GENERAL
Q: What is the Legatum Prosperity Index?
A: The Prosperity Index is an inquiry into the nature of prosperity and how it is created. We define prosperity holistically to include both material wealth and quality of life. Rather than replicating other measurements that rank countries by their actual levels of material wealth or life satisfaction, the Index produces a ranking based on the conditions that foster prosperity -- that is, the factors that promote economic competitiveness and improved liveability in a given country. We refer to these factors as drivers of prosperity and to those that impede prosperity, as restrainers. The Index endeavours to rank countries according to the strength of these drivers and restrainers, not according to simple measures of income and life satisfaction. In this way we hope to contribute to a richer analysis of what promotes prosperity globally.
Q: Why did you launch the Prosperity Index in the first place and who is the study for?
A. The Prosperity Index was launched with the desire to understand how prosperity is created and defined. In 2007, the Legatum Institute published the first results of an investigation into the drivers and restrainers of prosperity in nations, in a report and website accompanying the 2007 Prosperity Index.
This year, scholars and researchers affiliated with the Legatum Institute have significantly expanded the scope of the Index, investigating prosperity drivers and outcomes in 104 countries worldwide, increased from 50 last year.
The Legatum Prosperity Index is designed to be a practical tool for researchers, policy makers and influencers, members of the media, and the curious public – in short, anyone who wants to be better informed and armed with practical indicators that demonstrate a path to a nation’s prosperity.
Q. What is unique about this Index?
A. The Prosperity Index is unique in at least three ways:
First, it takes a holistic view of prosperity, encompassing both material wealth and life satisfaction.
Second, it assesses the drivers and causes of prosperity, rather than measuring outcomes. Rather than replicating other measurements that rank countries by their actual levels of material wealth or life satisfaction, the Index produces a ranking based on the conditions that foster prosperity – that is, the factors that promote economic competitiveness and improved liveability in a given country. The Index endeavours to rank countries according to the strength of these drivers and restrainers, not according to simple measures of income and life satisfaction. In this way we hope to contribute a richer analysis of what promotes prosperity globally.
Third, it clearly indicates that both individuals and governments have a role to play in promoting national prosperity.
Q. Can you explain in more detail the role of governments and individuals?
A. The Prosperity index reveals that governments alone cannot create nor mandate prosperity, but they can foster an environment that encourages prosperity through wise policies. Individuals, however, must choose to take ownership of the challenges and opportunities that accompany increased freedom and privilege, and thereby advance national prosperity overall. A website dedicated to measuring personal prosperity has been created at www.myprosperity.com.
Q. What are some of the key principles relevant to promoting prosperity?
The results of the 2008 Prosperity Index research highlight a number of general principles relevant to the promotion of national prosperity. These include:
- Freedom of choice is crucial. Whether people have freedom of choice and control over how they direct their lives and spend their time and resources is a strong determinant of life satisfaction and productivity.
- Holistic prosperity cannot be created or maintained without effective and accountable governance. Governments that exercise power responsibly and are accountable to their citizens dominate the top quartile of the rankings for both competitiveness and liveability.
- For poorer countries, raising incomes is a top priority. For countries with an income per person of less than US $10,000 on average, income levels are the single strongest predictor of how happy that country’s people will be.
- For richer countries, wellbeing means more than just money. For most people in rich countries, non-material drivers tend to have a bigger impact on their life satisfaction than increases in income.
- Entrepreneurship is a promising path to material wealth. Entrepreneurship indicators show a significant statistical relationship with long-term economic growth in both rich and poor countries.
- Growth in invested capital is crucial to long-term economic growth. Investment by the private sector (e.g. in factories, offices and production machinery) is one of the most important drivers of material wealth, for both rich and poor countries.
- Economic openness can help poorer countries catch up faster. Open economies in which foreign direct investment and international trade play larger roles have higher long-term growth rates. Economic openness enables countries to absorb foreign capital, technologies, skills and business techniques. However, poor countries that depend heavily on commodity exports, such as oil and gas, often have lower long-term growth rates.
- Climate and the environment impact our happiness. Several indicators of climate and the environment, including temperature extremes, land area devoted to nature, and perceived air quality, show a significant relationship with average national life satisfaction.
- Develop your gift and then give it away. Countries where charitable giving and volunteering are common report higher average levels of wellbeing.
- Geography is no longer destiny. Advances in medical science and productive technology are now available worldwide. The top 30 countries in the Prosperity Index include not only countries from Western Europe and North America but also Asia, Eastern Europe, and the Middle East.
- Governments and citizens each have a role in building the prosperity of nations. The 2008 Prosperity Index includes factors driven by individual choice ( such as volunteering and charitable giving), factors driven by the choices of policymakers (such as economic openness and good governance), and factors influenced by both, such as health.
Q. What are the key drivers and restrainers of prosperity? Is there a difference for poor and rich countries?
A. The key drivers of economic competitiveness vary according to a country’s level of development. For poorer countries (those with average incomes of less than $10,000 per capita), where increasing material wealth is a particular priority, the most important components of economic competitiveness are:
- Government Effectiveness
- Levels of Education
- Growth in Invested Capital
- Low Costs of Starting a Business
- Commercialisation of Innovation
- Low Dependence on Foreign Aid
- Low Dependence on Commodity Exports
- Economic Openness
For richer countries (those with incomes greater than $20,000 per capita) that wish to experience continued economic growth, the most important components of competitiveness include:
- Invested Capital
- Education
- Entrepreneurship
- Commercialisation of Innovation
The key factors for promoting life satisfaction also vary according to a country’s level of development. In richer countries, where moving beyond material wealth to broader wellbeing is an important goal, the most important components of liveability include:
- Continued High Levels of Income
- Good Health
- Political Rights and Civil Liberties
- Freedom of Choice
- Charitable Giving
- Family Life
- Equality of Opportunity
- Pleasant Natural Environment
- Community Life
- Religious Freedom
Many poor countries have surprisingly high levels of wellbeing, because traditional social strengths can compensate, at least somewhat, for low average standards of living. In poor countries, the most important components of comparative liveability include:
- Family Life
- A Warm Climate
- Religious Faith
The five prosperity indicators on which all top ten countries scored especially high are growth in Invested Capital, Good Governance on Economic Issues, Commercialising Innovation, Good Governance on political issues, and High Incomes.
All but Singapore and Hong Kong scored nearly as well on community life and family life indicators, which are important measures of Social Capital. Conversely, the bottom 25 percent of the Index countries get especially low marks on Invested Capital, Economic and Political Governance Issues, Innovation, Freedom of Choice indicators. They are especially troubled by low incomes and high dependence on foreign aid.
Q. What are some of the highlights of the Index? Which countries rank top in promoting prosperity?
There are different paths to prosperity. The top spot in the Index is claimed by Australia, followed by Austria and Finland in a tie for second place. These are followed closely by Germany, Singapore, and the United States, also in a tie.
Australia makes a particular virtue of entrepreneurship as a source of material wealth, as well as pursuing broader societal wellbeing through high levels of volunteering and charitable giving. Austria turns in top scores in education, a key to long-term income growth, and also in health, a key to quality of life. Finland boasts superb governance, helping to drive both wealth and wellbeing in that country.
This group of countries tops the Index because of imbalanced results from other regions. Many Asian countries score very well on the economic competitiveness indicators, but have comparative weaknesses in liveability, including limited equality of opportunity for women, a degraded natural environment, and long working hours. In contrast, most Nordic countries score very well on liveability indicators, but poorly on some wealth drivers, most notably entrepreneurship.
Q: Some countries have a wide variation between their material wealth and well-being rankings, while others are almost the same. What does that tell us?
A: First, that every country is unique – even among our three first-ranked nations we see significant difference in the composition of their ranking. This study has been specifically designed to encourage interaction with the data at a granular level, with the flexibility to compare multiple countries and indicators with one another in real-time.
Q: Why does Singapore rank 1st on the material wealth and as low as 17th on the well-being scales?
A: The indicators show that lack of leisure time has a strong effect on the life satisfaction scores in Singapore. In common with many of the countries that have moved fast up the material wealth rankings, long hours are seen as a necessity on the path to overall prosperity; reaching the kind of balance between material wealth and leisure time, exhibited by the countries at the top of the rankings, remains a challenge.
Q: Is there any hope for Yemen which is ranking last in the Index?
A: While no country has poor scores in every category, Yemen comes closest. While its people maintain a strong religious faith, they also suffer from extreme levels of poverty and poor governance. For most of the countries in the bottom ranks of the Index, extreme poverty appears to be the main cause. This usually has further wellbeing impacts by contributing to ill health and unemployment. A number of countries, such as Zimbabwe and Sudan, are both impoverished and politically repressive.
A remedy for countries like Yemen is to improve governance, reduce corruption, increase civil and individual liberties and improve investor confidence. Without doing this, these countries are unlikely to emerge from their bottom ranking for some time.
PROGRESS
Q: Who’s moving up and down this year compared to last year’s Index?
A: While the principles behind the 2008 Index are the same as last year, the datasets are not identical, and therefore direct comparisons between years are potentially misleading. For the liveability rankings, for example, we have used Gallup World Poll data which is more current than the World Values Survey used in 2007: although the data cover the same areas of inquiry, academic rigor demands that we do not pass these off as being comparable.
Q: Some of the negative scores seem to reflect ingrained cultural attitudes – for example, the lack of leisure time in the majority of Asian countries, where working long hours is a virtue. How can countries address these cultural norms and move up the rankings?
A: While some of these issues may indeed by cultural, the Index shows us that they are also personal – and claimed as reasons for reductions in perceived life satisfaction. There are no “quick-fixes”, which is one of the reasons we have analyzed data over a full 40 year period. There are a number of clear indicators for each country, some of which will be more immediately actionable than others. We are hopeful that recent progress towards higher standards of corporate governance will soon be reflected in the material wealth rankings.
Q: Which countries do you think will make the most progress in the next 5 years?
A: Last year the top five countries to make progress in the material wealth rankings were Ireland, Croatia, Portugal, Greece and China. This year the same phenomenon dominates the top ranks: catch-up growth by the newer European Union members, with Slovakia and Bulgaria leading at 1st and 2nd, and Romania close behind at 7th.
Joining the European Union seems to make the income convergence predicted by economic theory a reality. Like Ireland and Portugal before them, today’s new EU members appear on their way to joining the ranks of the world’s richest countries.
METHODOLOGY
Q: How did you collect the data?
A: We worked in partnership with Oxford Analytica, a leading independent research consultancy. The Index is produced using a quantitative approach and includes only factors for which a statistical link with material wealth or life satisfaction can be shown. Drawing on the Gallup World Poll and other new data, the country coverage of the Index has been expanded from 50 countries in 2007 to 104 in 2008.
Based on new statistical research, the Index uses a much wider range of indicators. This year the Index employs 16 drivers that show a strong statistical relationship with differences in countries’ relative levels of material wealth (indicators of Competitiveness), and 28 drivers that show a strong statistical relationship with differences in countries’ relative levels of life satisfaction (indicators of Liveability). The Index includes a new weighting methodology, which assesses how the drivers of prosperity change as countries become wealthier.
Q: Has the Index been independently reviewed?
A: Legatum engaged a panel of academic experts who specialise in the study of prosperity to review and edit the Index. These experts represent a wide range of scholars and researchers, from leading academic institutions, in disciplines from economics to political science and more.
Q: The Index now looks at 104 countries, as compared to 50 in 2007. Are there any plans to further expand the study?
A: Our goal is to provide accurate and reliable data. Over the coming years we will continue to refine our methodology, collect more data and expand the number of countries in each successive report.
Q: How are the rankings calculated?
A: The overall Index scores and rankings are based on a weighted combination of indicators that reflect Economic Competitiveness and Comparative Liveability. That is to say, the Index does not rank countries according to which have the most material wealth or the highest levels of happiness at a given time. Rather, it is an index of drivers, which means that countries are ranked by how well they are doing at fostering economic growth and improved quality of life. In other words, how well are nations promoting the practices, habits, policies, and institutions that create enduring prosperity? The indicators that comprise the Index were identified and weighted based on statistical analysis, using 40 years of historical data on economic growth in more than 50 countries, and life satisfaction survey data for more than 100 countries. The Index combines 22 key indicators and 44 sub-indicators in order to rank more than 100 countries, based on the degree to which the actions of their people and governments drive or restrain the creation of holistic national prosperity, relative to the prosperity of other countries.
LEGATUM-RELATED
Q: What is the Legatum Institute and what does it do?
A: The Legatum Institute is an independent policy, advocacy and advisory organization, whose mission is to research and promote the principles that drive the creation of global prosperity and the expansion of human liberty. The Legatum Institute undertakes original and collaborative research, and publishes case studies and ancillary literature, including the Legatum Prosperity Index.
Q: Who is Legatum?
A: Legatum is a privately owned international investment organisation, whose primary focus is commercial investment in international equities and financial securities, and which also applies its investor’s expertise to a long-standing involvement in the sustainable development of communities around the globe.
Headquartered in Dubai, part of the United Arab Emirates, the Legatum Group was founded in December 2006 following the demerger of the Sovereign Global group of companies ("Sovereign") which provided capital to companies and governments in various industry sectors worldwide since 1986.
Legatum’s mission is to maximise its absolute long-term return on investment in the global capital markets, while optimising capital allocation to promote sustainable human development and individual prosperity. The Group is composed of a number of divisions: Legatum Capital, Legatum Global Development (“LGD”); the Legatum Institute; and the Legatum Center at Massachusetts Institute of Technology.
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