Step 1: Theoretical framework
What is badly defined is likely to be badly measured
Composite indicators are generally used to summarise a number of underlying individual indicators or variables. An indicator is a quantitative or qualitative measure derived from a series of observed facts that can reveal relative position in a given area and, when measured over time, can point out the direction of change. In the context of policy analysis at national and international levels, indicators are useful in identifying trends in performance and policies and drawing attention to particular issues.
There are basically three levels of indicator groupings:
- Individual indicator sets represent a menu of separate indicators or statistics. This can be seen as a first step in stockpiling existing quantitative information.
- Thematic indicators are individual indicators which are grouped together around a specific area or theme. This approach requires identifying a core set of indicators that are linked or related in some way. They are generally presented individually rather than synthesised in a composite.
- Composite indicators are formed when thematic indicators are compiled into a synthetic index and presented as a single composite measure.
In the case of comparing for example the performance of countries on different dimensions, a typical composite indicator of n indicators will be the weighted average of a set of normalised indicators.
In practice, it is extremely difficult to integrate individual indicators in a manner which accurately reflects economic reality. As a starting point, one needs an understanding and a definition of what it is that is being measured. A theoretical framework is needed to combine individual indicators into a meaningful composite and to provide a basis for the selection of components and weights in the formula above. Ideally, this framework will allow indicators to be selected, combined and weighted in a manner which reflects the dimensions or structure of the phenomena being measured. The indicators selected should carry relevant information about the core components and be based on a paradigm concerning the behaviour being analysed. It is this framework which indicates which indicators to include and how to weight them to reflect their relative importance in the overall composite. But as yet, the theoretical underpinning of most composite indicators is very underdeveloped.
In general, composite indicators by their nature may be incapable of reflecting the complexity of performance and policies or of capturing the intricate relationships between indicators. A simple composite indicator, formulated as an average of individual indicators, implicitly assumes the substitutability of its components. For example, composite environmental indicators imply that clean air can compensate for water quality. In fact, the multi-dimensional nature of most performance areas argues for a set of individual indicators and against composites. The more comprehensive a composite, the weaker it may be in adequately reflecting actual country performance.