prosperityindexreport - 2009

8/9/2019 ProsperityIndexReport - 2009

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THE 2009

LEGATUMPROSPERITY INDEX

An Inquiry into Global Wealth and Wellbeing


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1 Finland 10 9 9 3 7 2 2 7 62 Switzerland 2 13 1 22 3 6 3 11 23 Sweden 16 3 7 4 15 7 5 5 34 Denmark 15 6 12 2 12 4 1 2 135 Norway 18 17 8 1 10 1 7 1 106 Australia 7 15 5 6 21 14 10 4 47 Canada 6 4 6 16 22 9 9 3 98 Netherlands 3 5 19 14 8 15 8 10 8

9 United States 14 1 2 7 27 19 16 8 710 New Zealand 27 18 4 10 19 13 11 6 111 Ireland 5 12 13 18 2 5 12 25 1212 United Kingdom 13 2 11 21 23 22 13 19 1113 Belgium 4 20 3 11 5 16 15 9 2614 Germany 23 8 21 19 6 21 17 17 1915 Austria 12 19 10 13 1 10 14 36 2316 Japan 8 7 20 20 9 12 20 22 4017 France 17 14 14 15 14 23 18 15 4818 Hong Kong 1 10 60 39 18 11 6 67 3319 Spain 11 25 15 12 17 28 21 13 7120 Slovenia 31 36 16 8 24 8 24 33 4421 Italy 25 26 23 17 11 31 35 40 3722 Portugal 28 31 22 29 20 17 25 26 6423 Singapore 9 11 86 26 4 3 4 64 7624 Taiwan 19 21 29 9 26 20 43 30 7325 Czech Republic 20 27 25 31 16 29 28 23 7426 South Korea 21 16 32 30 31 36 27 70 3127= Israel 22 23 17 25 25 74 26 41 7827= Hungary 26 22 26 23 30 30 29 48 9229 Poland 33 35 24 27 32 25 32 45 6830 Greece 42 43 40 5 13 32 30 65 5131 Estonia 30 24 34 35 35 33 19 43 9432 Costa Rica 55 33 28 61 37 44 38 12 4733 Uruguay 67 53 35 43 28 26 31 14 6034 Slovakia 35 30 18 36 36 34 33 69 6935 Croatia 41 34 41 40 34 39 42 28 4636 Chile 36 47 27 49 48 27 22 31 8537 Latvia 32 32 31 24 38 38 34 76 9938 Argentina 53 48 45 38 39 45 69 27 5639 Malaysia 24 28 69 52 40 48 37 83 5240 Trinidad and Tobago 48 58 43 73 49 54 52 18 34

41 Brazil 54 37 38 58 64 79 53 16 6242 Panama 46 73 39 48 57 41 50 54 5043 Mexico 34 29 61 60 51 72 51 73 4544 Thailand 37 39 81 54 66 58 40 74 2245 India 43 55 36 86 88 87 41 47 546 Bulgaria 40 45 30 37 43 46 45 81 10147 United Arab Emirates 38 44 98 47 29 18 39 72 7748 Romania 52 40 33 41 47 40 64 78 102

T he 2009 L egaTum P rosPeriTy i ndex


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Dear Reader,

Welcome to the 2009 Legatum Prosperity Index, the worlds only global assessment o wealthand wellbeing. Now in its third year, this edition builds on the previous versions with expandeddata and re ned analysis.

The Prosperity Index uses a holistic de nition o prosperity to include both material wealthand quality o li e. Rather than replicating other measurements that rank countries by their actuallevels o wealth, li e satis action, or development, the Prosperity Index produces rankings based onthe oundations o prosperity. These are the actors that help drive economic growth or producehappy citizens in a given country.

The Prosperity Index assesses 104 countries, accounting or 90 percent o the worldspopulation, and is based on 79 di erent variables, each o which has a demonstrated e ect eitheron economic growth or on personal wellbeing. This report provides the country rankings, anumber o key ndings, and background on how the Index was created. More in ormation on theProsperity Index, including data sources, pro les o each country, and interactive tools or urtherexploration, can be ound at www.p ospe it .co .

Our hope is that the Prosperity Index ndings will be o use to policymakers, journalists,business leaders, scholars, and interested citizens around the world. While there appear to be some

common oundations shared by prosperous countries such as economic liberty, accountablegovernment, human rights, healthy citizens, and strong communities it remains a act o history that each nation needs to nd its own path to success. Moreover, while governments bythemselves cannot create or mandate prosperity, they can help create an environment that isconducive to entrepreneurship, earned success, and human fourishing. Ultimately, it is citizensand their leaders who must choose to take ownership o the oundations that will drive theirnations long-term prosperity and their personal ul lment.

The Prosperity Index is the signature annual report o the Legatum Institute and is centralto our ongoing inquiry into the nature o prosperity and the pathways o success ul countries.The Legatum Institute is a London-based global think tank that promotes political, economic, andindividual liberty around the globe, with a special ocus on developing and transitioning countries.

We very much hope that you nd the 2009 Prosperity Index to be engaging and thoughtprovoking. For the Legatum Institute, the quest to understand the oundations o prosperity andthe pathways o success ul countries is an enduring investigation that we will seek to improve

with every edition. We would welcome any comments or eedback that may help improve ourunderstanding. Please visit us at www.li.co or more in ormation about our research, products,events, and initiatives.

Yours Sincerely,

Dr. William Inboden Dr. Ryan Streeter

Dr. William InbodenSenior Vice-President

Legatum Institute

Dr. Ryan StreeterSenior Fellow

Legatum Institute


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3

Table of conTenTs

Section one 5The 2009 Leg tu Institute P ospe it In ex

Executive Summary 6

Section two 9Ke Fin ings

Section tHRee 19C e ting the In ex

Economic Fundamentals 21Entrepreneurship and Innovation 22Democratic Institutions 24Education 25Health 27Sa ety and Security 28Governance 29Personal Freedom 30Social Capital 31

Legatum Prosperity Index Academic Advisory Panel 32


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f m i i i i i p i i i i i

mi p p it i i i i i . I NDIRA G ANDHI


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SECTION ONE

THe 2009 leGaTUMProsPerITy Index


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2009 leGaTUM ProsPerITy Index

6

Executive Su

Wh t i p p it , h w i it hi ?

Following a turbulent year marked by a global economic crisis, the Legatum Prosperity Index seeksto answer these two undamental questions. It de nes prosperity as both wealth and wellbeing,and nds that the most prosperous nations in the world are not necessarily those that have onlya high GDP, but are those that also have happy, healthy, and ree citizens.

c ti g th I

Now in its third year, the 2009 edition o the Prosperity Index ranks 104 nations according tonine building blocks o prosperity, which we have identi ed through extensive research and analysis:

Economic Fundamentals Entrepreneurship and Innovation Democratic Institutions Education Health Sa ety and Security Governance Personal Freedom Social Capital

Each building block corresponds to asub-index. A countrys position in the overall ProsperityIndex is produced by equally weighting and averaging its nine sub-index scores. The scores arethen ranked to produce the overall ranking.

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Finland tops this years Index, with the United States ranking ninth, ahead o large Europeannations such as Britain, Germany and France, which all still make the top 20. Finland is narrowlyahead o Switzerland, Sweden and Denmark. Zimbabwe ranks last, ollowing Yemen and Sudan.

1 Finland2 Switzerland

3 Sweden4 Denmark5 Norway6 Australia7 Canada8 Netherlands9 United States10 New Zealand

95 Kenya96 Algeria

97 Tanzania98 Nigeria99 Pakistan100 Cameroon101 Central A rican Republic102 Yemen103 Sudan104 Zimbabwe

Top 10 countries Bottom 10 countries


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execUTIve sUMMary

K fi i g

What does the Prosperity Index tell us? Its value is ound not only in its global rankings but alsoin what it can tell us about how prosperity is created. The ollowing are ten key ndings o the

Prosperity Index:1. Prosperous countries are strong across the board. Prosperous countries which lead the Indexdo well in all nine sub-indexes, indicating that the oundations o prosperity rein orce each other.

2. Entrepreneurs at the micro level need good economic policies at the macro level. Innovationand entrepreneurship are more strongly related to economic undamentals than any other actorin a society. Aspiring entrepreneurs will o ten hit a ceiling limiting their success i a nationseconomy is not undamentally strong.

3. Freedom cannot be divided. While some nations seek to allow one aspect o reedom whilerestricting other aspects, prosperous nations respect reedom in all o its dimensions: economic,political, religious, and personal.

4. Prosperity is concentrated in the North Atlantic for now. Sixteen o the top 20 mostprosperous countries sit in North America and Europe.

5. History is not destiny. Highly ranked nations include those with a long history o productiveeconomies, e ective and limited government, and social capital. Yet several other nations rankhigh that not long ago were a ficted with poverty, oppression, and unhappiness.

6. Good governance is central to life satisfaction and economic progress. Countries in which soundgovernance creates satis ed citizens are also the most likely to have the healthiest economic

undamentals and the most entrepreneurial societies.

7. Prosperity means security. Security and sa ety unction as both a cause and an e ect o overallprosperity. A secure nation enables its citizens to fourish without ear o attack or harm, andprosperous citizens provide the nancial resources and social capital to maintain sa ety and security.

8. Happiness is ... opportunity, good health, relationships, and the freedom to choose who you want to be. The highest levels o overall li e satis action are reported in countries which score bestin the areas o health, sa ety, personal reedom, and social capital.

9. Strong communities are better than weak governments. Some countries with ine ectivegovernments still score well on social capital, indicating that healthy networks o amilies and

riends play an essential role in helping a nation unction.

10. Its true that money cant buy happiness ... unless you are poor. Only in the poorest countries

do increases in income have a signi cant e ect on peoples li e satis action.

The Index rankings are available in the old-out chart in the ront cover to this document. Resultsor each o the nine sub-indexes are available on pages 2131.

The ull rankings o all 104 countries, together with country pro les and the ull Prosperity IndexReport, are available online at www.prosperity.com . Visitors to the interactive site may also viewand manipulate the data and create custom reports.


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THE GrOWING dEBaTE: HOW dO WEmEaSUrE WHaT maTTErS?

While Gross Domestic Product (GDP) remains the most widely used measure o a nations progress, there is a growingconsensus that better measures are needed. Going back at leastas ar as Robert Kennedys amous 1968 speech lamenting thatGDP measures everything, in short, except that which makesli e worthwhile, political leaders and scholars have recognisedthe inadequacies o GDP as a measure o true prosperity. But

what should take its place? Since 2007, the Legatum Prosperity Index hasattempted to provide a comprehensive measurement o prosperity using acombination o variables based on economic wealth and quality o li e. Morerecently, high pro le gures such as French President Nicolas Sarkozy have

joined the debate. He created a commission o 25 eminent scholars, includingve Nobel Laureates, to reassess according to the Commissions o cial title,

the Measurement o Economic Per ormance and Social Progress. The Sarkozy

Commissions report, issued on September 14, 2009, concluded that whilethere is no single holy grail statistic which can quanti y everything meaning ulin a single number, a range o new variables should be included in measuringa nations progress. While the Sarkozy Commission report gives perhaps toomuch weight to government regulation and social wel are spending as intrinsicgoods, it is overall a welcome contribution to an important discussion.


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SECTION TWO

Key fIndInGs


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Wh t oes the P ospe it In ex tell us?

Its value is ound not only in its global rankings but also in what it can tell us about how prosperity iscreated. Following are ten key ndings o the Prosperity Index:

1. P ospe ous count ies e st ong c oss the bo

The worlds most prosperous countries are success ul because they have strong and broadoundations and are generally doing well across all nine areas o prosperity with very little variation

between each area. For example, Finland ranks rst overall despite not having the highest score inany o the sub-indexes.

Sixteen o the top 20 countries in the Prosperity Index rank in the worlds top 20 countries with thehighest per capita GDP as well as the highest average li e satis action scores in the Gallup World Poll.

INSIGHT: Middle and low income countries have much wider variances in their sub-indexscores. The less prosperous the country, the more it will be subject to large di erences betweenits per ormance in one area, such as social capital, and another, such as governance.

Prosperous countries in the upper right corner have little variance in their

scores. One might expect poor countries to cluster similarly on the le t-hand side due to consistently bad scores, but they dont. Such variance inper ormance is a consistent trait o almost all less prosperous countries.

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Prosperity Index Ranking

Di erence in 15bottom rankingcountries

Di erence in14 top rankingcountries

M imum di i su -i r ki g


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Economic FundamentalsEntrepreneurship and Innovation

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2. Ent ep eneu s t the ic o level nee gooecono ic policies t the c o level

The sub-indexes measuring Economic Fundamentals and Entrepreneurship and Innovation are more

highly correlated with each other than they are with any other sub-indexes. We know this by comparingtheir scores, which are shown in the graph below. O the top 20 most entrepreneurial and innovativecountries in the Index, 17 are also among the top 20 countries with the strongest economic undamentals.

INSIGHT: When countries create environments ripe or business start-ups and riendly toinnovation, they are also doing the kinds o things that engender stability and growth in theoverall economy. Without sound economic policy, entrepreneurship may very well hit a ceiling.Countries may be innovative without having the highest health standards, or example, but theygenerally will never be innovative with a perpetually unsteady economy.

Key fIndInGs

The ability o anations peopleto innovate is

more stronglyrelated to thesoundness o itseconomy thanany other actor

All scores in this graph, and others toollow, are between 0 and 1, with the

higher number indicating a stronger score

3. F ee o c nnot be ivi e

One third o the 79 actors that make up the nine sub-indexes are indicators o reedom, including thereedom to start a business, the ability to access medical care and education, the reedom to worship or

engage in political activity, and others refected in each o the sub-indexes. The actors essential to reesocieties are positively correlated with prosperity, no matter which aspect o prosperity one measures.

INSIGHT: The Prosperity Index makes a unique contribution to our understanding o reedom.

Freedom is not something that can be measured by only assessing government regulatorypolicies or reedom o speech and worship. Rather, reedom is essential to all aspects o a healthy,success ul, prosperous nation and when a country ails to protect and advance the political, civil,and economic liberties o its citizens, its prosperity will be negatively a ected in the long run.


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4. P ospe it is concent te in the No th atl ntic fo now

Sixteen o the top 20 most prosperous countries sit in North America and Europe and twoothers (Australia and New Zealand) are the Paci c heirs o British commercial and politicalinstitutions. These 16 nations account or only 10 percent o the worlds population but40 percent o world GDP.

INSIGHT: Expanding to the top 25 countries in the Prosperity Index, the group becomes onlyslightly more diverse and accounts or just 14 percent o the worlds population. India andChina, by contrast, make up 40 percent o the worlds population yet are ranked 45th and 75threspectively. The highest-ranked sub-Equatorial country in the Index excluding Australia andNew Zealand is Uruguay at 33rd, and 10 o the bottom 20 countries are concentrated insub-Saharan A rica.

In ic tes st ong nk

In ic tes ve ge nk

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Insufcient t to ssign nk

The Index shows thatprosperity is currentlyclustered in a relativelynarrow 40 degree slice o northern geography


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5. Histo is not estin

The highly ranked nations include not only those with a long history o productive economies,e ective and limited government, and social capital, but also several others which have evenrecently been a ficted with poverty, oppression, and unhappiness. The top 40 spots in the Indexinclude countries that only 40 years ago had stagnant economies or dys unctional governments,and o ten both. In Asia, Singapore, Taiwan, and South Korea were barely distinguishable romdeveloping countries just a generation ago. In Europe, nations such as Croatia, Estonia, the CzechRepublic, Hungary, and Slovakia were controlled by communist governments, knew little o wealthor reedom, and some, o course, did not even exist. In Latin America, Chile and Brazil were justbeginning to nd their way to economic growth.

INSIGHT: Nations which become prosperous do so through a mutually rein orcing combinationo wise economic policies, democratic governance, and enterprising and trustworthy citizens. Forexample, amidst considerable geographic and cultural diversity, all but two o the top 40 countriesin the Index Hong Kong and Singapore are electoral democracies.

Key fIndInGs


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6. Goo gove n nce is cent l to life s tisf ctionn econo ic p og ess

Citizens not governments are ultimately responsible or the creation o wealth and therealisation o happiness. Yet governance is indispensable. Countries in which sound governanceleads to satis ed citizens are also most likely to have the healthiest economic undamentals andthe most entrepreneurial societies. Accountable political institutions, protections or civil liberties,predictability in contracts, and reliable regulatory structures all help promote prosperity.

INSIGHT: Governance is a key source o a countrys overall prosperity. O the top 50 countriesin the Prosperity Index, 46 have higher scores or governance than their overall scores, meaningthat this main actor has given them a higher ranking than they would have otherwise achieved.

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The Prosperity Index generates its nalrankings by equally weighting and averagingits sub-indexes. Some observers maybelieve that one particular sub-indexmatters more than others in terms o itscontribution to a countrys prosperity.For instance, i you believe that EconomicFundamentals and Entrepreneurship andInnovation are more signi cant drivers o national prosperity, then you might want todouble the weight you assign to them.

To interact with the Prosperity Indexdata and assign di erent values to thesub-indexes, visit www.p ospe it .co .

WHaT maTTErS mOST?

PIrank Country

New rank

Changein rank

2 Switzerland 1 11 Finland 2 -13 Sweden 3 04 Denmark 4 08 Netherlands 5 37 Canada 6 19 United States 7 25 Norway 8 -36 Australia 9 -311 Ireland 10 1

12 United Kingdom 11 110 New Zealand 12 -213 Belgium 13 014 Germany 14 015 Austria 15 016 Japan 16 018 Hong Kong 17 117 France 18 -119 Spain 19 023 Singapore 20 324 Taiwan 21 321 Italy 22 -1

20 Slovenia 23 -325 Czech Republic 24 122 Portugal 25 -3

7. P ospe it e ns secu it

Security rom domestic crime, oppressive government, or oreign attack seems to unctionas both a cause and an e ect o overall prosperity. Basic levels o sa ety allow citizens to beproductive and enjoy their lives; in turn, wealthy and happy countries are also able to devote thenecessary resources to maintaining sa ety and security.

The countries at the very top o the Index are quite similar when it comes to their relative levelso sa ety and security. For example, six o the 10 sa est countries also rank in the top 10 overallrankings, and no country in the overall top 10 ranks below the top 20 on security.

INSIGHT: A poor security environment hurts a nation in many ways. None o the countries thatrank in the bottom 10 on security make it into the top 50 in the overall rankings. And sadly, the

bene ts o sa ety and security are not enjoyed by much o the world. Only nine percent o the worlds population lives in the worlds 20 sa est countries, whereas 31 percent o the world livesin the 20 most dangerous countries.

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Key fIndInGs

This chart shows what the resultslook like when the EconomicFundamentals and Entrepreneurship

and Innovation sub-indexes aredouble weighted


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A selection of 25 countries in ascending order by Prosperity Index ranking

9. St ong co unities e bette th n we k gove n ents

Levels o social capital are unusually diverse throughout the Prosperity Index rankings. In particular,countries in which good governance adds to peoples overall wellbeing requently have low levelso social capital. In the graph below one can see that a countrys low social capital score is o tencounterbalanced by a high governance score, and vice versa.

INSIGHT: People in poorly governed countries o ten rely more heavily on their amilies,

communities, and other trust-building networks.

s i c pit . G

The gold and bluelines illustratethe occasionallyinverse relationshipbetween socialcapital and

governance

8. H ppiness is ... oppo tunit , goo he lth,el tionships, n the f ee o to choose who ou

w nt to be

The highest levels o overall li e satis action are reported in countries which score best in the areas o health, sa ety, reedom, and social capital. The Prosperity Index is able to determine which actorsinfuence peoples happiness more than others. The results show that being able to choose the course o

your li e is the most important ingredient o happiness along with your good health and relationships.

INSIGHT: The ability to reely move, worship, and choose ones way in li e matter more to peoplessense o satis action than how tolerant they eel their country is. Peoples capacity to participatein their political systems a ects their levels o personal wellbeing more than how much corruptionthey perceive in their local government and businesses. The ability to build trusting relationships andparticipate in social networks contributes more to li e satis action than being helped by a strangerthrough donations or volunteering. Personal sa ety has a greater e ect on ones sense o wellbeingthan the protection o material possessions. All in all, countries in which people can reely pursueopportunity amidst high levels o trust and sa ety are also the happiest, most prosperous countries.


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The notion that money doesnt make people happy is more than a truism. It is rooted in theevidence. Only in the poorest countries does money have a signi cant e ect on peoplessatis action. This makes sense, given its direct and positive impact on li es most basic needs. On ascale o 1 to 10, an increase in a countrys per capita income rom $0 to $3,000 leads to a 2 pointincrease in li e satis action among its residents a huge e ect. However, once a nation rises romextreme poverty, money begins to diminish airly quickly as a source o happiness. By the time acountry grows rich, money has an almost negligible e ect. An increase rom $30,000 to $33,000in per capita income only leads to a 0.06 point increase in a nations happiness.

INSIGHT: For the poorest countries, raising peoples incomes is the surest route to improvingtheir quality o li e and increasing their levels o happiness. As countries develop, however, therule o law, good health, strong relationships, and other quality o li e actors matter morethan money.

10. Its t ue th t one c nt bu h ppiness unless ou e poo

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Key fIndInGs


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SECTION THREE

creaTInG THe Index


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C e ting the In ex

The Prosperity Index accounts or 90 percent o the worlds population, providing a reliable guideto the worlds most and least prosperous countries. Based on years o statistical analysis andresearch into the most important ingredients o economic growth and wellbeing, the Index uses

a combination o objective data and subjective responses to surveys.

This data comprises 79 di erent variables, distilled into nine di erent sub-indexes, each o whichhas been identi ed as a oundation o prosperity. The variables have varying degrees o infuence ineach sub-index which is portrayed in the bar graphs in the pages to ollow. A countrys per ormancein each sub-index is given a score, and the overall Prosperity Index rankings are produced byaveraging the scores o the nine sub-indexes or each country. Those countries that per orm wellacross each sub-index do best in the overall rankings. The nine sub-indexes are:

Economic Fundamentals a growing, sound economy that provides opportunities or wealth creation

Entrepreneurship and Innovation an environment riendly to new enterprises andthe commercialisation o new ideas

Democratic Institutions transparent and accountable governing institutions thatpromote economic growth

Education an accessible, high-quality educational system that osters humandevelopment

Health the physical wellbeing o the populace Safety and Security a sa e environment in which people can pursue opportunity

Governance an honest and e ective government that preserves order andencourages productive citizenship Personal Freedom the degree to which individuals can choose the course o

their lives Social Capital trustworthiness in relationships and strong communities

The rst our sub-indexes are measures primarily o economic growth, measured in per capitaGDP, and the ollowing ve sub-indexes are measures o wellbeing, measured in li e satis action.Each sub-index, there ore, shows which drivers o economic progress or wellbeing matter most,and each ranks the world accordingly.


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Capital per Worker

Interest Margin

Export as a Capacity to Import

Non-performing Loans

Inflation

Foreign Direct Investment

Household Consumption

Domestic Savings

Unemployment

Raw Material Exports

The Economic Fundamentals sub-index measures how well the countries inthe Prosperity Index produce the elements necessary or economic growthand stability. Increased investment, trade, low unemployment, and solidlevels o growth without infationary or credit excess are all critical or nationsto grow more prosperous over time. The Economic Fundamentals sub-index,there ore, accounts or actors such as capital investment, unemployment,infation, trade, savings, and additional measures o productivity and stability. Italso takes into account actors such as nonper orming loans and overrelianceupon natural resource exports as threats to productivity and stability.

This sub-index attempts to account or economic wellbeing in the wake o the worst global nancial crisis since the 1930s. As many observers have noted inthe past year, measures o economic health that ocus too heavily on growth

without considering the role o excess credit present a skewed perspective.At the same time, an over-reliance on stability at the expense o growthand progress will also reduce the prospects o prosperity or a nation. TheEconomic Fundamentals sub-index strives to achieve a balance that rightlyrefects the best set o indicators or a healthy economic environment.

Variables by degree o infuence on per capita income

Econo ic Fun ent lsSub-in ex r nk O e

r nk Count1 Hong Kong2 Switzerland

3 Netherlands4 Belgium5 Ireland6 Canada7 Australia8 Japan9 Singapore10 Finland11 Spain12 Austria13 United Kingdom14 United States

15 Denmark16 Sweden17 France18 Norway19 Taiwan20 Czech Republic21 South Korea22 Israel23 Germany24 Malaysia25 Italy

creaTInG THe Index

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The Entrepreneurship and Innovation (E&I) sub-index measures how well thecountries in our study build upon key drivers o innovation. As pointed outearlier, E&I correlates most closely with the Economic Fundamentals sub-index, which suggests that sound macroeconomic measures oster innovation,and vice versa. A key part o a countrys capacity or entrepreneurship is its

ability to commercialise new ideas and create markets or innovative products.The ability to start and run new enterprises is an obvious, important aspecto a countrys approach to ostering innovation. The E&I sub-index there oreassesses the nations in the Prosperity Index by indicators such as businessstart-ups, technological capacity, royalties on inventions, and other keymeasures o entrepreneurial activity.

This means that the E&I sub-index gauges which countries possess the greatestability to commercialise ideas and launch new enterprises. It is not a simpleranking o the numbers o small businesses or some other relatively simplisticmeasure o entrepreneurship. Such outcome-oriented measures would missthe underlying capacity o a country to innovate. The E&I sub-index can be

regarded as a good measure o who will be producing the most innovativeproducts and starting new businesses in the near uture.

Personal Computers

Secure Internet Servers

Research and Development

Internet Bandwidth

Royalty Receipts

Value Added in Service Industry

ICT Exports

High-tech Exports

New Businesses Registered

Business Start-up Costs


Ent ep eneu ship n Innov tionSub-in ex r nk O e

r nk Count1 United States2 United Kingdom

3 Sweden4 Canada5 Netherlands6 Denmark7 Japan8 Germany9 Finland10 Hong Kong11 Singapore12 Ireland13 Switzerland14 France

15 Australia16 South Korea17 Norway18 New Zealand19 Austria20 Belgium21 Taiwan22 Hungary23 Israel24 Estonia25 Spain

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Four o the sub-indexes in the Prosperity Index are created by correlating variables with per capita GDP, and ve are created by correlating variables with subjective wellbeing, or happiness. Together, they give a comprehensive view o how well a nation is doing. The chart above is a scatterplot that placescountries on a continuum by how economically competitive they are and howhappy they are. One goal o national policy would be to move as ar into the

upper right quadrant as possible!

HaPPINESS aNd INCOmE

H a p p

i n e s s

Income

Happy, wealthycountries

UnitedKingdom

India

Chile

Kuwait

UnitedStates

Finland

Russia

Zimbabwe

China

Unhappy, wealthy

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Happy, poorcountries

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The Democratic Institutions sub-index is one o two sub-indexes in theProsperity Index that take account o how governance a ects prosperity. TheDemocratic Institutions sub-index relates governance measures to economicper ormance. The Governance sub-index, which ollows later, relatesgovernance measures to li e satis action. Measures o democratic governance

are important because they indicate whether or not a nation is osteringinstitutions that are conducive to the expansion o political and economicliberty, both o which are important to success over time.

The Democratic Institutions sub-index, as an indicator o the relationship o governance to economic progress, includes variables that measure politicalparticipation among citizens, the degree to which civil liberties are protected,constraints on the executive branch o government, the independence o the

judiciary, and other measures critical to expanding opportunity among thecountrys population as a whole.


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Civil Liberties

Political Rights

Regulation of Executive, Legislature and Judiciary

Level of Democracy

Executive Constraints

Regime Stability

de oc tic InstitutionsSub-in ex r nk O e

r nk Count1 Switzerland2 United States

3 Belgium4 New Zealand5 Australia6 Canada7 Sweden8 Norway9 Finland10 Austria11 United Kingdom12 Denmark13 Ireland14 France15 Spain16 Slovenia17 Israel18 Slovakia19 Netherlands20 Japan21 Germany22 Portugal23 Italy24 Poland25 Czech Republic


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E uc tion Sub-in exr nk O e

r nk Count1 Norway2 Denmark

3 Finland4 Sweden5 Greece6 Australia7 United States8 Slovenia9 Taiwan10 New Zealand11 Belgium12 Spain13 Austria14 Netherlands15 France16 Canada17 Italy18 Ireland19 Germany20 Japan21 United Kingdom22 Switzerland23 Hungary24 Latvia25 Israel

The Education sub-index takes account o the way in which a countryseducational institutions and practices contribute to its economic per ormance.It has become common wisdom that in todays growing services economy,

which is uelled largely by knowledge and its applications, education is criticalto economic progress and opportunity. Education has also long been an

important growth actor in productive economies and it is just as important inregions and countries dependent on manu acturing and agriculture. Along withthe economic opportunities education a ords, it is also a critical some mightsay the critical driver o opportunity or women and minority populations.

The Education sub-index assesses a countrys educational per ormance primarily bymeasuring the years o schooling that a nations citizens complete, combined withexpenditures on education and other actors that help gauge educational quality.Finding global coverage o educational per ormance measures, as represented intest scores, is virtually impossible and, there ore, we rely on years o schoolingand related actors as close approximations. O all the variables in the sub-index,secondary enrolment rates and average years o tertiary education have the

strongest relationships with economic growth. In addition, the sub-index includesmeasures o emale educational participation, which is an important indicator o how widely opportunity is expanding in a given country and is inescapably essentialto a nations overall economic success over time.

Secondary Education Enrolment

Average Years of Tertiary Education

Pupil to Teacher Ratio

Tertiary Education Enrolment

Primary Education Enrolment

Expenditure on Education

Average Years of Secondary Education

Girls to Boys Enrolment Ratio


creaTInG THe Index

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The Legatum Prosperity Indexmeasures the actors that createprosperity over time. It looks at

which countries are doing the mostto oster prosperity through arange o actors such as education,entrepreneurship, governance,

reedom, and social capital. But what about simpler measures suchas per capita income or happiness?I we were to take a snapshot o the world, which countries arethe richest or have citizens whoare most satis ed with their livesright now? The chart on the rightcompares each o these two simplemeasures with the Prosperity Indexrankings. The advantage o theProsperity Index is the way thatit indicates which countries haveunderlying undamentals most likelyto sustain and increase their wealthand wellbeing over time, even i theymay not be the richest or happiestcountries at the present moment.

COmParING PrOSPErITy, PEr CaPITaINCOmE, aNd HaPPINESS

Country PI Rank Happiness* IncomeFinland 1 2 15Switzerland 2 8 8Sweden 3 6 14Denmark 4 1 12Norway 5 3 1Australia 6 13 17Canada 7 7 10Netherlands 8 3 9United States 9 11 5New Zealand 10 9 26Ireland 11 5 6United Kingdom 12 17 18Belgium 13 15 16Germany 14 29 19Austria 15 14 11Japan 16 32 20France 17 16 22Hong Kong 18 70 7Spain 19 10 23Slovenia 20 40 25Italy 21 23 24Portugal 22 44 32Singapore 23 20 3Taiwan 24 50 13Czech Republic 25 27 29South Korea 26 59 28Israel 27 12 27

26

*Data taken rom Gallup World Poll


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Health Satisfaction

Level of Respite

Infant Mortality

Health Professionals

Sanitation

Life Expectancy

Undernourishment

Hospital Beds

Physical Pain

Water Quality

Health Problems

Variables by degree o infuence on li e satis action

He lth Sub-in exr nk O e

r nk Count1 Austria

2 Ireland3 Switzerland4 Singapore5 Belgium6 Germany7 Finland8 Netherlands9 Japan10 Norway11 Italy12 Denmark13 Greece14 France15 Sweden16 Czech Republic17 Spain18 Hong Kong19 New Zealand20 Portugal21 Australia22 Canada23 United Kingdom24 Slovenia

25 Israel

The Health sub-index measures how well the citizens o countries in theProsperity Index are physically capable o living healthy, ul lling lives. Peopleexpecting to live long lives are better able to pursue their own path andcontribute to the overall economy. The Prosperity Index provides a wide-

ranging evaluation o a nations health by assessing the existence o preventivemeasures, child health and in ant mortality, proper access to health care, andthe general physical wellbeing o citizens.

Empirical evidence shows that health a ects other aspects o prosperity. TheHealth sub-index is most highly correlated with overall li e satis action and also hasa strong relationship with the Education, Entrepreneurship and Innovation, andEconomic Fundamentals sub-indexes, demonstrating that a healthy populationis also one that is educated and part o a strong, fourishing economy.

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The Sa ety and Security sub-index takes account o a undamental elemento prosperity. When people and basic institutions are unsa e, then capital,investment, and most importantly, people, begin to fee. History is lled withexamples o once-prosperous nations alling into economic and social decayas a result o the insecurity that proceeded rom government corruption, theerosion o civil liberties, internal actions, and war. This sub-index provides animportant measure o the degree to which the sa ety and security o a nationcontributes to its citizens overall wellbeing.

This sub-index combines objective measures o security with subjective surveyresponses to questions about personal sa ety. Along with standard measureso violence such as homicides and assault, the sub-index considers measureso human fight, such as re ugees and brain drain among middle classpro essionals and intellectuals, to capture the ull e ects o instability resulting

rom sa ety and security problems. Together with additional measures o civil war and ethnic violence, the sub-index includes responses to survey questionsabout actual events such as the t as well as perceptions such as whetherpeople eel sa e walking alone at night. Altogether, this sub-index presentsa solid indicator o the overall sa ety environment within nations and itsrelationship to the wellbeing o the citizenry.


S fet n Secu it Sub-in exr nk O e

r nk Count1 Norway2 Finland

3 Singapore4 Denmark5 Ireland6 Switzerland7 Sweden8 Slovenia9 Canada10 Austria11 Hong Kong12 Japan13 New Zealand14 Australia

15 Netherlands16 Belgium17 Portugal18 United Arab Emirates19 United States20 Taiwan21 Germany22 United Kingdom23 France24 Kuwait25 Poland

Safety and Security

Physical Safety

Political Terror and Violence

Forced Uprooting

Refugees and Internally Displaced Persons

Human Flight

Assault

Casualties due to War

Homicide

Theft

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The Governance sub-index measures the connection between governmentper ormance and li e satis action. Unlike the Democratic Institutions sub-index, which is related to economic growth, the Governance sub-indexshows how a countrys governance directly impacts the quality o li eo its citizens. It helps gauge the extent to which a nation is promotingor restricting the political and economic liberties that are vital or thehappiness o its citizens.

This sub-index combines three objective governance indicators with a variety o subjective responses to survey questions. The result is a goodpicture o how the rule o law, the e ectiveness o governments, corruption,political participation, and other key actors contribute to the wellbeing o a countrys citizens. The level o con dence people have in the airnessand predictability o government actions has a signi cant impact on their

willingness and ability to be productive citizens.

Government Effectiveness

Rule of Law

Business Regulation

Political Participation

Confidence in Judicial System

Confidence in Elections

Business Corruption

Confidence in Military

Government Corruption


Gove n nce Sub-in exr nk O e

r nk Count1 Denmark2 Finland

3 Switzerland4 Singapore5 Sweden6 Hong Kong7 Norway8 Netherlands9 Canada10 Australia11 New Zealand12 Ireland13 United Kingdom14 Austria

15 Belgium16 United States17 Germany18 France19 Estonia20 Japan21 Spain22 Chile23 Botswana24 Slovenia25 Portugal

Governance

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Personal Freedom

The Personal Freedom sub-index measures how well citizens are able to reelychoose the course o their lives and pursue li e-enriching opportunities. Whilesocial norms vary around the world, the ability to make choices regardingones own li e is a universal good. Empirical data has shown that despitepeoples variation in the kinds o choices they make, their desire to makechoices reely is consistent. Through objective and subjective measures, thePersonal Freedom sub-index assesses citizens satis action with their reedomo choice and their perceptions o societal tolerance towards immigrants andminorities, as well as the reedom o religion, speech, and movement.

O the our variables that were identi ed as the strongest measures o Personal Freedom, citizens satis action with their reedom o choice and theirability to believe, speak, and move reely were the most signi cant variables.Countries that rank higher in the sub-index are ones in which citizens areable to choose the course o their lives, practise their religion, move about,and express their thoughts in the media with both limited inter erence andprotection rom the government.


Pe son l F ee o Sub-in exr nk O e

r nk Count1 Norway2 Denmark

3 Canada4 Australia5 Sweden6 New Zealand7 Finland8 United States9 Belgium10 Netherlands11 Switzerland12 Costa Rica13 Spain14 Uruguay

15 France16 Brazil17 Germany18 Trinidad and Tobago19 United Kingdom20 Philippines21 Dominican Republic22 Japan23 Czech Republic24 Jamaica25 Ireland

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Social Capital

Reliability of Others

Importance of Friends

Trustworthiness of Others

Membership of Arts Org.

Membership of Sports Org.

Membership of Environmental Org.

Membership of Religious Org.

Donations

Importance of Religion

Helping Strangers

Marital Status

Volunteering


Soci l C pit l Sub-in exr nk O e

r nk Count1 New Zealand2 Switzerland

3 Sweden4 Australia5 India6 Finland7 United States8 Netherlands9 Canada10 Norway11 United Kingdom12 Ireland13 Denmark14 Indonesia

15 Mali16 Nigeria17 Sri Lanka18 Nepal19 Germany20 Dominican Republic21 Zambia22 Thailand23 Austria24 Ghana25 Kenya

The Social Capital sub-index measures how well people in the countries in theProsperity Index are developing social networks and relationships that are trustworthyand supportive. Being able to rely on riends, amily, and even strangers during timeso need is critical to li e satis action. Relationships built on trust are grati ying andenjoyable but also vital when other areas o li e such as our health, job, or government

ail us. Accordingly, the Social Capital sub-index measures the importance that citizensplace on social capital through how much they trust, value, and associate with others,as well as the extent to which they engender social capital through the amount thatcitizens rely on others, donate, help a stranger, or volunteer.

The eld o social capital and its relation to wellbeing is still evolving, andthere ore, the data and measurement tools necessary to evaluate social capitalare still limited. This sub-index uses empirical data that demonstrate that valuing

riends and amily and being able to rely on them, trusting people, and voluntarilyparticipating in associations are the most signi cant variables in social capital.However, due to limitations in data, the sub-index does not assess anothersigni cant element o social capital: the level o collective action in a society.The ability o citizens to gather and become more e ective through cooperativee orts is a key element that this sub-index aims to capture in uture iterations.

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Leg tu P ospe it In ex ac e ic a viso P nel

The Legatum Institute (www.li.com) wishes to thank the members o the Academic Advisory Panelor their help ul advice, critiques and suggestions. The Legatum Institute assumes ull responsibilityor the content o the Prosperity Index. Participation in the Academic Advisory Panel does not

imply endorsement o every aspect o the Prosperity Index.

Te B bcock-Lu ish , University o Ox ord

d niel d ezne , Tu ts University

Pete Fe ve , Duke University

C ol G h , Brookings Institution

robe t Jensen , University o Cali ornia, Los Angeles

Stephen K sne , Stan ord University

mich el K e e , Harvard University

Phil Lev , American Enterprise Institute

Tho s m hnken , Johns Hopkins School o Advanced International Studies

E un m lesk , University o Cali ornia, San Diego

ann Owen , Hamilton College

robe t Putn , Harvard University

all n St , University o Michigan

The Legatum Institute also wishes to thank Gallup, Inc. or permission to use the Gallup World PollService and Gallup World Poll Data in construction o the Prosperity Index. Copyright Gallup2008. All Rights Reserved.

Finally, the Legatum Institute recognises Ox ord Analytica (www.oxan.com), an independentconsultancy that has or 30 years provided authoritative analysis o geopolitical events, or itsassistance in compiling the Prosperity Index data.


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prosperityindexreport - 2009

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