Key Findings | Investigating Prosperity | Leaders & Laggards | Principles of Prosperity | A Focus on Principles

Our investigation uncovered some basic principles that can be generalised across large numbers of country cases. For each principle, we have listed the relevant finding of our statistical research, and then the insight for citizens and policymakers which this results suggests.

Finding: On average, people’s self reported freedom of choice is so strongly correlated with life satisfaction that this factor alone may determine close to 50 percent of how people are satisfied with their lives.

Insight: Of the countries in the top ranks of the Prosperity Index, a few report markedly higher levels of freedom of choice than their peers -- notably the United States and New Zealand, followed by Iceland, Canada, Australia, and Austria. That is, in these countries, people, when surveyed, report that they feel they have "freedom of choice and the ability to control the way their life turns out". Analysis of this data suggests that to enjoy free choice, people need to have good health, equality of opportunity and economic freedom. A conclusion of some analyses of life satisfaction data is that life satisfaction can be legislated -- for instance, by providing guaranteed incomes or a shortened workweek. But this data indicates that such measures are likely to be counterproductive, by undermining the opportunity, economic freedom, and ultimately, the feelings of free choice that are so crucial to societal wellbeing.

Finding: Statistical testing indicates that for countries with an average income per person of less than US $10,000, income levels are the single strongest predictor of how satisfied that country’s people will be with their lives.

Insight: There is an old saying that “money can’t buy happiness”. While this may be true, it is equally true that the lack of money can cause great misery. In rich countries, without exception, people on average report themselves satisfied with their lives. By contrast, in many poor countries, for instance, Zimbabwe and Pakistan, the stresses of hunger, poor housing, and physical insecurity appear to be so overwhelming that large numbers of people report themselves dissatisfied with the life they lead. This suggests that for countries at the lower end of the income scale, raising incomes via economic growth should be among the top concerns.

Finding: Statistical tests on countries grouped by income find a powerful relationship between income and life satisfaction in countries with an average income below roughly US $10,000 per person, and this relationship remains fairly strong up to around US $20,000 per person. Above this level, the relationship weakens, and further increases in income appear to matter only very slightly.

Insight: Rising incomes can reduce human misery by alleviating the physical deprivations that sometimes accompany poverty. Yet further increases in the wealth of already wealthy societies do not seem to make people, on average, more satisfied. To the extent that there is a trade-off between time and money, this may have implications for the choices people in rich countriesmake in their lives. Indeed, wealth brings with it new and different challenges as people have increased choices which may require increased maturity and discipline if it is not to lead to self-destructive behaviour. Some causes of ill-health, such as alcoholism or obesity, or causes of ill-being, including high divorce rates and weakened community bonds, are more common in wealthier countries.

Finding: The factor with the strongest statistical relationship to economic growth is the growth in the value of fixed capital investment (such as factories and machinery) per worker.

Insight: Every country has financial capital, but all too often it is dormant and unproductive. Sometimes it is hidden under the mattresses of the poor, or in their informal dwellings, because the absence of secure property rights makes it impossible for the poor to put these assets to use (for instance, a squatter without legal title to his or her home cannot mortgage this home to start a small business). Sometimes a country’s financial capital becomes flight capital, which seeks a more stable and welcoming environment in foreign banks or real estate. It is difficult to lure this capital out of its hiding places and back into a country’s economy, because productive assets such as factories are high-profile and immobile -- easy targets for thieves or unscrupulous government bureaucrats. Turning hidden capital into invested capital thus requires a great leap of trust by investors, and this usually only happens in stable business environments offering sound property rights, the impartial application of just laws, and good economic policy.

Finding: Economies in which foreign investment and trade play a greater role grow more rapidly than closed economies.

The United States is well known for its unique social and political culture. Unusually for a rich country, the US maintains high levels of religious faith, and people with strong religious faith tend, other things being equal, to report higher average levels of life satisfaction. US citizens also report themselves exceptionally secure in their ability to make free choices and control their own lives. High scores on these factors are not unique to the United States. New Zealand and Canada report high levels of free choice; many countries in Latin America and the Muslim world report high levels of religious faith. However, only the US combines high levels of religious faith and freedom of choice with good scores in other areas of material wealth and life satisfaction.

Insight: Many of the factors we studied have a simple relationship with economic growth. Increases in capital and education contribute directly to the value of physical and human capital and thus directly increase economic output. Poor governance and excessive bureaucracy impose costs on business and thus restrain growth. Foreign investment and trade are different. We measured these factors as a percentage of economic output -- that is, we measured their relative weight in an economy, not their direct contribution to output. The analysis revealed a strong relationship between the weight of foreign trade and investment and long-term growth. This is because openness helps poorer countries catch up. Exposure to foreign trade and investment enable poor countries to adopt, in a matter of a few years, certain technologies, skills, and business methods that required generations to develop in the industrialised nations. Foreign direct investment in particular is doubly beneficial: not only does it provide much-needed invested capital (see Principle 4 above), it also facilitates the transfer of advanced skills and technology.

Finding: Two of the factors we tested - - commodity exports as a percentage of national income and foreign aid as a percentage of national income -- had strong negative relationships with long-term economic growth.

Insight: That more money could ever be impoverishing seems counterintuitive. But the statistical evidence shows that countries that rely on foreign aid or commodity exports for large portions of their income tend to grow significantly more slowly than other countries. (Commodity exports include oil and gas, minerals such as gold or copper, and agricultural commodities such as coffee.) In the case of commodity exports, the negative impact on growth arises partly due to economic distortions -- for example, inflows of funds from oil exports cause exchange rate appreciation that undermines the competitiveness of other economic sectors. It also arises through political effects, as oil exports have been shown to correlate with violent civil conflicts -- in part because these conflicts are often funded by such exports, as in the welldocumented case of ‘conflict diamonds.’ Nonetheless, commodity exports do not have to be a curse. As Norway, the top-ranked country in our Index has shown, oil revenues that are invested responsibility can help drive growth and foster high levels of wellbeing.

In the case of foreign aid, the negative impact on growth likewise comes through multiple channels: (1) as with commodity exports, there can be exchange rate effects; (2) local markets can be distorted by the inflows of funds -- for example, the most talented local workers often leave private business to work in well-paid aid projects; and (3) the quality of governance can be undermined as political leaders are incentivised to exploit their control over aid funds to distribute patronage to supporters, instead of focussing on delivering high-quality government services and economic growth.

Finding: Tests of the World Bank’s “Doing Business” indicators show a strong correlation with economic growth rates

Insight: The World Bank has developed an objective indicator of the burden that bureaucracy imposes on businesses, by measuring, in more than 100 countries worldwide, the cost and time required to establish a new company, the cost of registering property, the difficulty of hiring and firing workers, the cost of enforcing contracts, and so on. Because this indicator is relatively new it is not possible to assess its impact on historical rates of growth. However, tests on the most recent five years of data find the impact of bureaucracy to be strong -- second only to the impact of capital investment. This suggests that the World Bank’s annual updates on which countries have done the most that year to reduce the burden of bureaucracy are well worth watching.

Finding: Tests on data from the world’s richest countries (those with an average income per person greater than US $15,000) find that the statistical relationships between life satisfaction and factors such as strength of social communities, unemployment, and leisure time, are much stronger than the relationship between life satisfaction and income.

Insight: In all rich countries, people on average report that they are satisfied with their lives. This does not, however, mean that there is no room for improvement. Rich countries do exhibit substantial variation in average levels of life satisfaction. This variation is driven by factors such as a lack of trust in others (which can be caused by a lack of active social, religious and political organisations -- so-called “social capital”), high divorce rates, declining leisure time, and unemployment.

Some of these issues are arguably influenced by government policy, but others are a matter of individual choice -- it has long been said that wealth poses a more difficult test of a person’s character than poverty, as wealth offers more choices, for good and for ill, and therefore needs to be managed responsibly. As far as government policy is concerned, a central concern is the “miserable minority”. Because most people in rich countries report high levels of life satisfaction, a key differentiator in national average life satisfaction is the relatively small number of people who report extremely low levels of life satisfaction -- including the mentally ill and the unemployed.

Finding: Tests on data from rich countries (countries with an average income per person greater than US $15,000) find that competition and commercialisation of innovation increase long-term economic growth.

Insight: Rich countries tend to have uniformly excellent economic policies, education, and capital investment, when compared to the rest of the world. This is unsurprising -- had they not achieved such excellence they would not be rich. As a result, there is little variation among rich countries in these factors, and the vast majority of their growth tends to be accounted for by natural economic processes.

Yet, there are some things rich countries can do to improve their growth at the margins. Notably, our tests show that when rich countries are compared against their peers, those with deregulated and highly competitive domestic markets grow more quickly. Switzerland, which was the world’s richest country in 1990, has recently grown slowly because over-regulation has led to higher costs and lower productivity in sectors such as utilities, food products, construction, and education.

Another boost to rich-country growth comes from commercialising innovative technologies. Our tests were unable to identify a clear benefit to innovation itself -- some countries with great success in producing patents or scientific research have grown slowly in recent years. However, countries that succeed in commercialising innovation (as measured by high levels of high-technology exports) do grow faster than their peers.