THE LEGATUM PROSPERITY INDEX™ 2017

Creating the Pathways from Poverty to Prosperity

Methodology

The Legatum Prosperity IndexTM is a framework that assesses countries on the promotion of their citizens’ flourishing, reflecting both wealth and wellbeing. It captures the richness of a truly prosperous life, moving beyond traditional macro-economic measurements of a nation’s prosperity, which rely solely on indicators of wealth such as average income per person (GDP per capita). It seeks to redefine 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.

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. We endeavour to create an Index that is methodologically sound. This is something that the Legatum Institute has strived to achieve with academic and analytical rigour over the past decade.

For the 2016 issue, the Prosperity Index was refreshed following a two-year methodological review, with the input of academic and policy expert advisors. The objective of the review was to get closer to a measure of prosperity that is transparent and policy-relevant, constructed by combining established theoretical and empirical research on the determinants of wealth and wellbeing. The Index captures the breadth of prosperity across nine pillars of prosperity using 104 indicators. We ensured that all indicators displayed a statistically significant and meaningful relationship with at least wealth or wellbeing. The 2016 edition of the Prosperity Index™ covered more countries and more variables, added a new pillar on the Natural Environment and reflected new sources of data.

This short methodological overview offers the reader an understanding of how the Prosperity Index has been refreshed for the 2017 release

We also published 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 2017, we have retained the methodology established last year. For more information on the methodology, please refer to the Methodology Report.

A country is given a score for each pillar. This score is based on that country’s performance with respect to each of the indicators in that pillar, and the level of that importance—the weight assigned to each indicator—which is discussed in the methodology report. Finally, the pillar scores are averaged to obtain an overall prosperity score, which determines each country’s rank. Each pillar contains around 12 indicators; and for this year’s report we have also aggregated the indicators into sub-pillars, to capture an intermediate perspective. While the Index score provides an overall assessment of a country’s prosperity, each pillar (and sub-pillar) score serves as a reliable guide to how that country is performing with respect to a particular foundation of prosperity.

We also continuously monitor the quality and availability of global data, which is not constant. Under the Economic Quality pillar, for example, we have drawn on World Bank data for labour market participation (overall and female). Our past measure has been the ILO estimate of overall, and female, labour force participation rate as percentage of the population aged 15-64. However, these two datasets have been discontinued, thus we have replaced them with close analogues, the labour force participation rate as a percentage of the population aged 15+. These new metrics also include the labour force participation of older workers. Consequently, there have been some changes in the rankings for these indicators - countries with smaller 64+ populations tend to have more favourable scores – yet on the level of the overall Prosperity Index, this switch of indicators has had negligible impact on rankings.

Download the full 2017 Methodology Report here.

Pillars

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The Economic Quality pillar measures countries on the openness of their economy, macro-economic indicators, foundations for growth, economic opportunity and financial sector efficiency.

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

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

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The Education pillar measures access to education, quality of education and human capital.

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

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The Safety & Security pillar measures countries based on national security and personal safety.

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The Personal Freedom pillar measures national progress towards basic legal rights, individual liberties and social tolerance.

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

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

Step by step

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Selecting the variables

We carried out an extensive literature review in each pillar 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 pillar area, who advised on the reliability of data sources, alternative measures and the credibility of variables’ measurement. This left us with a final list of 104 variables, distributed fairly evenly across the nine pillars.

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Standardisation

The variables in the Index are based on many different 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.

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Variable weights

Each variable is assigned a weight, indicating the level of 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 important 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 regarding 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.

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Pillar scores

In each of the nine pillars, variables’ distance to frontier scores are multiplied by their weights and then summed to generate countries’ pillar scores, with the countries are then being ranked according to their scores in each pillar.

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Prosperity Index score

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