In the case of the composite indices<sup>of risk and return, the underlyingcomponents were</sup> selected on the basis of both<sup>theirrelevancein previous theoretical and empirical workand their</sup> data availability (see Milesi-Ferreti<sup>and Razin</sup><sup>**1996, 1998;**Easterly, Islam,and Stiglitz</sup><sup>**1999;**and</sup> Rodrik **1999).6** Each individual<sup>componentwasstandardizedusing its respectivepooled(time-</sup> series, cross-section) mean<sup>and variance.Apart fromhomogenizingunits acrossindicators, this</sup> standardization procedure allows<sup>us to control forcommon factorsand yields measures for the</sup> performance of a<sup>country</sup><sup>_relative_to the world.</sup> An issue is how to weigh<sup>the underlyingindicators toconstruct thecompositeindices.</sup> Since there is no obvious<sup>weighingscheme,we decided to favor theindicatorsrelated tothelevel</sup> and variance of per capita<sup>**GDP**growth ratesandassign them a large weightin thereturn and risk</sup> indices, respectively. The following<sup>two reasons justifythis choice.Thefirst ismotivated</sup><sup>**by**the</sup> new growth literature and<sup>arguesthat</sup><sup>**GDP**growth per capita reflectsthe most important</sup> elements of economic policy<sup>and performance.The secondreason is statistical and basedon the</sup> fact that when stock- market<sup>returns areregressedon all of our underlyingindicators,per capita</sup> **GDP** growth takes the lion<sup>share of explained variance.In practice, weassigned a</sup><sup>**50%**weight</sup> to the level and standard<sup>deviation of the per capita</sup><sup>**GDP**growth rate in the returnand risk</sup> indices, respectively; all<sup>remainingvariablesreceived equalweights.</sup><sup>**17**</sup> Combining the risk and return<sup>data with the wealthand foreignasset data,we obtainan</sup> unbalanced panel covering<sup>theyears</sup><sup>**1966-97.**In thecase of the composite and growth-based</sup> indices, the panel includes<sup>_54_countries.In turn,fortheset of indices derivedfrom stock market</sup> returns the sample size is considerably<sup>smaller</sup><sup>**-**just</sup><sup>**33**countries</sup><sup>**--**and with a large</sup> representation of industrial<sup>economies.</sup> Tables A2-A4 in the appendix<sup>show the correlationsbetweenthe composite indices,their</sup> underlying indicators, and<sup>thesingle-variableindices. Also,Tables</sup><sup>**A5-A10**provide descriptive</sup> statistics on the three sets of<sup>indices for selectedsamplesof countries and time periods,in aform</sup> analogous to Table **1.** It<sup>isimmediatelyapparentfrom the tables thathigher- income countries and</sup>

> **16** Note that some variables (such as financial depth and governance quality) enter in both the return and risk measures. The reason is that<sup>they may affectboth thelevel and thedegree of uncertainty of the returnon the</sup> country's assets.

**17** We also constructed indices<sup>giving equal weights toall variables underlying each compositeindex.Furthermore,</sup> we experimented with indices<sup>constructed as principalcomponentsof the underlyingindicators.Theempirical</sup> results (not reported to save<sup>space) were qualitativelysimilar to thoserelated to ourmain weighingscheme.</sup>

**16**