Policy application of composite indicators: The Global Entrepreneurship Index

Abstract

The popularity of composite indicators has been increasing over the last two decades. These indices are particularly useful, when we have to describe multidimensional concepts. At the same time, the shrinking of the available pieces of information into one number makes impossible to use the index for policy purposes. For policy application we need to decompose the index into its components.
Traditional policy suggestion, most of the times, are general, one-size-fits-to-all type of recommendations. The Global Entrepreneurship Index (GEI) was the first composite indicator that elaborated a method, called the penalty for bottleneck (PFB) that served as a basis for country-specific, tailor-made policy recommendations. The drawback of the method was the ad hoc selection of the penalty function. In this study, we present two methodological improvements that makes it possible to increase the efficiency of the additional resource deployment over the 14 pillars of GEI. The equalization of the pillar averages methodology is a monotonic transformation equalizing the 14 pillar averages and the marginal improvement effect around the average. The Benefit of the Doubt (BoD) method assigns weights to the pillars that makes possible to optimize distribution of the additional resources. Based on the weights, we can make country specific policy recommendations. We compare three scenarios: (1) the quantitative
increase of the GEI scores (2) the PFB implied and (3) the BoD based policies. We have concluded that the BoD and the POB provide similar efficiency improvement in the case of developed countries but the BoD is better for the developing countries. The endogen selection of the weights as opposed to the ad hoc penalty function also favors the BoD methodology.