THE LEGATUM PROSPERITY INDEX™ 2016

Bringing Prosperity to Life

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 striven 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.

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 constructed 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.

Download the full 2016 Methodology Report here.

Pillars

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

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

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

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

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The Health sub-index 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 sub-index ranks countries based on national security and personal safety.

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

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

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The Natural Environment sub-index 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 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 on the reliability 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.

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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 sub-indices, variables' distance to frontier scores are multiplied by their weights and then summed to generate countries' sub-index scores, and the countries are then ranked according to their scores in each sub-index.

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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.