THE LEGATUM PROSPERITY INDEX™ 2018

Creating the Pathways from Poverty to Prosperity

Executive Summary

Since 2007, the Legatum Prosperity Index has evaluated long-term changes in global prosperity, pinpointing drivers of progress and highlighting those nations that have made the greatest strides forward.

Prosperity has grown over the last year to its highest ever point. In the last five years, 113 countries have improved their prosperity. In many respects the world is getting better. It is now easier to start a business in many countries. There is more equal representation of women in national parliaments. Absolute poverty rates have fallen.

This year the Index highlights are that:

  • Prosperity has grown globally and is at its highest ever point in the history of the Index.
  • The gap between the highest and lowest score is the largest it has ever been.
  • Safety and Security continues to decline, with much of this decline concentrated in the Middle East and North Africa (MENA) and Sub-Saharan Africa. Safety and Security is fundamental to prosperity. Among the countries that rose the most, Safety and Security was their strongest pillar. In countries that fell, Safety and Security was the worst performing pillar.
  • Prosperity is directly linked to wellbeing, as reported by the citizens of countries that have risen in prosperity over the last 10 years. Countries whose scores have fallen have seen a decline in their wellbeing.
Prosperity is growing, but Safety and Security continues to fall

Prosperity has grown over the last year to its highest ever point. In the last five years, 113 countries have improved their prosperity. In many respects the world is getting better. It is now easier to start a business in many countries. There is more equal representation of women in national parliaments. Absolute poverty rates have fallen. However, the gap between highest and lowest scores is the largest it has ever been. Further, Safety and Security continues its long decline. Unsurprisingly, much of the decline in Safety and Security is concentrated in Sub-Saharan Africa and MENA. This is borne out by a fall in a number of indicators, including:

  • The number of people globally who have reported they have struggled to buy food at some point over the last year has risen from 25% in 2008 to 33.3% this year.
  • The number of people globally who have reported they have struggled to pay for shelter at some point over the last year has risen from 20.9% in 2008 to 27.3% this year.
  • In 2008 there were 1.09 deaths caused by terrorism per 1,000,000 people. In 2018, the figure is 3.82.
  • In 2008 there were 2.80 battlefield deaths per 1,000,000 people. In 2018 the figure is 6.13.
Regional challenges

We have also undertaken research across seven global regions. One of the interesting parts of this research is to note that, within regions, there is significant variation between countries, even at a sub-national level. In North America, there are large differences in living standards and basic living conditions between Canada and different regions of the US. Canada and the northeast of the US are in general, safer and more prosperous than other parts of the US. In Western Europe, there is a significant divergence between northern and southern Europe. This is particularly stark in political participation, where southern European countries have been steadily declining for the last decade.

Within regions there is significant variation between countries, even at a sub-national level. In North America, there are large differences in living standards and basic living conditions between Canada and different regions of the US.

As noted in our recent Central and Eastern Europe Report, there are distinct zones of prosperity across Eastern Europe. There are the entrepreneurial Baltic states, the industrial hinterlands, the food hub of the southeast, and the former Commonwealth of Independent States. Prosperity differs significantly across the region, as do the challenges and opportunities faced by each zone. In MENA, we see a significant divergence in prosperity between the wealthier Gulf states and poorer, and much more unstable, North African countries.

In Latin America and the Caribbean and Asia-Pacific, we look at the pillars that drive economic wellbeing: Economic Quality, Business Environment and Governance. These two regions provide an interesting contrast. Latin America and the Caribbean has weak Economic Quality and Business Environment. Beyond measures of political participation, Governance is also weak. Governments in the region are low performers, rule of law is poor and corruption is common. In contrast, Asia-Pacific has strong, and improving, Economic Quality and Business Environment. This is best exemplified by the two giants of the region, India and China. However, India and China differ in terms of Governance. China scores low on Governance because of its lack of political participation, while India, as the world’s largest democracy, scores high on this measure. Both countries still face challenges, as does the wider region. The next steps for both of these regions begin with better institutions. Reducing corruption and improving the effectiveness of government is fundamental. In Asia-Pacific, there is the additional challenge in many countries of increasing political participation.

In Sub-Saharan Africa, one of the greatest challenges lies in improving the Education pillar, where the region lags significantly behind the rest of the world. Although there have been improvements in recent years (for example, school enrolment rates have improved), there are further challenges not only in increasing enrolment at higher levels, but increasing the quality of education.

Risers and fallers

This year, in order to better understand the drivers of prosperity, we have focused on the 20 largest risers and the 20 largest fallers over the last decade. While 10 years ago, by pure coincidence, these two groupings would have both ranked 97th, there has since been significant divergence. The risers, when considered as a country, would rank 81st in 2018, up 16 places, while the fallers would rank 119th in 2018, down 22 places. Three themes emerged from this analysis.

First, wellbeing is more closely linked to prosperity than it is to GDP. We found that a rise or fall in prosperity is correlated with a rise or fall in wellbeing. The top 20 prosperity risers saw a rise in the wellbeing reported by their citizens, while the fallers saw wellbeing worsen. On the other hand, a rise in in GDP per capita is not particularly correlated with a rise in wellbeing, although countries with falling GDP do experience a drop in wellbeing.

Second, while our risers often experienced a slow and steady improvement in prosperity, the fallers often fell sharply and suddenly. That is, there was a shock that they were incapable of withstanding.

Third, Safety and Security is the binding constraint on prosperity. We found that the risers all had a far better Safety and Security score than the fallers at the end of the period. Indeed, the strongest pillar for the risers was Safety and Security.

Features of the risers

We also looked at the make-up of the risers. This grouping reveals some surprising countries: Georgia and Zimbabwe are two countries in this group. This does not mean that they are prosperous, but simply that they have improved significantly over the last decade, often from a low base.

Countries such as Bangladesh and Kazakhstan have seen their economic wellbeing improve significantly. In Bangladesh for example, absolute poverty has reduced from 44.2% in 1991 to 14.8% most recently.

The risers all rose for a variety of reasons. But one of the features of the group, in aggregate, was comparatively strong Safety and Security. The other reasons for growth are in three broad categories. First, ending conflict has enabled these countries to enjoy widespread improvements with almost all pillar scores improving over the last decade. A good example is Sri Lanka, which ended its civil war in 2009 and has prospered as a result. Second, these countries improved their Business Environment and Economic Quality pillars. Countries such as Bangladesh and Kazakhstan have seen their economic wellbeing improve significantly. In Bangladesh for example, absolute poverty has reduced from 44.2% in 1991 to 14.8% most recently. Thirdly, strengthening Governance, the fall of autocratic regimes and recovery from political instability have led to generally safer and more prosperous environments for whole populations.

We examined two risers more closely. Zimbabwe faces many challenges, yet it is one of our risers, showing that even a struggling country far down the Index can make gains. These improvements mainly come as citizens have gained more political rights, and institutions have improved. Georgia was the second largest riser. Following the Rose Revolution in 2004, it has steadily improved Governance and Personal Freedom. Further, despite Russian aggression, it has maintained a relatively safe and secure country.

Features of the fallers

In contrast to the risers, the fallers began with a low score in Safety and Security and declined even further. All of these countries faced some sort of shock. Greece and Italy faced economic shocks, but had cultural and institutional resilience to prevent them from being as affected as the other fallers. All the other fallers lacked the capacity to survive the shock, whether it be an economic disaster or conflict. Many of these shocks came in the form of conflict and violence. Several countries in MENA have been affected directly by conflict or pay the price for conflict in their region. Jordan and Lebanon, for example, have both been affected by refugees from the Syrian conflict. A further cause of falling prosperity was an increase in government oppression. Countries such as Turkey and Egypt have seen increases in government repression since coups a few years ago.

We also took a closer look at two fallers: Tunisia and Thailand. In Tunisia, a decline in Safety and Security at the time of the Arab Spring was followed by significant declines in other pillars. The lack of basic human security meant other pillars could not improve. In Thailand the main reason for decline is political instability. Coups have prevented prosperity from growing in the country. Since the 2014 coup, levels of satisfaction with the standard of living have dropped alongside availability of food and shelter.

Country profiles

We have profiled three risers in depth: Estonia, Paraguay, and Sri Lanka.

Since re-declaring independence in 1991, Estonia’s GDP per capita has increased from less than $2,000 to more than $18,000, among the highest growth rates in the world. Estonia has risen to 26th in the world, up from 29th in 2007, to rank second behind Slovenia in Eastern Europe. This has been driven by strong Governance and improving Economic Quality and Business Environment. This has been accompanied by strong improvements in Health and Education, with Estonia now ranking 11th in Education globally.

Paraguay has, over the last decade, jumped above seven of its Latin American neighbours and is now ranked 61st in the Index. The Latin American country has been successful in reducing poverty and improving Economic Quality, rising from 102nd in 2008 to 73rd in 2018 in this pillar. However, it faces institutional challenges: it scores low on measures of corruption and judicial independence. There are also limits on press freedom. These limit and slow down the growth of prosperity in the country, and strengthening these institutions needs to be the strong focus of Paraguay’s leaders.

Sri Lanka has seen a rise primarily because of the end of its 30-year civil war in 2009. It has managed to retain reasonably good Education and Health systems during this time. There have been some business reforms and the economy is growing. However it also faces significant challenges to improve Governance and Personal Freedom. Sri Lanka needs to continue to build strong institutions that are democratic, as well as building a strong Business Environment.

The future of prosperity

Prosperity is at its highest point since 2007, which is good news for many. Yet too few of the world’s inhabitants are enjoying its fruits. Much needs to change to enable all nations to fulfil their potential in the nine pillars of prosperity. Given the different political, cultural and geographic contexts in which nations find themselves, the solutions to realising such potential could scarcely be more wide-ranging. Our hope is that our Index can help all leaders and policy makers to identify the pathways to prosperity for all.