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PROSPERITY INDEX

TENTH EDITION 2007-2016

www.li.com www.prosperity.com

Bringing Prosperity to Life

The Legatum Prosperity Index ™ 2016

contents

Executive summary 2 The Legatum Prosperity Index™ rankings 2016 4 Key findings 7 Ten years of changing prosperity 12 Stairway to prosperity 14 Mind the gap! 16 Ten years, ten stories 18 Regional analysis 40 Methodology 46 Acknowledgements 48

©2016 The Legatum Institute Foundation. All rights reserved. The Legatum Prosperity Index and its underlying methodologies comprise the exclusive intellectual property of Legatum Foundation Limited. The word ‘Legatum’ and the Legatum charioteer logo are the subjects of trade mark registrations of Legatum Limited and ‘Legatum Prosperity Index’ is a registered trade mark of Legatum Foundation Limited. Whilst every care has been taken in the preparation of this report, no responsibility can be taken for any error or omission contained herein.

How do people flourish? Why are some nations more prosperous than others and how do poorer communities transition from poverty to increasing prosperity?

Over the past ten years the Legatum Institute, through the Legatum Prosperity Index™, has tracked the journey of 149 nations in order to answer these questions. The results explain how and why nations with similar resources do better or worse than their peers and what drives and constrains the creation of a more prosperous society.

Why do we care? We believe that true prosperity is not just for a privileged few, but for everyone. Prosperity is simply the opportunity for every person to discover, fulfil, and share their potential, becoming the best they can be and helping others be the best they can be. It involves both wealth and wellbeing. No person need languish in poverty or in social isolation.

In measuring prosperity, the goal of the Legatum Prosperity Index™ is the transformation of people. We want to know what life is really like for people, identify what is preventing it being better, and remove obstacles to prosperity in order to help all become the best that they can be.

Through the insights generated by ten years of data, the Prosperity Index provides both the evidence that transfor- mation is possible, and the tools and knowledge to help bring about that change.

Consider the prosperity of Indonesia, that has risen 19 ranks up the Index to 61st over the past decade. It proves just how quickly prosperity can grow when its foundations are well established. A steady six rank improvement in Personal Freedom, firm progress on Governance (up 14 ranks), and a rapidly strengthening society (up 51 ranks in Social Capital) has laid firm foundations on which Indonesian prosperity has flourished.

But just as prosperity can be created, it can also be squan- dered. Venezuela, home to huge oil reserves has experienced the biggest decline in prosperity over the past decade. Millions of once prosperous Venezuelans have fallen back into poverty in the past decade. Venezuela’s experience offers every nation an important warning that choices have consequences and we must each fight for prosperity.

This year’s report is based on an updated methodology developed over the past two years with input from world leading advisers including Nobel Laureate Professor Angus Deaton. Among other changes we have expanded the number of countries to 149 and added a 9th pillar on the natural environment. I encourage you to read about all the improvements in the Legatum Prosperity Index Methodology Report which you will find online at www.prosperity.com.

On behalf of the Prosperity Index team, we commend this 10th edition. Please study it, challenge it, add to it, but most of all use it to help create a more prosperous world.

Use it to inform your vote; use it to hold leaders to account; use it as a leader to make better choices; use it to keep media honest; use it to educate children; use it to inspire your family, your friends, and help your community be the best they can be.

Join us as we help create prosperity for everyone, e ve r y w h e re .

The Legatum Prosperity Index Team Alexandra Mousavizadeh, Harriet Maltby, Paul Caruana- Galizia, Fei Xue, Giulia Gemelli, Madeleine Bradley, and Pauline Coste

Measuring prosperity The first decade

foreword

The Legatum Prosperity Index 2016 1

The Legatum Prosperity Index 20162

The Legatum Prosperity Index™ has now been running for a decade. One of its greatest strengths is that it is not just a snapshot in time. Capitalising on ten years’ worth of data, we can evaluate long-term changes in prosperity, pinpointing the drivers of progress and highlighting those nations that have made the greatest strides in turning their wealth into greater prosperity.

It is no surprise to find that the bottom of our prosperity table is largely populated by the world’s poorest countries and the top is dominated by the world’s richest. However, this does not tell the whole story. Prosperity is as much about wellbeing as it is about wealth. There are numerous factors that together determine the life chances and oppor- tunities made available to a nation’s citizens.

This year. the report itself goes beyond rankings and looks at how well countries deliver prosperity in relation to their wealth levels (see page 16). Using GDP per capita, the level of prosperity delivered by a country can be compared with the level of prosperity expected given that country’s wealth. It is here that countries performing most impres- sively can be identified, with those delivering more pros- perity than would be expected given their wealth described as having a ‘prosperity surplus’ and those delivering less, a ‘prosperity deficit’. For this reason, poor countries can do extremely well in delivering prosperity, enjoying a prosper- ity surplus, while rich ones may lag far behind, experiencing a prosperity deficit.

New Zealand (1st)

USA (17th)

68 70 72 74 76 78 80

Prosperity score

0 10 20 30 40 50 60 Wealth (GDP per capita US$ ‘000)

Prosperity is not just about wealth: New Zealand (1st) turns less wealth into much more prosperity than the US (17th).

Different paths to prosperity New Zealand is the world’s top-ranked country. Over the past decade it has consistently delivered a large prosperity surplus through the combination of a strong society, free and open markets, and high levels of personal freedom (page 18). This path to prosperity is shared by other devel- oped Commonwealth countries and has proved the most effective at delivering prosperity (page 8).

One such Commonwealth nation, the United Kingdom, ranks third in the world in the delivery of prosperity, higher than richer nations such as Germany and the United States (page 10). However, the UK, while successful in prosper- ity generation, is less successful in sharing its prosperity equally among its citizens – a failure that is widely seen elsewhere in Western Europe and the US (page 22).

The United States has consistently delivered a prosperity surplus over the past decade, but that surplus is falling as prosperity stagnates (page 28). This stagnation, combined with a sense that globalisation has left many behind, has caused discontent among Americans, who are turning to populism as a quick remedy. A similar story is playing out across Europe, as a rising tide of populism threatens to undermine what has long been one of the world’s most prosperous regions (page 32).

The two biggest drivers of global prosperity growth over the past ten years have been the world’s most populous nations, China and India, where many millions have been moved from poverty onto the road to prosperity (page 9). The success of these nations is the result of economic liber- alisation and integration into the global economy, but both face severe environmental issues and each has developed a markedly different prosperity profile. China’s Governance and Personal Freedom performance remains weak, while Health and Education have held India back.

Executive summary

The two biggest drivers of global prosperity growth over the last ten years have been the world’s most populous nations, China and India, where many millions have been moved from poverty onto the road to prosperity.”

The Legatum Prosperity Index 2016 3

Obstacles to prosperity The fact that wealth does not equate to prosperity is seen very clearly in those countries that have large oil reserves. Over the past decade the Gulf states have consistently failed to deliver prosperity proportionate to their wealth (page 36) though the UAE is starting to set itself apart, while Venezuela has one of the largest prosperity deficits in the world (page 15).

The biggest barriers to prosperity, as always, are war and other forms of violence. Some of the least prosper- ous countries in the world – Iraq, Yemen, and Libya – are all currently afflicted by civil war (page 44). In Latin America, the great social and economic progress made in recent years is threatened by high levels of drug-related and other violence (page 42). Another great obstacle to prosperity – corruption – is found worldwide, and is as destructive in European countries such as Italy (page 26) as it is elsewhere.

Pr os

pe ri

ty s

co re

2007 2016

40

50

60

70

80

North America

Europe Latin America

Asia MENA Sub-Saharan Africa

Changing regional prosperity 2007-2016

Prosperity, region by region In Sub-Saharan Africa prosperity is growing, yet remains below the world average. Commodity-dependent economies continue to struggle, though the Business Environment has generally improved. Education and Health have improved but remain the region’s biggest obstacles on its path to prosperity.

Citizens of Europe are among the healthiest, wealthiest, and safest in the world. Globally, 15 of the top 20 countries are European. However, ongoing economic turmoil in the eurozone, the refugee crisis, and Britain’s vote to leave the EU have exposed divisions that threaten further progress.

In the Middle East and North Africa (MENA), oil-rich Gulf states are striving to diversify their economies, but all continue to under-deliver prosperity to their citizens. No other region has experienced such devastating effects of war; the three least prosperous countries in MENA (Iraq, Yemen, and Libya) are all mired in civil war. In North Africa, meanwhile, the Arab Spring has set countries on different prosperity trajectories.

In Asia and the Pacific, we find four of the five countries with the largest real prosperity gains: Cambodia, Sri Lanka, Indonesia, and Nepal. We also find China and India, whose rapid economic growth has lifted hundreds of millions out of poverty, substantially raising global prosperity. Meanwhile, Australia and New Zealand, which have long enjoyed similar levels of prosperity, have diverged in the past six years.

North America has seen marked stagnation over the past decade. Canadian prosperity has risen marginally, while US prosperity is no different in 2016 than it was in 2007. In both Canada and the US, declining performance in Health and Safety & Security is undermining gains made elsewhere.

Latin America has undergone a deep social and economic transformation over the past ten years. While this trans- formation has seen gains in education, democracy, and poverty, Latin America has not learned how to deliver greater prosperity with its wealth. It is still not delivering enough prosperity to its citizens compared to some less wealthy Asian countries.

The biggest barriers to prosperity, as always, are war and other forms of violence. Some of the least prosperous countries in the world – Iraq, Yemen, and Libya – are all currently afflicted by civil war.”

The Legatum Prosperity Index 20164

The Legatum Prosperity Index™ Rankings 2016

The Economic Quality sub-index ranks countries on the openness of their economy, macroeconom- ic indicators, foundations for growth, economic opportunity, and financial sector efficiency.

The Business Environment sub-index measures a country’s entrepreneurial environment, its business infrastructure, barriers to innovation, and labour market flexibility.

The Governance sub- index measures a country’s performance in three areas: effective governance, democracy and political participa- tion, and rule of law.

The Education sub-index ranks countries on access to education, quality of education, and human capital.

The Health sub-index measures a country’s performance in three areas: basic physical and mental health, health infrastructure, and preventative care.

The Safety & Security sub-index ranks countries based on national security and personal safety.

The Personal Freedom sub-index measures national progress to- wards basic legal rights, individual freedoms, and social tolerance.

The Social Capital sub-index measures the strength of personal rela- tionships, social network support, social norms, and civic participation in a country.

The Natural Environment sub-index measures a country’s performance in three areas: the quality of the natural environment, environmental pressures, and preservation efforts.

Rank Country

Sub-Indices

1 New Zealand 1 2 2 15 12 19 3 1 13 2 Norway 7 10 3 5 13 6 11 6 5 3 Finland 12 8 1 3 21 18 8 11 2 4 Switzerland 4 9 6 1 3 8 18 16 8 5 Canada 13 3 9 14 16 22 2 3 19 6 Australia 15 7 13 4 8 20 12 2 14 7 Netherlands 2 14 4 2 5 12 7 13 36 8 Sweden 3 13 5 13 6 10 14 18 9 9 Denmark 6 11 7 12 23 5 13 7 18

10 United Kingdom 10 5 11 6 20 13 15 12 10 11 Germany 5 12 10 16 10 7 21 9 6 12 Luxembourg 9 29 8 27 1 2 1 23 3 13 Ireland 25 15 14 7 24 16 5 10 25 14 Iceland 18 17 12 28 22 4 4 5 17 15 Austria 11 20 15 11 25 9 23 15 12 16 Belgium 16 19 16 9 11 30 9 24 26 17 United States 14 1 22 8 32 52 26 4 35 18 France 17 18 23 18 14 28 22 49 4 19 Singapore 8 6 18 10 2 1 97 31 11 20 Slovenia 30 60 38 23 35 14 20 22 1 21 Spain 38 42 35 22 17 15 16 29 15 22 Japan 19 21 17 20 4 3 49 101 48 23 Hong Kong 20 4 27 21 7 11 45 53 98 24 Malta 33 73 21 42 18 17 17 8 90 25 Portugal 35 40 28 61 41 25 10 42 27 26 Estonia 27 26 20 29 55 43 32 71 7 27 Czech Republic 26 30 34 24 27 27 28 78 32 28 Uruguay 40 39 19 73 38 55 6 27 67 29 Costa Rica 62 38 31 51 33 67 19 39 40 30 Mauritius 42 32 26 63 43 36 29 40 62 31 Chile 57 43 25 36 51 49 34 63 20 32 Italy 43 68 49 26 34 24 27 51 60 33 Cyprus 39 33 29 57 42 26 35 32 77 34 Poland 37 45 36 33 47 21 39 85 46 35 South Korea 29 36 41 17 19 29 73 105 91 36 Slovakia 46 49 48 30 46 23 43 86 34 37 Latvia 34 34 39 32 82 42 57 94 16 38 Malaysia 23 16 40 31 37 58 112 33 49 39 Panama 47 22 56 69 72 75 31 26 42 40 Israel 32 25 24 19 9 94 91 46 133 41 United Arab Emirates 21 23 53 66 28 32 109 25 43 42 Lithuania 45 55 37 43 80 45 41 125 33 43 Croatia 61 89 44 37 56 31 38 113 30 44 Greece 77 61 42 62 36 33 63 100 24 45 Trinidad and Tobago 56 47 45 65 74 88 47 20 39 46 Qatar 24 24 60 93 15 41 98 36 69 47 Hungary 52 56 46 38 50 38 46 114 93 48 South Africa 111 37 33 70 126 115 24 37 45 49 Argentina 78 96 86 55 44 66 25 57 63 50 Romania 65 41 64 47 85 46 48 97 61 51 Suriname 89 137 58 74 54 56 30 61 23 52 Brazil 44 90 74 81 81 89 36 52 28 53 Macedonia 93 44 62 40 66 37 69 119 85 54 Botswana 99 70 30 78 84 110 51 41 51 55 Jamaica 75 27 63 84 63 117 62 34 59 56 Sri Lanka 41 76 66 58 39 83 110 19 57 57 Bulgaria 73 71 78 39 91 48 66 111 41 58 Montenegro 96 52 59 52 69 35 54 117 125 59 Ecuador 72 103 83 75 60 84 61 75 22 60 Philippines 69 62 57 68 98 141 58 21 44 61 Indonesia 55 75 50 72 95 50 128 14 73 62 Thailand 22 64 99 59 30 86 121 28 79 63 Dominican Republic 86 99 85 96 73 114 40 44 21 64 Peru 58 48 76 89 90 106 68 69 38 65 Mexico 81 31 77 64 64 133 55 126 53 66 Serbia 101 102 70 46 86 40 59 127 105 67 Bahrain 31 46 91 67 29 51 127 56 119 68 Namibia 112 65 32 111 108 122 33 50 74 69 Nicaragua 88 93 88 104 78 108 37 55 31 70 Oman 51 54 90 77 26 34 104 66 137 71 Kuwait 59 94 97 95 31 39 108 35 99 72 Colombia 76 28 89 79 65 142 44 64 52 73 Paraguay 68 91 116 99 57 59 56 76 64 74 Albania 107 67 71 76 49 68 60 106 121 75 Vietnam 36 80 104 50 62 53 124 58 80

The Legatum Prosperity Index 2016 5

The Legatum Prosperity Index™ Rankings 2016

Making sense of it all Take a look at some of the stories behind the rankings.

Two prosperity giants How India and China have contributed the most to rising global prosperity. Page 9

Good government, bad government Why do some people think that bad govern- ments are good? Page 9

Ten years Who are the winners and losers from the past decade’s changing prosperity? Page 12

Mind the gap! How much prosperity is your country delivering with its wealth? Page 16

BRICs v VIPPs Make way for our new grouping of countries to watch. Page 21

UK: Social revolutionary Why it has been social reform not economic success driving the UK’s rising prosperity. Page 22

American decline? Why is the world’s great superpower struggling to deliver rising prosperity? Page 28

Populism stirring Europe’s rising populism is a problem for prosperity. Page 32

Beating the oil curse How the UAE is leading the way to prosperity beyond commodity dependency. Page 36

Rank Country

Sub-Indices

76 Mongolia 64 82 81 48 93 105 83 30 108 77 Kyrgyzstan 71 87 113 60 61 81 86 47 68 78 Turkey 49 74 65 80 52 126 94 104 55 79 Bolivia 80 123 73 82 105 77 42 72 81 80 Guyana 97 115 61 100 94 79 75 43 65 81 Belize 106 128 80 94 70 91 53 91 29 82 Kazakhstan 48 53 105 35 75 65 122 109 97 83 El Salvador 79 57 67 91 58 125 64 88 114 84 Georgia 94 66 54 54 96 78 79 139 124 85 Saudi Arabia 70 50 95 83 45 74 133 45 71 86 Guatemala 83 51 103 110 104 116 85 38 37 87 Ghana 109 81 43 109 115 85 71 89 88 88 Rwanda 95 35 52 123 77 98 84 99 110 89 Jordan 90 112 79 86 48 54 119 68 103 90 China 28 63 123 34 40 64 138 140 134 91 Cambodia 54 79 124 88 102 102 72 95 100 92 Honduras 110 72 101 87 79 128 76 83 86 93 Tunisia 92 95 55 105 71 61 115 136 84 94 Nepal 53 107 87 116 112 82 50 67 129 95 Russia 63 69 108 25 101 119 141 116 56 96 Moldova 84 77 98 49 103 73 87 123 142 97 Kenya 108 59 68 103 119 137 100 17 96 98 Belarus 50 92 135 41 89 57 134 121 102 99 Armenia 115 83 107 56 100 70 99 141 104

100 Tajikistan 103 108 126 53 67 47 130 81 127 101 Morocco 66 84 118 118 87 44 118 144 66 102 Laos 60 105 122 107 97 92 103 60 120 103 Azerbaijan 102 78 127 44 76 71 116 133 141 104 India 67 86 47 102 113 135 102 84 140 105 Lebanon 82 100 131 101 83 80 120 129 82 106 Senegal 121 106 51 134 114 104 52 77 117 107 Ukraine 85 97 128 45 111 134 93 135 112 108 Zambia 134 58 72 115 120 99 96 92 92 109 Tanzania 100 109 82 114 124 100 111 70 83 110 Malawi 123 125 75 121 116 113 82 110 54 111 Algeria 116 131 120 90 53 60 136 138 75 112 Burkina Faso 117 113 102 137 123 62 70 79 78 113 Djibouti 120 144 114 85 117 72 90 124 70 114 Bangladesh 87 116 109 119 99 76 105 122 138 115 Lesotho 146 119 69 120 118 107 81 90 132 116 Uganda 74 98 111 122 140 132 106 48 115 117 Egypt 105 101 117 92 88 93 146 134 131 118 Iran 114 114 136 71 92 120 145 74 111 119 Zimbabwe 104 136 130 97 107 109 113 103 123 120 Gabon 128 118 132 112 132 97 92 102 109 121 Venezuela 127 145 146 98 68 129 95 130 50 122 Mozambique 129 122 96 135 144 103 67 87 101 123 Ivory Coast 119 104 106 136 143 118 78 118 72 124 Madagascar 133 133 112 131 137 63 80 115 116 125 Sierra Leone 118 124 94 139 139 95 89 65 130 126 Togo 122 129 125 129 141 96 74 146 94 127 Cameroon 113 111 133 113 130 139 125 80 76 128 Benin 124 120 84 143 145 90 65 147 87 129 Swaziland 135 88 140 106 106 101 135 73 135 130 Congo 143 126 148 124 134 124 77 128 47 131 Comoros 130 135 119 130 129 69 131 93 107 132 Ethiopia 91 132 115 128 128 123 126 120 122 133 Liberia 132 110 92 140 146 121 107 96 95 134 Mali 131 121 110 145 122 130 88 98 126 135 Nigeria 139 85 121 117 142 145 123 59 106 136 Libya 137 147 144 108 59 138 144 54 136 137 Niger 136 134 93 147 135 87 117 108 128 138 Guinea 126 130 129 146 147 111 114 112 58 139 Pakistan 98 117 100 125 121 143 132 137 149 140 Burundi 138 138 141 127 110 136 101 149 113 141 Angola 140 148 138 132 127 127 129 142 139 142 Mauritania 148 139 137 138 109 112 143 82 146 143 Iraq 142 146 134 126 131 147 139 62 148 144 Chad 144 140 145 149 149 131 137 132 118 145 Democratic Republic of Congo 147 141 143 133 136 148 140 131 144 146 Sudan 141 142 142 144 133 144 148 107 143 147 Central African Republic 145 143 139 148 148 149 142 143 89 148 Afghanistan 125 127 147 141 138 146 149 145 147 149 Yemen 149 149 149 142 125 140 147 148 145

The term ‘country’ is used to refer to the 149 societies included in the Index. These include 148 nations and one Special Administrative Region of China, Hong Kong.

The Legatum Prosperity Index 20166

The Legatum Prosperity Index 2016 7

key findings

After a lacklustre performance during the 2008 and 2009 global financial crisis, global prosperity has risen to unprecedented levels. Whether we look at the global average or weight countries’ scores by their populations, the picture remains the same: global prosperity is now three percent higher than it was in 2007.

Driving this trend towards higher global prosperity are improvements in Personal Freedom, particularly in Western Europe and Central and Latin America; improvements in Health and Education in Asia; and a better Business Environment in the Middle East and North Africa, Sub- Saharan Africa, and Eastern Europe.

However, the picture is not universally positive. The rise of Islamic State and other groups like AQAP in the Middle East since the Arab Spring has exerted a drastic limit on prosperity growth in the region.

The Western world is not immune to challenges either. American prosperity has stagnated over the past decade. Even countries that were less badly affected by the financial crisis, like Australia, have seen prosperity decline over the past decade. Indeed, it is the only country in the top 20 to have seen prosperity fall.

This demonstrates that despite the upward trend, countries cannot take rising prosperity for granted. To keep global prosperity rising requires resolving ongoing conflicts, miti- gating against economic disruption, and tackling the stagna- tion of key social outcomes in major developed economies.

Global prosperity is at its highest point in the past decade

0

1%

2%

3%

2007 2016

% In

cr ea

se

Global average Global population-weighted

The Legatum Prosperity Index 20168

key findings

The Commonwealth Effect

Across the world, the Index captures a notable ‘Commonwealth Effect’. The Commonwealth delivers greater prosperity, and greater prosperity given its wealth, than the global average.

This additional prosperity comes primarily from the Business Environment, Governance, Personal Freedom, and Social Capital sub-indices. On the delivery of prosper- ity, together the Commonwealth outperforms the world average in all but one sub-index.

This Commonwealth Effect transcends wealth. We see the developed Commonwealth “Anglosphere” bloc of New Zealand, Australia, Canada, and the United Kingdom deliver greater prosperity than any comparable bloc, including the Nordic area and Western Europe. In Africa, Commonwealth members together outperform the Sub-Saharan average in every sub-index.

What also transcends wealth is the root of this Commonwealth Effect. Whether in Africa or Australia, the pattern is the same. This additional prosperity comes from freer markets (reflected in a more competitive business environment and certain indicators of governance), freer peoples with greater opportunity, and most importantly, stronger civil society.

The Commonwealth States

Sub-Saharan Africa Botswana, Cameroon, Ghana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Rwanda, Seychelles, Sierra Leone, South Africa, Swaziland, Uganda, Tanzania, Zambia

Asia & Pacific Australia, Bangladesh, Brunei Darussalam, Fiji, India, Kiribati, Nauru, New Zealand, Malaysia, Pakistan, Papua New Guinea, Samoa, Singapore, Solomon Islands, Sri Lanka, Tonga, Tuvalu, Vanuatu

North America Canada

Latin & Central America Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Saint Lucia, St Kitts and Nevis, St Vincent and The Grenadines, Trinidad and Tobago

Europe Cyprus, Malta, United Kingdom

The Commonwealth is a voluntary association of 52 independent and equal sovereign states. It is home to 2.2 billion citizens, of which more than 60 percent are under the age of 30. The Commonwealth includes some of the world’s largest, smallest, richest and poorest countries, spanning five regions.

Prosperity score

World Commonwealth

57.5 58 58.5

Prosperity score 73 74 75 76 77 78

W. Europe Nordics Anglosphere

Prosperity score

Sub-Saharan Africa Commonwealth Africa

48 49 50 51 52 53 54

The Legatum Prosperity Index 2016 9

Why do some people think bad governments are good? The Prosperity Index is unique in its combination of objective and subjective data. The first is factual, the second based on survey respondents’ perceptions. For the most part, subjective data align with objective data. Interestingly, however, there are cases where subjective and objective data diverge – that is, where there is a dis- connect between reality and people’s perceptions of it.

One such example is the relationship between survey responses on people’s confidence in their national gov- ernment and expert-based objective assessments of government effectiveness. We would expect there to be a positive relationship between these two variables – that is, for people to have more confidence in their government the more effective it is. In some instances, there is no such relationship. In some countries, such as Egypt and Bangladesh, people have a high degree of confidence in their government despite it being ineffective; in others, such as Austria and Iceland, people have little confidence in their government despite it being highly effective.

This is in part due to the variety of governance across coun- tries. In more autocratic countries, people may feel uneasy about expressing their true views on their government, or they might have a limited sense of alternative forms of gov- ernment, ones that have the potential to be more effective.

Whatever the reason for the disconnect between subjective and objective data, as exemplified in the government effec- tiveness case, the phenomenon raises an important point. Prosperity has both subjective and objective components, and the fact that they sometimes diverge makes it impor- tant to measure both.

key findings

China and India: Biggest drivers of prosperity Most countries have seen their prosperity rise over the past decade, but their contributions to global prosperity have been very uneven. That the biggest gains have been made by poorer countries is unsurprising, but China and India stand out. Together they account for almost 40 percent of the growth in global prosperity over the past decade.

Combining the world’s largest population with some of the fastest economic development in recent memory, China has lifted a large share of its population out of poverty and into prosperity. In doing so, it accounted for 19 percent of the growth in global prosperity over the past decade. This is due to China’s move towards economic liberalisation and global economic integration.

Similarly, India, home to the world’s second largest popu- lation, has liberalised and globalised its economy, moving more and more people from poverty to prosperity. India’s prosperity growth accounted for 20 percent of the growth in global prosperity over the past decade.

India and China have developed very different prosperity profiles, and both face problems. China’s Governance and Personal Freedom performance is weak. India, the world’s largest democracy, faces different problems, namely in Education and Health. This explains why both still have some way to go to reach European or American prosperity levels. Still, their progress to date is responsible for much of the improvement in prosperity the world has seen.

Vietnam 81 percent of respondents claimed to have confidence in their national government

Iceland 43 percent of respondents claimed to have confidence in their national government

% Global prosperity gains since 2007

0 5 10 15 20

Pakistan

Russian Fed.

Indonesia

China

India

Top contributors to global prosperity gains since 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-3 -2 -1 0 1 2 3

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io na

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less effective < government effectiveness > more effective

Perception and reality aren’t always aligned

Ineffective government, but high confidence in government: 30% of countries

Effective government, but low confidence in government:

19% of countries

The Legatum Prosperity Index 201610

key findings

Britain is flourishing, helped by a world-class performance in transforming wealth into prosperity. However, prosperity created is not prosperity shared. The opportunity for flourishing is not open to all. Despite strong prosperity generation, the absence of life chances in urban areas limits its reach.

The UK is a world leader on the top-level delivery of prosperity. When countries are compared on how much prosperity they deliver for every pound their economy generates, the UK ranks third in the world. This means that, despite being 12 percent poorer than Germany and 32 percent poorer than the US, the UK is more prosperous than both.

Britain also delivers more prosperity per pound than before the global financial crisis. Rising prosperity over the past decade, despite stagnant GDP per capita, makes the UK one of the best prosperity performers of any major developed economy.

However, Britain is not good at making sure that prosperity reaches all. Our UK Prosperity Index, published in October 2016, highlights a significant failure of the UK’s urban areas – rich and poor – to deliver prosperity. Their rural counterparts, however, are flourishing.

2007 2016

GDP per capita Prosperity

Pr os

pe ri

ty s

co re

74

75

76

77

78

G D

P pe

r ca

pi ta

( U

S$ ‘0

0 0

)

35

36

37

38

39

UK: Falling wealth, rising prosperity

This failure is driven by an absence of life chances in many UK cities. Poor education, poor health, weak social support, the lack of opportunity, and low wellbeing are all holding back urban areas. For the citizens of these areas, prosperity and the opportunities it brings have not yet come knocking.

Despite ranking tenth in the Prosperity Index and third for top-level delivery, UK prosperity is limited by the fact that it does not reach the whole population. If life chances can be unlocked for all, then the potential for UK prosperity is significant indeed.

Why is the UK world-class at generating prosperity but not so great at sharing it?

The Legatum Prosperity Index 2016 11

90

Prosperity score, 2007

20 30 40 50 60 70 80

D iff

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Sc or

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0 0

7 to

2 0

16

-5.5

-3.5

-1.5

0.5

2.5

4.5

6.5

8.5 Togo

Germany

Hong Kong

Venezuela

ProsperousProsperous Negative prosperity growthNegative prosperity growthNegative prosperity growth

Not prosperousNot prosperous Negative prosperity growthNegative prosperity growthNegative prosperity growthNegative prosperity growth

ProsperousProsperous Fast prosperity growthFast prosperity growth

Not prosperousNot prosperous Fast prosperity growthFast prosperity growthFast prosperity growth

key findings

The conversation about global inequality is almost always one about the distribution of the world’s wealth, but it is not the whole story. What do we see if we expand our view beyond wealth to a broader definition of prosperity?

The Prosperity Index paints a more optimistic picture of the world than the one we see when looking at wealth alone.

Differences in prosperity between countries declined between 2007 and 2016. This decline in inequality was driven by faster prosperity growth in initially less prosperous countries. By growing faster, these countries have narrowed the gap between their level of prosperity and the higher level of prosperity enjoyed by more advanced countries. The outcome is a lower level of global prosperity inequality.

The graph above divides the world according to prosper- ity growth and the starting level of prosperity in 2007. Unsurprisingly, large gains have been made by less pros- perous nations like Togo. However, progress has also been made at the top, with prosperous countries like Germany posting impressive rates of prosperity growth.

The sloping line shows that as you move up the prosperity rankings, more prosperous countries tend to have slower prosperity growth rates than less prosperous ones. It is this 'catch up' that is reducing the inequality of prosperity between countries, as the difference between the prosper- ity of those at the bottom and those at the top shrinks.

Looking at prosperity rather than wealth alone, we see a new story: an increasingly prosperous world, composed of increasingly equal countries.

Change in average prosperity 2007-2016

Bottom 20 Top 20

0 1.50.5 1

Despite conflict marring prosperity growth at the bottom of the Index, prosperity has grown faster among the bottom 20 countries than among the top 20.

Global prosperity inequality is falling as the less prosperous grow faster than the prosperous

72

73

74

2007 2016

USA

2007 2016 48

52

56

Venezuela

The Legatum Prosperity Index 201612

Ten years of changing prosperity

United States of America US prosperity has stagnated over the past decade, as improvements in the Business Environment and Personal Freedom have been offset by sharp declines in Safety & Security and Economic Quality. In the context of this stagnation, the rise of the Trump brand of populism is less surprising.

Venezuela Venezuela has seen the biggest decline in prosperity in the world over the past ten years, losing nearly ten percent of its 2007 prosperity level. This has come as a result of poor governance and a heavily oil dependent economy. In Economic Quality and Governance, Venezuela has lost a fifth of its prosperity since 2007.

We have already seen that global prosperity is on the rise, however, that rise has not been evenly felt across the world. The map shows how much prosperity has been gained or lost over the past decade in every country covered by the Index.

The results are surprising. Just 28 countries have seen prosperity decline, from the world’s biggest decline in Venezuela, to small falls in developed countries like Australia and Greece. A further 16 have seen negligible pos- itive change, including developing countries like Tanzania and Mali, but half are also members of the OECD. This includes economic giants like the United States, where prosperity has stagnated over the past decade. Europe too has not been immune. The Netherlands, Ireland, and Denmark have failed to secure prosperity growth over the past ten years.

However, 70 percent of the world’s nations have seen a notable increase in their level of prosperity. Be it Togo in Sub-Saharan Africa, Cambodia in Asia, Ecuador in Latin America, the UAE in MENA, or Lithuania and Germany in Europe, prosperity growth has been seen, and seen in abun- dance somewhere in every continent in the world.

The challenge for global prosperity is how to keep lifting people from poverty to prosperity over the next decade. We have already seen the challenge that so-called Islamic State and others are presenting for prosperity in the Middle East. Yemen, Libya, and Tunisia have all seen their prosper- ity retreat. Latin America is the only region in the world that has failed to deliver sustained prosperity growth. It is instead highly cyclical, locking the continent’s prosperity into a loop of economic boom and bust. The developed world is not exempt either. Populism is threatening pros- perity on both sides of the Atlantic.

Prosperity may be at its highest point since 2007, rising sharply following the global financial crisis. However, trends over the past decade strike a note of caution. Rising pros- perity has to be fought for, it cannot be taken for granted.

+4 to +8.5

+2 to +4

+0.5 to +2

-0.5 to +0.5

-2 to -0.5

-4 to -2

-6 to -4

Change in Prosperity Score 2007-2016

quick key findings

The world has never been more free, but some regions are freer than others

While most people now enjoy more Personal Freedom than they did in 2007, the improvement has been regionally uneven. Three world regions – Sub-Saharan Africa, Eastern Europe, and the Middle East and North Africa (MENA) – have seen their level of Personal Freedom decline slightly. Western Europe and Central and Latin America saw the biggest gains in Personal Freedom, while Asia and North America saw only slight increases.

It is encouraging that, in the face of large immigration and refugee pressures, Western Europe’s growing level of Personal Freedom is largely due to higher levels of tolerance of ethnic minorities and immigrants – and this despite the fact that the region is expe- riencing a populist backlash. In Central and Latin America, the gains in Personal Freedom are down to higher levels of LGBT tolerance among its population and more people feeling satisfied with their freedom of choice in general.

In contrast to Western Europe, the decline in Personal Freedom in Eastern Europe is due to lower tolerance of ethnic minorities and immigrants among Eastern Europeans. MENA’s decline in Personal Freedom is in part due to the deterioration in civil liberties in many Arab states as a result of the civil war in Yemen, for example, and the unrest following the Arab Spring in Egypt.

2007 2016 40

45

50

Togo 2007 2016

36

38

40

Yemen

2007 2016 76

77

78

79

Australia

2007 2016 54

56

58

60

Indonesia

2007 2016 74

75

76

77

78

UK

2007 2016 76

77

78

79

Norway

2007 2016 54

56

58

Mongolia

The Legatum Prosperity Index 2016 13

United Kingdom The UK’s strong prosperity growth has come as a result of social reform, not economic success. Significant improvement has been made in the Education sub-index, but in areas like the Business Environment, while still world-class, UK competitiveness is slipping.

Yemen Yemen has experienced the third biggest fall in prosperity in the world over the past ten years. While most areas of prosperity have been declining, the country has been sliding significantly in the Governance and Safety & Security sub-indices, as Al Qaida in the Arabian Peninsula and so-called Islamic State continue to challenge the Yemeni government.

Mongolia Described as a country “on the brink of prosperity”, Mongolia has proved itself so over the past ten years. Rising prosperity has come thanks to fast improving Economic Quality and a society that is growing rapidly stronger.

Norway Norway has seen good prosperity growth over the past decade thanks to being one of the few countries in Western Europe not to have suffered marked decline in the Economic Quality sub-index.

Togo Togo has seen the largest prosperity improvement in the world since 2007, improving in every sub-index. The biggest gains have been made in Business Environment where ease of starting a business has gone from the second worst to be on a par with Malta, and Personal Freedom where tolerance has been rising.

Indonesia One of the fastest prosperity risers in Asia, Indonesia has seen significant improvement in Social Capital and Governance in the past ten years. Increasing altruism and improving fundamentals of good governance have helped drive Indonesia’s rise.

Australia Australia is the only country in the global top 20 to have seen prosperity decline over the past decade, the result of weakening economic openness and the increasing terror threat affecting the country’s Safety & Security performance.

The Legatum Prosperity Index 201614

Stairway to prosperity

Global prosperity has grown since 2007, but countries grew at different rates and some even saw their prosperity decline. We can think of these changes in prosperity scores as countries moving up and down the Prosperity Steps. A large positive change allows a country to climb up the steps, to rank among more prosperous countries, while a negative change means a country is moving down the steps, to rank among less prosperous countries.

How do countries move up the Prosperity Steps? Looking at countries at the bottom of the rankings table, we see a lot of variation in performance across the pillars of prosperity. If, however, we look at countries at the top of the ranking table, we see the opposite picture: among top performers, scores are high in every pillar. In this sense, what Leo Tolstoy said of families applies to countries and their prosperity: “Happy families are all alike; every unhappy family is unhappy in its own way.”

For example, India, which has a low prosperity score, scores well in Governance but poorly in Education. On the other hand, Azerbaijan, which also has a low prosperity score, scores well in Education but poorly in Governance. This is not the case for top performers in the Prosperity Index, where scores are high in every pillar. New Zealand, which enjoys the highest prosperity score, ranks among the top three countries in four of its pillars and among the top 20 in the remainder of its pillars.

This has implications for the way in which countries climb up the Prosperity Steps. For countries at the lower end of the steps, improvements can be made in a wider range of areas. India can improve its Education score, while Azerbaijan can improve its Governance score. For countries already at the upper end of the steps, the options are more limited because their performance is already high. For these countries, the challenge is more a matter of maintaining prosperity than improving it.

Charting movement up the Prosperity Steps The chart illustrates how countries have climbed up the Prosperity Steps over the past decade. By splitting all 149 countries into quadrants, where the first quadrant contains the top 30 countries, the second countries ranked 31st to 75th, the next 76th to 119th, and the fourth quadrant the bottom 30 countries, we can plot the movement of coun- tries up the steps.

The chart shows that climbing up the steps, from one quadrant to another, is difficult. Between 2007 and 2016, only eleven countries did so. Two – Mauritius and Uruguay – climbed from the second quadrant to the first; eight – Vietnam, Albania, Paraguay, Serbia, Ecuador, Indonesia, Sri Lanka, and the Philippines – climbed from the third quadrant to the second; and only one – Zimbabwe – climbed from the fourth quadrant to the third. This shows us that mobility is higher in the middle of the steps: moving from the third quadrant to the second is easier than it is at the top or bottom.

Urug uay

Maur itius

Zimb abwe

4th 3rd

2nd 1st

QUADRANT

QUADRANT

QUADRANT

QUADRANT

Alban ia

Ecua dor

Indon esia

Sri La nka

Vietn am

Serbi a

Philip pines

Parag uay

The Legatum Prosperity Index 2016 15

Sitting on the step Over the past ten years, Poland has moved up from 40th place in the Prosperity Index rankings to 34th place. In both 2010 and 2014, the country reached a peak of 32nd place, sitting close to the edge of the Prosperity Step that would see it rise into the first quadrant.

Poland’s rise up the ranks is the result of rapid improvements in its Natural Environment, Business Environment, Governance, and Safety & Security sub-indices. Concerted efforts to make the country a better place for business, like the simplification of its registration and construction permitting processes, have helped Poland to rise from 57th to 45th in the Business Environment sub-in- dex over the past ten years. Structural change to strengthen rule of law, judicial independence, and other indicators of good governance has also helped Poland’s prosperity rise.

But what would it take for Poland to make it up the Prosperity Step into the first quadrant? The country has seen falling prosperity in Personal Freedom and stag- nation in Social Capital. If it is to make it into the global top 30, action needs to be taken to strengthen altruism and reverse rising intolerance and restrictions on reli- gious freedoms.

quick key findings

Venezuela – The world’s biggest prosperity loser

Venezuela has seen the biggest decline in prosperity over the past decade, falling in all but two sub-indices. Having prioritised oil over the devel- opment of other industries and now

finding itself in an era of structurally lower oil prices, Venezuela has seen its Economic Quality drop by 20 percent since 2007. A coup d’état in 2002 was followed by a national strike in 2003, which caused GDP to fall by 27 percent, and in 2014 there were violent protests triggered by corruption and hyperinflation.

This highlights Venezuela’s real problem: Governance. Venezuela’s Governance rank is the fourth-lowest

in the world, down 13 places since 2007. From judicial independence to rule of law, every variable in this sub-index is in decline.

Venezuela’s experience offers other countries an important lesson. It is good governance, and not just the existence of resources, that is critical for the creation and distribution of prosperity.

Identifying countries at risk and countries with potential The Prosperity Steps also allow the identification of countries that, while not moving up or down the steps, are hovering around the thresh- old – that is, they are placed to either climb up or fall down the steps.

Risk of Falling 1st to 2nd Quadrant

Potential to Grow 2nd to 1st Quadrant

Mauritius Chile

Costa Rica Italy

Uruguay Cyprus

Czech Republic Poland

Estonia South Korea

Risk of Falling 2nd to 3rd Quadrant

Potential to Grow 3rd to 2nd Quadrant

Vietnam Mongolia

Albania Kyrgyzstan

Paraguay Turkey

Colombia Bolivia

Kuwait Guyana

Risk of Falling 3rd to 4th Quadrant

Potential to Grow 4th to 3rd Quadrant

Zimbabwe Gabon

Iran Mozambique

Egypt Venezuela

Uganda Ivory Coast

Lesotho Madagascar

The table above contains the countries that are just above or below the threshold between quadrants. This framework brings us back to the issue of improving and maintaining prosperity. For relatively less prosperous countries, like the UAE, the challenge is to improve performance in pillars where they are currently lagging behind. For already prosperous countries like Italy, the challenge is to maintain prosperity by not letting performance in any pillar slip.

-25

-20

-15

-10

-5

0

2007 2016

R ed

uc ti

on in

p ro

sp er

it y

sc or

e (%

)

Prosperity

Economic Quality Governance

QATAR

GDP per capita $135,322

Prosperity rank 46 Significant deficit Qatar has the highest GDP per capita in the world ($135,321), far higher than second-richest Luxembourg ($93,552). Its inclusion in the Index alters slightly the delivery line, mildly exaggerating the surpluses of other very high income countries like Luxembourg and Singapore. Without Qatar, the prosperity surplus of Singapore falls from +1 to +0.6.

The Legatum Prosperity Index 201616

Mind the gap! Exploring a country’s prosperity potential

NEW ZEALAND

GDP per capita $34,762

Prosperity rank 1 Significant prosperity surplus New Zealand has been the best deliverer of prosperity in the world for the past ten years. So strong is its prosperity delivery, it ranks 1st in the Prosperity Index, above 26 countries with greater wealth at their disposal. Its strong social capital, high level of freedom, and open trading economy have helped keep it at the top.

UNITED KINGDOM

GDP per capita $38,658

Prosperity rank 10 Significant prosperity surplus The UK is the third best deliverer of prosperity in the world and this deliv- ery has risen over the past decade. This is because the UK has managed to improve overall prosperity despite not growing much wealthier. This has largely been the result of radical social reform improving performance in areas like Education.

Across the world, prosperity is delivered to a greater or lesser extent as shown by the rankings and results on the previous pages. Some of the findings are unsurprising. The bottom of the ranking table is populated by some of the world’s poorest countries, like the Central African Republic, while the top of the table is populated by some of the world’s richest countries, like Norway.

However, the level of prosperity delivered by a country can, using GDP per capita, be compared against the level of prosperity expected given that country’s wealth.

It is here where the countries in most need of praise can be identified, those delivering far more prosperity than you would expect given their wealth.

In the chart opposite, each dot represents a country. The curve shows the general tendency with which prosperity increases as GDP per capita increases. Its shape is fitted to all 149 countries covered by the Prosperity Index. If a country falls below the curve, then we can say that com- pared to all other countries, it is under-delivering prosper- ity for its citizens. That is, it has a prosperity deficit: its level of prosperity is lower than we would expect given its wealth. Likewise, if a country rises above the curve, then we can say that it is over-delivering prosperity for its citizens: it has a prosperity surplus.

More than absolute prosperity scores or rankings alone, the Prosperity Gap shows the Prosperity Index to be a tool for change. It provides leaders with the assessment they need to transform their nation into a more prosperous one and it provides citizens with the information they need to hold those leaders to account.

Explanatory Note: The vertical axis measures a country’s Prosperity Index score. The horizontal axis measures a country’s level of GDP per capita, adjusted for purchasing power parity, and expressed in current international dollars. The fitted curve is logarithmic with a coefficient of 6.52 on logged GDP per capita, which is statistically significant at the highest level, and an overall fit of 63 percent. The curve intercepts the vertical axis at -2.22. The Prosperity Gap refers to the verti- cal distance from each country to the curve (the ‘residual’).

99% of New Zealanders say they have relatives or friends to count on, the best in the world

70% of Britons say they are satisfied with their local education system and schools

SAUDI ARABIA

GDP per capita $50,284

Prosperity rank 85 Significant deficit Saudi Arabia is carrying a significant prosperity deficit, common among oil-dependent economies. This deficit has been broadly static over the past ten years. While it is positive that the Kingdom’s prosperity deficit has not been increasing with its fiscal deficit, little progress has been made in turning oil wealth into broader prosperity for its citizens.

30

40

50

60

70

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90

0 20,000 40,000 60,000 80,000 100,000 120,000

Pr os

pe ri

ty In

de x

sc or

e

GDP per capita, PPP (current international $)

NEW ZEALAND

UNITED KINGDOM

UNITED STATESFRANCE

ITALY

UNITED ARAB EMIRATES QATAR

SAUDI ARABIA CHINA

VIETNAM

BRAZIL

ZAMBIA

The Legatum Prosperity Index 2016 17

BRAZIL

GDP per capita $14,455

Prosperity rank 52 Expected prosperity Brazil delivers as much prosperity as expected given its wealth. A rising surplus in Personal Freedom and shrinking deficit in Safety & Security have been offset by widening deficits in the Business Environment, Governance, and Health sub-indices.

ITALY

GDP per capita $33,587

Prosperity rank 32 Expected prosperity Italy has seen its small surplus erased in the past ten years, as prosperity has fallen faster than wealth following the global financial crisis. The biggest declines have come in Economic Quality and Social Capital, where surpluses have been turned into equal sized deficits.

FRANCE

GDP per capita $37,306

Prosperity rank 18 Moderate surplus France’s prosperity surplus has been consistently strong over the past decade. While the country has wit- nessed a collapse in Social Capital and seen recent terror attacks affect Safety & Security performance, the surplus has been maintained by rising freedom and education scores.

UNITED ARAB EMIRATES

GDP per capita $66,102

UAE prosperity rank 41 Moderate deficit The UAE is carrying a moderate deficit, not uncommon among oil-dependent economies. However that this deficit is noticeably shrinking is uncommon, the result of concerted efforts to move beyond oil-dependence. Over the past decade, the UAE’s deficit has shrunk by 30 percent.

UNITED STATES

GDP per capita $52,549

Prosperity rank 17 Moderate surplus While the United States continues to over-deliver prosperity, its prosperity level has stagnated over the past decade and declined relative to emerging and advanced countries alike. When delivery just among advanced economies is considered, the US under-delivers.

ZAMBIA

GDP per capita $3,626

Prosperity rank 108 Expected prosperity Zambia has been broadly delivering as much prosperity as you’d expect given its wealth, carrying a small surplus for the past ten years. Progress to deliver more in areas like the Business Environment have come at the cost of Social Capital and the Natural Environment.

VIETNAM

GDP per capita $5,668

Prosperity rank 75 Mild surplus Vietnam has always consistently over-delivered prosperity and has the third highest prosperity surplus in Southeast Asia behind Cambodia and the Philippines. Its surplus comes mainly from its Economic Quality and Education performance.

CHINA

GDP per capita $13,400

Prosperity rank 90 Moderate deficit That prosperity growth has not kept up with China’s economic rise is reflected in a widening prosperity deficit over the past decade. China’s GDP per capita has nearly doubled in the past ten years, but the size of its prosperity deficit has quadrupled.

The Legatum Prosperity Index 201618

ten x ten

Free markets, free people, strong society New Zealand and delivering prosperity the Anglosphere way

For the past decade, the Legatum Prosperity Index™ has tracked the flourishing of citizens worldwide. We look particularly at the level of prosperity delivered relative to a country’s wealth. Some deliver a lot of prosperity with little wealth. Others have vast wealth, but have not turned it into better lives for their citizens.

Over the next 22 pages, we ex- plore ten of the world’s most interesting stories of prosperity delivery from the past ten years. From the large prosperity sur- plus that pushes New Zealand to the top of the Index, to oil-rich countries not so rich in prosper- ity, these stories highlight the foundations of prosperity that are

needed if people are to flourish.

From rising stars in Asia, to the clouds overhanging prosperous countries like the US and others in Europe, these stories are about what helps a nation deliver pros- perity to its people, and how once unquestionable progress can rap- idly change.

The Legatum Prosperity Index 2016 19

There is an old Māori proverb, he kai kei aku ringa – “There is food at the end of my hands.” It speaks to a resilience; an ability to use your basic skills and resources to create success.

This New Zealand has done in abundance. For the past decade, this remote island nation of just 4.7 million has stood out as the best deliverer of prosperity in the world – the best at turning its resources and the skills of its people into prosperity.

It has done this through a combination of strong society, free and open markets, and high levels of personal freedom. Alongside New Zealand (ranked overall first this year), other developed Commonwealth countries also deliver high levels of prosperity in this way: the UK (tenth), Australia (sixth), and Canada (fifth). Together, these “Anglosphere” nations perform better than any compara- ble developed bloc in bringing prosperity to their shores. The combination of free markets, opportunity, and strong society is their secret.

Social Capital drives New Zealand’s prosperity success That New Zealand is a clear outlier in the Social Capital sub-index does not seem to be met with much surprise by many New Zealanders. They point to the country’s history as an agrarian society – remote rural communities tend to depend on one another to a greater extent – and the country’s Māori tradition. The strength of the country’s social capital stands out like no other, underpinned by the Māori idea of society built around the whānau (family), hapū (community), and iwi (tribe). The result is a nation with the strongest social capital in the world, where 99 percent of New Zealanders say they have family or friends to rely on in times of need.

40

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60

70

18 28 38 48

GDP per capita (US$ ‘000)

So ci

al C

ap it

al s

co re

New Zealand

Social Capital delivery, developed countries

It is not just in Social Capital (where New Zealand ranks first) that the country excels. Free people and free markets are clear traits too. New Zealand ranks first in Economic Quality, second in Business Environment, and third in Personal Freedom.

NEW ZEALAND PI ranking 1st

Population 4,724,470

Languages English (96.1%)

Māori (3.7%)

Capital city Wellington

Currency New Zealand dollar

GDP per capita US $34,762

Principal export Agricultural product

The Legatum Prosperity Index 201620

The Commonwealth Effect It is not only New Zealand that should be noted for its prosperity delivery, but close Commonwealth allies Australia, the UK, and Canada too. These four Anglosphere nations all rank among the top five deliverers of prosperity in the world. Together, they outperform any similar devel- oped bloc both in their prosperity level and in its delivery.

Why are these Anglosphere nations – tied by common language, values, and institutions – the best at delivering prosperity in the world? Their comparative strength is most obvious in the Business Environment, Education, Personal Freedom, and Social Capital sub-indices; the result of eco- nomic openness, opportunity, and strong society.

G ap

0

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15

20

25

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Prosperity Business Environment

Education Personal Freedom

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Anglosphere Nordics Western Europe

The Commonwealth Effect

Delivering prosperity the Anglosphere way: free markets, opportunity, society Free markets and undistorted economies are critical to the success of these nations. Together, this bloc has lower non-tariff trade barriers, more flexible labour markets, more competitive regulation, and a more open environ- ment for new businesses than the Nordic countries or Western Europe.

So too is opportunity more abundant in the Anglosphere nations, despite the fact that some still struggle to share prosperity through their populations. UK urban areas deliver notably less prosperity than their rural counter- parts (see page 24) and child poverty remains an issue in New Zealand, particularly among the Māori population. Nevertheless, together, New Zealand, Australia, Canada, and the UK offer a level of opportunity higher than that found elsewhere.

Freedom is at the heart of this opportunity. In these coun- tries people are most free to pursue their ambitions and achieve their potential. Of all the world’s nations, New Zealand is the most tolerant of immigrants. These countries also offer greater opportunity for their citizens to flourish through their education systems. Human capital is stronger in these countries, mainly through the quality and quantity of tertiary education. Most importantly, the link between socioeconomic background and educational attainment is less pronounced than in the Nordic area or in Western Europe. Opportunity knocks on more doors.

Free markets, freedom, and opportunity are one thing, but their potential is limited when civil society is weak – when people do not support one another to be the best they can be. The final, and perhaps most important, aspect of prosperity in Anglosphere nations is that markets, individual freedom, and opportunity are supported by a strong society.

In these countries, people look out for each other to a much greater extent. Volunteering and charitable donation rates are higher, friend and family networks are stronger, and the altruistic desire to help someone you do not know is more prevalent than in the Nordic or Western European blocs. This social capital is important. Strong social capital has been linked to higher economic growth and higher levels of subjective wellbeing. In the case of the Anglosphere nations, it helps them deliver a lot more prosperity with their wealth than is found elsewhere.

Anglosphere Nordics Western Europe

0

0.2

0.4

0.6

0.8

1.0

Absence of trade barriers

Tolerance of immigrants

Volunteering Helped a stranger

Freer markets, freer people, stronger society

This high level of delivery cannot be achieved through free markets and free people alone. The success of these English-speaking nations is testament to the importance of strong society alongside an open economy and free people in the creation of prosperity.

quick key findings

ten x ten: free markets, free people, strong society

Social Capital stars in the developing world

Where else outside the developed Commonwealth do we see the emer- gence of strong society? Significant improvements in Social Capital have been recorded over the past ten years in

Indonesia, Uruguay, Sri Lanka, Rwanda, and Mongolia. Consistent performance has been seen in the Philippines, which ranks 21st. Yet, not all combine strong society with comparatively free people and opening markets. Those that do have significant potential for future prosperity, be they towards the bottom of the Index, or within the top 30.

Both Mongolia (76th overall) and Rwanda (88th) have seen small improvements in Personal Freedom.

However, Rwanda has also seen its markets opening and its labour market become increasingly flexible. It has risen from 110th to 35th in the Business Environment since 2007. Mongolia too has seen trade barriers fall and its market grow increasingly competitive. Uruguay (28th) combines its social capital with the sixth freest people in the world, and slowly improving market competitiveness.

39 percent of Mongolians say they have volunteered in the past year, among the ten highest in the world

Free markets, freedom, and opportunity are one thing, but their potential is limited when civil society is weak – when people do not support one another to be the best they can be.”

ten x ten

Forget the BRICs – make way for the VIPPs!

In 2001 Jim O’Neill, then Chief Economist at Goldman Sachs, coined the famous acronym BRICs, referring to Brazil, Russia, India, and China. He predicted that by 2050 these four economies would be the biggest contributors to global economic growth.

O’Neill got two countries right: China and India. As of 2016, these two economies account for almost a quarter of global economic output, up from a tenth in 2001. According to the Prosperity Index, they accounted for over a third of the past decade’s growth in global prosperity. Meanwhile, Russia and Brazil continue to grapple with economic and political unrest, and contribute less to global economic output in 2016 than they did in 2001.

We need a wider perspective on a country’s potential to grow What went wrong? The BRICs were chosen purely for their economic growth potential, and on this basis O’Neill was right to group them as he did. From the perspective of 2001, the BRICs showed a lot of economic promise: the demo- graphic projections mostly showed labour force growth, their growth rates showed an ability to harness technolog- ical progress, and their investment rates were high.

But non-economic factors do not only matter, more gen- erally, for prosperity – they matter for economic growth too. Over the past decade, the countries that have been among the strongest performers in rising up the prosper- ity rankings have shared certain common foundations: high scores in Education, Governance, and Social Capital. Education makes people more productive and better able to lead prosperous lives; good governance provides the policy stability needed for growth and the freedom that allows people to flourish; and strong social capital built on high levels of trust oils the wheels of commerce and improves individuals’ wellbeing.

While the BRICs shared similarly promising economic foundations, their performance across these other pillars of prosperity varied, and it is this variation that explains their different trajectories. For example, Brazil’s Governance ranking dropped from 63rd to 74th place over the past decade, and Russia’s remains ranked at a lowly 108th. These are not the foundations on which economic growth, and still less prosperity, can be built.

Introducing the VIPPs So which countries show the most promise now? We looked for countries that have performed solidly in the three foundational sub-indices – Education, Governance, and Social Capital; which have populations large enough to make a substantial contribution to global prosperity; and which are on an upward prosperity growth trend. These are the VIPPs: Vietnam, Indonesia, Poland, and the Philippines.

Together, the VIPPs account for 6.6 percent of the world’s total population. The largest – Indonesia – alone accounts for 3.5 percent. As they are home to such large popula- tions, growth in the prosperity of the VIPPs is growth in the prosperity of hundreds of millions of people worldwide.

0% 2% 4% 6% 8%

World average

Vietnam

Poland

Philippines

Indonesia

Change in prosperity score, 2007 to 2016

All the VIPPs have seen faster prosperity growth than the world average 2007-2016

Prosperity growth in the VIPPs over the past decade is encouraging. Indonesian prosperity grew by over seven percent, while Vietnam – the slowest of the group – grew by close to five percent. Meanwhile, the world average prosperity growth was close to just three percent.

Maintaining such fast prosperity growth requires the foun- dations of good governance, social capital, and education. In this regard, we see that the VIPPs perform well. Their 2016 scores in Education are all above the world median score. In Governance, Vietnam is below the world median because it is not democratic, but otherwise it has reasona- bly effective governance. The remainder of the VIPPs score well above the world median. In Social Capital, Poland falls slightly below the world median, but the rest of the VIPPs enjoy high levels of social capital.

A combination of large populations and positive prosperity growth trends makes the VIPPs well placed to drive global prosperity growth over the next decade. Their solid foun- dations in education, governance, and social capital may help them avoid the fate of the BRICs.

% of world median score in: Governance Education Social Capital Population

Millions

Indonesia 116% 101% 125% 257.6

Philippines 110% 103% 120% 100.7

Poland 129% 117% 97% 37.9

Vietnam 87% 109% 104% 91.7

The Legatum Prosperity Index 2016 21

75 percent of Indonesians have donated money to charity in the past 12 months

83 percent of Vietnamese are happy with the quality of their local education system and schools

67 percent of people in the Philippines have confidence in their national government

The Legatum Prosperity Index 201622

ten x ten

Economic deficit, prosperity surplus The social revolution driving rising UK prosperity Standing in Hull, it is hard to imagine the UK as the third-best deliverer of prosperity in the world. Walk through this northern city’s estates and you are struck by a deep-rooted poverty of prosperity. It is the least prosperous part of the UK; a city where children grow up without knowing aspiration and the elderly die having never seen much beyond the end of their street.

Yet, Britain stands out as a world leader in turning its wealth into prosperity. The Prosperity Index ranks it third for delivery and tenth overall. At the heart of this success is an aggressive programme of social reform that has seen delivery in areas like education rocket. Britain is not alone. Those countries that have seen prosperity grow despite a tumultuous economic path following the global finan- cial crisis have done so by delivering on social progress. However, such progress has not touched all, and lost potential is prosperity lost too. If Britain can bring human flourishing to all, then her future is extremely positive.

At the economic heights before the financial crisis, the UK ranked ninth for its delivery of prosperity. Wealth per head today is not notably higher than in 2007. The wealth increase over the past decade in the UK has been around a third of that in the US, and just a seventh of that in Germany. Yet, with similar wealth, the UK is delivering far more prosperity, something not frequently seen among OECD countries.

Much has been made of Britain’s dogged economic policy and its strong growth in recent years, but the Prosperity Index does not point to notable economic success as the factor at the heart of the UK’s growing prosperity surplus. While scoring well in the Economic Quality sub-index, the UK’s surplus here has been shrinking despite record employment and comparatively strong growth. Rising non-tariff trade barriers and less effective anti-monop- oly policy are to blame. So too in Business Environment, where the UK is a world leader, its competitive edge has been slipping.

Social progress is at the heart of the UK’s growing prosperity surplus It is social progress, not economic success, that has driven the UK’s growing ability to turn its wealth into prosperity. Radical reforms, such as those in welfare and education, have sought to return responsibility to the individual. In Education, the UK has risen from 14th to sixth over the past decade. Policy reforms such as the mass extension of vocational education, improving access to good education through Free Schools, and raising the school leaving age have done much to strengthen Britain’s human capital and extend opportunity. Here the surplus has risen by 43 percent. In Health (ranked 20th), the UK’s surplus has risen by an impressive 176 percent, driven by rising satisfaction with personal health and improvement in key outcomes such as mortality and diabetes.

Alongside health and education, the UK is safer than it was ten years ago. Crime rates have fallen, people feel safer, and the terrorist threat is being contained. The UK has risen from 32nd in 2007 to 13th in 2016 in the Safety & Security sub-index. Prosperity has also been rising in the nation’s communities. Volunteering rates have risen from 23 percent ten years ago to 33 percent today. A rising surplus in Social Capital shows a nation whose communities are growing stronger and taking greater responsibility.

The prosperity payoff of social reform is seen elsewhere among countries which have increased prosperity with similar or even shrinking wealth. Finland, whose wealth is well behind 2007 levels, has seen prosperity rise over the past decade, predominantly as the result of improve- ments in Education, Personal Freedom, and Social Capital. Countries such as Germany, on the other hand, whose wealth today is far higher than in 2007, have seen pro- gress in prosperity largely as a result of economic, not social, improvement.

Yet, prosperity still does not reach all This development of UK prosperity through social reform over the past decade offers good prospects in the task, so far unachieved, of bringing prosperity to all. Perhaps the most striking aspect of UK prosperity delivery is the fact that such prosperity has been achieved, according to the UK Prosperity Index, without realising the potential of the whole population. In places like Hull, and elsewhere, people have been left behind.

The Legatum Prosperity Index 2016 23

The Legatum Prosperity Index 201624

0 20 40 60 80 100

All

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Rural areas are more likely to be delivering more with less

The UK Prosperity Index points to a wholescale failure of urban areas to deliver prosperity with their wealth because they fail fundamentally on providing basic life chances – health, education, social support, opportuni- ties – to their citizens. Rural areas, on the other hand, are flourishing. It also points to the power of communities themselves to turn things around. With social capital growing in the UK, the potential for this community trans- formation is growing too.

Alongside broadly improving health and education, the fundamentals are there. Using the UK Prosperity Index, policy-makers can see where prosperity has not yet reached and why. Britain’s prosperity is strong, and if new prime minister Theresa May is successful in delivering a country that “works for everyone”, it has no limits.

Competitiveness and a poverty of aspiration still limit UK prosperity However, slipping economic competitiveness strikes a warning note, particularly given Britain’s new need to go it alone in a global economy. The ongoing capacity for wealth creation is important to the UK’s future, particu- larly in more deprived areas like Hull, whose economy was stripped of its major industry (fishing) when Britain joined the EU in the 1970s, from which many of the city’s social difficulties stem.

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Nevertheless, if Britain can sit third for prosperity delivery when it is not delivering for a large part of its population, imagine what would be possible if it did. A nation that frees individuals to rise as far at their talents can take them is limited only by the ingenuity and aspirations of its people. Despite her success, Britain remains limited by an absence of aspiration. If the lost potential of those in Hull and others around the country who have been left behind by the UK’s rising prosperity can be realised, then Britain has a very prosperous future ahead.

ten x ten: economic deficit, prosperity surplus

Rural areas deliver greater prosperity surpluses than their urban neighbours. This ability to turn less wealth into more prosperity is the result of rural areas performing well in the delivery of life chances. Be it good education, opportunity, good health, strong community, or economic security, rural areas outperform the UK's cities.

84 percent of Britons think that working hard will get you ahead, up from 75 percent in 2007

78 percent of Britons feel safe walking alone at night, up from 62 percent in 2007

16 percent of Britons say they have a health problem that prevents them doing things, down from 21 percent in 2007

The Legatum Prosperity Index 2016 25

Unlike any other region in the world, Latin American prosperity follows the economic cycle. When economies are booming, so too is prosperity. As economies shrink, prosperity falls too. Why is Latin American prosperity so closely related to its economic fate?

On the streets of Rio de Janeiro, a teenage boy was shot dead outside his home on his way to school. For denounc- ing the murder, the boy’s father was killed that same day. These were just two of the 4,000 killings that happen every year in Rio. Nearly as many people are murdered annually in Brazil as are killed in Syria’s civil war. Brazil is not alone. Latin America is the most violent region in the world: with just ten percent of its population, it has almost half of its homicides. Honduras is particularly badly affected, with the city of San Pedro Sula now earning the title of murder capital of the world.

2007 2016

2007 2016

2007 2016

42 47 52 57 62 67

World avg.

Latin America avg.

Honduras

Safety & Security score

Prosperity held back in Latin America by declining Safety & Security

This absence of personal safety in the region speaks to a fundamental failure to provide the basic structural founda- tions of prosperity. However, it is not just the safety of its citizens that Latin America is failing to secure.

Governance in Latin America is fundamentally weak. The region has very low scores in government confidence and effectiveness. Just 37 percent of citizens in the region have confidence in their national government. This compares poorly to the developed and developing world alike. In Europe, it is 41 percent and in Asia, 58 percent. Rule of law is the second lowest of any region in the world after Sub- Saharan Africa. Latin American prosperity is structurally weakened by the absence of strong governance foundations.

Other foundations of prosperity are similarly absent. After Safety & Security, the region’s second worst global perfor- mance is in the Education sub-index, with a median rank of just 82nd. Poor education quality and low levels of human capital are limiting the potential for prosperity growth. The average Latin American worker has just 2.7 years of secondary schooling.

Without structural foundations, Latin American prosperity is subsequently highly dependent on economic perfor- mance. When the economy is doing well, economic oppor- tunity abounds, masking the challenge of poor education and weak governance. The result is that prosperity rises, though on shaky ground.

When the economy is on the slide, however, prosperity falls. With no structural foundations beyond the perfor- mance of the economy, prosperity gained is quickly pros- perity lost. There is nothing in place to ensure growth can be sustained. With weak human capital, little can be done to help drive new sources of growth through innovation and entrepreneurship. Without basic effective structures of governance, government can do little to help lift prosperity. Crime rates rocket as people look elsewhere for opportu- nities, further harming the chance of progress. The whole fabric of prosperity generation breaks down.

The effects of the recent slowdown in commodities-backed growth are already being felt in the region. Brazil’s prosper- ity is in decline, and Chile and Colombia are stagnating. Where prosperity growth is found, such as in Argentina, the rate of growth has been significantly curtailed.

That Latin America has no real structural foundations for prosperity is most stark when we consider the extent to which regions have learned how to deliver greater prosper- ity with their wealth over the past decade. Just two parts of the world – Sub-Saharan Africa and Europe – have learned how to deliver more to their citizens with their economic wealth. The rest of the world is delivering less, but nowhere more so than Latin America.

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Latin America is delivering less prosperity with its wealth today than it was in 2007

If Latin America is to learn how to deliver greater prosper- ity to its citizens, then it needs to begin by addressing the fundamental foundations of human flourishing. Unless its citizens are safe, educated, and governed by an effective and fair system of governance where the rule of law is supreme, then prosperity has no foundation in which to take root. Without the structural necessities of prosperity delivery, the fate of the region’s prosperity will forever be tied to the fate of its economy.

49 percent of the world’s citizens have confidence in their national government

37 percent of Latin America’s citizens have confidence in their national government

Why has Latin America not learned how to deliver prosperity?

ten x ten

The Legatum Prosperity Index 201626

ten x ten

Corruption in Southern Europe Is the remedy as dangerous as the disease?

A warning from Italy Looking out across the chaotically corrupt Eternal City, Marcus Tullius Cicero gave vent to anger: “Exploiting the state for selfish profit is not only immoral; it is criminal, infamous.” He rose in the public’s estimation, but not in that of his fellow senators, who had him assassinated a year later.

More than 2,000 years later, and Rome is no longer the Eternal City but the “Mafia Capital”, so named after a scandal that came to light in 2014. This centred on the Palazzo Senatorio, home of the Roman city council, which stands symbolically on top of the most famous of Rome’s seven hills, the Campidoglio or Capitoline Hill, where the first Romans built their citadel. Crime syndicates, newspa- pers revealed, had stolen millions of euros destined for city services with the help of corrupt officials.

Corruption is not a specifically Roman problem. Italy ranks poorly across a range of anti-corruption and good-govern- ance measures, and recent surveys show that most Italians think corruption is widespread throughout their govern- ment and businesses. Does it matter? Many Italians think that they have comfortable lives, but the Eurozone’s third largest economy ranks just outside the global top 30 for overall prosperity. The famed political scientist Samuel Huntington argued that corruption can raise prosperity by enabling individuals to bribe their way through an ineffi- cient bureaucracy. While there may be some truth in this argument, the weight of evidence suggests that corruption, by weakening social trust and the rule of law, erodes the foundations of prosperity in the most pernicious ways.

In October 2015 the mayor of Rome resigned in the wake of the “Mafia Capital” scandal. Eight months later, he was replaced in a landslide electoral victory by Virginia Raggi of the anti-establishment Five Star Movement, which is led by the 68-year-old comedian Beppe Grillo. Speaking of the corrupt officials who preceded her, Raggi told The Observer, “We have seen a pit of waste which they have created – they have robbed Rome.”

Raggi’s platform centres on fighting corruption, which is unarguably a good policy. But there are concerns that this may come with more of the Five Star Movement’s ideas, such as “degrowth”, an ecological, anti-capitalist ideology that threatens prosperity.

Beware of the backlash: corruption threatens prosperity across Southern Europe The wider Southern European experience, from Spain to Greece, shows that these two policies – fighting corruption and anti-capitalism – often go hand in hand.

When corruption between government and businesses is widespread, people tend to vote for anti-establishment politicians like Raggi and for the anti-capitalist parties to which they belong. In the process they end up endorsing regulation, nationalisation, and higher taxes – creating an economic environment that handicaps businesses.

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Golden Dawn, the Greek anti-globalist and fascist polit- ical party, rode a wave of public anger into the Hellenic Parliament in May 2012, winning seven percent of the popular vote and winning parliamentary seats for the first time since registering as a party in 1993. Its success lay in channelling anger about chronic corruption, economic austerity, and immigration, capitalising on the fact that its members had never belonged to previous highly corrupt governments. Its plans to eliminate cronyism and corrup- tion would involve nationalising banks and Greece’s natural resources.

It appears that voters favour state economic intervention as a means of punishing corrupt businesses and politicians. Indeed, they are willing to incur the costs of this punish- ment themselves in order to achieve an economy which they deem to be fairer.

The graph above shows that more corrupt coun- tries tend to have worse Business Environment scores. Italy's Business Environment performance is as expected given its level of corruption.

The graph opposite shows that less corrupt countries tend to deliver more prosperity with their wealth. New Zealand massively over-performs here, and Italy delivers slightly less prosperity with its wealth than its corruption level would suggest.

90 percent of Italians think that corruption is widespread in government

The Legatum Prosperity Index 2016 27

Perhaps that economy will be “fairer”, but it will not be able to deliver prosperity. One of the few things on which most economists agree is that free markets, along with compensation for those who lose out from liberalisation, are better than state economic intervention at delivering broad-based prosperity.

There has always been corruption in Southern Europe and particularly in Italy, so much so that the abuse of a system is becoming the system itself. Italy maintains a respectable global prosperity rank – though the lowest in the G7 – despite its corruption, but it is unclear how long it can continue to do so. Like Cicero’s Rome, Italy’s prosperity is in decline. Rampant and endemic corruption is one of the causes.

Protesters stand in a tangled web of wool at a demonstration against political corruption on 13 February 2011 in Turin, Italy

Italy New Zealand

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The Legatum Prosperity Index 201628

ten x ten

At the 2016 Democratic National Convention in Philadelphia, US vice president Joe Biden thundered to rapturous applause, “But folks, let me tell you what I literally tell every world leader I’ve met with – and I’ve met them all: it’s never, never, never been a good bet to bet against America.”

In one sense, Biden is right. Grand narratives of American decline that emerged after the seemingly unbounded pros- perity and youthful enthusiasm of the 1950s have been shown to be false. The economic power of the US did not decline relative to that of the Soviet Union, as the Nobel Prize-winning economist Paul Samuelson predicted in the many editions of his seminal textbook right up to the col- lapse of the USSR. Neither did American strength decline relative to that of Japan, as Harvard professor Ezra Vogel warned in his Japan as Number One, published in 1979. But Biden is wrong in another way, one closer to his own experience. Claiming that America is in decline – “betting against America” – has long been a popular, but not always successful, route to the White House.

In 1976 Gerald Ford’s election campaign ran television advertisements that claimed the president was “making us proud again”. Ronald Reagan’s 1984 re-election cam- paign declared, “It’s morning again in America.” Now it is 2016 and we have Donald Trump, perhaps the most radical “declinist” yet, who wants to “Make America great again”.

On the issue of decline, Trump is partially right. The Prosperity Index shows that America is in relative decline and, while the picture is not too worrying yet, Trump’s anti-trade, anti-immigration, anti-government plans to reverse that decline will make things worse. It is, in fact, Americans’ experience of relative decline that in part explains Trump’s popularity.

Why American prosperity is stagnant and declining We think of a country in decline as one in which living standards are in free fall and where society is collapsing. This kind of decline – absolute decline – is what the Roman Empire went through in its final years. Its population shrank, its infrastructure crumbled, and its territory split into various polities until it was no more.

It is true that the median American household has a lower income now than it did in the late 1990s. Adjusted for infla- tion, it peaked in 1999, dropped to a lower level after the global financial crisis, and has hovered around that same lower level since then. But there is more to living standards than income alone. Americans enjoy better technology, have larger houses and more leisure time, and live longer.

As with UK prosperity, the US experience of decline is different across the country. Perceptions of individual flourishing, government confidence, and the future of the local area change drastically between the most optimistic areas and the areas where people feel US prosperity stagnation more acutely. Data source: Gallup US Dailies

Is prosperity declining in the United States? The politics of relative decline

Rhode Island

District of Columbia

Wyoming

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I am thriving

I have confidence in the President

My area is becoming a better place to live

The Legatum Prosperity Index 2016 29

21 percent of Americans are dissatisfied with their standard of living. This is more than twice the percentage in Germany

81 percent of Americans think that working hard gets you ahead. This compares to 86 percent in China

Income aside, living standards in the US have improved; the country is not following Rome’s path of absolute decline.

A better analogy for the US today is the British Empire’s relative decline in the late 19th century. Once the “work- shop of the world”, Britain experienced a decline in both its economic output and its productivity relative to the emerging industrial powerhouses of Germany and the US. The US economy grew faster and larger than the economies of Britain and Germany, but then its mid- to late-20th- century rivals emerged – the Soviet Union and, after that, Japan. The collapse of the USSR and the bursting of an asset bubble in Japan meant that American prosperity surged ahead of the rest again.

China is now to the US what the US was to Britain in the late 19th century. Its rapid economic growth has taken its share of global economic output from 2.3 percent in 1980 to 16.5 percent in 2014, making it 0.6 percentage points larger than the US economy. Millions of Chinese citizens have been lifted out of poverty in the process. American prosperity remains higher than Chinese prosperity – accord- ing to the Prosperity Index, it is some 32 percent higher. But this lead has narrowed from 35 percent over the last decade. At this rate of convergence, China’s prosperity will match that of the US in another decade.

Perhaps the comparison is unfair: China is an emerging economy and is seeing gains in welfare that Americans enjoyed a long time ago. But if we look to a fellow OECD member – Germany, for example – the story is the

same. America’s prosperity score stood at 99 percent of Germany’s in 2007, but had dropped to 96 percent by 2016.

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We can think of a country being in decline in one more way: when it is stagnant. In this sense, the US has been in decline since household income peaked in 1999. More broadly, prosperity has also been stagnant for the past decade. The American prosperity score is at the same level now as it was in 2007.

There is some truth in Trump’s “American decline” nar- rative. While American prosperity is not in free fall, as he claims, it is stagnant and losing ground to advanced and emerging countries alike. Researchers continue to debate the causes of this decline, but there has been no consensus yet, which complicates the search for policy fixes.

The Legatum Prosperity Index 201630

Populism will not make America great There is at least consensus on the effects of Trump’s tweet-sized policies: build a wall along the Mexican border, restrict Muslim immigration, make NATO allies pay for protection, start a trade war with China. Each one will harm the components of American prosperity. Restricting and deporting immigrants, to the extent Trump proposes, requires a police state with constant identity checks, home raids, and neighbours spying on one another; it corrodes Americans’ Personal Freedom and Social Capital. Trump’s proposed treatment of NATO would damage American and global Safety & Security, while his anti-trade plans would knock America off first place in Business Environment.

Decline breeds the populism that threatens American prosperity It is not the level of prosperity but the trend which people experience most acutely. Our wellbeing is amplified during periods of growing prosperity and is diminished, at a greater rate, during periods of declining or stagnant prosperity.

Research by the Nobel Prize-winning economist Daniel Kahneman has shown that we are more sensitive to losses than we are to equivalent gains. A loss can be absolute, like that experienced by the ancient Romans, or it can be rel- ative, like that experienced by Americans today. Although the US remains one of the world’s most prosperous coun- tries, its stagnant prosperity over the past decade has caused widespread discontent. The experience of decline causes anxiety among voters and so broadens the appeal of populists like Trump who, by embodying radical change, promise relief from stagnation.

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American relative decline is associated with sadness and worry

But what populism, whether represented by Trump or by others, offers instead of relative decline is absolute decline: an America where people have lower Personal Freedom and weaker Social Capital; an America that is unsafe and closed to global commerce. Apart from Personal Freedom,

which the Index shows to have improved recently, these are the pillars of prosperity that are most in need of improvement. American Social Capital, Safety & Security, and Economic Quality are at a lower level now than they were a decade ago.

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Now, it is not Joe Biden’s world leaders who are betting against America, but American leaders themselves.

Make America Great Again: In the context of the United States’ prosperity stagnation and relative decline, the appeal of the Trump brand of populism to those who feel left behind by globalisation is not unsurprising. The Prosperity Index has pointed to decline in the US long before Trump emerged as a voice for discontent.

quick key findings

Prosperity grows rapidly from peace

Countries like Yemen (149th) and Afghanistan (148th) demonstrate that deep internal conflict, often with external intervention, has a devastating impact on prosperity. However, there is a more positive story: that of the rapid

flourishing of prosperity that is possible when peace finally comes.

Sri Lanka has achieved the biggest rank improvement in the Prosperity Index over the past decade, rising 33 ranks to 55th since 2007. The end of the civil war in 2009 brought the beginnings of a peace that has allowed Sri Lankan prosperity to flourish. The country has risen from 145th to 83rd in Safety & Security, and Health, Economic

Quality, and the Business Environment have improved.

However, what is most striking is the way Sri Lankan society had begun to heal itself as war drew to a close. The country has risen from 63rd to 19th in Social Capital as trust has strength- ened and altruism grown. Those reporting they had helped a stranger has risen from 43 percent in 2007 to 61 percent today.

ten x ten: is prosperity declining in the united states?

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The Legatum Prosperity Index 2016 31

“ What populism, whether represented by Trump or by others, offers instead of relative decline is absolute decline: an America where people have lower Personal Freedom and weaker Social Capital; an America that is unsafe and closed to global commerce.”

The Legatum Prosperity Index 201632

ten x ten

Why is populism stirring beneath the surface of Europe’s growing prosperity?

Rapid economic and social change breeds uncertainty and fear that populists can exploit.

The political theorist Margaret Canovan argued that populism would “accompany democracy like a shadow”. In Europe today, it is clear that populism is no longer a mere shadow but an increasingly ominous force. Whether it stems from the radical left or from the radical right, the rise of populism threatens to destabilise a region that has long been one of the world’s most prosperous.

While European prosperity has continued to rise over the past decade, particularly in Eastern Europe, many people feel angry, betrayed, and unrepresented. Change, even positive change, can be unsettling, and post-war Europe has undergone particularly rapid political, economic, and social change – a transformation that has become even more pronounced since 1989.

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Europe's Prosperity Rises, but Economic Quality falls

While globalisation has brought economic growth to the region, many Europeans have not shared in its benefits. Income inequality is on the rise, and many working-class people see their jobs being moved abroad or, worse, “taken from them” by cheaper foreign labour.

Rapid technological change has also seen industries eliminated or changed to the extent that workers and the elderly no longer have the necessary skills or knowledge to compete. The global financial crisis of 2008 exacerbated these issues as economies contracted, unemployment increased, and poverty, which had declined across Europe, crept back up.

It is unsurprising that the greatest support for populist parties comes from these particular groups – the poor, the elderly, and workers who feel let down by the “system”: the “losers of globalisation”.

Prosperity has gone up overall in Europe over the past decade, but economic quality has not: this is what is felt most acutely. France, Denmark, the UK, Austria, and

Sweden – all countries that “over-deliver” prosperity and are some of the most prosperous in the world – have seen their prosperity surplus in Economic Quality fall while witnessing a surge in popularity for populist parties: from France’s Le Front National to Austria’s Freedom Party and the Danish People’s Party. Even economic powerhouse Germany is not immune: the economy has slowed and the populist Alternative für Deutschland (AfD) has gained pop- ularity, but, notably, Germany’s performance in Economic Quality has not dropped as much as that of its regional peers, buoyed by falling unemployment and its high-quality exports. The AfD appeared on the political scene much later than other populist parties in the region and still has less support. Greece’s prosperity has declined overall, particu- larly because of poor Economic Quality following its debt crisis, and the radical left-wing party Syriza (Coalition of the Radical Left) soared to electoral victory in 2015.

While populists often run on platforms which promise greater prosperity, populism can, in fact, threaten eco- nomic prosperity with its protectionist tendencies that seek to weaken the liberal capitalism and free markets found in Europe. Limiting the influx of foreign workers, for example, could dampen a country’s growth prospects, while over-regulation of private enterprises could make a country’s business climate less competitive.

Globalisation has changed economies as well as societies. Europe has become more culturally diverse, more secular, and more tolerant of differences in culture, religion, or sexual orientation. This is reflected in rising Personal Freedom scores across Europe over the past decade, par- ticularly in Western Europe.

Not everyone views this as a positive development: right- wing populists have exploited feelings of fear and uncer- tainty over these changes in social norms. The rise of far- right populism can be viewed as a backlash against what is perceived as “too much personal freedom”, which could lead (in the AfD’s words) to the “slow cultural extinction” of national identity. Recent terrorism in Europe and the ongoing refugee crisis have only added fuel to this fire.

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Liberalism's Discontent: More Personal Freedom, more anti-liberal populism?

Just as “too much personal freedom” might explain a rise in right-wing populism, so too can “too little”. Eastern Europeans lag behind their Western peers in Personal Freedom: tolerance of immigrants and minorities is low to begin with, making the region susceptible to right-wing populism. Although Eastern Europe has not yet experienced the same widespread multiculturalism as Western Europe, leaders in Hungary and Poland have already exploited fears over potential changes and won on populist platforms.

33 percent of people in France have confidence in their national government

44 percent of people in Hungary think their country is a good place for immigrants, down from 56 percent in 2007

12 percent of Austrians gave financial help to another household in the past year, down from 45 percent in 2007

The Legatum Prosperity Index 2016 33

While Personal Freedom has improved, Social Capital has stagnated or declined in much of Western Europe, further opening the door for populism. Community life is paying the price for this increased freedom and tolerance, populists argue. They see multiculturalism as eroding civil society and have thrived in countries like France and Austria, where Social Capital has considerably declined since 2007. In both countries, integration of non-nationals into the labour market and local communities has not been achieved effectively.

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Social Capital stagnates and declines across Western Europe as societies become more fluid

Notably, France’s performance has declined to the point that it now has a prosperity deficit in Social Capital – the second-largest Social Capital deficit in Western Europe. France’s integration record is fairly dismal, so the surge in popularity for Le Front National is perhaps not surprising. By contrast, Social Capital went up in Germany, whose experience with integration has been relatively positive. The AfD’s popularity might have gone up since the refugee crisis, but it enjoys far less support than Le Front National, whose leader Marine Le Pen is a presidential contender. The generally positive socioeconomic conditions in Germany still limit the AfD’s ambitions: integration is certainly challenging, but it is confidence in Germany’s strong civil society that let Angela Merkel claim, “We can do this.”

As the Index shows, prosperity has been rising steadily in Europe, but changes in Economic Quality, Personal Freedom, and Social Capital, amplified by the refugee crisis, have given rise to populism. Populism threatens future prosperity with its rejection of the reality of European society, which is changing and opening up. But it is important to remember that, while populist parties are enjoying “a moment”, they are rarely winning outright majorities – yet. Mainstream parties must address people’s concerns over rapid economic and social change, while restoring faith in the benefits of globalisation and open, liberal societies.

Marie Le Pen, leader of the French popu- list right-wing party Front National, addresses supporters following the election of 62 Front National candidates in the 2015 French departmental elections. Opinion polls for the 2017 Presidential Election have Le Pen on between 25-33 percent, which would guarantee her a place in the second round run-off.

The Legatum Prosperity Index 201634

ten x ten

The bright stars of Southeast Asian prosperity Cambodia, Indonesia, the Philippines, and Vietnam have all seen rapidly rising prosperity over the past decade. However, investment in the fundamental roots of prosperity growth in Cambodia, Indonesia, and the Philippines has seen them magnify the prosperity effects of economic growth by delivering greater prosperity with their rising wealth.

Some of the biggest individual prosperity gains over the past decade have come from Asian nations as rapidly rising wealth has lifted hundreds of millions of people out of absolute poverty and towards prosperity. Wealth in Indonesia has risen by nearly 40 percent in the past ten years. Greater prosperity has accompanied it: the country has posted the third-biggest rank rise of any country in the Index.

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Real prosperity gains in Southeast Asia 2007-2016

Yet, it has been more than simply rising wealth that has driven the rapidly growing prosperity of countries like Indonesia. The prosperity gains from rising wealth have been magnified by an increasing ability to turn that wealth into prosperity. Indonesia has turned a small pros- perity deficit into a surplus, the surplus of the Philippines has almost doubled, and Cambodia’s small surplus has increased more than fourfold over the past decade.

These countries have in common increasingly compet- itive economies and business environments, like many Asian countries, but crucially also greater delivery of prosperity across key structural areas like Governance, Personal Freedom, and Social Capital. Surpluses in Social Capital have been growing, as has combined performance in Governance and Personal Freedom. Investment in the structural foundations of prosperity growth have amplified the prosperity gains made from rising wealth.

That is in the Philippines, Indonesia, and Cambodia. Vietnam is a different story. In 2007, Vietnam had the largest prosperity surplus in Southeast Asia. It was easy to see why. Walk through the streets of Ho Chi Minh City, and it was hard to imagine that war and famine once reigned here. Construction had begun on the futuristic Bitexco Financial Tower past which cars carried a new generation of Vietnamese, relentlessly chasing business opportunities rather than simply food and shelter.

Vietnam has performed well since. Its embrace of a market economy and integration into global manufacturing flows have transformed it from a lesser-developed economy to a middle-income country in just a generation. What

is striking about Vietnam is its recent rapid convergence with its ASEAN peers. Vietnamese prosperity has passed, and surpassed, that of China in the past five years alone.

54

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56

57

58

59

60

61

2011 2016

Pr os

pe ri

ty s

co re

ASEAN (excluding Vietnam) Vietnam China

Vietnam’s prosperity convergence with its Southeast Asian peers

It has done so through considerable improvements in both Economic Quality and Education, where Vietnam now ranks among the world’s top 50 countries. The proportion living on under $1.90 a day has fallen from 22 percent to three percent, lifting more than ten million out of extreme poverty. The Index shows more and more Vietnamese are satisfied with their household income and living standards.

In Education, more Vietnamese than ever are happy with their education system and literacy rates continue to rise. In some tests, Vietnamese students scored higher in core subjects than the average for OECD countries. Unsurprisingly, Vietnam now has the largest surplus in these two sub-indices of any country in Southeast Asia.

However, Vietnam’s overall surplus, while still high, has shrunk slightly since 2007. Vietnam no longer has the largest surplus in Southeast Asia, overtaken by Cambodia and the Philippines. Vietnam is getting richer, and this wealth is bringing prosperity, but Vietnam is not getting any better at turning wealth into prosperity. The prosperity gains from its wealth creation are stubbornly fixed.

This is largely the result of a failure to invest in the structural foundations of prosperity growth. Vietnam’s rapid prosperity gains from economic progress are at risk of leaving no lasting mark. Deficits in Governance and Personal Freedom are growing. In Governance the country ranks 104th and in Personal Freedom 124th. Vietnam not only has the lowest combined score for these sub-indices in Southeast Asia, it is also the only one of its peers to see performance decline since 2007.

Investment in the roots of prosperity delivery is reflected in growing prosperity dividends in Indonesia, Cambodia, and the Philippines. Vietnam’s performance is impressive, but at risk of being less resilient than that of its peers. If it is to truly take off, this resilience must be addressed. Together, Vietnam, Indonesia, the Philippines, and Cambodia have the potential to be shining stars of global prosperity. However, unless gains are rooted in prosperity’s structural foundations, future prosperity growth will be heavily dependent on growing economic wealth. Economic storms will always batter nations. Without free people, fair gov- ernance, and strong society, the resilience of prosperity in weathering the next storm is in question. Bright stars can fast be extinguished in a storm laden sky.

95 percent of Cambodians are satisfied with their freedom to choose the course of their lives, up from 71 percent in 2007

50 percent of Indonesians volunteer, up from 24 percent in 2007

49 percent of people in the Philippines have con- fidence in the honesty of elections, up from 38 percent in 2007

The Legatum Prosperity Index 2016 35

More Vietnamese than ever are happy with their education system and literacy rates continue to rise.

The Legatum Prosperity Index 201636

ten x ten

Beating the oil curse The UAE leads the way to prosperity beyond commodity dependency

Saudi Arabia was once the kingdom of easy living. Sitting on the world’s second-largest proven oil reserves, Saudi citizens enjoyed free comprehensive healthcare and heavily subsidised water and electricity, and their streets were lined with SUVs. With petrol cheaper than water – just 16 cents a litre – few worried about oil consumption. And thanks to generous unemployment benefits supplemented by occasional cash hand-outs, Saudi nationals rarely worried about jobs either.

Now the crude oil price is plateauing at around $50 per barrel, less than half of what it was two years ago. Given that less favourable oil prices are forecast for the coming decade, the Kingdom’s mounting fiscal deficits – equiva- lent to roughly 20 percent of GDP – are serious grounds for concern.

Benefits from crude oil have provided wealth but not pros- perity. Despite being the 11th-wealthiest country globally in terms of GDP per capita, Saudi Arabia is ranked only 85th on the 2016 Prosperity Index, the lowest of the six Gulf Co-operation Council member states. The Kingdom has one of the world’s largest “prosperity deficits”, revealing alarming inefficiency in transforming the vast oil windfall into economic and social progress.

The authoritarian political system is evidenced in the Kingdom’s weak performance in the Governance and Personal Freedom sub-indices. The ability to maintain stability in the country, based on a bargain of a wealthy lifestyle for the population in exchange for acquiescence in the family’s rule, may start to weaken as oil prices decline. The real obstacle, however, to the fostering of a truly pros- perous Arab nation commensurate to its remarkable wealth lies in its economic system.

Like many other oil-rich countries, Saudi Arabia built almost the entire economy around the petroleum industry. According to the IMF, over 80 percent of its exports in 2014 were generated from oil and refined products, while oil rev- enues made up 90 percent of the government’s incomes.

A highly capital-intensive business, the oil industry is by nature not a powerful employment generator. It diverts talent and capital that could be applied to innovation and economic diversification, crowding out the private sector and broader job creation.

Most of the jobs created in infrastructure and the service sectors go to low-cost foreign workers. Consequently, the government has to sustain a disproportionately large public sector to accommodate a growing younger pop- ulation: approximately two-thirds of Saudi workers are employed by the state, a situation not unique among Gulf states. Less than 60 percent of the labour force and barely one-fifth of women are actively seeking a job; unemploy- ment rates among Saudi nationals hover at around 11 percent. All this represents a huge monument to the waste of the country’s talents.

Fully aware of the public sector’s difficulty in meeting the increasing demands for jobs, the government has now turned to the private sector. But companies face quotas for Saudi employees and those hiring foreigners may incur extra fees. Such distortionary labour policies dissuade potential entrepreneurs and foreign investors. Innovation and productivity inevitably suffer. In the Business Environment sub-index of the Prosperity Index, Saudi Arabia ranks 25 places below its major regional com- petitors, the United Arab Emirates (UAE) and Qatar, both of which have a more diversified economy.

However, the Saudis are not the only victims of overde- pendence on the oil industry. On average, oil-dependent countries (defined as those whose oil rents exceed ten percent of total GDP) rank 22 places lower than what their level of wealth would suggest. In comparison, countries not reliant on oil as a main source of revenues over-deliver by an average of four points. As the chart opposite shows, countries with high oil dependency perform significantly worse on both actual prosperity level and the ability to convert wealth into a prosperous life.

22 percent of women in Saudi Arabia partici- pate in the labour force

77 percent of people think the UAE a good place to start a business, greater than in any OECD country

The Legatum Prosperity Index 2016 37

Country with oil rent less than 10% of GDP Country with oil rent higher than 10% of GDP

Kuwait Saudi Arabia

Angola

Venezuela

Iran

Qatar UAE

Ecuador

Russia

35

40

45

50

55

60

65

70

75

80

0 10-10 20-20 30-30 40-40-50

Pr os

pe ri

ty s

co re

in 2

0 16

Prosperity Gap in 2016

Does dependence on oil resource drag prosperity down?

Even allowing for geographical location, the inefficiency of oil-dependent countries is still striking. Political indi- cators aside, these states share lacklustre economies, restricted business environments, and poor educational attainment incompatible with their relatively high GDP- to-population ratio.

Recent progress made by the UAE will perhaps provide a model for the region to move to a more diverse economy and prosperous society. The UAE has looked more to the OECD than to regional peers in its efforts to deliver pros- perity. Policy decisions over the past decade have reduced dependence on oil and instead diversified the economy by encouraging the manufacturing and financial sectors.

The UAE has become the Gulf’s business hub because of its openness to foreign investors, flexible labour policies, advanced infrastructure, easy access to credit, and the

excise of British law. This in turn invigorated the economy and brought more jobs. Market liberalisation, exemplified by the introduction of a competition law in 2012, pushed the country further away from oil reliance by encouraging competition between and within sectors.

These changes substantially improved the country’s per- formance in Economic Quality and Business Environment, which surged by 22 and 19 ranks respectively within a decade. By 2016 the UAE had the highest prosperity score among all oil-dependent countries globally and had almost erased its 20-rank deficits in the economy-related sub-indices.

The UAE’s experience shows that oil is not destiny. With the right incentives, countries endowed with oil reserves can escape the grip of oil reliance and create a dynamic economy, thereby increasing overall prosperity.

Falling oil prices have hit government revenues, falling from 41 percent of GDP in 2013 to around 29 percent of GDP in 2015. However, growing economic diversification in the UAE has helped the country to improve its prosperity delivery and drastically reduce its prosperity deficit

Oil dependents: less prosperous and less efficient

Oil-dependent countries on average have lower level of prosperity and are significantly under-delivering.

Oil dependence has a significant effect on prosperity delivery across the world, particularly in MENA, where ongoing problems with insurgency and instability contribute also to prosperity deficits.

Non-oil dependent non-MENA Non-oil-dependent MENA Oil-dependent non-MENA Oil-dependent MENA

0-5-10-15-20-25-30 5 Gap between achieved and expected prosperity based on wealth

The Legatum Prosperity Index 201638

Rising prosperity across Africa has not lifted educational outcomes

In the outskirts of Serenje, a typical middle-of-nowhere place in Zambia, there is no war, nor has there been any devastating natural or health catastrophe in recent memory. It is the kind of little village that could as easily be in rich Botswana as in poor Burundi. Some 20 children are waiting for school to start – literally: they are waiting for the rainy season to end so that the bricks can dry in the sun before being hardened in kilns and used to build the school. The gift of a classroom is still over a year away.

When considering why Sub-Saharan Africa has not trans- lated a decade of growth into greater prosperity, the imme- diate answer is always economic or institutional. Indeed, resource dependency has limited the impact of economic growth, and prosperity is likely to be further constrained as structurally lower commodity prices affect growth. Our 2016 Africa Prosperity Report, published earlier this year, pointed to good governance and robust institutions in securing prosperity, but highlighted the many Sub-Saharan nations that have failed to develop the leadership and sta- bility needed to become more prosperous.

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30

40

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70

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in di

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sc or

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on ic

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ty &

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ri ty

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on al

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al C

ap it

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Education is Africa’s worst performing sub-index

Critically, many have also failed to develop and invest in their education system. The region underperforms signifi- cantly in the Education sub-index, even when its wealth is taken into account. For the children in Serenje, their per- sonal flourishing is on hold. So too is Zambia’s prosperity.

However, the children of Serenje are in many ways the lucky ones. For many Sub-Saharan children, there are not even plans for schools. Where schools do exist, many chil- dren cannot attend because they must work to support their families, or – if they are girls – because they are forced into marriages at a young age: according to data release by UNICEF in 2016, 12 percent of girls in Sub-Saharan Africa get married before the age of 15, and as many as 39 percent before the age of 18.

Sub-Saharan Africa’s poor performance in Education is constraining prosperity Why has something so obvious as education been over- looked? One factor is booming commodities markets masking the need for investment in people as well as in infrastructure. Now that growth rates are falling, many African nations are discovering that they lack an educa- tion system developed enough to sustain the high growth rates of the commodities boom. Even the region’s more prosperous countries – South Africa, Rwanda, Ghana – are no exception. Since 2007, all three have performed well relative to their wealth in the areas of Governance and Personal Freedom. Yet, ominously, they have consistently underperformed in Education.

20

30

40

50

60

70

2007 2016

Ed uc

at io

n sc

or e

SSA MENA Eastern Europe Asia

No convergence: Africa’s Education score is significantly lower than other regions, and shows no sign of catching up

There are bright spots. In the past decade, several educa- tion indicators have improved: both primary completion rates and literacy rates have substantially increased, with Kenya, Ghana, and South Africa performing alongside OECD

53 percent of people in Sub-Saharan Africa are satisfied with the quality of their education system. This compares to a global average of 62 percent

62 percent of people in Sub-Saharan Africa think that their children have the opportunity to learn and grow everyday. This compares to a global average of 70 percent

ten x ten

The Legatum Prosperity Index 2016 39

averages. But educational performance is as diverse as the region itself. Last year, only 38 percent of pupils completed primary school in Chad. In Niger, youth and adult literacy rates remain stuck at 26.6 and 15.7 percent, respectively.

Education is critical in igniting positive prosperity momentum Improving education in Sub-Saharan Africa is a daunting challenge, but remains key in the path towards greater prosperity. Africa’s population is rocketing – 23 of the 30 countries with the highest population growth are in Sub- Saharan Africa – and with growth rates falling, high-quality education is needed to raise human capital and productiv- ity. Skilled, literate workers will of course be more able to find better employment, and avoid insecurity and poverty.

Our 2016 Africa Prosperity Report pointed to a need for Sub-Saharan Africa to develop its manufacturing sector, rather than jumping from primary industry to services as is happening in countries like Nigeria, where services already account for over half the economy. This premature deindus- trialisation limits the potential for long-term development by constraining the emergence of a middle class with rising incomes. It also means that human capital is not properly developed. The jump to services is a jump from low-skilled agricultural work to low-skilled jobs in the service indus- try. However, without an adequate education system, this jump is simply development along the path of least

resistance. Manufacturing, and the growth it could deliver for Sub-Saharan Africa, require a level of human capital and skills that many countries have failed to develop.

Tackling educational outcomes is key if the continent is to progress up the prosperity ladder. But how can education systems be improved? The education sector often encap- sulates broader problems in a country. Where schools do not exist or when children have to walk barefoot for miles to reach them, then we know that there is not just a lack of schools but also of transport infrastructure and wealth creation. When the majority of a country’s students come from relatively wealthy families, then again we know there is a problem with access to education for the country’s poorest. Solutions to these issues are not about education alone.

Education has the power to unlock one of the region’s most under-utilised resources: its people. As a Swahili proverb goes, “Wealth, if you use it, comes to an end; learning, if you use it, increases.”

49 percent of children complete primary school in Angola, the region’s fifth richest country

81 percent of children in Zambia complete full primary education

27 percent of Niger’s youth is literate

The Legatum Prosperity Index 201640

asia-pacific

South and Southeast Asia have made strides in prosperity gains

Four of the five countries with the largest pros- perity gains in absolute terms between 2007 and 2016 – Cambodia, Sri Lanka, Indonesia, and Nepal – come from South and Southeast Asia. Two factors are at play. First, easing of ethnic tensions and victory over military insur- gents have allowed resources previously used to maintain security to be channelled into economic and social programmes. Second, proximity to fast-growing China has created numerous opportunities. China’s enormous appetite for primary commodities and con- sumer products has boosted export industries and facilitated local economies’ integration in the global production chain. Moreover, busi- nesses squeezed out of China by rising costs can easily migrate south to benefit from the cheap, educated labour and business-friendly policies.

-1

0

1

2

3

4

5

6

2007 2016

Pr os

pe ri

ty le

ve l (

% )

Southeast Asia South Asia East Asia

Greater prosperity growth in South and Southeast Asia

Divergent domestic circumstances set Nepal and Afghanistan apart Enjoying similar levels of wealth per person, Nepal and Afghanistan have followed

starkly contrasting paths over the past decade, emphasising the importance of safety and stability to prosperity-building in developing countries.

Despite suffering a devastating earthquake in 2015, Nepal has risen 15 ranks over the past ten years

In Nepal, the transition from monarchy to republic, after the peaceful resolution of the civil war, brought better governance and enhanced civil liberties. In contrast, recur- rent conflicts in Afghanistan devastated the economy, aggravated ethnic divisions, and foiled international and domestic efforts to create effective and clean governance. The divergence between the two countries’ tra- jectories is clearly captured in the Prosperity Index: while Afghanistan continues to struggle at the bottom of the ranking table, Nepal has made a 15-rank jump since 2007, to become in 2016 the 94th most prosperous country globally – and this in spite of the devastating effects of the earthquake in 2015.

Pr os

pe ri

ty s

co re

90

95

100

105

110

2007 2016

Nepal Afghanistan

Nepal leaves Afghanistan further behind

China and India in need of greener development China and India’s unprecedented economic growth has lifted hundreds of millions out of poverty, substantially raised their people’s living standards, and its increasing benefi- ciaries have kept pressing policy-makers for deeper economic reforms.

These achievements have come at a cost, however. Increasingly acute environmental deterioration in both countries exposes a darker side of their developmental stories. While both can boast a marked over-delivery in Economic Quality, their considerable defi- cits in Natural Environment – larger than any other Asian country’s, with the exception of conflict-torn Pakistan and Afghanistan – indi- cate a long journey before they achieve comprehensive prosperity. Moreover, both countries face challenges from unbalanced prosperity paradigms: while China’s long-term prosperity development may be constrained by its below-par Governance and Personal Freedom scores, democratic India struggles to improve its Education, Health, and Safety & Security performance.

0 10-10 20-20 30-30

Economic Quality

Environment

Gap between real performance and expectation based on wealth per person

China India

Stuck between economic development and environmental degradation

Social Capital crisis in East Asia? Already at a low level, Social Capital in China, Japan, and South Korea took a further hit over the past decade, while countries in other parts of Asia saw theirs steadily accumulating. People in these countries have historically been reserved in expressing opinions, which may explain some of the deficit. A more convincing explanation, however, highlights globalisation’s impact on traditional family- and community-based social structures. This is reflected in a decline in the help extended within and between families, and in the alien- ating effects of rapid urbanisation, demon- strated by a widespread mistrust of strangers in China.

Social Capital score 0 10-10 20 30 40 50 60 70

China, Japan & South Korea

South Asia

South East Asia

2016 level Change since 2007

Declining Social Capital in East Asia

Regional Analysis

The Legatum Prosperity Index 2016 41

Divergent paths for Australia and New Zealand in the Pacific Australia and New Zealand long enjoyed similar levels of prosperity, but in the past six years have markedly diverged.

New Zealand lead Australia in the Prosperity Index

The cause of this divergence has predomi- nantly been structural. While in many ways New Zealand has been improving structural competitiveness, Australia’s has been declin- ing. Be it labour market flexibility, government transparency, regulation, judicial independ- ence, or effectiveness of government, the two countries have been moving in opposite directions. For example, on hiring and firing flexibility, Australia has fallen from 71st in the world into the bottom ten, while New Zealand has risen from 107th to 58th.

Pr os

pe ri

ty s

co re

76.5

77

77.5

78

78.5

79

79.5

2007 2016

New Zealand Australia

Divergence in the Pacific

north america

North American prosperity: still high, but stagnating

Compared to other top 20 countries, North American prosperity has seen marked stagna- tion over the past decade. Canadian prosperity

has risen marginally, while US prosperity is no different in 2016 than it was in 2007. Compared to progress in countries like the United Kingdom, North American prosperity is stagnating.

The US needs to see improvements in its Safety & Security sub-index if prosperity is to improve

To reverse the trend of stagnation, North America must progress in areas where pros- perity is weak. In both Canada and the US, declining performance in Health and Safety & Security is undermining gains made elsewhere. Canada has slipped two ranks in each sub-in- dex since 2007, and the US has fallen ten ranks to 52nd in Safety & Security and 11 ranks to 32nd in Health.

Pr os

pe ri

ty s

co re

70

72

74

76

78

80

2007 2016

Canada US UK

Stagnation in North America

Life, Liberty, and the Pursuit of Happiness Economic growth rates in the US have improved and unemployment is now lower than in Canada and most of Western Europe. However, stagnating prosperity and a declin- ing prosperity surplus are fuelling discontent among Americans. Satisfaction with living standards and household incomes is falling. While the US’s comparatively strong recovery from the global financial crisis is a matter of record, it has not seen improvement in the lives of Americans.

10

15

20

25

30

2007 2016

Pr os

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Canada USA Top 20 average

American delivery of prosperity compared to wealth is dissapointing

While it is true that household income in real terms is now below 1990s levels, the real cause of stagnation is social. Safety & Security is in serious decline, driven by violence and terror- ism. Serious issues exist in healthcare, where satisfaction with the current system has fallen and key problems such as obesity and mental health are on the rise. Personal Freedom has been hit by falling levels of tolerance. Together, these social issues are a significant obstacle to an increase in American prosperity.

Pr os

pe ri

ty s

co re

74

75

76

77

78

79

2007 2016

Finland Canada UK

Canada under threat

Canada: Land of the free, land under threat While Canadian prosperity has been broadly static over the past decade, the composition of that prosperity is on the move. Canada and its fellow developed Commonwealth n a t i o n s – N e w Z e a l a n d , t h e U K , a n d Australia – form a bloc that is better than any other comparable grouping at delivering prosperity to their citizens. The pattern of this delivery is very clear.

Canada’s prosperity has been growing broadly along the lines seen in other comparable nations. Greater labour market flexibility has improved the country’s Business Environment ranking to third. Governance has been improv- ing, and Personal Freedom and Social Capital remain among the three best in the world. Free markets, free people, and strong society are increasingly the cause of Canada’s prosperity success.

However, a note of caution is required. Despite stagnating wealth, the UK has maintained strong prosperity growth by means of social reform. So too has Finland. With Canada slipping in both Health and Education, the nation’s consistent top six finish is threatened. If Canadian prosperity remains static, large gains by countries currently ranked below Canada threaten to propel them upwards and beyond. Finland has already overtaken, and the UK is rapidly catching up.

The Legatum Prosperity Index 201642

latin america & caribbean

A decade of prosperity gains about to disappear?

With literacy rates higher than 90 percent, improved democracy levels, large reductions in absolute poverty, and efforts to reduce ine- quality through ambitious social programmes, Latin America has undergone a deep social and economic transformation over the past ten years. Particular achievements can be observed in the region’s best-performing sub-indices since 2007: Health and Personal Freedom. The fear is that a decade of pros- perity gains will be lost now that the windfall from the commodities boom has subsided and demand from China is disappearing. Latin America finds itself at a turning point again. Can the regional leaders finally overcome the long history of boom-and-bust cycles?

Pr os

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ty s

co re

( av

g. )

58

58.4

58.8

59.2

59.6

60

2007 2016

Rapid increase in prosperity in Latin America followed by stagnation since the end of the commodities boom

Latin America’s hard-won prosperity increases are starting to fragment Interestingly, the prosperity surplus in Latin America – the amount of prosperity delivered relative to wealth levels – has been small but relatively stable. Not surprisingly, Costa Rica, Uruguay, Nicaragua, and Chile enjoy the highest prosperity surpluses, while Colombia, Mexico, Peru, and Venezuela are among seven of 23 Latin American countries covered by the Prosperity Index that are still struggling with a prosperity deficit.

0 10-10-20-30 Prosperity Gap

Costa Rica Uruguay

Nicaragua Chile

Argentina Brazil Peru Colombia Mexico Venezuela

Delivery of prosperity relative to wealth, 2016

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Change in delivery of prosperity, 2007-2016

Argentina is this decade’s rising star, with the largest increase in delivery of prosperity compared to wealth in the region, thanks in particular to a 42-rank improvement in its Education sub-index. This is highly encourag- ing for a nation whose past has been marred by severe economic crises.

Argentinians have cause to celebrate as one of the few strong performers in the Latin America region

Venezuela keeps the unenviable title of Latin America’s biggest disappointment, with one of the world’s largest prosperity deficits. Over- dependence on oil and low oil prices means that there is currently little hope for increased prosperity. Not only has its Economic Quality sub-index collapsed by 36 ranks but standards of living have plummeted by 56 percent, and with a 57-rank decline Social Capital is at an all-time low. Gains made in the past decade have pretty much evaporated.

In terms of prosperity, Latin America compares poorly with peers in Asia Despite the few bright spots, Latin America overall is delivering far less prosperity to its citizens than its peers in developing Asia. GDP growth has almost completely collapsed since 2010, and this has been followed by deterioration in the region’s average Health, Environment, and Governance ranks.

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Trailing five-year GDP growth 2007-2016

Why is Latin America particularly prone to an erosion of prosperity when growth slows? Latin American growth is built on a weak foundation – primary commodity exports. A boom in the demand for primary commod- ities temporarily drives growth, but it does so without establishing the structural foundations needed for longer-term development. When the bust comes, Latin American countries find themselves without demand for their exports and – more problematically – without the Business Environment, Education, and Economic Quality needed to provide an alter- native source of success. Prosperity evaporates.

2007 2016

2007 2016

3.1 3.2 3.3 3.4

Latin America avg.

World avg.

Export Diversification Index Lower score = better

Export Diversification Index (Lower score = more diversification)

In order to achieve greater resilience, more investment in the workforce is essential. Despite overall improvements in the Education sub-index, secondary education per worker is only 2.7 years; this contrasts with Sri Lanka and Mauritius, where it is more than 3.7 years, and Kazakhstan, which reaches as high as 6.6 years. Tertiary education is still too underdeveloped.

Declining Safety & Security scores are caused by extremely high levels of internal violence, mainly driven by organised crime, drug-traffick- ing, and gangs; these are undermining human development and the growth of prosperity.

A new model for Brazil? For years, Brazil relied on the commodities boom to reduce poverty and, indeed, to trans- form it into one of the world’s greatest econ- omies. It is now facing the dire consequences of that complacency, but – fortunately – it still has the greatest potential for diversification of any Latin American country. Since the impeachment and removal from office of President Dilma Rousseff in 2016, the question has become: what new model should replace doctrinaire socialism in order to rescue the Brazilian economy, whose GDP has fallen for six successive quarters?

regional analysis

The Legatum Prosperity Index 2016 43

Brazil is indicative of a wider trend. Since the commodities boom ended, left-leaning gov- ernments in the region have lost credibility with their populations and been ousted in Brazil, Argentina, and Peru; the hard-left government of Venezuela faces considerable opposition in the streets as the country’s economy collapses. The results of these polit- ical developments are still unclear, but if Latin America wants to make strides forwards, it will have to drastically improve its worst-perform- ing sub-index: Governance.

47

48

49

50

2007 2016

G ov

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Latin America avg. World avg.

Governance lagging significantly behind world averages

Is Latin America at a turning point? It is a continent full of untapped potential, facing increased expectations from a rising middle class that demands more than poverty alle- viation. With a significant reversal in the groundwork that has been achieved and a middle class confronting the ruins of a once buoyant economy, Latin America needs to take far firmer measures to hold onto its gains in prosperity. It is one thing to obtain prosperity and another to keep it.

europe

Europe’s prosperity is rising: Why is it uneven between Western and Eastern Europe?

Europe has long been a region of stability and prosperity; its citizens are among the healthiest, wealthiest, and safest in the world. Globally, 15 of the top 20 countries are European: Norway (second) leads Western

Europe, while Slovenia (20th) is the most prosperous country in Eastern Europe.

The effects of the 2008 global finacial crisis are still being felt across Europe

Our research has uncovered some surprising trends, however. Although overall prosperity in Europe has increased over the past decade, the effects of the 2008 global financial crisis are still being felt across the region.

Even more significantly, ongoing economic turmoil in the eurozone, the refugee crisis, and Britain’s vote to leave the EU have exposed north–south and east–west divisions that threaten further progress.

Overall, the Prosperity Index shows Eastern Europe converging with Western Europe, having improved its delivery of prosperity at a faster rate than western countries. But, at the same time, poor performance in Governance, Personal Freedom, and Social Capital means that the region is not as prosperous as it might be. The convergence with Western Europe, though steady, should be faster than it is.

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D iff

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ce in

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it y

sc or

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Eastern Europe is steadily converging with Western Europe

Western Europe Populist backlash against economic and social integration Since the 2008 global financial crisis, the region has seen slower growth and many countries have declined in Economic Quality. However, with the exception of Greece, Cyprus, Italy, and Spain, Western Europe has maintained or even increased its delivery of prosperity. Finland, despite a considerable decrease in GDP per capita, has improved its prosperity levels, with the result that it now has the highest prosperity surplus in Europe.

One reason for Western Europe’s rising pros- perity is the steady improvement in Personal Freedom as societies become more open and multicultural. It is encouraging that tolerance

towards immigrants and ethnic minorities does not appear to have declined over this period: in Germany, France, and the UK, 12 percent more people believe their country is a good place for immigrants than ten years ago.

However, despite this evidence that toler- ance of immigrants has increased, Northern Europe is witnessing a revival of right-wing, anti-immigrant populism in response to these economic and social changes. In Southern Europe, meanwhile, left-wing populist parties are benefiting from economic discontent within the eurozone.

40 50 60 70 80 90

Economic Quality

Bus. Environment

Governance

Personal Freedom

Social Capital

Environment

Eastern Europe Western Europe

How do Western and Eastern Europe compare across the sub-indices of the Prosperity Index?

Eastern Europe Prosperity held back by corruption Business is booming, but Economic Quality has not followed

Eastern Europe continues to lag behind We s t e r n E u ro p e i n a l l s u b - i n d i c e s o f the Prosperity Index, though there have been notable improvements in Business Environment as post-communist states continue market reforms. Macedonia and Romania have made particular strides here: remarkably, Macedonia now ranks as the sec- ond-easiest country in the world in which to start a business after New Zealand.

Macedonia is currently the second-easiest country in the world to start a business

We might expect that improvements in Business Environment would lead to better Economic Quality. Yet, this is often not the case. Why? The answer is that, despite rapid GDP per capita growth, this new wealth has not been distributed equally. Corruption continues to hamper the sharing of economic prosperity in a region where anti-monopoly

The Legatum Prosperity Index 201644

regional analysis

laws are weak. Poverty is still a reality in Bulgaria, Moldova, and the non-EU Balkan states, where development has been uneven and favoured urban areas.

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Sc or

e (%

)

Business Environment Economic Quality

Improvements in Eastern European Business Environment: not translating into better Economic Quality?

Performance in the Natural Environment sub-index has also improved considerably, despite overall economic growth. This is notable given that other rapidly develop- ing economies in Asia have made far less progress in combating air pollution or pro- moting conservation over the same time period. This development is largely due to Eastern European states catching up with EU environmental regulations, highlighting the importance of regional co-operation in the protection of the natural environment.

Performance in Governance and Social Capital has not converged with Western Europe One of the keys to Eastern Europe’s prosperity deficit lies in its poor scores in Governance and Social Capital. Corruption – especially, corrupt or compromised judges – holds back good governance in many parts of the region. In Hungary, Governance has been falling as a consequence of the weakening of the inde- pendent judiciary by the current government.

An exception to this gloomy picture is Romania, which has made good progress in Governance. The anti-corruption agency set up in the country has jailed more corrupt politi- cians than in the rest of the region combined. As a result, it is moving towards prosperity faster than its neighbours.

Social Capital is also considerably lower than in Western Europe. Corruption is, again, perhaps one reason for this: there is less trust in law enforcement given the widespread bribery of officials. Civic participation in charitable organisations is hindered by lower disposable incomes. Depressingly, a quarter of a century after the end of the Soviet Union, the communist legacy of an eroded civil society still haunts the region.

mena

The UAE joins Israel to lead prosperity in the MENA region

The UAE has long looked to the OECD, not its Gulf neighbours, as a target peer group. The Index shows that it has reached this target, making the biggest absolute prosperity gain over the past decade to sit alongside OECD member Israel at the top of MENA’s prosper- ity rankings.

Ranking 41st to Israel’s 40th, the UAE’s success has largely been driven by reforms to open and diversify the economy. Now, after almost erasing the gaps in Economic Quality and Business Environment, the UAE has a smaller overall prosperity deficit than any of the other Gulf states.

It is not only about the economy, however. Over the past decade, Social Capital in the UAE has risen from 51st to 25th largely as a result of more Emiratis participating in voluntary work in their communities. Small improvement has been made in Governance as measures of government effectiveness and the rule of law rise. The UAE has also improved in Health, rising into the top 30 globally as life expectancy climbs. The country retains an ambitious agenda for national success and has proved that ambition can pay off. Prosperity can rise further yet.

0

5

-5

-15

-20

-25

-10

2007 2016

Pr os

pe ri

ty G

ap

Prosperity Economic Quality Business Environment

The UAE is closing its Prosperity Gap

Saudi Arabia: oil-rich, but not prosperous Saudi Arabia is the worst performing of the Gulf Co-operation Council (GCC) coun- tries. Besides severe restrictions on Personal

Freedom even by Gulf standards, it also faces the region’s weakest performance in Economic Quality and Business Environment. Years of dependency on oil exports have created an economy that is – unlike the UAE’s – undiversi- fied and uncompetitive. Labour force partici- pation is the lowest of any GCC state.

Saudi Arabia's recently launched 'Vision 2030' initiative seeks to improve prosperity in the nation

Saudi Arabia faces problems across the board, not just in its economy. It ranks poorly in terms of Safety & Security as well as Education and Health outcomes. Recognising the issues facing the country, the current leadership of the Kingdom has launched “Vision 2030”, a long-term plan for economic diversification and social transformation. The Index shows that such an initiative is desperately needed if prosperity is to rise.

0 20 40 60 80 100

Saudi Arabia

Oman

Kuwait

Bahrain

UAE

Qatar

Labour force participation rate (%)

Female General

Saudi Arabia's labour market: a lot of untapped potential

War is devastating the region’s prosperity Over the past decade, no other region has experienced such devastating effects of war on its prosperity. As of 2016, the three least prosperous countries in MENA – Iraq, Yemen, and Libya – are all mired in violent civil war. The near-complete breakdown of prosperity in these countries is stark: war has caused the suspension of most economic activity, health and education have been devastated, and civil society has been dismantled. Yemen, 2016’s least prosperous country, has seen terrorism-related deaths more than treble since 2007, while Libya has seen its rule of law collapse.

The Legatum Prosperity Index 2016 45

0 20-20 40-40-60 60 80

Prosperity score

Prosperity Gap

Iraq, Yemen, and Libya Other MENA countries

Prosperity completely destroyed by war

Post-Arab Spring syndrome The social movements that swept the Arab world around 2011 have set North African countries on different prosperity trajectories. Five years on, the prosperity legacy of the Arab Spring is both varied and unclear.

Tunisia’s trajectory has been downwards. While a new constitution and democratic elections saw great progress in Personal Freedom and Governance, IS insurgency has undermined both the country’s security and its heavily tourism-dependent economy. Prosperity has suffered as a consequence.

Tourism in Tunisia has suffered as a result of a series of IS related incidents in the country

In contrast, Morocco’s trajectory has been upwards. Its semi-authoritarian monarchy saw it through the Arab Spring with less turmoil than its neighbours. This stability has enabled a modest rise in prosperity, predominantly the result of the stability itself improving per- formance in Safety & Security and enabling ongoing economic progress. Satisfaction with living standards has risen from 57 to 75 percent in the past decade alone.

-6

-4

-2

0

2

2010 2016

Pr os

pe ri

ty (

% )

Algeria Egypt

Morocco Tunisia

Uncertain legacy of the Arab Spring

sub-saharan africa

Africa’s prosperity is growing yet still below world average

… and the gap between best and worst performing countries remains significant The Prosperity Index records a large variation across Sub-Saharan Africa, from South Africa and Botswana with the best scores, to Sudan and the Central African Republic with the worst. The number of countries delivering prosperity above what their wealth levels would otherwise suggest has increased. Yet in 2016, as in 2007, more than half of these countries sit in the bottom 30 of the Index. The median rank of Sub-Saharan African countries remains low, at 124.5 (it was 125.5 in 2007). Meanwhile, that of developing Asia has improved from 85 to 75.5, and that of Eastern Europe from 62.5 to 55. In other words, despite strong absolute prosperity growth, Africa is lagging behind other developing regions.

57

58

59

60

61

2007 2016

Pr os

pe ri

ty s

co re

( av

g. )

SSA Asia Latin America

Eastern Europe

Africa's prosperity is rising but still lagging behind other developing regions

Commodity-dependent economies struggle to convert wealth into prosperity The majority of Sub-Saharan Africa has seen economic growth, though at a slower rate than in the past decade. However, many of the region’s richest economies underper- form significantly when prosperity delivery is measured against their wealth. Oil-rich Gabon and Angola, posting some of the largest prosperity deficits globally, are strik- ing examples of such underperformance. Similarly, Nigeria and the Republic of Congo struggle to deliver prosperity in spite of

sizeable commodity endowments and are, in addition, afflicted by unstable political and security environments. Overall, economies across the continent remain in need of more diversification, in terms of quality of exports and revenue sources.

...while business environments improve On the other hand, the business climate has become far more competitive, thanks to poli- cies that make it easier to start new businesses and gain access to credit. This is particularly evident in Ghana, Togo, and Rwanda. However, a chronic lack of electricity and political turmoil remain the major obstacles to developing a thriving business environment, not only in these countries but in the whole region.

-11

3

SSA 9 wealthiest countries avg.

0-4-8-12 22-6-10 4

Others SSA avg.

Prosperity Gap size

Sub-Saharan Africa's wealthiest countries are under- delivering prosperity

In the race for better health and education outcomes, Africa trails last in the field Despite some progress in Health and Education, the overall score of both sub-in- dices remains far below the average of other developing regions, crippling countries’ chances of building a prosperous society. Literacy rates and primary completion rates have increased, but it is the quality of edu- cation that is not improving. Similarly, life expectancy and immunisation rates have both increased by five to ten percent, but in the vast majority of African countries over half the population has no access to basic sanitation, and in Niger, Togo, and Madagascar less than 12 percent have such access.

25

35

45

55

65

75

2007 2016

Ed uc

at io

n sc

or e

SSA Eastern Europe SE Asia World

55

65

75

2007 2016

H ea

lt h

sc or

e

SSA Eastern Europe SE Asia World

The Legatum Prosperity Index 201646

Methodology

The Legatum Prosperity Index™ is a framework that assesses countries on the promotion of their citizens’ flourishing, reflecting both wealth and wellbeing across nine pillars of prosperity and 104 variables. It captures the richness of a truly prosperous life and with it seeks to re-define the way we measure national success, changing the conversation from what we are getting to who we are becoming. This makes it an authoritative measure of human progress, offering a unique insight into how prosperity is forming and changing across the world.

A nation’s prosperity has traditionally been measured by macroeconomic indicators of wealth such as average income per person, GDP per capita. In moving to “GDP and beyond” to cover both wealth and wellbeing, and not just one or the other, the Prosperity Index faces the challenge of finding a meaningful measure of national success. This is something that the Legatum Institute has strived to achieve with academic and analytical rigour over the past decade.

This short methodological overview offers the reader an understanding of how the Prosperity Index has been refreshed for the 2016 release, following a two-year methodological review, to get us closer to a measure of prosperity that is transparent and policy-relevant. It is con- structed by combining established theoretical and empirical research on the determinants of wealth and wellbeing, and with the input of academic and policy expert advisors. This version of the Prosperity Index covers more countries and more variables, adds a new pillar on the environment, and reflects new sources of data.

We endeavour to create an Index that is methodologically sound. To that end, we also publish a full methodology document to provide the reader with all the information required to understand the Legatum Prosperity Index™ in a way that is transparent, useful, and informative. For more information on our methodology please refer to the 2016 Methodology Report published at www.prosperity.com.

Pillars

The Economic Quality sub-index ranks countries on the openness of their economy, macroeconomic indicators, foundations for growth, economic opportunity, and financial sector efficiency.

The Business Environment sub-index measures a country’s entrepreneurial environment, its business infrastructure, barriers to innovation, and labour market flexibility.

The Governance sub-index measures a country’s performance in three areas: effective governance, democracy and political participation, and rule of law.

The Education sub-index ranks countries on access to education, quality of education, and human capital.

The Health sub-index measures a country’s per- formance in three areas: basic physical and mental health, health infrastructure, and preventative care.

The Safety & Security sub-index ranks countries based on national security and personal safety.

The Personal Freedom sub-index measures national progress towards basic legal rights, indi- vidual freedoms, and social tolerance.

The Social Capital sub-index measures the strength of personal relationships, social network support, social norms, and civic participation in a country.

The Natural Environment sub-index measures a country’s performance in three areas: the quality of the natural environment, environmental pressures, and preservation efforts.

The Legatum Prosperity Index 2016 47

Step by step

1 Selecting the variables We carried out an extensive literature review in each sub-index looking at the academic literature on economic development and wellbeing. We identified more than 200 variables that have an effect on wealth and wellbeing. This was refined based on input from academic and policy experts in each sub-index area, who advised one the reli- ability of data sources, alternative measures, and the credibility of variables’ measurement. This left us with a final list of 104, distributed fairly evenly across the nine sub-indices.

2 Standardisation The variables in the Index are based on many dif-ferent units of measurement such as numbers of individuals, years, percentages, and ordinal scales. These different units need to be normalised for comparison between variables and countries to be meaningful. A distance to frontier approach is employed for this task. The distance to frontier approach compares a country’s performance in a variable with the value of the logical best case as well as that of the logical worst case. As a result, the country’s relative position can be captured by the distance to frontiers score generated. This approach also enables us to compare Index scores over time.

3 Variable weights Each variable is assigned a weight, indicating the level importance it has in affecting prosperity. Weights fall into four buckets: 0.5, 1, 1.5, and 2. Each variable by default is weighted as 1, and based on their varying significance to prosperity their weight may be adjusted downwards or upwards accordingly. For example, a variable with a weight of 2 means that it is twice as importance in affecting prosperity as most other variables. Weights were determined by three factors, ordered according to priority: (1) the relevance and significance of the variable regard- ing the accumulation of material wealth and the enhancement of wellbeing as informed by the academic literature; (2) expert opinions offered by the Index’s special advisors; and (3) the degree of compatibility with the Legatum Institute’s view of prosperity as human flourishing across wealth and wellbeing.

4 Pillar scores In each of the nine sub-indices, variables’ distance to frontier scores are multiplied by their weights and then summed to generate countries’ sub-in- dex scores, and the countries are then ranked according to their scores in each sub-index.

5 Prosperity Index score The Prosperity Index score is determined by assigning equal weights to all nine sub-indices for each country. The mean of the nine sub-index scores yields a country’s overall Prosperity score. The overall Prosperity Index rankings are based on this score.

The Legatum Prosperity Index 201648

The Legatum Prosperity Index Team

Alexandra Mousavizadeh Director of Indices

Harriet Maltby

Paul Caruana Galizia

Fei Xue

Giulia Gemelli

Pauline Coste

Madeleine Bradley

The Legatum Institute would like to thank Prof. Angus Deaton, Nobel Laureate, and our Special Advisers to the Prosperity Index for their helpful advice, critiques, and suggestions.

Tim Besley, London School of Economics Daniel Drezner, Tufts University Carol Graham, Brookings Institution John Ifcher, Santa Clara University Edmund Malesky, Duke University Ann Owen, Hamilton College

In addition, we thank the other attendees of our Methodology Symposium for their time and feedback: Aparna Mathur, Ed Al-Hussainy, Judith Kelley, Kevin Hassett, Ole Hagen Jorgensen, Reuben Abraham, Robert Bradley, and U. Srinivasa Rangan.

The Legatum Institute would like to thank the Legatum Foundation for their sponsorship and for making this report possible.

Learn more about the Legatum Foundation at www.legatum.org

We encourage you to share the contents of this document. In so doing, we request that all data, findings, and analysis be attributed to the 2016 Legatum Prosperity Index™.

#ProsperityIndex @ProsperityIndex @LegatumInst

The Legatum Institute also wishes to thank Gallup, Inc. for permission to use the Gallup World Poll Service© and Gallup World Poll Data in construction of the Prosperity Index. Copyright Gallup, Inc. 2016. Reprinted with permission of Gallup, Inc. All Rights Reserved.

Unless otherwise stated, all data is from the 2016 Legatum Prosperity Index™. All original data sources can be found in the Prosperity Index methodology report and online at www.prosperity.com.

Inside back cover photo ©Polly Eltes / periodliving.co.uk

The term ‘country’ is used to refer to the 149 societies included in the Index. These include 148 nations and one Special Administrative Region of China, Hong Kong.

Acknowledgements

Creating the Tree of Prosperity To mark the tenth edition of the Legatum Prosperity Index, award-winning illustrator, Andrew Davidson, was commissioned to re-imagine the Tree of Prosperity. Well known for his intricate wood engravings, Andrew uses traditional techniques to produce truly beauti- ful and unique pieces of art.

The Tree of Prosperity is the Legatum Institute’s representation of flourishing societies, from strong roots, providing a firm foundation for growth and stability, to the branches which bear the fruit that nurtures life on our planet.

The Legatum Institute measures prosperity against nine sub-indices; Economic Quality, Business Environment, Governance, Education, Health, Safety & Security, Personal Freedom, Social Capital and Natural Environment. Representations of each sub-index have been hidden within the illustration. See if you can find them all!

ISBN 2 -24 -911125 -1 -978

9 78 1 9 1 1 1 2 5242 NOVEMBER 2016

The Legatum Institute is a charitable public policy think tank whose mission is to promote policies that lift people from poverty to prosperity.

Legatum Institute 11 Charles Street, Mayfair London W1J 5DW United Kingdom T: +44 (0) 20 7148 5400

www.li.com www.prosperity.com

@ProsperityIndex @LegatumInst #ProsperityIndex

PROSPERITY INDEX