IFs represents three dimensions of governance (security, capacity, and inclusion) and uses two sub-dimensions for each. Just as the dimensions themselves show considerable conceptual independence, the sub-dimensions tend not to be highly correlated.
Thus there is value in creating an index for each of the three governance dimensions that integrates the two variables representing them as well as an overall index. We have taken the typical basic approach to index construction when there is no clear external referent against which to judge the validity of the resultant index; that is, we have scaled each variable from 0 to 1 and averaged the two variables that make up each dimension. The resultant indices, GOVINDSECUR, GOVINDCAPAC, and GOVINDINCLUS, each have a global average value near 0.5, but the distribution of countries across the component measures varies; for instance, because the intrastate conflict variable of the security index exhibits a power-law distribution, the global average of the security measure is slightly higher than that of the other two indices. The security index uses 1.0 minus the average of the probability of intrastate war and the IFs performance risk index—the relative infrequency of intrastate war causes many states to cluster near 1.0 in the former formulation.
In computing the index for governance capacity, we do not attribute increased capacity to countries when the revenue to GDP ratio rises above 0.45. Migdal (1988: 281) and Joshi (2011) suggest that the appropriate upper limit is 0.30, but their focus is on central government; our own analysis suggests that local government can on average for high-income countries add another 0.15 (15 percent of GDP) to that ratio.
Finally, we compute an overall governance index (GOVINDTOTAL) as the simple average across the three dimensions. Just as the rankings of countries on the three dimensional indices provide some face or subjective validity to the indices, the rankings on the combined index likely correspond to the general perceptions that most analysts have.