Measuring Prosperity and Progress

November 24, 2014

Continued sluggishness in the eurozone. Japan falling into yet another recession. China facing its slowest annual growth rate in more than two decades. Deadly turmoil in the Middle East. Russian aggression. Ebola. Surveying this landscape last week, David Cameron, the UK Prime Minister, wrote that, “six years on from the financial crash that brought the world to its knees, the red warning lights are once again flashing on the dashboard of the global economy.”

The Rt Hon Cameron is right to be concerned, and his candor is a refreshingly welcome contrast to elected officials who so often speak about economic matters in abstruse code. We don’t mean to overlook all these real and pressing concerns. But taking a slightly broader view reveals a more positive story to tell about global progress in recent years.

That progress is skillfully documented in a new report by the Legatum Institute, a London-based think tank. This report, called the Legatum Prosperity Index, ranks 142 countries—which collectively account for 99 percent of global gross domestic product—across eight categories: economy, entrepreneurship & opportunity, governance, education, health, safety & security, personal freedom, and social capital. And when viewed in total, say the report’s authors, “global performance on each of these has improved” over the past six years.

The report makes for fascinating reading, precisely because it ranks countries on such a wide range of indicators, such as governance (which measures effective and accountable government, fair elections and political participation, and the rule of law) and health (which measures health outcomes, health infrastructure, and preventative care). In this sense, the report differs from the World Bank’s “Doing Business” rankings (touted in this space last year), which, useful though they are, evaluate only a country’s regulatory environment.

Although there is considerable overlap between the top performers in both reports (e.g., New Zealand, Australia, the Scandinavians, the United States), there is also significant divergence. China, for example, is ranked 54th in the Prosperity Index but 90th in Doing Business. The higher ranking is partly a byproduct of China’s “economy” score (which measures macroeconomic policies, economic satisfaction and expectations, foundations for growth, and financial sector efficiency) being the sixth highest in the world. But the country’s overall ranking is weighed down by its place in the “personal freedom” ranking: 117th.

Beyond China, there are noteworthy findings throughout the Prosperity Index:

• The United States ranks 10th overall, and has the highest percentage of people reporting that they’ve helped a stranger in the previous month (80 percent).
• France ranks 21st overall but only 56th in social capital, which measures social cohesion and engagement, as well as community and family networks. 
• Slovenia ranks 24th overall and has the lowest startup costs in the world.
• Israel ranks 38th overall, and 19th in social capital, but 105th in safety & security.
• Russia ranks 68th overall, and 37th in education, but 113th in governance and 124th in personal freedom.
• Indonesia ranks 71st overall—up from 91st in 2009—and public opinion surveys show that 99 percent of the population links hard work to getting ahead (the highest share of any country in the world).
• Venezuela experienced the largest decline since last year’s report, falling from 78th to 100th, after seeing its economy ranking plunge from 60th to 104th and its social capital ranking decline from 68th to 94th.
• India ranks 102nd overall and is the only country in the Asia-Pacific that has not improved its position in the Prosperity Index since 2009.

The findings are a reminder, as the report notes, “that prosperity is truly multi-dimensional.” Indeed, as important as GDP is to understanding countries’ material well-being, it may not reflect progress (or regress) in categories like governance, health, education, personal safety, and social capital. The shortcomings of GDP were demonstrated earlier this year when the United Kingdom and Italy disclosed that revenues from prostitution and the sale of illegal drugs would henceforth be factored into GDP data (estimated revenues, that is, since these illicit transactions don’t show up in accounting ledgers). Thus the value of reports, such as the Prosperity Index, that present a more nuanced portrait of living conditions in countries throughout the world.

There is also value in country-by-country rankings: they seem to spur policy competition among leaders keen to see their countries stack up better. Many heads of state have set explicit goals of boosting their country’s “Doing Business” rankings, including Vladimir Putin, Narendra Modi, and Paul Kagame. Mr. Cameron’s guarded outlook of last week underscores that many countries have much work to do to heal from and move past the world financial crisis. The optimistic news of studies such as the Legatum Prosperity Index will hopefully fortify more leaders to pursue that work toward a wealthier, healthier, and more prosperous world.

Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.