The Recipe for Good Government

By Arnold Kling

If we compare countries around the world, what factors are generally associated with good governance and what factors are associated with bad governance?

Recently, some prominent individuals have complained about the poor functioning of the U.S. government. Steven M. Teles called it a “kludgeocracy.” Francis Fukuyama called it the “Decay of American Political Institutions.” In an interview, President Obama noted that “we have these big agencies, some of which are outdated, some of which are not designed properly.”
What is the solution? Reorganization of the executive branch might help. Others have proposed campaign finance reform, less gerrymandering of congressional districts, or adopting a parliamentary system as an alternative to divided government. However, none of these offers a proven remedy.


Rather than look at government reform in terms of theory, I propose that we look at what works in practice. If we compare countries around the world, what factors are generally associated with good governance and what factors are associated with bad governance?
It turns out that a country's size, in terms of population, is an important negative factor. Large countries are less likely to be well-governed than are small countries.
For a quantitative measure of the quality of government, I used the Fraser Institute's Economic Freedom of the World Index. The 2013 values of the index ranged from a high of 8.97 for number-one-ranked Hong Kong to 3.93 for Venezuela, country number 152 on the list.
Certainly there are factors other than economic freedom that constitute good government. Human rights, political freedom, and minimal corruption should also count. Progressives would admire countries that have robust welfare states. The Fraser Institute rankings show a high correlation between economic freedom and these other factors. For example, many of the countries near the top of the list are known for their strong social insurance systems.
There are 118 countries with a population of at least 5 million, but 17 are not included in the Fraser Institute rankings.¹ That leaves 101 countries. Consider the smallest of these countries and the largest. I broke these into five groups of countries, choosing break points that would put close to 20 countries in each group.
The 23 countries with population between 5 million and 9 million are:

Next, look at all 18 countries with populations of 76 million or more:

The median Economic Freedom Index among these countries is just 6.44, compared to 7.26 for the small countries mentioned above. Just three of the largest countries are in the top 39 freest states and five are in the bottom 36.
Relative to this peer group of high-population countries, the United States is the best governed, with only Germany and Japan coming close – and both of them have less than half of the U.S. population. Perhaps we should be grateful that our government is not worse than it is.
Here is a breakdown of all 101 countries in the Fraser index with a population of at least 5 million. I broke the countries into four approximately equal-sized groups according to the Fraser index.

Overall, 43 percent of the small nations are in the highest group for economic freedom. Only 20 percent of the middle-sized nations are in that group. And just 17 percent of large nations have high levels of economic freedom.
As I read these data, they offer a lesson for Washington and Brussels. Centralized government for the European Union or the United States faces a structural impediment to success due to their large populations. A population size between 5 million and 9 million seems to be most conducive to good government.
If the optimum population is somewhere between 5 million and 9 million people, then the United States and Europe are “too big to govern.” In fact, even if the United States and the European Union were broken up, many of the countries within Europe and several of the largest states in the United States would be above the 9 million threshold in population.
There are many proponents of federalism who base their arguments on theory or on what they regard as the original intent of the Constitution. My point here is that the case for federalism can also be made empirically. Good government is going to be more prevalent in polities with populations between 5 million and 9 million than in much larger jurisdictions.
This suggests that welfare-state responsibilities should be handled at the state level, not the federal level. Could we turn back to the states the trust funds, taxing authority, and responsibility for social welfare? If Sweden, Singapore, Switzerland, and Denmark can provide for health coverage and other elements of a social safety net, then so can Vermont or Arkansas. The challenge is to get the national government out of the way.
Arnold Kling is a member of the Mercatus Center's Financial Markets Working Group at George Mason University.