Expressing reservations about the utilization of the World Bank’s Worldwide Governance Indicators in credit ratings assessments, particularly for emerging economies, Chief Economic Adviser V Anantha Nageswaran emphasized the necessity for greater transparency and reduced subjectivity in the World Governance Index.
Nageswaran, speaking at a seminar on ‘Multilateral Institutions for the 21st Century,’ highlighted concerns about the World Governance Index’s significant influence on credit rating assessments carried out by major credit rating agencies. He criticized the opaque nature of this process, pointing out that the sub-indices within the World Governance Index rely on subjective opinions from expert institutions without a presence on the ground. According to him, these assessments lack an understanding of the contextual appropriateness for the countries being evaluated. Nageswaran called for transparency in the assessment methodology, urging credit rating agencies to disclose the extent and weights assigned to these indices, emphasizing the need to minimize qualitative overlays on qualitative assessments.
He proposed a crucial change that could be implemented by the World Bank’s management without shareholder consent. This change involves making the World Governance Index more transparent, less subjective, and better aligned with the context, with the active participation of developing countries. Nageswaran argued that such a modification could lead to more objective assessments by credit rating agencies for emerging economies. Improving credit ratings, he asserted, would result in substantial savings in global capital markets, which could then be directed towards development needs and global public goods.
Nageswaran’s remarks echoed concerns raised in a paper by Sanjeev Sanyal, a member of the Economic Advisory Council to the Prime Minister, who had identified serious methodology issues in perception-based indices like the Freedom in the World Index and the Economist Intelligence Unit Democracy Index. These indices contribute to sovereign ratings through the World Bank’s Worldwide Governance Indicators.
The Worldwide Governance Indicators rank 215 countries and territories based on six governance dimensions: ‘Voice and Accountability,’ ‘Political Stability and Absence of Violence,’ ‘Government Effectiveness,’ ‘Regulatory Quality,’ ‘Rule of Law,’ and ‘Control of Corruption.’