THE LEGATUM PROSPERITY INDEX™ 2018

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.

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 sought 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 advisors. The objective of the review was to get closer to a measure of prosperity that is transparent and policy-relevant, achieved 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 Natural Environment pillar and captured new data sources.

This short methodological overview offers the reader an understanding of how the Prosperity Index has been refreshed for the 2018 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 2018, 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 indicator’s 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. 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 continuously monitor the quality and availability of global data, which is not constant. As a result of datasets being discontinued, or new datasets becoming available, we have updated some of the variables used in the Index. For example:

  • Under the Health pillar, the World Bank replaced the variable called “Improved sanitation facilities”, with two new variables: “People using at least basic sanitation services (% of population)”, and “People using safely managed sanitation services (% of population)”. We chose the first of these measures, because it had greater coverage and a higher correlation with the old measure.
  • In the Natural Environment pillar, the air pollution measure has changed. In the latest data release, the Environmental Performance Index, has used a weighted average of four levels of air pollution, unlike previous years when it had used a different weighting system. We have used their new measure in this year’s Prosperity Index.
  • In the Economic Quality pillar, the International Monetary Fund (IMF) had not updated the Export Diversification Index since 2010. We therefore chose to replace the IMF measure with the Harvard Economic Complexity Index, which is a measure of export diversity.

In all cases, we updated the historical data. This resulted in some minor changes to scores and rankings for prior years; the overall effect, however, is small. A full list of changes and updates to variables can be found in the 2018 Methodology Report.

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.