Consumer price index measurement in international economic comparisons

History Of Quantification

Corruption Quantified

Country comparisons serve many purposes: Economic, political, social, educational, and so on. Many countries -- and likely all of the developed countries -- conduct country comparisons that are focused on international trade and overall national economic status. The collection of international economic data has been increasingly influenced by sophisticated strategy and technique, largely because national fiscal markets are globally linked and multinational corporations engage at high rates with foreign supply chain vendors (Podobnik, et al., 2008). Measures such as the gross domestic product (GDP), the consumer price index (PCPI), general government gross and net debt, and purchasing power parity (PPP) are all used to understand the economic status, monetary exchange, and other fiscal dynamics in different countries ("WEO," 2014). Discourse among economists is strongly skewed toward ratios, curves, slopes, and derivatives -- each carefully constructed to reveal patterns and trends that would not otherwise be accessible or interpretable ("WEO," 2014). Indeed, it is because the data is quantitative that it is so comparable; moreover, statistical procedures are used to weight difference that might inadvertently skew the outcomes, and to calculate the relationships between various measures, such as the CPI and GDP (Shao, et al., 2007). For example, to accomplish surveillance of other countries, the WEO produces a country database that contains: data on each country's currency; the type of national account used, and the historical and latest data on national accounts, whether chain weighted methodology is used; and the historical and latest data on the consumer price index (CPI). The Consumer Price Index (CPI) is a term used by economists to reflect the changing monthly data on "prices that urban consumers pay for a representative basket of goods and services" ("Bureau of Labor Statistics," 2014).

Another organization that uses country-based data is the Organization for Economic Co-operation and Development (OECD). OECD is known for examining patterns related to international trade and business. The mission of the OECD is to "promote policies that will improve the economic and social well-being of people around the world" ("OECD," 2014). The OECD takes measure of national productivity and the flow of global investment and trade. An additional output of the OECD is the setting of international standards on things as disparate as agriculture, taxation, pension systems, and chemical safety.

From their policy experience and the country facts the OECD collects, policies are designed and recommended that can improve quality of life. At the core of OECD work is "a shared commitment to market economies backed by democratic institutions and focused on the well-being of all citizens" ("OCED," 2014). Tandem objectives of OECD work are substantially making "life harder for the terrorists, tax dodgers, crooked businessmen and others whose actions undermine a fair and open society" ("OCED," 2014). To these goals, the OECD holds a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Each participating country agrees to treat foreign bribery as a crime for which individuals and enterprises are held responsible. As such, the Convention is instrumental in curbing the export of corruption globally since roughly two-thirds of global exports and nearly 90% of foreign direct investment outflows are directly tied to the 41 signatory countries. To increase its influence and effectiveness, the OECD Working Group on Bribery conducts a follow up reviews of nine to ten countries annually. While the OECD emphasizes fact-based policymaking and implementation, an organization known as Transparency International serves as an aggressive watchdog.

Transparency International is one of many non-governmental organizations (NGOs) that monitor and publicize the performance of political groups and corporations. The type of performance that Transparency International focuses on is the level of corruption in countries and territories around the world. The instrument used by Transparency International to measure and communicate perceived levels of corruption is the Corruption Perception Index

What Is the Corruption Perception Index?

The Corruption Perceptions Index (CPI) 2013 measures the perceived levels of public sector corruption in 177 countries and territories ("Transparency International," 2014). It is important to take note of the word "perceived" as it holds considerable importance with respect to the data collection and data analysis procedures used to generate the CPI. When the CPI was first developed, pubic opinion surveys were used to gather corruption data -- this information was truly based on people's perception. Over years of application, the CPI drew on different sources, which made it difficult to make year-over-year comparisons. However, the current CPI utilizes up to 12 institutional sources to build the case for each country -- though most countries use far fewer data sources (See Table 2). Currently, the institutions providing assessment or survey data include: the African Development Bank, the Bertelsmann Foundation, the Economist Intelligence Unit, Freedom House, Global Insight, International Institute for Management Development, the Political and Economic Risk Consultancy, the Political Risk Services, the World Economic Forum, the World Bank, and the World Justice Project. These organizations are described in more detail below, with the survey or assessment included in parentheses just after the name of the institution:

1. Africa Development Bank- Country Policy and Institutional Assessments 2009 (AFDB 2009)

2. Asian Development Bank -Country Performance Assessment Ratings 2009 (ADB 2009)

3. Bertelsmann Foundation- Bertelsmann Transformation Index (BF 2009)

4. Economist Intelligence Unit -Country Risk Service and Country Forecast 2009 (EIU 2010)

5. Freedom House -Nations in Transit 2009 (FH 2010)

6. Global Insights, formerly World Markets Research Centre- Country Risk Ratings 2009 (GI 2010)

7. Institute for Management Development - World Competitiveness Report 2009 and 2010 (IMD 2009 and IMD 2010)

8. Political and Economic Risk Consultancy, Hong Kong - Asian Intelligence 2009 and 2010 (PERC 2009 and PERC 2010).

9. World Economic Forum - Global Competitiveness Report 2009 and 2010 (WEF 2009 and WEF 2010)

10. World Bank - Country Policy and Institutional Assessments for IDA Countries (WB 2009) ("Transparency International," 2014).

Survey and assessment rigor has increased during the interim since the CPI was first introduced. The strength of the current aggregated index is that a more reliable and more robust measure of a phenomenon is achieved when the measures are taken from a combination of sources than when a measure is taken from each source independently. Current CPI data is derived from performance assessments from an analyst group, from surveys of business people, or standing assessments and reports. It is generally understood that the CPI must measure the perception of corruption since it would not be possible to measure corruption in absolute terms -- incidences of corruption or corrupt behaviors. In the section below entitled How Is the Data Collected and Analyzed, the discussion is more detailed and provides examples of the sources of data that are used to determine country rankings.

The purpose of the Corruption Perceptions Index (CPI) is to make transparent the undesirable behaviors that are integral to the economic, political, and social functioning of countries around the world. These behaviors include abuse of power, bribery, and secret dealings of officials and non-officials in positions that impact capacity of societies to conduct business and administer government ("Transparency International," 2014). As a Turkish citizen, I am saddened by the corruption that is slowly taking over my country with the new government, which is why I gravitated towards the idea of looking into the CPI.

The rationale behind the Corruption Perceptions Index is that reform begins with transparency. But in addition, the Index makes salient the importance of cracking down on corruption as the category includes much more than simply greasing the wheels of a society. Anti-corruption efforts include halting money laundering and a relentless pursuit of the stolen assets in order to return them to their rightful owners ("Transparency International," 2014). Anti-corruption efforts also include fundamental political finance clean up and ordinary initiatives to establish higher levels of transparency in public institutions ("Transparency International," 2014). Huguette Labelle, the chairperson of Transparency International, has underscored the need to move from exposure to termination:

"It is time to stop those who get away with acts of corruption. The legal loopholes and lack of political will in government facilitate both domestic and cross-border corruption, and call for our intensified efforts to combat the impunity of the corrupt" ("Transparency International," 2014).

What Do the Rankings on the Index Mean?

The ranking of countries and territories on the Corruption Perceptions Index is dependent upon public sector corruption. The rankings indicate the level of public sector corruption on a scale of 0 to 100 (see Appendix I, Appendix II, and Appendix III). A ranking of zero (0) on the Corruption Perception Index represents perceptions that the country or territory is highly corrupt. A ranking of one hundred (100) on the Corruption Perception Index represents perceptions that the country or territory is, in the terminology of Transparency International, very clean. The scores convey the positions of the countries and territories in relation to each other. The indices are produced annually. The 2013 index shows the rankings for 177 countries and territories. It is important to realize that a perfect score is never given, and that 69% of the countries and territories are ranked below 50 ("Transparency International," 2014). The obvious conclusions to be drawn from this information is that global corruption is a serious problem, and that changing these normative societal states will be an enormous challenge. For those disinclined to agree with this conclusion, it is worthwhile to examine the findings from a number of economic research studies conducted in 2007 and 2008 that explicitly considered the consequences of corruption perception -- as determined by the CPI.

Research conducted by Shoa, et al. (2007) found a strong correlation between long-term economic growth at higher levels and a better corruption perception score as shown on the CPI. Podobnik, et al. (2008) showed that for every unit that a country's CPI score raised, there was a corresponding 1.7% increase in GDP growth. This relationship is apparent even through a visual inspection of the data, showing that the wealth of a country maps consistently to its corruption, with the one most notable exception of China.

Welhelm (2002) found that there was a power-law dependence linking higher rates of foreign investment in a country and higher CPI scores. The simplest way to think about the power-law construct is to recall the Pareto distribution: this is commonly known as the 80-20 rule, a distribution applied to any convenient purpose by business people (Newman, 2006). The figure below illustrates the frequency of some action on the Y-axis while the X-axis represents the number of individuals in the population.

Figure 1. Example Parieto Chart or the 80-20 Rule

Those who have read The Black Swan by Nicholas Taleb will recognize the depiction of the long tail, and what it can mean to prediction models. By extension, on the topic of corruption, the X-axis would represent countries, and the Y-axis would represent the perception (of corruption incidence). This model only holds, however, as with all power-law dependencies, for limited numbers (Newman, 2006). That is to say that, in examining a map showing the number of countries that are considered to have high levels of corruption, only those countries with the worse levels of corruption on the CPI would appear at the intersection nearest zero (lower left) in the figure above. For illustration, the 80-20 rule is an explanation used for trouble shooting quality problems or personnel problems or client loyalty, such that 80% of the quality problems (labor strikes, annual sales) are caused by 20% of the technology components (dissatisfied employees, returning buyers) (Newman, 2006).

Wilhelm (2002) conducted a study to validate the measures used to gauge and report levels of global corruption. Wilhelm (2002) found a "very strong significant correlation of three measures of corruption," a finding that indicates validity. The three measures were: 1) black market activity; 2) country scores of the Corruption Perceptions Index (CPI); and, 3) the overabundance of regulation or unnecessary restriction of business activity. Moreover, "a highly significant correlation" was found between these three measures and gross domestic product per capita (RGDP/Cap). Notably, when testing the correlation with the RGDP/Cap, the CPI accounted for more than 75% of the variance. The study of corruption in relation to business is not an empty exercise: corruption appears to actually deter country development and economic growth. Indeed, "Sustainable economic development appears very dependent on a constant, virtuous cycle that includes corruption fighting, and the maintenance of trust and innovation, all reinforcing each other" (Wilhelm, 2002). The Corruption Perception Index interactive world map illustrates macro level changes in the status of the countries, and primarily of the inclusion of countries in the CPI assessment (http://edutube.org/interactive/corruption-perception-index-cpi-interactive-world-map).

How Is Data Collected and Analyzed?

The nature of corruption severely limits accurate assessment, as pointed out by Alex Cobham in a 2013 opinion piece in Foreign Policy, who states that, "Perceptions are not facts, and in this case [the Index] they may also be an unhelpfully distorted reflection of the truth" (Cobham, 2013). Cobham simply expressed an opinion and did not offer any facts either, which -- since this is what he criticized CPI of routinely doing -- did not add any credibility to his comments. The level of Cobham's "analysis" can be sufficiently met with a counterargument comments such as, "Where there's smoke, there's fire."

It is true that absolute levels of corruption are hidden and not easily discernible. Corrupt illegal activities are concealed at all levels by the actors who engage in corruption ("Transparency International," 2014). Like the proverbial tip-of-the-iceberg, when investigations, prosecutions, or scandals propel corrupt activities into the light, some measure of corruption is presumed -- but it may be erroneous in either direction. Data based on prosecutions or investigations do not accurately represent the incidence or proclivity toward corruption in a society ("Transparency International," 2014). Rather such data illustrates the effectiveness of the police, prosecutors, courts, and the media with respect to their capacity for dredging up evidence of corruption, and it represents the tacit agreements and social contracts that are normative in the culture ("Transparency International," 2014). There is general agreement that the perceptions of corruption by people in a position to assess the public sector provide "the most reliable method of comparing relative corruption levels across countries" ("Transparency International," 2014).

The discussion in the following paragraphs addresses the data collection and analysis process from a top-to-bottom tact, first examining the 12 institutions that provide the 13 data sources, then considering the types of information that are obtained and, finally, exploring the actual questions or topics covered at the survey or assessment level.

Scores to develop the Corruption Perceptions Index are taken from any of 13 sources shown in the table below (Saisana & Saltelli, 2012, p. 8). Countries that have been evaluated by three sources or more can be included in the index (Saisana & Saltelli, 2012, p. 8). For the 2012 Corruption Perception Index, the highest number of sources attributed to any one country was ten (i.e., Czech Republic, Hungary, India, Poland, South Korea) (Saisana & Saltelli, 2012, p. 8). Seven to eight sources were used to evaluate most of the countries in the 2012 CPI, with 19 countries evaluated by data from only two sources (Saisana & Saltelli, 2012, p. 8). With so many different data sources and unique scales being used to obtain the data, a process of rescaling takes place in order to make comparisons possible. The process, which is similar meta-analysis data preparation processes, is detailed in Appendix III - Calculation Steps for the CPI Index Scores.

Table 2 shows the institutions that are currently participating in the CPI, with the number of countries that utilize the data from the institutions listed at the end of each row.

Table 2. 2012 CPI Sources of Information

Source Number of countries

1. African Development Bank Governance Ratings (AFDB) 53

2. Bertelsmann Foundation Sustainable Governance Indicators (BF-SGI) 31

3. Bertelsmann Foundation Transformation Index (BF-BTI) 128

4. Economist Intelligence Unit Country Risk Ratings (EIU) 138

5. Freedom House Nations in Transit (FH) 29

6. Global Insight Country Risk Ratings (GI) 175

7. IMD World Competitiveness Yearbook (IMD) 59

8. Political and Economic Risk Consultancy Asian Intelligence (PERC) 16

9. Political Risk Services International Country Risk Guide (ICRG) 140

10. Transparency International Bribe Payers Survey (TI) 29

11. World Bank, Country Performance and Institutional Assessment (WB) 67

12. World Economic Forum Executive Opinion Survey (WEF) 147

13. World Justice Project Rule of Law Index (WJP) 97

Source: Corruption Perceptions Index 2012

Two different types of sources are used in the CPI: Opinion surveys and analysts assessments. The opinion surveys are completed by business people. When more than one year of the same version of a survey is available, the data from the last two years are included in the data set. This results in data smoothing, which avoids abrupt changes, which would make the index less stable. The analysts' assessments are scores related to the performance of a country, and risk analysts, country analysts, and other expert analysts provide the assessments.

The CPI uses the panel of experts on the Economist Intelligence Unit - Country Risk Service and Country Forecast 2010 (EIU 2010) to provide an assessment on corruption. The EIU panel of experts assesses the incidence of corruption, and it defines corruption as the misuse of public office for personal (or party political) financial gain. Responses are indicated on a 4-point Likert scale from "0" (that denotes a "very low" incidence of corruption) to "4" (that denotes a "very high" incidence). The various aspects that the experts on the EIU panel are asked to consider include:

"Existence of clear procedures and accountability governing the allocation and use of public funds, public funds misappropriation by ministers/public officials for private or party political purposes; existence of special funds for which there is no accountability; general abuses of public resources; existence of a professional civil service; existence of an independent body auditing the management of the public finances; existence of an independent judiciary with the power to try ministers/public officials for abuses; and payment of bribes to secure contracts and gain favors" ("Transparency International Long Memo," 2010).

The CPI uses data from a survey questionnaire utilized by the Freedom House: Nations in Transit 2010 (FH 2010) organization. The ratings are recorded on a 7-point Likert scale with the ratings running from "1" (that denotes the highest rating) to "7" (that denotes the lowest rating). The ratings correspond to a quarter-point scale that reflect the responses derived by CPI from country experts who responded to the following questions which are presented verbatim from the Transparency International Long Memo (2010):

Has the government implemented executive anticorruption initiatives?

Is the country's economy free of excessive state involvement?

Is the government free from excessive bureaucratic regulations, registration requirements, and other controls that increase opportunities for corruption?

Are there significant limitations on the participation of government officials in economic life?

Are there adequate laws requiring financial disclosure and disallowing conflict of interest?

Does the government advertise jobs and contracts?

Does the state enforce an executive legislative or administrative process -- particularly one that is free of prejudice against one's political opponents -- to prevent, investigate, and prosecute the corruption of government officials and civil servants?

Do whistle-blowers, anticorruption activists, investigators, and journalists enjoy legal protections that make them feel secure about reporting cases of bribery and corruption?

Are allegations of corruption given wide and extensive airing in the media?

Does the public display a high intolerance for official corruption? ("Transparency International Long Memo," 2010).

Correlation of Data

It is important to consider the association or correlation across the different data sources used in the CPI. Multivariate linear regression using pair-wise comparison shows strong correlation, significant at p < .01, among the data sources used in CPI calculations. There is good correlation across the assessments conducted by the different participating institutions and agencies: asterisks indicate a statistically significant relationship. Note that the correlation coefficients refer to all countries assessed by the sources.

Table 1. Pair-Wise Comparisons of Data Sources Used in CPI

EIU 2010

GI 2010

PERC 2009

PERC 2010

ADB 2009

AFDB 2009

WB 2009

IMD 2009

IMD 2010

WEF 2009

WEF 2010

EIU 2010

1

0.81*

1

GI 2010

0.90*

0.89*

1

PERC 2009

0.94*

0.90*

1

PERC 2010

0.98*

0.96*

0.96*

1

ADB 2009

-0.30

0.81

0.39

1.0*

1.0*

1

AFDB 2009

0.75*

0.51*

1

0.81*

0.94*

0.75*

0.78*

0.94*

0.69*

0.74*

1

WB 2009

0.62*

0.80*

0.66*

0.25

0.96

0.7471*

0.83*

0.73*

1

IMD 2009

0.89*

0.79*

0.91*

0.87*

0.96*

0.70*

1

IMD 2010

0.85*

0.58

0.87*

0.83*

0.92*

0.65*

0.96*

1

WEF 2009

0.86*

0.77*

0.89*

0.91*

0.96*

-0.22

0.38

0.68*

0.01

0.94*

0.94*

1

WEF 2010

0.87*

0.71*

0.87*

0.92*

0.95*

-0.13

0.35

0.64*

0.28

0.95*

0.95*

0.97*

1

Notably, for a number of the pair-wise comparisons in Table 1, the correlation holds regardless of the fact that the assessment scores come from quite different types of respondents and sources: businesspeople vs. country analysts (e.g., Gi2009 and IMD2009(2010), or BTI2009 and PERC2009(2010). It is also important to note that some sources do not correlate as strongly, which means that more research may need to be conducted, or at some point a different source with stronger correlation may be substituted.

Magnitude of Scores by Approximate Categories

The countries are located in categorical clusters according to their CPI scores.

The categories are: 90 to 100; 80 to 89; 70 to 79; 60 to 69; 50 to 59; 40 to 49; 30 to 39; 20

to 29; 10 to 19; and 0 to 9 ("Transparency International," 2014). The number of countries that approach scores of 100 is quite small: Denmark and New Zealand both have scores of 91 ("Transparency International," 2014). Similarly, only three countries score in the category that ranges from 0 to 0: Afghanistan, North Korea, and Somalia ("Transparency International," 2014). In terms of absolute number of countries or territories in the group, the largest category is 30 to 39, followed by the second largest category of 20 to 29. It is readily apparent that countries in the lower ranking categories experience high rates of poverty and periods of sustained conflict ("Transparency International," 2014). While these and similar attributes are not necessarily the drivers of corruption, they do make it more difficult to eradicate corruption ("Transparency International," 2014).

Conclusion

Transparency International has published the Corruption Perception Index for nearly 20 years. In that time it has evolved and taken a tack toward greater evidence-based research, a factor that has improved its stature in the scientific world -- and also in a number of policy-related disciplines. The methods and figures used to establish the country ranking scores has become more reliable and rigorous. Because of the work of Transparency International, the problem of corruption has been made more salient, and the need for greater accountability and transparency is showing up on agendas -- and being taken seriously by policymakers, business educators, and leaders in nearly every field.

Appendices

Appendix I -- WEO Database -- Country Data Documentation as of October 2014

Appendix II -- Corruption Perception Index by Country Score

Appendix IV- Visualization of CPI Data

24

History of Quantification

Appendix V -- Calculation Steps for the CPI Index Scores

The calculation of the index entails the following steps:

1. To enter the index, individual responses from business people opinion surveys are averaged by country. When more than one question is used, first the simple average score across questions is calculated for each respondent, and then the average score by country is calculated.

2. Because each of the sources uses its own scaling system, the data have to be standardized before entering into the index. The rescaling is carried out in two steps:

2.1 The first step consists of standardizing the scores using "matching percentiles." This technique uses the ranks of countries reported by each individual source (but not the scores). The method allows all reported scores to be denominated in common (and thus comparable) units and within the same bounds, enabling proper aggregation remaining within the CPI bounds of 0-10 that is to say, to remain between 0 and 10. However, while it is a method useful for combining variables that have different distributions, there is some information loss in this technique.

Standardization is only required for data that have not been used in previous editions of the CPI. Data used in last year's index are already standardized and enter the calculation of the current edition with those standardized values. The implementation of the matching percentile technique proceeds as follows: Let us label the individual survey or assessment, Source Y.

2.1.1. Select a master list: This master list is the pool of values going from 0 to 10 to which rankings of Source Y will be matched. As in years past the master list has been chosen to be based on the previous year's scores. Specifically, for the 2010 edition of the CPI, the master list is the TI CPI 2009.

2.1.2. Identify countries included in both the master list and assessed by source Y: Only information included in both is used in the standardization. Information on countries only included either in the master list, or in source Y, is not used for the standardization of the scores.

2.1.3. Rank countries according to their scores in source Y: Countries identified in the previous step are ranked according to their score in source Y, starting from the country with the lowest perceived level of corruption to the country with the highest perceived level of corruption.

2.1.4. For each country, the only information kept from source Y, is their position in the ranking.