuring perceptions of the extent to which agents have confi dence in and abide by the rules of society, and in particular, the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. 6. Control of Corruption (CC): measuring perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests. Research has tested the relationship between countries’ WGI dimen- sional scores and economic productivity and growth. Using the WGI dimensions, Huynk and Jacho-Chavez (2009) found that the voice and accountability, political stability and rule of law were signifi cantly correlated with economic growth. Their fi ndings supported past research that found positive relationships between the quality of governance and per capital income (Kaufmann & Kraay, 2002). Rios-Morales, Gamberger, Smuc and Azuaje (2009) found that low political instability, the presence of rule of law and lack of corruption was related to foreign investor perception that political risk is low in developing countries. That is, foreign investment in a county is contingent on 40 THE BRC JOURNAL OF ADVANCES IN BUSINESS investors’ perception of expected return on investment given the political risk of doing business in that specifi c country (Rios-Morales et al., 2009). These authors defi ne political risk as the likelihood that the political climate in a foreign country will deteriorate such that company objectives are threatened. Activities that tend to increase the perception of political risk include government takeovers, civil disorder, and poor relations with other countries (Rios-Morales et al., 2009). High political risk can adversely infl uence foreign investment and business activities, and political risk is often assessed before making foreign investments (Khanna, Palepu, & Jayant, 2005; Oetzel, 2005). Bris, Brisley, and Cabolis (2008) studied cross border mergers where the target fi rm (acquired fi rm) adopted the governance and account- ing principles of the acquiring fi rm. Their study spanned mergers from 1990–2001 across 39 industries and 41 countries. These authors found that shareholder value increased when target companies adopted the superior governance practices of the acquiring fi rm (measured by the acquiring fi rm country’s WGI score). Studies have indicated that increased shareholder value can spillover to other fi rms in the same industry and same country even when the other fi rms are not involved in the cross border merger (Martynova & Renneboog, 2008; Bris & Cabolis, 2008). Several studies have explored the control of corruption and rule of law WGI dimensions. Anokhin and Schulze (2009) analyzed data from 64 countries, and found that there were signifi cant relationships between control of corruption, innovation and entrepreneurship. They reasoned that economic growth and development is possible when investors believe that government can impartially enforce law and the rules of trade. Meon and Sekkat (2004) found that high levels of corruption serve as a barrier to economic growth. The validity and use of governance indictors such as the WGI have been debated (Van de Walle, 2006; Malik, 2002). Devarajan and Johnson (2008) notes that the WGI is a defensible measure of governance because it focuses on “rules on the ground” (how institutions actually operate) as opposed by “rules on the books” (how institutions are World Governance, National Productivity and Environmental 41 supposed to operate as depicted in offi cial documents). Devarajan and Johnson (2008) also note that the WGI was derived from a num- ber of diverse sources (e.g., experts and surveys). While recognizing the value of the WGI for cross-country comparisons, Devarajan and Johnson (2008) suggested that the WGI can be improved by being more sensitive to country specifi c phenomenon. For example, these authors point out that Bangladesh has poor governance ratings but respect- able economic growth. Non-government organizations (NGO) or civil societies may deliver services typically done by the government (e.g., health and education). There exists little empirical research that investigates the relationship between national governance effectiveness and environmental sustainability. Drawing from a model fi rst proposed by Tricker (1994), Reed (2002) drew parallels between corporate and national governance.

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