Methodology

Tuesday, March 27, 2012 7:06 PM. by

Explanatory Notes on Methodology

The overall grading scale of the IPRI ranges from 0 to 10, with 10 representing the strongest level of property rights protection and 0 reflecting the non-existence of secure property rights in a country. Similarly, each component and variable is placed on the same 0 to 10 scale.

For the calculation of the final index score, the variables within each component are averaged to derive the score for each of the three components. The final overall IPRI score is itself the average of the component scores. During construction of the index, a number of weighting methods for the components were tried. These were based on the authors’ subjective views as well as to account for the dif- ferent variances within each variable. However, the choice of the weighting method had little impact on the final rating and ranking of thecountries.Thus,for reasons of simplicity and objectivity,the final numbers presented in this report are the result of a simple average calculation. It combines available variables into the three component area ratings, which in turn are averaged into the final IPRI score. However, the author does not wish to imply that all components and areas in the index are of equal importance. Thus, readers who prefer to weight the variables in a different manner are invited to do so.

The 10 variables included in the IPRI stem from different sources. Most of them can be easily normalized to the IPRI’s 0-10 scale. To combine variables that did not come in an indexed form, we applied the following standardization formula:

{Xmax –Xi }*10 Xmax – Xmin

Xi represents the individual country’s value of the factor involved, while Xmax and Xmin were set at the maximum value for that factor within the original sample of countries in 2008 and zero, respectively. This method was used to standardize the Registering Property variables in the PPR component.

This rescaling procedure, while similar, is slightly different than that which was employed in the previous years. Previously, the maximum value for each of the factors was allowed to change with changes in the sample of countries. This year, it was anchored to the benchmark value in the sample of countries in the 2008 IPRI report. This change allows for a more objective comparison of countries from year to year. Previous years’ data were rescaled, and scores were recalculated to account for this change. It is important to note that the recal- culation of previous years’ scores for PPR as well as IPRI had a very minor effect on rankings for those years.

The Countries

The 2012 International Property Rights Index ranks a total of 130 countries from around the world.Yemen was added to this year’s index as data became available. The selection of countries was determined by the constraint of available data only. Covering 97 percent of the world’s Gross Domestic Product, these countries differ substantially in economic performance and market structure. For means of comparison, the economies included in the IPRI were assigned to seven geographic regions, which include the following: Latin America and Caribbean, Western Europe, Central/Eastern Europe and Central Asia, Middle East/North Africa, Africa, Asia and Oceania, and North America.

It is important to note that the number of countries covered by the IPRI’s different data sources varied significantly. Therefore, the author was provided with significant variation in the number of potential countries to be included in the IPRI. To be considered for the final IPRI ranking, a country’s data needed to be represented in a minimum of one half of the included variables per category, although in most cases countries exceeded this threshold. Consequently, there are some countries that do not enter any of the final country sets of the index’s three components and some that met the threshold of only one or two of the components. The countries that qualified for all three categories are the 130 included in this report.

Limitations and Future Considerations

Several things must be kept in mind when understanding the conceptualization and outcomes of the IPRI. First, the IPRI ranking covers a relatively large number of nations from greatly varying economic, political, and cultural backgrounds. Consequently, many of the countries’ idiosyncratic characteristics with respect to property rights protection and strength cannot be considered here.

None of the data used for the construction of the IPRI is generated by the author but was instead collected from third-party sources such as the World Bank, World Economic Forum, and trade groups. While this allows the study to refrain from any potential bias, it limits the ability of the authors to reconstruct any missing data. The problem of missing data becomes serious when the variable that is missing is not highly correlated with the ones that are available. In those cases, a country’s score can be not as representative as those countries with all data available. Moreover, changing data availability from year to year can result in changes in scores that are not related to the actual changes in the situation with property rights. The author tried his best to point out any such cases throughout the report and particularly in the country profiles (Appendix I).

As in the past, this study remains constrained by the availability of intellectual property rights data, especially by the lack of data on trademarks. In 2009, trademarks were dropped as one of the sub-components because of the lack of updated data, a situation that persists. However, the author remains confident that in future years reliable data will be available because of development of new databases by authoritative sources. Additionally, the IPR data can significantly benefit from better measures of enforcement efforts in the area of intellectual property rights by national governments, private sector groups and non-profit organizations. Similarly, the PPR component could also be improved by including more ‘hard data’ on the security of property rights. These remain the areas with the most potential for further improvement of the data underlying the IPRI.

Finally, time-series aspects of the index continue to be used as the index enters its sixth year of publication. However, the nature of institutions is such that effects of their changes might not be felt in the outcomes of interest for many years. Additionally, lack of updated data on economic outcomes significantly interferes with this analysis. The author hopes that these constraints will be overcome in the future and that the theoretical relationship between property rights institutions and economic well-being can be tested empirically using more robust methods.