# Motivation

Endeavors by multilateral agencies, donors, non-governmental organizations and academia to create a better understanding how institutions and policies determine economic and social outcomes have led to the considerable development of databases seeking to present meaningful global indicators of policies and policy outcomes across countries.

One of the most influential works that led to this boom has been the academic work on institutional economics (starting with Djankov, La Porta, Lopez de Silanes and Schleifer, 2002), itself inspired by the work of Hernan De Soto (1989). The research used cross-country variations in institutional quality (measured by indicators of performance) to demonstrate their importance for economic outcomes. This later led to the production of annual Doing Business indicators in 2003 and an earlier iteration of this in the World Development Report 2002 (Djankov, 2016). Doing Business has been hugely influential in informing development economics. Other influential indicators include the World Economic Forum’s competitiveness report, and the Logistics Performance Index. The business of indicators is now thriving: the World Bank’s TCdata360 on trade and competitiveness, an aggregator site, offers access to over 2,400 indicators.

The statistical relevance of many of these policy indicators has been amply demonstrated in the academic literature, and their relevance to economic policy through the widespread adoption by policy makers. However, the exact nature of what these indicators measure remains often subject to interpretation. They vary in degree of quality, and approaches to measurement: from ordinal measures such as perception of given issues, expert judgment of policy quality, to objective measurements of economic variables.<sup>5</sup> Amidst this variety, the sheer volume of indicators has become challenging to navigate, and thus to incorporate into coherent frameworks. For instance, we know that what affects trade or investment success is due to a very wide range of causal factors, but where are the best measures of these factors? Most analyses using indicators only look at selected subsets of indicators, and one can question how these indicators have been selected.

Aware that different sets of factors matter in different country contexts, policy advisors have developed broader frameworks (starting with Doing Business) that would offer a more comprehensive picture, guiding policy makers in their reform efforts, and helping them identify and prioritize where action is needed. There is a plethora of tools and a large industry serving prospective investors and policy makers to assist them in identifying priority markets and factors impacting them, illustrating the complexity of the environment facing them and therefore the difficulty to reduce it to the key factors that would majorly impact their decisions. The exercise is not without challenges, as noted by Kraay and Tawara (2013). Their research finds significant shortcomings when attempting to identify sets of policy indicators that could be particularly correlated with specific (desired) policy outcomes. They find that sets of policies identified for one outcome do not correlate well with closely related and similar outcomes, thus suggesting that any attempt to identify partial effects of specific policies and to pick a subset of variables could be spurious.

A recent framework was developed for a new strategic exercise in the World Bank Group, the Country Private Sector Diagnostics (CPSD), designed to inform support efforts to mobilize private sector initiative for development. To guide the understanding about the extent of factors constraining private

> 5 For a discussion, see Hausmann and Klinger (2008).

2