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SECTION HEADER

LEGATUM INSTITUTE | THE 2013 LEGATUM PROSPERITY INDEX™ | 1

2014The 2014 Legatum Prosperity Index™

www.li.comwww.prosperity.com


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FOREWORD

©2014 Legatum Limited. All rights reserved. The Legatum Prosperity Index and its underlying methodologies comprise the exclusive intellectualproperty of Legatum and/or its affiliates. ‘Legatum’, the Legatum Logo and ‘Legatum Prosperity Index’ are the subjects of trade mark registrations ofaffiliates of Legatum Limited. Whilst every care has been taken in the preparation of this report, no responsibility can be taken for any error or omissioncontained herein.

Over the last six years, the world has become more, not less, prosperous.

Tis may be surprisi ng given the negative impac t of the nancial crisis.But economic growth is just one dimension of national success. In order todetermine a nation’s true prosperity we must consider a broad set of measures. Te Prosperity Index identies eight co re pillars of prosperity. On average,over the last six years, global performance on each of thesehas improved.

Te past six years have seen the onward march of democrac y. Emboldened citizens across multiplecontinents have led protests calling on their governments to grant them greater freedoms and a moreopen democracy. Te ‘Arab Spring’ began with the lone actions of a unisian street seller and spreadacross an entire region toppling governments and empowering individuals. Even in these last weeks we have seen thousand s of protesters taking to the s treets of Hong Kong seeking the f reedom to

choose who governs them. Te progress here is fragile. Islamists in the Middle East, for example,pose a major threat to freedom and wellbeing. It is vital to protect these liberties whether in Iraq,Syria, Libya, Hong Kong, or elsewhere.

In health, the last six years have seen positive advancements in some of the poorest places in the world. Across A frica, life expec tancy has starte d to increase whil e infant mortali ty has decreased. Yet, this too is under threat in parts of West Africa as nati ons struggle to contain the worst recordedoutbreak of the deadly Ebola virus, which has already killed thousands of people and threatens many,many more. Te Prosperity Index highlights the weakness of health infrastructure in parts of Africa.Strengthening that infrastructure to prevent future disasters must now become a priority.

In recent years the importance of education has been brought to global prominence through theinspiring work of Malala Yousafzai, the Pakistani schoolgirl who has become the youngest ever winner of the No bel Peace Prize. Malala’s belief in the transformatio nal power of education hastaken her from the streets of Pakistan where her views made her a target of extreme violence, tothe centre of the global stage where she is a leading light in the ght for universal education.

All of this emphasises that prosperity is truly multi-dimensi onal. Economic recover y after thenancial crisis is important, but to secure a better world we need to look beyond GDP. We need torecognise that freedom of choice and democracy are the building blocks of prosperous societies. Weneed to recognise that health lays the foundation for human ourishing. We need to understandthat education is a cornerstone of individual wellbeing as well as economic growth. And we need toprioritise opportunity and social capital, without which societies cannot prosper.

Te 2014 Prosperity Index provides a lens through which to view a comprehensive assessment ofnational success. Te Index measures the broad set of indicators that tel l us not only how nationsperform economically but in vital areas of education, health, freedom, opportunity, social capital,and more. Te Prosperity Index covers 142 countries in the wo rld, accounting for 96 per cent of the world’s population and 99 per cent of global GDP making it the most comprehensive tool of its kind.

I hope you enjoy the 2014 edition.

Sian Hansen

Executive Director, Legatum Institute

CONTENTSRankings

Headline Findings

Six-Year rends

Mapping Prosperity

Te Financial Crisis

Principles of Prosperity

Regional Findings

Sub-Indices

Methodology

Bibliography

Acknowledgements

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LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™ | 43 | LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™

O V E R A L L P R O S P E R I T Y

R A N K

C O U N T R Y

E C O N O M Y

E N T R E P R E N E U R S H I P &

O P P O R T U N I T Y

G O V E R N A N C E

E D U C A T I O N

H E A L T H

S A F E T Y &

S E C U R I T Y

P E R S O N A L F R E E D O M

S O C I A L C A P I T A L

1 Norway 3 7 7 5 5 6 2 12 Switzerland 1 3 1 21 3 11 12 93 New Zealand 15 18 2 7 20 10 1 24 Denmark 18 2 3 3 13 8 9 35 Canada 5 17 8 2 11 9 5 46 Sweden 4 1 4 16 12 4 6 117 Australia 12 13 9 1 14 16 3 68 Finland 26 4 5 6 15 3 16 59 Netherlands 25 10 11 4 6 18 7 810 United States 17 11 12 11 1 31 21 711 Iceland 35 9 18 9 16 2 4 1312 Ireland 29 16 14 8 17 5 11 1013 United Kingdom 28 8 10 20 19 21 10 1214 Germany 8 14 17 10 7 22 14 1715 Austria 19 15 15 25 8 15 18 1416 Luxembourg 11 5 6 45 2 17 32 29

17 Belgium 23 23 16 19 10 19 13 2018 Singapore 2 12 13 22 18 14 40 4519 Japan 7 24 19 27 4 25 28 2220 Hong Kong 21 6 22 60 26 1 23 2621 France 22 22 20 24 9 30 17 5622 Taiwan 14 21 36 13 23 7 31 2823 Malta 32 19 21 41 28 28 19 1824 Slovenia 63 25 34 12 25 12 24 3025 Korea, Rep. 9 20 30 15 21 23 59 6926 Spain 46 29 27 17 22 29 22 3227 Portugal 53 30 33 47 30 13 20 4628 United Arab Emirates 10 31 32 39 37 26 55 4329 Czech Republic 36 26 35 23 27 20 65 5730 Uruguay 55 52 31 68 41 27 8 3131 Poland 41 40 39 31 33 24 58 4732 Estonia 58 27 26 40 39 36 70 3933 Chile 30 32 23 63 48 41 33 7134 Costa Rica 43 45 29 53 46 48 15 4835 Slovakia 59 37 45 14 29 32 64 5136 Kuwait 16 35 44 30 40 34 83 6237 Italy 45 41 43 38 24 38 63 4138 Israel 27 28 25 18 34 105 97 1939 Hungary 69 47 37 32 35 37 42 7540 Cyprus 64 34 24 35 32 53 53 8641 Panama 33 43 60 65 51 52 34 3842 Lithuania 79 39 40 29 43 35 95 5043 Trinidad and Tobago 71 36 47 77 69 45 25 5444 Latvia 49 33 41 34 50 44 86 9045 Malaysia 20 38 38 51 56 71 112 3646 Argentina 54 55 97 44 42 47 30 5347 Saudi Arabia 24 49 49 28 45 72 136 2348 Bulgaria 82 42 74 48 47 33 72 8749 Brazil 37 51 63 86 63 86 27 6550 Croatia 73 53 51 36 36 39 85 119

51 Thailand 13 64 57 59 59 92 130 1552 Mongolia 80 58 76 46 91 40 90 2553 Belarus 93 54 117 26 38 51 104 2154 China 6 65 66 61 66 97 117 2455 Kazakhstan 44 60 106 54 58 63 91 3556 Vietnam 31 69 61 70 75 58 73 8057 Uzbekistan 67 92 118 69 60 65 57 1658 Belize 60 81 71 72 68 66 61 5259 Greece 103 48 53 33 31 42 121 12960 Romania 88 50 70 58 65 46 71 10961 Jamaica 128 59 67 78 79 55 38 4262 Sri Lanka 76 85 52 66 78 120 43 2763 Ukraine 70 57 121 42 77 54 103 4064 Mexico 34 83 59 85 49 99 75 7665 Montenegro 123 62 65 43 53 43 89 11566 Colombia 39 61 64 84 72 127 52 6667 Philippines 40 75 55 76 97 111 50 5968 Russia 57 46 113 37 44 96 124 6769 Macedonia 110 63 69 74 52 67 77 8270 Paraguay 38 86 110 100 84 73 35 6171 Indonesia 42 84 78 80 94 68 109 33

THE LEGATUM PROSPERITY INDEX™ RANKINGS 2014

O V E R A L L P R O S P E R I T Y

R A N K

C O U N T R Y

E C O N O M Y

E N T R E P R E N E U R S H I P &

O P P O R T U N I T Y

G O V E R N A N C E

E D U C A T I O N

H E A L T H

S A F E T Y &

S E C U R I T Y

P E R S O N A L F R E E D O M

S O C I A L C A P I T A L

72 Dominican Republic 81 79 86 88 90 91 54 5873 Ecuador 47 76 99 75 81 98 37 12374 Kyrgyzstan 120 82 116 56 71 83 93 3475 Botswana 101 72 28 94 111 84 41 9376 Nicaragua 77 99 91 90 88 69 36 8177 Serbia 130 77 81 55 57 64 74 9678 Peru 48 74 83 87 86 100 69 10679 Azerbaijan 65 67 105 83 89 75 102 7780 Georgia 91 70 42 79 92 62 56 13981 South Africa 92 44 54 92 105 109 79 7282 Jordan 99 71 58 50 61 77 132 10083 El Salvador 68 88 75 101 83 76 82 8884 Albania 117 78 90 62 62 49 111 11685 Morocco 52 80 72 106 76 78 113 8486 Turkey 86 66 48 81 55 95 134 11487 Bolivia 51 98 96 91 102 88 46 98

88 Namibia 84 96 46 102 106 82 45 9989 Moldova 125 73 102 67 80 70 107 10290 Guatemala 72 90 87 107 93 104 68 6391 Bosnia - Herzegovina 113 94 108 73 54 57 122 10392 Tunisia 87 56 94 71 70 74 120 13593 Laos 56 107 77 104 117 61 80 7494 Tajikistan 118 110 109 64 98 59 105 6495 Armenia 129 68 88 49 87 56 123 12496 Nepal 89 108 104 95 96 94 47 7997 Algeria 50 95 103 82 73 89 137 9598 Ghana 116 97 62 109 100 60 60 11299 Rwanda 98 104 50 112 101 87 76 89100 Venezuela 104 87 134 52 74 116 108 94101 Lebanon 75 91 107 89 64 102 110 126102 India 62 103 56 93 109 119 78 132103 Burkina Faso 61 124 84 130 122 80 29 85104 Bangladesh 74 106 89 96 95 106 49 138105 Honduras 112 100 111 98 82 81 118 101106 Senegal 102 111 80 125 104 101 39 70107 Iran 114 93 120 57 67 126 128 111108 Benin 115 132 79 117 107 50 26 136109 Kenya 111 101 93 113 112 132 66 60110 Zambia 108 105 82 105 135 121 88 68111 Uganda 105 118 100 116 127 130 62 44112 Cambodia 78 112 73 108 103 90 116 134113 Mali 90 126 112 139 123 113 44 37114 Niger 95 139 85 140 115 85 48 78115 Cameroon 83 120 129 114 119 114 81 105116 Egypt 119 89 119 99 85 112 141 107117 Tanzania 94 119 95 119 121 117 114 73118 Malawi 136 129 68 118 108 108 84 118119 Djibouti 126 133 92 132 118 79 101 83120 Mozambique 96 117 98 131 137 110 67 117121 C te d'Ivoire 85 115 131 127 128 128 51 130122 Congo Republic 66 128 132 111 131 115 98 133123 Zimbabwe 122 123 137 103 126 133 115 104124 Mauritania 131 116 127 129 113 103 127 92125 Nigeria 97 114 130 123 132 137 106 108126 Ethiopia 100 134 101 133 125 131 100 125127 Pakistan 107 102 122 122 110 139 135 122128 Iraq 109 125 133 110 116 134 140 91129 Syria 134 122 124 97 99 140 139 127130 Sudan 135 113 135 124 124 141 138 49131 Liberia 142 127 125 137 129 107 99 128132 Angola 106 131 126 135 133 125 133 131133 Guinea 140 137 138 138 134 118 92 121134 Sierra Leone 141 130 114 134 142 129 96 110135 Haiti 133 138 139 115 139 124 131 97136 Togo 132 135 123 121 130 93 87 142137 Afghanistan 138 109 140 128 120 136 126 137138 Yemen 137 121 136 126 114 122 142 120139 Burundi 139 136 115 120 136 123 119 140140 Congo (DR) 121 141 142 136 138 142 125 55141 Chad 124 140 141 142 140 138 129 113142 Central African Republic 127 142 128 141 141 135 94 141

HIGH1ST 30TH UPPER MIDDLE31ST 71ST LOWER MIDDLE72 ND 112TH LOW113TH 142ND


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Russia is the worst performing country in Europethis year, falling seven places on the ProsperityIndex to 68th.

Russia has fallenthe most in Europe

e US has risen to 10th, overall on the ProsperityIndex. e country rose seven places on theEconomy sub-index, to 17th, and declined veplaces on the Personal Freedom sub-index, to 21st.

US rises seven places onthe Economy sub-index

New Zealand is now 3rd on the Prosperity Index. e country has risen two places this year, the resultof a large increase in the country’s Social Capitalscore, and an increase of four places on the PersonalFreedom sub-index.

New Zealand rises to 3rdon the Prosperity Index

China has risen to 6th on the Economy sub-index,up one place this year. By contrast the country stilllanguishes in 117th position on the PersonalFreedom sub-index, down six places this year.

China is now 6th on theEconomy sub-index

e UK has th e third lowest start-up costs in the world. It only costs 0.3% of gross national income(per capita), around £66, to set up a business in theUK. e UK has always ranked within the top tenin the Entrepreneurship & Opportunity sub-index.

UK extremelyentrepreneur friendly

Sierra Leone is ranked 142nd in the world forHealth. e country has always been in the bottomthree for this sub-index.

Sierra Leone is worston the Health sub-index

Venezuela has declined the most of any country this year. e country has fallen 22 places to 100th onthe Index. is is the result of a decline of 44 placeson the Economy sub-index (to 104th), a decline of24 places on the Personal Freedom sub-index (to108th), and a fall of 26 places on the Social Capitalsub-index (to 94th).

Venezuela has fallenthe most globally

Unsurprisingly given events in the country, Syria’sprosperity has declined the most in the MENAregion this year. is is the result of large falls in theGovernance and Personal Freedom sub-indices.

*a more detailed explanation of these ndings is provided overleaf

Syria’s Prosperitydeclines dramatically

HEADLINE FINDINGS HEADLINE FINDINGS

Headline Findings


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HEADLINE FINDINGSHEADLINE FINDINGS

HEADLINE FINDINGS: OVERVIEW Te 2014 Prosperity Index picks up some interesting trends. Te changing economic situation is having a clear impacton the rankings this year, notably the improvements ofChina, the US and New Zealand and the deterioration inthe ranking of Venezuela. But other factors are importantfor prosperity, such as entrepreneurship, health, security,freedom, and governance; poor performance in these areashave signicantly affected the rankings of Russia, Venezuela,and Syria. A number of African countries, led by SierraLeone, show up as particularly vulnerable on our Healthsub-index. Te data that lies behind the Index predates theEbola outbreak, but the weakness of the health infrastructureof these countries is a key reason why it has been difficult to bring it under control.

NEW ZEALAND RISES TO 3RDON THE PROSPERITY INDEX

New Zealand is a big winner this year climbing to third; it has neverrecorded a higher score on theProsperity Index. Despite ongoingconcerns about productivity, NewZealand has risen 12 places in theEconomy sub-index in just two years, from 27th in 2012 to itshighest ever rank (15th) in 2014.

However, New Zealand’s success is also driven by strong freedomand civil society. Te country records the highest tolerance levelsin the world: 92% and 93% of citizens report the country to bea good place to live for immigrants and minorities, respectively.It is also 2nd on the Social Capital sub-index, with 96% of NewZealanders able to count on friends and family in times of need,the 2nd highest in the world. Similarly, 44% report donating tocharity, the 4th highest in the world.

Optimism has ourished with an additional 14% of citizensreporting that working hard gets you ahead compared to 2008.Coupled with the fact that New Zealanders also now worry lessand report greater satisfaction with their f reedom of choice, thisis a nation that is optimistic, prosperous, and free.

CHINA IS NOW 6TH ON THE

ECONOMY SUB INDEX

While China has been experiencingsomething of a slowdown oflate, the country’s economicdevelopment over the last decadehas been dramatic, which has lifted

hundreds of millions of people out of poverty. China is nowranked in the top 10 of the Economy sub-index. High savingsand investment has allowed the country to become one of the

largest exporters of high-tech products. Millions of Chinesehave found work in the country’s continually expanding citiesand as a result the country’s unemployment rate has remainedbetween 4% and 5% for the last two decades.

Juxtaposing this success though is China’s failure to providefreedom to its people. Te country performs poorly on thePersonal Freedom sub-index, scoring very poorly in measuresof civil liberties and only 52% of Chinese people feel that thecountry is tolerant of immigrants, below the global average of66%. While the Communist Party has managed to head off callsfor greater political and civil liberty so far, the recent turmoil inHong Kong suggests that this may not be sustainable in thelong run.

US RISES 7 PLACES ON

THE ECONOMY SUB INDEX

Tis year the US is back in the topten on the Prosperity Index. Te bigimprovement has come through therecovery of the economy which hasseen it rise up the Economy sub-indexthis year. Tis is the result of fallingunemployment, improvements ineconomic sentiment and a decline innon-performing loans in the nation’sbanks.

However, the picture is not all rosy. Te land of the free is nolonger so free. Te United States performs relatively poorly onthe Personal Freedom sub-index. While 86% of people feltthat they had the freedom to choose the course of their ownlives in 2011, only 82% feel this way now, a lot less than the94% of New Zealanders, whose country tops the sub-index.Similarly the number of people who feel that the country isa good place for ethnic minorities and immigrants has fallensteadily, dropping to 82% this year. Given the revelations aboutinternet and phone tracking by US agencies and growing racialtensions surrounding the events in Ferguson, Missouri, it willbe interesting to see if the country can rediscover its passion forfreedom and tolerance.

UK EXTREMELY

ENTREPRENEUR FRIENDLY

Te UK is one of the top countriesin the world for entrepreneurship,ranking 8th on theEntrepreneurship & Opportunitysub-index. Contributing to this

is the fact that it is relatively easy to start a business, costingonly around £66. Similarly, the country has a strong internet

infrastructure, with the internet sector contributing more than £2,000 per person to GDP, and the UK possessing 1,193 secureinternet servers per one million people, the 11th most in the world. Te current government have taken a number of steps toincrease support for entrepreneurs and this seems to have helpedpublic perceptions with the number of people who believe thathard work pays off growing by 6%, to 84%, since 2009.

RUSSIA HAS FALLEN

THE MOST IN EUROPE

Coverage and analysis of Russiain the past year has focusedon the country’s internationalactions: vetoing Security Councilresolutions on Syria, invadingCrimea, and stirring unrest inEastern Ukraine. Such attention

detracts (probably intentionally) from the countries’ domestic woes. Te country recorded the worst performance of anyEuropean country on the Prosperity Index this year.

Russia struggles in the Governance, Personal Freedom, andSafety & Security sub-indices, ranking 113th, 124th and96th, respectively. In the past three years the country hasperformed poorly on these three sub-indices. Te country isincreasingly intolerant of ethnic minorities and immigrants andperforms poorly in terms of civil liberties and political rights– unsurprisingly only 27% of Russians have condence in thefreedom and fairness of elections. Russians are also increasinglyfearful, only 46% feel safe walking alone at night, compared tothe global average of 62%. 82% of Russians feel that businessesand their government are corrupt, far higher than the globalaverage of 67%.

VENEZUELA HAS FALLEN

THE MOST GLOBALLY

Despite possessing the highest oilreserves in the world, Venezuela’seconomic performance has long beenpoor. Tis year the strain is clear asthe country fell dramatically downthe Prosperity Index due to large fallsin the Economy, Personal Freedomand Social Capital sub-indices.

Ination in the country is running at well over 50% per annum.Satisfaction with living standards is down to 56% from 80% ve years ago and only 27% of people feel that now is a good timeto enter the job market. Tis economic malaise has a clear socialimpact: volunteering rates are down, donations are down, foodshortages threaten social cohesion, and recent protests point to

a country that is increasingly divided. Unsurprisingly Venezuelaperforms poorly on the Personal Freedom sub-index. Tis is theresult of the further erosion of civil liberties and is increasinglyevident in public opinion: only 64% of Venezuelans feel thatthey have the freedom to choose the course of their lives, downfrom 80% in 2012.

SYRIA’S PROSPERITY

DECLINES DRAMATICALLY

Syria has been embroiled in acivil war since early 2011 whichhas devastated the country. Tecountry’s poor performance on the

Prosperity Index, unsurprisingly, reects this. Although thequality of international data has obviously deteriorated as the war has spread, the indicators used in the Index continue topaint a picture of decline.

Tis is particularly apparent when examining the subjectivedata, which has continued to be collected, albeit with somesections of the population excluded. Syrians are the least well-rested in the world and report the highest levels of worrying.If the war does not abate the country is likely to continue itsdramatic fall down the Prosperity Index next year.

SIERRA LEONE IS WORST

ON THE HEALTH SUB INDEX

Sierra Leone is the worstperforming country on ourHealth sub-index and sub-Saharan African countriesmake up nine of the bottom ten

countries on this sub-index. Te health systems in the majorityof countries in the region are underdeveloped and ill-preparedto face serious threats to public health, such as the recentoutbreak of Ebola in West Africa.

Seven of the ten countries who spend the least on healthcareare in sub-Saharan Africa and ve of the ten countries withthe fewest hospital beds per person are also in the region. Teresult, not surprisingly, is poor health outcomes. Eight of theten countries with the highest incidences of tuberculosis and ofrespiratory diseases are in the region. Te Index highlights thatthese countries were vulnerable to an outbreak like Ebola and while the near term focus has to be on tackling that problem,the longer term strategy has to be to address the weakness of thehealthcare infrastructure in countries like Sierra Leone.


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SIX YEAR TRENDS SIX YEAR TRENDS

COUNTRYCOUNTRY RANK

2009 2010 2011 2012 2013 2014

Norway 1 1 1 1 1 1Switzerland 8 8 8 9 2 2New Zealand 3 5 4 5 5 3Denmark 2 2 2 2 6 4Canada 6 7 6 6 3 5Sweden 7 6 5 3 4 6Australia 5 4 3 4 7 7Finland 4 3 7 7 8 8Netherlands 11 9 9 8 9 9United States 10 1 0 10 1 2 1 1 1 0Iceland 12 12 12 15 13 11

Ireland 9 1 1 11 10 12 12United Kingdom 13 13 13 13 16 13Germany 16 1 5 15 14 14 14Austria 14 14 14 16 15 15Luxembourg / / / 1 1 10 16Belgium 15 16 17 1 7 17 17Singapore 17 1 7 16 19 1 8 18 Japan 19 18 21 22 21 19Hong Kong 21 2 0 19 1 8 19 2 0France 18 19 18 21 20 21Taiwan 22 22 20 20 22 22Malta / / / 25 25 23Slovenia 23 21 22 24 24 24Korea, Rep. 29 2 7 24 2 7 26 2 5Spain 20 23 23 23 23 26Portugal 25 26 25 26 27 2 7UAE 27 30 27 29 28 28Czech Republic 24 24 2 6 2 8 2 9 2 9Uruguay 32 28 29 31 30 30Poland 28 29 28 32 34 31Estonia 31 3 5 33 35 36 32Chile 35 32 31 34 35 33Costa Rica 30 33 34 3 7 31 3 4Slovakia 37 37 32 36 38 35Kuwait 34 31 35 38 33 36Italy 26 25 30 33 32 37

Israel 33 36 38 40 39 38Hungary 38 34 36 39 41 3 9Cyprus / / / 30 37 40Panama 42 40 37 4 2 40 41Lithuania 40 42 44 43 43 42Trinidad and Tobago 46 44 47 51 42 43Latvia 41 47 51 47 48 44Malaysia 43 43 43 45 44 45Argentina 44 4 1 39 4 1 45 46Saudi Arabia 57 4 9 49 5 2 50 4 7Bulgaria 47 4 6 48 48 49 48

COUNTRYCOUNTRY RANK

2009 2010 2011 2012 2013 2014

Brazil 45 45 42 44 46 49Croatia 39 38 41 50 53 50Thailand 54 52 45 56 52 5 1Mongolia 60 60 60 59 5 7 52Belarus 55 54 50 54 58 53China 58 58 52 55 51 54Kazakhstan 51 5 0 46 46 4 7 55Vietnam 50 61 6 2 53 62 56Uzbekistan 65 7 6 64 6 4 63 5 7Belize 53 56 56 65 65 58Greece 36 39 40 49 54 59

Romania 48 51 5 8 60 55 60 Jamaica 52 55 55 62 56 61Sri Lanka 68 59 6 3 58 60 62Ukraine 63 69 74 7 1 64 63Mexico 49 53 53 61 59 64Montenegro / / / 57 71 65Colombia 64 65 6 1 69 6 7 66Philippines 61 6 4 66 6 7 66 6 7Russia 62 63 59 66 61 68Macedonia 70 7 2 76 7 5 79 6 9Paraguay 69 67 5 7 68 68 70Indonesia 85 70 7 0 63 69 7 1Dominican Rep. 71 68 72 81 70 72Ecuador 77 7 7 83 76 74 73Kyrgyzstan / / / 88 80 74Botswana 59 57 6 7 70 72 7 5Nicaragua 73 87 86 9 1 73 7 6Serbia / / / 7 9 76 77Peru 72 73 68 72 75 78Azerbaijan / / / 94 81 79Georgia / / / 93 84 80South Africa 67 6 6 69 7 4 77 81 Jordan 75 74 65 77 88 82El Salvador 81 7 8 77 9 0 85 83Albania / / / 92 83 84Morocco 66 62 7 1 73 82 85

Turkey 80 80 75 89 87 86Bolivia 84 82 85 95 86 87Namibia 74 7 1 80 83 93 88Moldova 83 86 7 9 84 89 89Guatemala 82 8 1 84 9 7 90 90Bosnia-Herzegovina / / / 99 97 91Tunisia 56 48 54 78 91 92Laos / / / 82 92 93Tajikistan / / / 86 94 94Armenia / / / 98 95 95Nepal 8 8 91 9 3 1 08 1 02 96

COUNTRYCOUNTRY RANK

2009 2010 2011 2012 2013 2014

Algeria 91 7 9 88 100 99 9 7Ghana 89 90 7 8 87 100 9 8Rwanda 1 05 98 9 8 1 11 10 5 9 9Venezuela 76 7 5 7 3 80 7 8 100Lebanon 9 0 84 8 2 85 9 8 101India 7 8 88 9 1 10 1 1 06 1 02Burkina Faso / / / 112 112 103Bangladesh 9 5 9 6 9 5 10 3 1 03 10 4Honduras 79 8 5 87 9 6 96 105Senegal 9 2 9 4 9 2 11 8 1 04 1 06Iran 9 3 92 9 7 1 02 1 01 1 07

Benin / / / 119 113 108Kenya 9 7 10 4 1 02 11 6 116 10 9Zambia 9 8 1 01 10 1 11 0 1 07 11 0Uganda 1 02 9 9 10 0 117 114 111Cambodia 1 01 9 5 9 4 10 7 11 0 11 2Mali 9 4 93 9 0 1 04 1 11 11 3Niger / / / 114 109 114Cameroon 9 9 10 2 99 11 5 11 5 11 5Egypt 8 7 89 8 9 10 6 1 08 1 16Tanzania 9 6 9 7 9 6 10 9 1 17 11 7Malawi / / / 105 119 118Djibouti / / / 121 120 119Mozambique 104 103 103 124 121 120C te d'Ivoire / / / 1 26 131 121Congo (Republic) / / / 120 118 122Zimbabwe 110 110 109 135 124 123Mauritania / / / 1 22 125 124Nigeria 103 106 104 123 123 125Ethiopia 108 107 108 133 126 126Pakistan 107 109 107 132 132 127Iraq / / / 131 130 128Syria 8 6 83 8 1 11 3 1 22 1 29Sudan 106 100 105 125 128 130Liberia / / / 130 127 131Angola / / / 129 133 132Guinea / / / 127 135 133

Sierra Leone / / / 1 28 129 134Haiti / / / 138 134 135Togo / / / 136 137 136Afghanistan / / / 1 40 139 137Yemen 100 105 106 134 136 138Burundi / / / 137 138 139Congo (DR) / / / 1 41 140 140Chad / / / 139 142 141Central African Rep. 109 109 110 142 141 142

YEAR ON YEAR PROSPERITY RANKINGS 2009 2014*

*In 2012 the number of countries in the Index wasincreased to 142 (from 110 countries in 2009–2011).This should be borne in mind when looking at rankingmovement over the five years. This is particularlyrelevant for lower ranking countries that appear to havedeclined signicantly in 2012.

PROSPERITY INDEX RANKINGS 2009 2014 Tis is based o n the 110 countr ies original ly included i n the Prosperit y Index. It excludes the 32 countri es added in 201 2.


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Mapping Prosperity in 2014

REGIONAL CHANGES IN PROSPERITYBETWEEN 2009 AND 2014

EAST ASIA

+0.52SOUTH ASIA

+0.52CENTRAL ASIA

+0.54SOUTHEAST ASIA

+0.55SUB SAHARAN AFRICA

+0.58CENTRAL AMERICA

+0.35SOUTH AMERICA

+0.38

EASTERN EUROPE

+0.28

MIDDLE EAST

+0.21

AUSTRALIA & OCEANIA

+0.1

EUROPE

+0.09

NORTH AMERICA

+0.08

NORTH AFRICA

+0.01

GDP per capita (Constant PPP 2011)

BIGGEST RISE AND FALL

GREECEFalling by $6,065 since

2009 to $24,389

SINGAPORERising by $12,805 since

2009 to $76,237

BIGGEST RISE AND FALL

SYRIAFalling by 2.3 to 2.7

since 2009

AZERBAIJANIncreasing by 0.9 to 5.5

since 2009

Average assessment of how people feelabout their life today (0–10 scale)

GDP PER CAPITA(Constant PPP 2011)

CENTRAL AFRICAN REPUBLIC$584

LUXEMBOURG$86,442

Average assessment of how people feelabout their life today (0–10 scale)

LIFE SATISFACTION

SYRIA2.7

CANADA7.6

Norway is the highest ranked country1st

Central African Republic is the lowest ranked country142nd

HIGH (1ST - 30TH)

UPPER MIDDLE (31ST - 71ST)

LOWER MIDDLE (72ND- 112TH)

LOW (113TH - 142ND)

KEY

MAPPING PROSPERITYMAPPING PROSPERITY


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| 1413 | LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™

PROSPERITY SINCE THE FINANCIAL CRISIPROSPERITY SINCE THE FINANCIAL CRISIS

Special ReportPROSPERITY SINCE THE FINANCIAL CRISIS Te nancial crisis and ensuing recession have tested countriesacross the globe. World Bank data shows that global GDPfell from $51.03 trillion in 2008 to $49.97 trillion in 2009, itrebounded to $52.00 trillion in 2010 and rose to $55.43 trillionin 2013. Te speed of recovery varied for different countries.Indeed some saw no fall in output at all, while for others, GDPremains below the pre-crisis peaks.

In many countries, the impact of the nancial crisis goes farbeyond economics. Data from the Legatum Prosperity Index™help us understand why some countries have recovered quickerthan others by providing a broader picture of the drivers ofnational success. Te results are stark and surprising. Whileeconomic performance is important, arguably just as important ishow well-governed a country is, how free its people are, and howstrong its social bonds are.

Figure 1 compares countries on two measures: GDP1 and overallProsperity score.2 Some countries, such as Canada, the UnitedStates, Germany, the United Kingdom, Japan, and Francereacted better economically to the nancial crisis than others.Moreover, across the same period these countries have also seenan improvement in their overall prosperity. In contrast, countriessuch Spain, Italy, and Greece have struggled to recover from thenancial crisis: they have witnessed a decline in both GPD andProsperity. Some of these declines have been dramatic. Greecehas fallen 20 places down the rankings in six years, Italy is downnine, and Spain down four.

Within these two groups, however, there are interestingdifferences. In terms of GDP, France and Japan have grownthe least since 2008, and both now face signicant economicproblems. France’s recovery has stalled since 2011 and the currentgovernment is struggling to take unpopular structural reforms(Economist 2014). Similarly, Japan experienced a 7% drop inGDP in the second quarter of 2014, as an increase in the salestax took effect (Kihara 2014). Even Germany, long the growth-engine for the entire eurozone, has seen economic growth slowrecently (Benoit 2014).

Comparing GDP and prosperity, the United States performedparticularly strongly in terms of GDP, but less so on Prosperity.Conversely, the UK’s improvement on prosperity outstrippedgrowth in GDP. A look at the Prosperity Index explains thisdiscrepancy. While the United States has seen its economyexpand, the country has witnessed a decline in governance.Government approval has fallen from 51% to 29% since 2009and approval of the judiciary has fallen from 63% to 46%.* Bothmay be responses to the growing gridlock in Washington DC.

Meanwhile, although the UK’s economic performance has beenunderwhelming until recently, the country has become safer andmore entrepreneurial. Te percentage of people who feel safe walking home at night has increased from 66% to 74% since 2009. Te number of people who feel that working hard gets you aheadin life has increased from 78% to 84% and the UK now boasts

the third-lowest start-up costs in the world. Clearly prosperityis a broader measure of national performance than GDP, andthe evidence, presented below, is that it can help explain nationalrecovery.

Te drivers of economic recovery have been widely debated.Organisations such as the International Monetary Fund andthe Organisation for Economic Cooperation and Developmenthave investigated, and suggested policy reforms to help countriesrespond to economic crises. Examples of reforms includerestructuring product and labour markets, ending inefficientpublic spending, and ensuring that nancial institutions aresolvent. Although there are debates about the appropriatenessof certain reforms in certain contexts, there is a consensus onthe importance of a stable macroeconomic environment andregulation that supports rather than hinders an efficient privatesector (OECD 2010). Using the Prosperity Index we candemonstrate not only the importance of these factors but alsothat of social capital and personal freedom.

In gure 2 we split the countries into two groups depending ontheir success in recovering from the nancial crisis. Te gurecompares the average score in 2014 of the two groups on theeight difference sub-indices of the Prosperity Index3. Te biggestdifferences between these two groups are in the areas of SocialCapital, Personal Freedom, and Governance, and a very similarpicture emerges if we construct the same graph for sub-indexscores in 2009.

Te data suggest that freer, more socially cohesive, and well-governed countries rode out the nancial crisis better. Anunderstanding of how countries differ in these respects can shedlight upon what countries need to do to rediscover prosperity inthe wake of the crisis.

Robert Kennedy famously enumerated the many things thatgross domestic product does not measure, including the ‘strengthof our marriages’, ‘our compassion’ and ‘our devotion to ourcountry’. ‘It measures everything, in short, except that whichmakes life worthwhile’, he concluded. Although RFK did notuse the specic term, the then-US presidential candidate wasdescribing a nation’s social capital. Societies where people trustone another, have compassion for one another, and have peopleon whom they can depend in times of need are stronger thanthose without these characteristics. Social cohesion is most testedin times of economic difficulty and the evidence is that countries with greater levels of social capital experience greater levels ofeconomic growth (Zak 2001).

On nearly all measures of social capital, Canada, Germany,France, Japan, the UK, and the US perform better than Spain,Italy, and Greece. In the rst group, an average of 32% of peoplehave volunteered in the past month; 51% have donated to charity;54% having helped a stranger; and 33% trust others in society. Inthe latter group these gures are far lower at 11%, 21%, 48%, and20% respectively.

0

10%

5%

0%

15%

P R O S P E R I T Y S C O R E

G D P

-15%

-20%

-25%

-10%

CHANGE IN PROSPERITY SCORECHANGE IN GDP

-5%

0.2

0.6

0.4

-0.8

-0.2

-0.4

-0.6

CANADA USA GERMANY UK JAPAN FRANCE

SPAIN ITALY GREECE

P R O S P E R I T Y I N D E X S U B I

N D E X S C O R E

3

2.5

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0.5

0

-0.5

1

1.5

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0.5

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-0.5

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SPAIN, ITALY & GREECECANADA, US, UK, GERMANY, FRANCE & JAPAN DIFFERENCE BETWEEN THE TWO GROUPS

SOCIALCAPITAL

PERSONALFREEDOM

GOVERNANCE ECONOMY OPPORTUNITY HEALTH SAFETY &SECURITY

EDUCATION

FIGURE 2: THE 2014 PROSPERITY INDEX SUB INDEX SCORES FOR THE G7 ANDSELECTED EUROPEAN COUNTRIES

FIGURE 1: CHANGE IN PROSPERITY SCORE 2009 2014 VS. CHANGE IN GDP 2008 2013


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| 1615 | LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™

GERMANY, FRANCE & UKGREECE, ITALY & SPAIN

TOLERANCE FOR IMMIGRANTS

TOLERANCE FOR ETHNICITIES

2 0 1 0

2 0 1 4

2 0 1 0

2 0 1 4

67%

72%

83%

83%

73%

78%

80%

67%

PROSPERITY SINCE THE FINANCIAL CRISIS PROSPERITY SINCE THE FINANC

Figure 3 shows that the differences between the two groups ofcountries are most stark in terms of volunteering and donatingto charity, but the difference in trust is also notable. Research hasfound a relationship between social capital and both economicsuccess (Zak 2001) and individual wellbeing (Leung 2013). Terefore it is unsurprising that there are clear differencesbetween more and less prosperous countries. Te challenge facingcountries most affected by the nancial crisis is how to strengthensocial bonds so that society is more resilient in the future.

Personal freedom is an important driver of prosperity. Free andtolerant societies provide individuals with the opportunities toshape their own lives. Tis applies as much in the economic sphere, where people need to be able to invest their time and money howthey choose, as it does in the social sphere, where people needto be free from persecution, whether from government or theirfellow citizens (Mill 1982). In Canada, 92% of people feel thatthey have the freedom to choose the course of their own lives, thehighest score of the countries grouped above. By contrast only43% of Greeks feel this, and only 50% of Italians. While in theUK the percentage of people who believe they have the freedomto choose the course of their lives rose from 78% to 91% between2010 and 2014, the number of Italians who felt free dropped from62% to 50% over the same period. Greater freedom of choice inthe UK may be related to the Coalition Government’s reformsto expand choice in the education, health, and energy sectors. Te Government has also abolished control orders, scrapped theprevious government’s proposed ID card scheme, and in 2012passed the Protection of Freedoms Act. As a result the countryhas been dubbed a ‘more liberal and principled country’ (TeEconomist 2014) than it was six years ago.

Economic downturns can strain societies; intolerance and xenophobia often ourish as people look for others to blame fortheir own misfortunes. In Europe, where many countries havesuffered economically, there has been widespread discussion inthe media about the rise of populist, xenophobic parties (Higgins2014), and much new research has examined the phenomenon(Bartlett 2011).

Te Prosperity Index suggests that this concern is well-founded.In those countries that have suffered the most economically -in this case, Greece, Italy, and Spain - there has been a fall intolerance. Te number of people who believe that society istolerant of immigrants and ethnic minorities fell from 73%and 72% to 69% and 67%. Tis decline in tolerance mirrors thedecline in economic sentiment, in 2009 9.3% of people in thesecountries felt it was a good time to nd a job, a low gure, butnot as low as in 2013 when only 3.3% felt this way. By contrastin those countries that have fared better economically there wasno meaningful change in tolerance. Te Index shows that thosesocieties that were originally more tolerant have remained so, andare growing comparatively more so as intolerance grows in othercountries.

Well-governed countries are more resilient: they are more likelyto experience economic growth (Fayissa 2013) and their citizensare more likely to be happy (Ott 2010). Indeed the OECD andEU have placed a lot of emphasis on the importance of structuralreforms in the aftermath of the nancial crisis (Gurría 2013). An aspect of governance in need of reform in many countries,and which relates to national economic success and individualprosperity, is corruption. It is difficult for private initiative toourish in countries where businesses and public authorities arecorrupt. Perceptions of corruption are markedly higher in thosecountries whose economies have not grown since 2008. In 2010in Spain, Greece, and Italy 78% of people believed that businessesand the government of their country were corrupt, for the othercountries this gure was 55%. Te nancial crisis has contributedto the broadening of this gap. Indeed, when asked again in 2014,88% of people in Spain, Italy, and Greece felt that corruption was widespread, whereas the gure was 54% for Canada, Germany,France, Japan, the US, and the UK.

Governments that are seen as corrupt nd it more difficult toimpose spending cuts and other unpopular policies necessary at atime of economic malaise upon their citizens. Poor governance canbecome self-fullling in this respect, as ineffective governmentsfail to make necessary reforms and become even more unpopularand ineffective as a result (Rothstein 2011). Government approvalis at a nadir for those countries that have witnessed seriousdeclines in economic output: across Greece, Italy, Spain, andPortugal average approval of the government stands at only 17%. Tis makes it incredibly difficult for the governments of thesecountries to take the actions necessary to revive their decliningeconomies. Italy has had particular problems in this regard withthree different governments holding power since the crash. Temost recent, led by Matteo Renzi, continues to struggle to makekey political and economic reforms. Te World Bank’s assessment

of the quality of governance also draws a stark contrast betweenthe two groups. While Italy, Greece, and Spain score -1.20 onthe Bank’s measure of government effectiveness, Canada, France,Germany, Japan, the UK, and the US score 0.65. Te globalaverage is 0.024.

Te nancial crisis continues to dominate. Journalists, policyanalysts, academics, and decision-makers in business and politicsoften frame their analysis by seeking to draw lessons from it.In many cases the lessons are economic: what was it about theeconomies of the more successful economies that helped themride out the storm? What economic reforms are needed by thosestruggling states? Te Prosperity Index suggests that we havebeen blinkered in understanding what drives national success. Although a solid macroeconomic environment is a prerequisite,other factors matter. Te Index shows that countries that haverecovered from the nancial crisis (both in terms of GDP andProsperity) are those where the social bonds between peoplecreate trust, compassion, and tolerance: where individual libertyis safeguarded; and government rules effectively. Spain, Italy,Greece, and other countries can learn from this and start toimplement reforms that support and safeguard social capital,personal freedom, and good governance. Such reforms may beimplemented without signicant increases in public spending,but could result in large increases in wealth and wellbeing and,ultimately, prosperity.

* All survey data in this chapter are taken from the Gallup® World Poll.1 For the UK we use the most recent statistics produced by the ONS.Te change in GDP ismeasured using constant prices,stripping out the effect of ination.2 GDP is measured between 2008 and 2013,while a country’s prosperity score is taken from theLegatum Prosperity Index measured between 2009 and 2014.Te two periods are comparablebecause data in the Prosperity Index is lagged a year.3 Economy,Entrepreneurship & Opportunity,Governance,Education,Health, Personal Freedom,Safety & Security,and Social Capital.4 Te World Bank measures ‘Government Effectiveness’as ‘the quality of public services,the qualityof the civil service and the degree of its independence from political pressures,the quality of policyformulation and implementation,and the credibility of the government’s commitment to suchpolicies’.Countries are awarded a score between -2.5 and 2.5.

SPAIN, ITALY & GREECE

CANADA, US, UK, GERMANY, FRANCE & JAPAN

0% 60%10% 20% 30% 40% 50%

HELPING STRANGERS

DIFFERENCE BETWEEN THE TWO GROUPS

TRUSTING OTHERS

VOLUNTEERING

DONATING

60%

50%

G O V E R N M E N T E F F E C T I V E N E S S

10%

0%

20%

GOVERNMENT EFFECTIVENESSGOVERNMENT APPROVAL

30%

GERMANY CANADA FRANCE JAPAN UK USA

SPAIN ITALY GREECE

40%

0

0.5

1.5

1

-1

-1.5

-2

% W H O A P P R O V E O F T H E G O V E R N M E N T

FIGURE 3: DIFFERENCES IN SOCIAL CAPITAL 2014

FIGURE 4: PERCENTAGE OF PEOPLE WHO BELIEVESOCIETY IS TOLERANT OF IMMIGRANTS AND ETHNIC

MINORITIES 2010 & 2014

FIGURE 5: PERCENTAGE OF PEOPLE WHO APPROVE OF THEGOVERNMENT AND GOVERNMENT EFFECTIVENESS


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17 | LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™

PROSPERITY

ECONOMY

ENTREPRENEURSHIP& OPPORTUNITY

GOVERNANCE

EDUCATION

HEALTH

SAFETY & SECURITY

ERSONAL FREEDOM

SOCIAL CAPITAL

PRINCIPLES OF PROSPERITY

| 18LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™

PRINCIPLES OF PROSPERITY

wo fundamental questions lay at the heart of all nationalstrategy: What is prosperity? And how can it be achieved?

raditionally, the most commonly used and widely acceptedmeasures of national success are GDP: the size of a nation’seconomy, and GDP per capita: the average economic output ofits citizens. Since its development in the 1930s by economistSimon Kuznets, GDP has become a benchmark against whichnations have been measured. But there is a growing consensusthat GDP alone is too narrow to capture a country’s overallsuccess.

Tis has become known as the ‘Beyond GDP’ debate. TeProsperity Index does not, however, seek to remove GDP fromour concept of national success. Wealth remains a fundamentalrequirement of prosperity; one among many others. What theProsperity Index offers, therefore, is best described as ‘GDPand beyond’.

As yet, there is no consensus on what to include as a complementto GDP in an attempt to measure national success. A rangeof factors including wellbeing, health, and education amongothers have been suggested. In the absence of an agreeddenition, one thing is clear: national prosperity is about morethan just money. Te outcome of this is the realisation that what we measure needs to catch up with what we value.

Tis is not new. In March of 1962, Robert Kennedy eloquentlysummarised the shortcomings of using purely economicmeasures to assess a nation’s progress:

“…Gross National Product counts air pollution and cigarette

advertising, and ambulances to clear our highways of carnage. Itcounts special locks for our doors and the jails for the people whobreak them. It counts the destruction of the redwood and the loss

of our natural wonder in chaotic sprawl … Yet the gross national product does not allow for th e health of our child ren, the qualityof their education or the joy of their play. It does not include thebeauty of our poetry or the strength of our marriages, the intelligenceof our public debate or the integrity of our public officials. Itmeasures neither our wit nor our courage, neither our wisdomnor our learning, neither our compassion nor our devotion to ourcountry, it measures everything in short, except that which makeslife worthwhile.”

Tis section of the report, explores six principles of prosperity. Te list is by no means exhaustive but it includes some of thecore principles that have been widely discussed and debatedin both the academic and policy community, and which wehave found have a strong relationship with both GDP andindividual wellbeing. Tese are: Opportunity; Education;Health; Freedom; Safety; and Social Values. Each chapterdraws on leading academic scholarship and uses examplesfrom the most recently available global data to illuminate thendings.

Te purpose of these short chapters is not to provide denitiveanswers to major questions (although it does provide some)but rather to summarise some existing answers and to pointtowards further areas of study. A full bibliography is providedon pages 51 and 52 of this report.

Principles of Prosperity


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PRINCIPLES OF PROSPERITY: ENTRPRENEURSHIP & OPPORTUNITY

MOBILITY AND OPPORTUNITY BRING PROSPERITY

Te relationship between inequality, social mobility, andgrowth has been long debated. Although some degreeof inequality can act as a catalyst for growth, it is widelyrecognised by economists and policy makers that high levelsof inequality (Persson and abellini 1994, Rodrik 1998, Barro1999, Ostry et al. 2014) and low level of social mobility (Revees2013, OECD 2010) can have a negative effect on growth. Temain causes are the waste or misallocation of human skillsand talents; and the negative effect on the motivation, effortand, ultimately, the productivity and wellbeing of citizens. All these elements damage prosperity and future growth.(OECD 2010).

Data from the Prosperity Index show a very strong andnegative correlation between a nation’s Prosperity score andinequality (correlation coefficient = -0.7). Prosperity is alsopositively correlated with mobility (gure 1).1 Simply put, moreprosperous countries have lower levels of inequality and higherlevels of mobility. Moreover, more equal and mobile countrieshave become more prosperous across time. Correlation,however, is not causation. Te ndings do not mean that if anation were to experience a decrease in income inequality that would automatically increase social mobility and prosperity. Temissing link in the chain is more equal access to opportunity(Brunori, Ferreira and Peragine 2013).


PRINCIPLES OF PROSPERITY: ENTRPRENEURSHIP & OPPORTU

Intergenerational mobility reects the extent to which individuals move up or down the social laddercompared to their parents. Tis is measured by usingthe intergenerational elasticity of earnings where lowernumbers equal high mobility. Looking at cross-countrycomparison, we notice that these estimates range fromless than 0.2 in more mobile countries like Denmarkand Finland to a high of almost 0.7 in the least mobilecountries such as Peru and South Africa. Te UK and USare classied in the middle of the income mobility league, with values close to 0.48 (Corak 2006).

Part of the variation across the countries is due to theprocess of economic development, with lower-incomecountries generally having higher inequality betweengenerations. If we focus our attention on rich countriesthere are still considerable variations, with the UnitedStates standing out along with the United Kingdom,Spain, Italy, and France as being the least inter-generationally mobile countries.

Intergenerational mobility depends on a host of factorsthat determine individual economic success and explaindifferences across countries. Some of these factors arerelated to the inheritability of traits (such as innateabilities) while others depend on the family and socio-economic environment in which individuals develop(Reeves 2014).

Family structure and community are key elements in socialmobility and prosperity. Sawhill (2014) identied thecomplicated kaleidoscope of family structure as ‘the newfault line in the American class structure’. Reeves (2014)says that the ‘social capital’ generated by the networksand norms of community life can be crucial for upwardmobility, especially for people from troubled families. TeProsperity Index nds that in 2014 countries with highincome mobility have much stronger Social Capital thanstagnant societies and this variation explains the largerpart of the difference in prosperity.

Looking at the socio-economic factors, inequality is themost debated. Te nancial crisis of 2008 and subsequent years of low growth, high unemployment, and wagestagnation in the West have shone a light on the issueof inequality. Tanks to movements such as Occupy WallStreet, we are all familiar with phrases such as ‘the

1%’ and ‘the 99%’. It is well known that high inequality maybe associated with low mobility across generations (Krueger2012).2 However, it is not inequality by itself that is the principalcause of social stagnation: it affects mobility by skewingopportunities. Indeed, countries with lower levels of incomemobility have higher inequality and lower and more unequalaccess to opportunities. Te United States offers a good casestudy. Americans have, historically, accepted the gap betweenrich and poor on the grounds that, thanks to equal opportunity,the gap is bridgeable by everyone. Te ‘American Dream’ isbased on the idea that every child born in the US – regardless ofsocial status – can rise to the top of their chosen eld as a resultof talent and hard work. Revees (2014) argues, however, thatowing to growing economic and social divide, the AmericanDream today faces a double threat: a big gap between the richand the rest, plus low rates of upward mobility. Te main cause?Increasingly unequal access to opportunity.

Opportunity can be dened as the tool that gives childrenthe capacity to pursue a fullling life and to exercise choice.Graham and Nikolova (2013)3 measure opportunity as thecombination of self-reported subjective factors – the absenceof health problems; opportunity to learn and get ahead in life;satisfaction with freedom of choice – and objective factors suchas income, education, and employment status. Following theirapproach and using subjective variables from the ProsperityIndex, we can show that countries with higher social mobilityare characterised by better opportunities (gure 2). Te UnitedStates and the United Kingdom, along with France and Italy,present a poorer set of opportunities in comparison withNorway, Germany, and other high mobile nations. Tis messageis echoed by the Prosperity Index: countries with higher scoresin Entrepreneurship & Opportunity 4 also have higher socialmobility (the average scores for the high, medium, and lowincome mobility groups are: 3.78; 2.74; 0.47).

Not only access to but also equality in opportunities is importantfor social mobility and prosperity. Brunori, Ferreira, and Peragine(2013) show a strong correlation between unequal access toopportunity and higher social stagnation. A similar exercisecan be replicated using the ‘uneven economic development’ variable from the Prosperity Index, which measures the level ofinequality in education, jobs and economic status.5 Te analysisshows that countries with low mobility are characterised by amore uneven economic environment (gure 2).

Te Prosperity Index shows that more prosperous countrieshave higher income mobility and lower inequality. Among otherreasons, this is because more prosperous societies promote betterand more equal access to opportunity.6 In order to boost moreprosperous countries, governments should implement policiesthat improve access to opportunity for children regardless offamily background and address both cash and class gaps. Tefocus on family, schooling, health, and community should behigh on the policy maker’s agenda in order to avoid the dangersof a divided nation and low future prosperity.

* All survey data in this chapter are taken from the Gallup® World Poll.1 Inequality is measured using the World Bank (2013) indicator of otal Inequality; for Mobility we use the intergenerational elasticity of earnings as in Corak (2006).2 Tis relationship is well-known as “the Great Gatsby Curve”.3 Graham and Nikolova (2013) use the terms “agency”and “capability”.4 It is worth noting that the Entrepreneurship & Opportunity sub-index not only includes variablesrelated to opportunity as dened by Graham and Nikolova (2013) but also other variables thatmeasure opportunity of starting and running a b§usiness (such as start-up costs and internetbandwidth).5 Uneven Economic Development – Failed States Index.6 Te correlation is statistically signicant and the coefficients are 0.5267 with access to opportunity(Graham and Nikolova 2013); -0.4560 with the World Bank’s indicator of unequal access toopportunity (IEO_L); and -0.8587 with the Failed States Index variable.

LEGATUM PROSPERITY INDEX SCORE1-2 0-1 2 3 4

0.7

0.6

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0.2

0.1

0

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M O B I L I T Y S C O R E

NORWAY

SOUTH AFRICA

LOW MOBILITY, LOW PROSPERITY

HIGH MOBILITY, HIGH PROSPERITY

0.81

More prosperous societies promote betterand more equal access to opportunity

LOW MOBILITYMEDIUM MOBILITYHIGH MOBILITY

DENMARK, FINLAND,NORWAY, SWEDEN,

GERMANY, NETHERLANDS

ITALY, FRANCE, SPAIN,UNITED KINGDOM,

UNITED STATES

INDIA,BRAZIL, PERU

SOUTH AFRICACOUNTRIES

OPPORTUNITY 59% 49% 46%

2 4.08 8.05INEQUALITY OFOPPORTUNITY

Note: Mobility is measured as i ncome elasticity across generation(Corak 2006).Te y axis in the graph reports an invested scale.

ENTREPRENEURSHIP& OPPORTUNITY

FIGURE 1: PROSPERITY AND INCOME MOBILITY

FIGURE 2: HIGH MOBILITY, HIGH OPPORTUNITY, AND LOW INEQUALITY


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Various studies have shown that not only equality butalso the quality of education such as teaching as well as thecurricula (including extra-curricular activities) are importantfor economic, social, and political development (Cohen 2006,Gutman and Schoon 2013). In gure 4, primary educationand political rights are highest in the countries where peopleare most satised with education quality (here we are usingsatisfaction with education quality as a proxy of curriculumcontent and experience in class). For example, 85% of peopleare satised with the quality of education in Norway, the mostprosperous country in our Index.

Education has an important role to play in the democraticprogress of nations. Simply increasing educational attainment,however, will not automatically yield more democracy. Datafrom the Prosperity Index conrm academic ndings thatboth quality and equality of education matter for democracy. Although the relationship between education and democracyhas yet to be fully understood, one thing is clear: education anddemocracy go hand in hand.

PRINCIPLES OF PROSPERITY: EDUCATION

EDUCATION FOR DEMOCRACY AND PROSPERITY

Education is important for prosperity. Educated peoplecan secure good jobs, compete in the market place, oatnew ideas, enrich society, and contribute to their own –and their nation’s – development. One of the chief reasons why education is important for prosperity, however, is thateducation is important for democracy.

Te relationship between education and democracy has been widely discussed theoretically and empirically (Glaeser, Ponzettoand Shleifer 2007, Rindermann 2008), even though the literatureis not unanimous on this relationship (Acemoglu et al. 2005).In fact, certain factors seem to mediate the relationship betweeneducation and democracy, in particular the quality and inclusivityof education (Brookings Institution 2014). Te Prosperity Indexenables us to look at this in more detail.

Te Prosperity Index supports ndings in the literature thateducation is positively related to governance and democracy.1 Infact, there is a high correlation (0.6) between the Education andGovernance sub-indices (gure 1). Countries like Switzerland, which is 2nd in the Prosperity Index in 2014, rank highly in bothEducation and Governance. Te relationship between educationand democracy runs in both directions. First of all educationinstills democratic values (Lipset 1959 and Zeuner 2013),raises the benets of civic participation (Glaeser, Ponzetto, andShleifer 2007), and increases income (Harmon, Oosterbeek, and Walker 2003), which in turn has been shown to foster politicaldevelopment. On the other hand, democracies also give citizensmore rights to make their voices heard and hence to ask for abroader provision of public education (Brown 1999).

Using the ‘political rights’ measure2 from the Prosperity Index as well as data on enrolment rates in education3, we can examine theextent to which more democratic societies have higher schoolinglevels (see gure 2). Tis data show us that countries with higherpolitical rights (scores 6 and 7) have greater educational enrolmentrates. When testing this with other measures of democracy 4, thesame pattern emerges, which shows that education is related bothto the extent to which a country has a democratic system in placeand also to the extent to which individuals are able to participatein the political process.

We may suspect that this nding is driven simply by high incomecountries also having higher political rights scores and schoolinglevels. However, this result holds across the world when weexclude high income countries. Tis is in line with preliminaryndings from Hegre et al. (forthcoming) that education has apositive impact on democracy over and beyond income.


PRINCIPLES OF PROSPERITY: EDUCATION

FIGURE 3: GENDER EQUALITY IN EDUCATION,ENROLMENT, AND POLITICAL RIGHTS

Tese results could indicate that democracies need to reacha certain level of ‘maturity’ before education is positivelyassociated with democracy. But what are the factors dening‘mature’ democracies? Te literature suggests several factorssuch as the quality of political institutions and political stability(Hegre et al. forthcoming), ethnicity and religion (Inglehartand Welzel 2006), economic structure (Bueno de Mesquitaand Smith 2009) as well as the quality and inclusiveness ofeducation systems (Cohen 2006, Harber and Mncube 2012). Te idea behind the latter is that for a broad set of views tobe represented in the political sphere, citizens would need tohave equal access to education and better quality of education.Equality and quality of education would need to be sufficientlyhigh to create a ‘culture of democracy’ (Lipset 1959).

Using data from the Prosperity Index, we can examine theinclusiveness of education systems and quality of education. Tis is done using the gender ratio in education5 and satisfaction with education quality,6 respectively.

FIGURE 1: BETTER EDUCATION, BETTER GOVERNANCE

FIGURE 2: HIGHER ENROLMENT,HIGHER POLITICAL RIGHTS

Note: Primary education enrolment rates for countries with differing degrees of political rights

Access to education for girls has been argued to have asignicant effect on democratisation (Barro 1999, Brown2004, Beer 2009), through socio-economic and politicalempowerment. Studies have found that low gender inequalityin education is positively related to democracy, even whenaccounting for general inequality in education. In gure 3 wesee that both primary education and political rights are highin the group with the highest girls to boys ratio in education.Primary education stays roughly the same between a middleand high level of girls to boys to ratio while both are very low incountries with high gender inequality in education. Tis couldindicate that reducing inequality in education would boosteducation and democracy mainly for countries that have veryhigh levels of gender inequality.

Tis is why many experts, academics and institutions – includingthe World Bank in its 2014 report – agree that improving theagency of women as well as access to opportunities is crucial fordevelopment and prosperity around the world.

0-6 -2-4 2 4 6

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E D U C A T I O N

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CONGO D.R.

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%

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98

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1 2 3 4 5 6 7

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GIRLS TO BOYS RATIO IN EDUCATION

LOW

AVERAGE NET ENROLMENT RATE IN PRIMARY EDUCATION

AVERAGE SCORE OF POLITICAL RIGHTS

HIGH

N E T E N R O L M E N T R A T E S I N

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82

FIGURE 4: SATISFACTION WITH EDUCATION,ENROLMENT, AND POLITICAL RIGHTS

AVERAGE SATISFACTION WITH EDUCATION

AVERAGE SCORE OF POLITICAL RIGHTS

N E T E N R O L M E N T R A T E S I N

P R I M A R Y E D U C A T I O N

%

P O L I T I C A L R I G H T S S C O R E

1 7

1

2

3

4

5

6

0

82

86

88

90

92

94

96

80

84

MIDDLE

SATISFACTION WITH EDUCATION

LOW HIGH

1 All the data used in this analysis except when indicated is taken from the Prosperity Index andcomprises 142 countries in 2014.2 Political rights measure the ability to participate in political processes such as voting in legitimateelections,joining parties, running for office,etc.Tis variable from Freedom House captureselements relating to the electoral process,political pluralism and participation as well as thefunctionality of the government and additional discretionary political rights (with -7 being thelowest and +7 being the highest score).3 In the article the results for primary education and measures of democracy will be presented butthe same kind of relationships hold throughout for secondary and tertiary education.4 Tese are: “government type”,a Polity IV variable measuring the extent to which a societyis autocratic or democratic (scale of -7 to +7); and “civil liberties”, a Freedom House variablemeasuring a range of freedoms as well as equality of opportunity.5 Te gender ratio is t he ratio of girls-to-boys for years of education attained at the primary,secondary and tertiary level. Te ratio is calculated based on the Barro and Lee dataset from 2010for 127 countries.6 Satisfaction with education quality is a question from a Gallup® World Poll survey “In the cityor the area where you live,how satised or dissatised are you with the educational system or theschools?”

Quality and equality of educatiomatter for democracy

EDUCATION


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PRINCIPLES OF PROSPERITY: HEALTH

HEALTH MATTERS: SPEND MORE BUT SPEND WELL

as the quality of governance increases the effect of healthcarespending increases. Put simply, healthcare spending goes furtherin better governed countries.

Data in the Prosperity Index can shine a light on this issue, giventhat it includes 142 countries and measures infant mortality,life expectancy, and healthcare spending along with a range ofgovernance indicators.

A simple correlation tells us that across all 142 countries inour Index those with higher spending on healthcare see lowerlevels of infant mortality and higher life expectancy. Tis isunsurprising, but there are some important caveats. Te USspends far more on healthcare than any other country in the world - $8,895 per person - yet the average American citizenlives 78.7 years, 4.7 years fewer than the average resident ofHong Kong, the territory with the highest life expectancythat spends only $2,144 per person. By contrast, Vietnamspends only $233 per person on healthcare and yet the averageVietnamese person lives 75.6 years. At the other extreme Russiaspends $1,474 per person on healthcare, yet the average Russianonly lives 70.5 years.

1 Te correlation coefficient for spending and life expectancy is 0.64 and for infant mortality it is -0.56.2 Governance is measured using the World Bank’s ‘government effectiveness’indicator which‘combine[s] the views of a large number of enterprise,citizen and expert survey respondents inindustrial and developing countries’.Te scale is -2.5 to 2.5.Countries are grouped into threecategories of governance based on whether they fall one standard deviation below the mean,withinone standard deviation of the mean,or one standard deviation above the mean.Te mean is 0.02and the standard deviation is 0.99.

Does spending more on healthcare increase the health andprosperity of a nation? In the past ten years some studiesdispute, or at least seek to qualify, the link between healthspending and outcomes. Data from the Prosperity Index canhelp to shed light on this issue.

According to McGuire (2006) healthcare spending, as apercentage of GDP, no longer has a relationship with infantmortality, once you control for the quality of maternal andinfant health programs and the share of births attendedby trained personnel. While McGuire’s conclusion seemsplausible, quality is clearly somewhat related to spending. Usingmore sophisticated methods than McGuire, Bokhari, Gai, andGottret (2007) nd that government health expenditures dohave a positive effect on both maternal and child mortality.

Because the evidence is somewhat mixed it is worth exploring whether or not the effect of healthcare spending on healthoutcomes is mediated by other variables. McGuire’s study hintsthat how much money is spent seems to be less important thanhow it is spent. Te quality of governance may therefore havean effect upon health outcomes. Rajkumar and Swaroop (2008)test this on 91 developing and developed countries and nd that

Clearly there is no simple relationship between health spendingand outcomes. We can understand more by introducinggovernance into the analysis.

Figure 1 shows that poorly governed countries spendrelatively little on healthcare and have poor health outcomes.Interestingly, a rise in spending from $132 to $691 perperson and an improvement from low to average governmenteffectiveness, see an increase in life expectancy of 12 years anda fall in infant mortality of 40.8 deaths per 1000 births. Healthexpenditure increases signicantly between those countries withaverage government effectiveness and those with very effectivegovernments (see gure 1) but life expectancy increases by only10.7 years. Although improvements in life expectancy are harderto achieve as societies grow healthier, because many of the easy-to-solve health issues have been dealt with, there are clearlydiminishing returns where healthcare spending is concerned.

Figures 2 and 3 are scatterplots showing the relationshipbetween spending and infant mortality. While the relationshipbetween spending and infant mortality is weak for poorlygoverned countries (gure 2) it is strong for countries with anaverage level of governance (gure 3). Furthermore, the evidenceis that within better-governed countries the largest gains fromincreasing healthcare spending occur as spending increasesfrom approximately $70 to $700 per person. Tis is equivalentto moving from the spending of Benin ($70) to unisia ($686).

Developing countries may witness greater returns frominvestments in health, if they also invest in improvinggovernance. aking those countries in our Index with a low oraverage level of government effectiveness and that spend only$50 to $200 per person on healthcare, we see that the bettergoverned countries are healthier. Life expectancy is 2.4 yearslower in the poorly governed countries, and there are 7.9 morecases of infant mortality per 1,000 live births. Tis is despitethe fact that spending is approximately the same. o put this inperspective, life expectancy across the globe only increased byve years between 1990 and 2012, suggesting that improvinggovernance can have big rewards in terms of health.

We set out to explore the relationship between healthcarespending and outcomes. Contrary to the work of McGuire(2006), we found that higher healthcare spending is relatedto better health outcomes. However, in line with McGuire(2006) and Rajkumar (2008), there is strong evidence to believethat increasing healthcare spending alone is an inefficient way to improve a nation’s health. Te health of a country isan important determinant of its prosperity. Tere is a provenlink between health and economic growth: unhealthy peoplend it harder to succeed in school and in the workplace (Barro2013). By improving governance, developing countries improvethe efficacy of healthcare spending. For developed countries,the returns to healthcare spending are likely to be limited ifhealthcare systems are not efficient.

There is a proven linkbetween health andeconomic growth


PRINCIPLES OF PROSPERITY: HEALTH

HEALTHCARESPENDING $

I N F A N T M O R T A L I T Y P E R 1 0 0 0 L I V E B I R T H S SIERRA LEONE

0 400300200100 500 600 700

0

20

40

60

140

80

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120

VENEZUELA

0.40

HEALTHCARESPENDING $

I N F A N T M O R T A L I T Y P E R 1 0 0 0 L I V E B I R T H S

PAKISTAN

0 200015001000500 2500 3000 3500

0

10

20

30

80

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70

ITALY

0.68

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H E A L T H S P E N D I N

G P E R P E R S O N

$

Y E A R S A N D N U M B E R S O F D E A T H S P E R 1 0 0 0 B I R T H S

HIGH GOVERNMENT

EFFECTIVENESS

AVERAGE GOVERNMENT

EFFECTIVENESS

LOW GOVERNMENT

EFFECTIVENESS

4000

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HEALTH EXPENDITURELIFE EXPECTANCY INFANT MORTALITY

HEALTH

FIGURE 3: INFANT MORTALITY AND HEALTHCARESPENDING IN COUNTRIES WITH AN AVERAGE

LEVEL OF GOVERNANCE

FIGURE 2: INFANT MORTALITY AND HEALTHCARESPENDING IN POORLY GOVERNED COUNTRIES

FIGURE 1: HEALTHCARE SPENDING AND OUTCOMES FOR COUNTRIESWITH DIFFERING DEGREES OF GOVERNMENT EFFECTIVENESS


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PRINCIPLES OF PROSPERITY: SAFETY & SECURITY

THE GENDERFEAR GAP

1 Survey question: ‘Do you feel safe walking alone at night in the city or area where you live?’Source:Gallup® World Poll.2 Te literature on fear of crime has been developed since the mid-1960s and the lack of connectionbetween actual crime and fear of it has been a consistent nding until today.See e.g. Garofalo 1973and Farral,Gray and Jackson 2007.3 As cited by Scott 2003.4 Citing Warr 1984 and Ferraro 1996.

‘Do you feel safe walking alone at night?’ Tis short,straightforward question is one we ask ourselves–consciouslyor unconsciously–many times in our lives. Indeed the answer we give to this question can have a profound effect on how we spend our time or where we choose to live. It is a questionthat has been asked to millions of people all around the worldas a way to measure their fear of crime and their feelings ofpersonal safety.1

Te answers reveal a lot about global personal safety. One ofthe starkest ndings is this: women universally report feelingless safe than men. In 2013 this happens in every country inthe world except for three, and this ‘fear gap’ between gendersis consistent between 2006 and 2013. Disproportionate fear ofcrime among women is a concern not only for their safety andsecurity but also for mental health and wellbeing. Tis genderfear gap prompts us to ask where and why these disparitiesoccur, and how the gender fear gap can be narrowed.

It may come as a surprise that among the top ten countries withthe largest differences between male and female fear of crimeare high-income, highly prosperous countries, such as Australia,New Zealand, and Canada – see gure 1.

In Canada, a country that ranks ninth in our Safety & Securitysub-index, 91% of men reported feeling safe versus 62% of women in 2013. In New Zealand 81% of men reported feelingsafe walking alone at night, compared with just 54% of women.In Australia, 80% of men reported feeling safe compared withonly 54% of women. In all of these countries, the gap betweengenders is much higher than the global average of 13%.

On the other hand, it is still true to say that the majority of women and men in the world feel safe. Tat is to say that morethan 50% answered yes when asked ‘do you feel safe walkingalone at night?’ Tere is one region in the wo rld, however, wherefor the last eight years women have consistently reported feelingmore unsafe than safe: Latin America. Eastern Europe used tohave the same problem, but has improved since 2011, albeit thereare still signicant discrepancies between countries in the region.

In Latin America the majority of women live in fear of crime. And it is the only region in the world where this is true forall the years analysed – 2006 to 2013. Latin America has longfaced big safety challenges, and this is reected in the data – onaverage only 51% of men in the region felt safe. Gender-based violence is viewed as a particular problem in the region (UNDP2013), and the low positive answers for women mirror it well.

In Brazil only 26% of women feel safe compared with 43% ofmen. Brazil’s ‘Maria da Penha’ law – which protects victims ofdomestic violence – celebrated its eighth anniversary in Augustthis year, but questions have been raised about the effectivenessof its enforcement (UNHR 2012).

In Eastern Europe, the majority of women declared feelingunsafe between 2006 and 2010, although there has been asteady improvement in recent years. Tis improvement has beendriven by countries such as Georgia and Montenegro, where in2013 82% and 72% of women reported feeling safe respectively.However, there are still countries presenting a high numberof women feeling unsafe. In Russia, for example, only 35% of women reported feeling safe in 2013, a percentage that actuallyshows improvement compared with previous years. Many issuesaffect women’s sense of security in the region. Sex traffickingis one of the most widely recognised problems of this part ofEurope (UNODC 2010).

Studies examining the causes of fear of crime are unanimous2 inconcluding that fear of crime is unrelated to actual crime rates. Itis argued that fear of crime can be the result of past victimisation,psychological predisposition (Stafford, Chandola, and Marmot2007), the way media reports national crime incidents or evena perceived increase in community policing (Hanslmaier 2007).Clearly it is very difficult to pin-point exactly why people fearcrime in general. Some authors, however, suggest that womenfear crime more than men as a result of fear of sexual abuse ornegative experiences with (male) strangers.

One study found that ‘women and men reported the samefear levels for non-violent crime’, but ‘when the crime ofrape was added (...) women’s reported fear rose signicantly’(Ferraro 1995).3 Others have argued ‘that women perceive theseriousness of rape as almost equal to or exceeding the perceivedseriousness of murder’ (Scott 2003).4


PRINCIPLES OF PROSPERITY: SAFETY & SECURI

Te data shows that not only is there a striking gap betweenmen’s and women’s fear of crime, it also reveals that the situationis not improving for women: around the world women feel lesssafe today than at any point in the last eight years. It is clearthat a lot of work still needs to be done to empower and support women. In a 2012 report, the World Health Organisationuses several international reviews to identify effective policiestowards addressing violence against women. For example, thereport shows how early-life intervention can reduce dating violence. Tis includes classroom work and targeting of youngadults in at-risk families ( WHO 2012). Also, when addressinggender-based violence the report suggests the promotion of‘social and economic empowerment of women and girls’ andthe engagement of ‘men and boys to promote nonviolence andgender equality’.

Te main concern at the moment is how to overcome thedifficulty of cross engagement between government and civilsociety, affirming the necessity of a ‘comprehensive, multi-sectoral, long-term collaboration’ between the two, rather than just ‘individual-level’ intervention.

Y E S

%

2006 2010200920082007 2011 2012 2013

30%

40%

60%

70%

FIGURE 2: DO YOU FEEL SAFE WALKING ALONE AT NIGHT?

WOMEN'S ANSWERS YES% IN LATIN AMERICA AND EASTERN EUROPE 2006 2013

50%

LATIN AMERICA

EASTERN EUROPE

CANADA

NEW ZEALAND

AUSTRALIA

YES (%) WOMEN MEN

81%

-27%

54%

80%

-26%

54%

91%

-29%

62%

I

WOMENFEEL

13% LESS SAFE THANMEN GLOBALLY

2013

53%

66%

Around the world women feel lesssafe today than at any point in thelast eight years

SAFETY &SECURITY

FIGURE 1: DO YOU FEEL SAFEWALKING ALONE AT NIGHT?


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LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™ | 2827 | LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™ | 28LEGATUM INSTITUTE | The 2014 Legatum Prosperity Index™

PRINCIPLES OF PROSPERITY: PERSONAL FREEDO

FREEDOM, A FOUNDATIONFOR PROSPERITY

Free people are more satised with their lives (Inglehart, etal. 2008). Freedom also encourages economic growth (Cebula2011) and economic freedom can stimulate calls for otherfreedoms (Dreher 2012).

While the evidence suggests that the greater the level offreedom in society the greater the satisfaction with life.Some studies have gone further, exploring exactly what typeof freedom, economic, political or social, has the largesteffect (Veenhoven 2000). Others have explored whether therelationship between freedom and life satisfaction changesfor countries with different levels of income (Inglehart2008). Using data from the Prosperity Index to test therelationship between freedom and national prosperity we will ans wer two ques tions:

Te results show that while all types offreedom have a signicant relationship with prosperity, the effect of economicfreedom is the greatest: its coefficient(0.145) is the largest.3 Again, economicfreedom appears the most importantfactor.

Of the top 20 countries in the LegatumProsperity Index™, 11, including the UK,US and Singapore, are some of the freesteconomically in the world.4 In particularSwitzerland, New Zealand, Canada, and Australia are all world leaders in economicfreedom and prosperity, ranking second,third, fth, and seventh respectively.Others such as Chad and the DemocraticRepublic of Congo have little economicfreedom and are ranked near the bottomof the Prosperity Index (141st and 140th).

So economic freedom is the mostimportant factor, but does the relationshipbetween our measures of freedom andprosperity vary across income levels?Inglehart (2008) and Verme (2008)tested the relationship between freedomof choice and life satisfaction and foundit to be stronger for more developedcountries. Is this also the case for nationalprosperity?

As countries become richer, people havethe resources, nancial and otherwise,to realise freedom of choice (Inglehart2008). Te two scatterplots (right) displaythe relationship between freedom ofchoice and prosperity for two differentgroups of countries. Te relationship is37% stronger for those countries at thetop of the income distribution than forthose countries in the middle.

Tis points to clear policy implications fordeveloping countries. Economic freedomcan help stimulate prosperity, regardlessof a country’s level of development.Once this is established, the benetsof wider freedoms – such as freedom ofchoice – can be realised. Furthermore,the evidence presented here is compatible with the argument that economicfreedom can help stimulate demand forother freedoms. Once people are freeto buy, sell and trade they may demandfreedom in other aspects of their lives.

PRINCIPLES OF PROSPERITY: PERSONAL FREEDOM

In his 2000 study Veenhoven found a positive relationshipbetween a composite measure of freedom composed of‘objective’ indicators and life satisfaction (Veenhoven, 2000).Replicating Veenhoven’s method we can test the relationshipbetween different measures of f reedom and a country’s overallprosperity 1 for 132 countries in the world.2

Economic freedom has the strongest relationship with nationalprosperity. Using d

Documents

Pi2014brochure Web Prosperidade