Raising concerns over the use of World Bank's Worldwide Governance Indicators in ratings assessment by credit ratings agencies, especially for emerging economies, Chief Economic Adviser V Anantha Nageswaran on Wednesday said there is a need for the World Governance Index to be more transparent and less subjective. “The World Bank..has something called the World Governance Index, which unfortunately or fortunately plays a very significant part in opaque and non-transparent ways in the credit rating assessment deployed by the three credit rating agencies in assigning letter-grades to credit rating of member countries, particularly emerging markets. This World Governance Index itself is a composite of several sub-indices, which are purely based on the subjective opinions of some so-called expert institutions which do not have presence on the ground nor do they understand whether the context in which they are making these judgements is appropriate or apt for the member countries. But these indices become an important part of the assessment methodology of the credit rating agencies and they do not reveal the extent to which these indices are implanted in their assessment process, the weights they carry, because there seems to be qualitative overlays on top of qualitative assessments,” Nageswaran said at a seminar on ‘Multilateral Institutions for the 21st Century’ organised by the Department of Economic Affairs, Ministry of Finance. “So, in other words the easiest way in which multilateral development banking system can help their member countries to access capital for global challenges and development needs is to ensure that their World Governance Index is transparent, less subjective and less arbitrary, more suited to the context, involves participation of developing countries, and also make sure that it's limitations are very well understood by the credit rating agencies,” he added. He said this one change, which does not require the consent of shareholders but the management of the World Bank, can help many emerging economies be assessed objectively by credit rating agencies. “If their credit rating improves, or at the minimum stops being downgraded, the amount of financing cost it will save in the global capital markets will run into billions of dollars which can then be spent on development needs and global public goods as well,” he said. In November last year, Sanjeev Sanyal, member of the Economic Advisory Council to the Prime Minister had also in a paper written about "serious” methodology problems plaguing the computation of perception-based indices – such as Freedom in the World Index and the Economist Intelligence Unit (EIU) Democracy Index – that feed into sovereign ratings via the World Bank's Worldwide Governance Indicators. The World Bank’s Worldwide Governance Indicators provide a ranking of 215 countries territories based on six dimensions of governance: ‘Voice and Accountability’; ‘Political Stability and Absence of Violence’; ‘Government Effectiveness’; ‘Regulatory Quality’; ‘Rule of Law’ and ‘Control of Corruption.’
