Beyond GDP, How the World’s Economies Stack Up
November 2, 2011 Editor 0
These days, many people agree that, just as the full measure of a man can’t be taken by his banker, the full measure of a nation isn’t reflected in its GDP. But what should take the place of that alpha metric as a better indicator of economic health? Is there a better way to size up the relative performance of the world’s economies, and to judge whether a given one is getting better or worse over time?
The index issued annually by the Legatum Institute is the best answer we’ve seen to that question. Called simply “The Prosperity Index,” it is the world’s only global assessment of prosperity that integrates measures of both financial income and nonfinancial wellbeing—in all, reflecting 93 dimensions of performance. Legatum is able to gather data on these variables in 110 countries of the world, so that the Index reflects the conditions experienced by 93% of the world’s population. We write about all this in our forthcoming book, Standing on the Sun, but since our manuscript was copyedited in October, we went to press with 2010 numbers. Today, the Legatum Institute releases its 2011 Index, and we were eager to know what might have changed.
Happily, Legatum’s Nathan Gamester and Matt Baker were happy to answer a set of questions we pulled together to provide both an update and some background for readers unfamiliar with their work:
What are the major trends that the index reveals that would be of particular interest to managers in multinational companies?
It reveals that the components within our Entrepreneurship & Opportunity sub-index are very important for increasing national prosperity. This means that if a country can create an inviting entrepreneurial environment and also provide the opportunity for citizens to become entrepreneurs should they want to (and that second point is crucial), a rise in national prosperity should follow. Obviously, this is relevant to managers because they are often the drivers of entrepreneurial activity as well as the inspiration to the next generation of entrepreneurs. There is also a responsibility here on governments to lift bureaucratic burdens that restrict entrepreneurs and would-be entrepreneurs.
The Index also sees the rise of Asia confirmed on economic measures. Singapore ranks first on our economy sub-index—the first time a non-western country has done so. And China climbs to 10th on the economy (from 24th last year). Interestingly, despite this strong economic performance, Asian countries’ wellbeing scores tend to be higher than their income scores.
The Index also reveals that right across Africa, there is an untapped natural resource that has the potential to transform the economic fortunes of the continent. That resource is people and specifically, their optimism regarding entrepreneurship. The Index finds that African citizens are the most optimistic in the world about entrepreneurship, but this resource remains underused because of various constraints—most notably poor infrastructure.
What is the biggest surprise in the data? What would strike many people as counterintuitive?
India has fallen down the rankings again for the third consecutive year while China has risen over the last two years. The US remains 10th overall (same as 2010) and the UK also remains stable at 13th.
Perhaps the most counterintuitive finding is the emergence of eastern countries as possible models for post-revolutionary Arab Spring countries. While Turkey has been oft cited as a good model, the Index suggests that Arab Spring countries could do well to look eastward to Indonesia and Malaysia.
In the past year, Zimbabwe is the country with the largest improvement in overall Prosperity Index score, due to large improvements in the Economy sub-index. But over the past two years, the country with the largest improvement in Prosperity score was actually Indonesia. Very few countries see declines in their overall score but Italy is one of them, with a drop in its performance on the Governance and Social Capital sub-indices.
In Europe, Slovenia outperforms some European countries including Spain, Portugal, Italy, and Greece. We also see further evidence that top-down integration has done little to equalize not just economic but also institutional differences among European countries.
Why is this work so important?
Life is about more than money; it’s about trust, confidence, happiness, life satisfaction, and much more. This is intuitive on a personal level but has not yet been accepted on a national level: we still measure national success by the size of a country’s output, not the wellbeing of its citizens. The Index seeks to address this. It is the first global index to measure countries based on both wealth and wellbeing.
If the Prosperity Index were to become widely accepted, what would change? How might national economic policy be different?
National policy would begin to take account of citizen wellbeing. In fact, in the UK, this has already begun. David Cameron’s government has started to measure national wellbeing (or gross national happiness as he puts it) and has ordered government departments to take this into account when assessing the impact of policy. We have had meetings with UK government officials on this and continue to do so. This is a first step in what we hope will become a global norm.
Your index measures output at the national level. What would be the corporate equivalent?
The Prosperity Index is a global measurement of income and wellbeing. So a corporate equivalent might try and measure both in a slightly different way: perhaps sales, profits, and turnover on the income side but also employee and customer satisfaction on the wellbeing side. In an age when CSR is so important and when feedback can be both instant and public (via social media), perhaps we should begin to see this type of “holistic” prosperity measurement in the corporate sphere.
What kind of reaction do you get to the Index in business circles? In particular, what do financial industry executives think about it?
So far (the Index is in its fourth year), the major interest in the Index has come from governments, the policy community, and the media. However, we have had a degree of interest from the financial community and some companies. For example, one investment fund uses our data to research the investment potential in different countries because it provides a fuller picture of a country by taking account of more than just the financial landscape. And a couple of companies have told us they use the Prosperity Index as a resource when they assess the potential of new markets.
What do you most wish you could measure better than you can?
One of the key determinants of citizen wellbeing is the degree to which he/she is involved in a social/community group. Unfortunately data on this is not available globally. We’d love to be able to include that in order to get a better, more accurate measure of social capital. Another variable that is not available is the efficiency of healthcare systems. We use a lot of health-related variables that are very good proxy measures for this, but ultimately it is not known how effective a country’s healthcare system is. Further data that would be excellent to have is a time series data set on citizen wellbeing. For example, if the same people were surveyed about their wellbeing over time, we could track changes, which would allow us to see trends.
Sounds like the Prosperity Index in future years will not only bring fresh rankings but also new dimensions for countries to compete on.
It’s certainly true that wellbeing is an evolving area of academia and policy research. We are trying to keep ahead of the curve. We will continue to observe the new developments, and will strive to make the Prosperity Index as interesting and relevant as possible.
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