Index Insights

There can be no single model for the region after the Arab Spring. Each country’s path to prosperity is unique. For some in the region, Turkey is a model. What does the Index show about the wisdom of that choice? It depends on our focus. If our focus is on effective democratic governance, then Turkey, may be to some extent, a good model among Muslim countries. In other areas, though, notably the economy, the post-Arab Spring countries could just as usefully look to other countries like Indonesia and Malaysia.

What, then, do we see when we turn to Indonesia and Malaysia? As the graph illustrates, Indonesia outperforms Turkey on the Economy sub-index, ranking 44th while Turkey places 78th. Indonesia’s success partly comes from having the 19th largest market in the world. Indonesia’s market recovered well from the 1997 Asian financial crisis, and this has enabled that country to reduce poverty levels and maintain robust economic growth even during the recent global downturn. Job market expectations have continued to improve since 2008, while satisfaction with living standards has risen from 44% in the 2009 Index to almost 70% in this year’s Index.

With regard to democratic governance, Indonesia presents a mixed picture. Despite its economic successes, democratic Indonesia still suffers from high levels of corruption and low levels of rule of law. Most notably, Indonesia, which started its transition from autocracy to democracy in 1998, has seen a decline in voter support for Muslim-oriented parties over the last two elections. In 2004 religious parties won 38% of the vote, but in 2009 that share had dropped to 28%1, the lowest ever in Indonesia. Unlike the AKP in Turkey, which has benefited from that country’s economic successes, the religious parties in Indonesia seem to have suffered.

In terms of economic prosperity, Malaysia looks like a model, ranking 17th globally on the Economy sub-index. This economic success is largely due to export-led industrialisation, fuelled by foreign direct investment. In addition, the country has low unemployment and high public confidence in financial institutions at 87%. Less exemplary is Malaysia’s effective yet relatively unaccountable governance. In 2008 Malaysia saw a breakthrough for opposition parties for the first time since its independence, but the recent crackdowns on political expression and protest mark a worrying trend.

The power of example – the need for a model to inspire positive change – should not be underestimated. But because no model can ever be perfect, it is prudent to hold up more than one, and to keep in mind what the Prosperity Index continues to demonstrate: that the world changes, regions and countries change, but the foundations of national prosperity remain the same. A commitment to free markets and democratic governance are central to success.

Sub-Saharan Africa is blessed with a vigorous entrepreneurial spirit. Indeed the imminent rise of African economies has been prophesied by academics, investors, and commentators alike. These projections are predominately based upon economic growth forecasts and demographic trends. However, it is the African entrepreneurial spirit that will ultimately be the key to making Africa’s future prosperity sustainable. The Prosperity Index finds that most African citizens believe they can get ahead by working hard, and that the area in which they live is good for starting a new business (as shown in the graphic below). In the Central African Republic, for example, less than onequarter of citizens have access to adequate food and shelter. But despite these difficult circumstances, 94% of the citizens still express faith in the rewards of hard work.

Yet something is restricting this entrepreneurial spirit. Despite ranking highly on some subjective variables, the majority of African countries rank at the bottom of the Entrepreneurship & Opportunity sub-index. And while several countries in the region have shown robust per capita growth rates, the full potential of African entrepreneurs has yet to be unleashed. Naturally, the world looks for exceptions to this rule, and in recent years the small country of Botswana has emerged as a possible model of what sustained African prosperity might look like. For example, Botswana has a remarkably high penetration of mobile phones: over 96 per 100 persons, significantly more than the regional average of 41.

This statistic is striking because 21st-century economic growth is associated with improvements in communications infrastructure. The Prosperity Index also shows that mobile phone ownership is linked to higher levels of entrepreneurship and opportunity. Throughout the sub-Saharan region, cellular telephone subscriptions have sky-rocketed from less than two per 100 people in 2000 to over 40 in 2009. This upsurge has conferred many benefits on African citizens and businesses, from rural farmers being able to find commodity prices in different locations, to remote villagers becoming adept at “mobile banking”.

To Western philanthropists and aid organisations, it makes sense to support micro-technology, such as mobile phones powered by miniaturised solar panels, as part of a new communications infrastructure. This enables African entrepreneurs to reduce their transaction costs, access valuable information, and connect with larger regional and even global markets.

But this is not the whole picture. In the case of Botswana, the advantage conferred by widespread mobile usage is offset by the disadvantage imposed by high transportation costs: 3,200 USD is the average cost per shipping container, more than twice the Index average (1,400 USD). Despite the headline-grabbing growth of Africa’s communications infrastructure, the less trendy physical infrastructure of roads, railways, airports, and harbours lag far behind. Indeed in some countries there are fewer paved roads than there were 30 years ago. A World Bank study1 has also shown that a 10% drop in transport costs could increase trade by 25%.

For these reasons, Ghana may be better positioned than Botswana to provide a model of sustained economic growth in Africa. According to the World Bank, Ghana is projected to be the fastest growing economy in sub-Saharan Africa, despite Ghana having only 63 mobile phones per 100 persons. The cost of moving goods from point A to point B, however, is lower in Ghana than any other sub-Saharan African country, at a cost of 1,100 USD per container, which is below the global average. Maybe that’s why Ghana is the most optimistic about entrepreneurship of all 110 countries in the Index!

In 2011 the world’s attention was riveted by anti-corruption protests in two Asian giants, India and China. The protests took different forms, but comparisons are irresistible: which nation’s corruption is worse? Which protests are more likely to succeed? And which nation has a better chance of reducing corruption to a level that, in the long run, will not hinder prosperity?

No index can provide definitive answers to these questions, but certain data within the Prosperity Index suggest some interesting patterns that shed light on the issue.

When looking at overall Prosperity Index rankings, India seems to be worse off than China. Both have similarly outstanding economic growth rates and average levels of satisfaction with living standards, but India’s overall rank has fallen 13 places since 2009 (from 78th to 91st), while China’s has risen six places (from 58th to 52nd).

Some of these differences are related to factors such as business start-up costs; in China these represent only 4.5% of Gross National Income, while in India these stand at 57%. However, it is corruption that remains a common problem in both nations.

While many people think of India as more corrupt, both countries’ Index rankings on corruption are very similar: 57th for India, 55th for China. The Chinese government does not allow the polling agency Gallup to ask about corruption, so the Index uses data from Transparency International, a Berlin-based NGO that monitors public and private corruption around the world. On this front, India’s democracy clearly has the advantage, in possessing greater openness and transparency on corruption issues. But, do these similar corruption levels suggest a shared path to prosperity?

China benefits from higher rates of education and literacy, which have been shown to correlate with more effective measures against corruption – educated people are more likely to protest against corruption than those with less education.2 But India has problems that China does not. For example, it has been suggested that Chinese bribery is more efficient: once the money changes hands in China, the desired service or favour is more likely to be forthcoming than it is in India. One possible explanation for these different forms of corruption is found in the levels of trust within society. Societies with high trust levels tend to see corruption as “efficiency-enhancing” and less detrimental to economic growth. In contrast, societies with low levels of trust, corruption is more predatory, which can reduce economic growth.

Here the Index offers a unique insight: in the Social Capital subindex, the level of trust toward others is vastly higher in China (60%) than in India (21%). But China scores much lower than India with regard to other important variables within the Social Capital sub-index such as charitable donations, volunteering and religious attendance.

What this suggests is that India possesses denser and more vibrant social networks, which are both a source of corruption and a resource that can be tapped when seeking to curb it. But this resource can only be tapped in a society where governmental institutions allow people to utter the word “corruption” in public, not to mention include it in surveys. In China, social capital resources are more limited but even more importantly, the government is afraid to ask these questions, demonstrating their unwillingness to grapple with the answers.

The Prosperity Index findings suggest that top-down political integration by European policymakers has done little to equalise economic or institutional differences among European countries. The income gap between the richest and poorest EU member states remains vast. Countries in the Mediterranean area report high levels of corruption, low rates of social trust, low levels of rule of law, and inefficient public sectors. European integration also seems to fail to raise institutional quality in these countries, as indicated by low public opinion regarding the quality of the court system and fewer reported instances of citizens voicing their concerns to officials.

Europe’s current financial troubles manifest themselves in several objective and subjective variables in the Index. Domestic savings rates, for example, shrank in almost all European countries. And perceived confidence in financial institutions has plummeted almost uniformly across the continent (see graph below).

There has also been a varied performance in the crucial areas of Social Capital and Governance. While the countries at the top of the Index have maintained their position on this front, the so-called PIGS (Portugal, Italy, Greece, and Spain) have stagnated or fallen for the past two years.

Ireland and Iceland took a plunge in the Economy sub-index – a reflection of the economic turmoil both countries have gone through. However, both countries rank in the top 20 on all other sub-indices, which sets them apart from the PIGS and indicates that they may have a stronger platform for recovery. Unexpectedly, France shows a decline similar to the PIGS on the Economy sub-index, despite its less troubled economy.

Belgium has seen its overall Prosperity Index score fall two years in a row. On many variables, Belgium now ranks closer to Eastern and Southern Europe than to its neighbours in Western Europe, raising further questions whether European integration and the associated desire for convergence have worked.

Remarkably, some of the more dynamic countries of Central and Eastern Europe have overtaken their Western neighbours in recent years. Slovenia, for example, has seen improvements on the Governance sub-index since last year. Italy and Greece, in contrast, have seen a decline in this measure. Overall, Slovenia has improved its score on seven of the eight sub-indices since 2009. And while their rise is not as impressively consistent, Czech Republic, Poland, Slovakia, and Estonia now also see eye-to-eye with the PIGS.

For decades, European policymakers have relied on top-down measures to encourage convergence on a whole range of economic, political, and social policies. The Prosperity Index reinforces the widespread impression that such convergence, as presently understood, has not occurred. This suggests that more top-down integration is unlikely to solve Europe’s crisis.