Legatum Prosperity Index: A Comprehensive Measure of Wealth and Wellbeing

1. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com Policy & Wellbeing @LegatumInst @stephenlclarke The Legatum Prosperity Index & the Commission on Wellbeing

2. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com TABLE OF CONTENTS The Legatum Institute The Prosperity Index • What is it? • How is it constructed? • How can it aid policy makers? • How has it been used? The Commission on Wellbeing • Appropriate areas for wellbeing analysis • A wellbeing approach to Cost-Benefit Analysis • Implications for policy

3. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE LEGATUM INSTITUTE The Legatum Institute is an independent non-partisan public policy organisation. Prosperity is a more capacious idea than can be expressed by a purely material measure such as gross domestic product. To that end in 2007 the Institute created the Legatum Prosperity Index™ based upon wealth and wellbeing. In this respect the Institute was a pioneer of trying to integrate wellbeing measures into political and economic analysis. Wishing to further the integration of wellbeing concerns into policy-making, in 2013 the Institute convened and sponsored the Commission on Wellbeing and Policy in order to stimulate a debate as to if and how wellbeing analysis should influence government policy. In other areas of our work we seek to advance ideas and policies in support of free and prosperous societies across the globe. To that end we have two other main streams of work: • The Transitions Forum (http://www.li.com/programmes/transitions-forum) • The Culture of Prosperity (http://www.li.com/programmes/the-culture-of-prosperity)

4. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX THE PROSPERITY INDEX - What is it? • The Prosperity Index tries to offer a more-complete picture of a country’s prosperity. First created in 2007, the current methodology has been in place since 2009, giving us five years of comparable data. • It incorporate a mixture of traditional economic indicators alongside measurements of wellbeing and aspects of life satisfaction. • Currently the Index covers 142 countries, representing 96% of the world’s population and more than 99% of global GDP. • The Index is composed of eight sub-indices: Economy, Entrepreneurship & Opportunity, Governance, Education, Health, Safety & Security, Personal Freedom and Social Capital. More than just assess countries on a range of metrics, our methodology is structured so that we can begin to see relationships between variables and prosperity.

5. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX THE PROSPERITY INDEX - How is it constructed? The Prosperity Index is created in six stages: • Selecting the variables • Standardisation • Weights • Income and wellbeing scores • Sub-index scores and rankings • Prosperity Index scores and rankings

6. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX Selecting the variables Standardisation Weights Income and Wellbeing scores Sub-index scores and rankings Prosperity Index scores and rankings

7. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX Selecting the variables Standardisation Weights Income and Wellbeing scores Sub-index scores and rankings Prosperity Index scores and rankings

8. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX Selecting the variables Standardisation Weights Income and Wellbeing scores Sub-index scores and rankings Prosperity Index scores and rankings

9. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX Selecting the variables Standardisation Weights Income and Wellbeing scores Sub-index scores and rankings Prosperity Index scores and rankings

10. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX Selecting the variables Standardisation Weights Income and Wellbeing scores Sub-index scores and rankings Prosperity Index scores and rankings

11. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX Selecting the variables Standardisation Weights Income and Wellbeing scores Sub-index scores and rankings Prosperity Index scores and rankings

12. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX THE PROSPERITY INDEX - How can this aid policy makers? The Prosperity Index is composed of variables that are correlated with two things we care about; wealth and wellbeing. As a result we can measure a country’s performance, not only in broad areas such as the economy or social capital, but also in the variables which are related to success in these areas. First level bullet point • Second level bullet point • Third level bullet point First level bullet point • Second level bullet point • Third level bullet point

13. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX THE PROSPERITY INDEX - How can this aid policy makers? First level bullet point • Second level bullet point • Third level bullet point First level bullet point • Second level bullet point • Third level bullet point The graph on the left plots tolerance for immigrants, as measured by a question in the Gallup World Poll, against the social capital score of a country from the Prosperity Index A correlation between these two measures does not imply causation, but this, coupled with further research could indicate to policy makers that monitoring and encouraging tolerance could increase social capital.

14. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX THE PROSPERITY INDEX - How can this aid policy makers? There is evidence that policy makers do pay attention to variables and targets. ‘Scotland Performs’ is one example of this, whereby specific variables or indicators are monitored because it is felt that they capture something important and that improvements in them translate into real improvements in collective and individual wellbeing. E.G. Increase exports Increase GDP growth First level bullet point • Second level bullet point • Third level bullet point First level bullet point • Second level bullet point • Third level bullet point

15. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE PROSPERITY INDEX THE PROSPERITY INDEX - How can this aid policy makers? There is evidence that policy makers do pay attention to variables and targets. ‘Scotland Performs’ is one example of this, whereby specific variables or indicators are monitored because it is felt that they capture something important and that improvements in them translate into real improvements in collective and individual wellbeing. E.G. ? Increase exports Increase GDP growth First level bullet point • Second level bullet point • Third level bullet point First level bullet point • Second level bullet point • Third level bullet point Or what causes this What is missing from the Index is often how to do this

16. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - The Commissioners Lord Gus O’Donnell – Currently Chair of Frontier Economics, Cabinet Secretary between 2005 and 2011. Prof. Angus Deaton – Dwight D. Eisenhower Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs and the Economics Department at Princeton University. Ms. Martin Durand – Chief Statistician and Director of the OECD Statistics Directorate. David Halpern – Chief Executive of Behavioural Insights and Board Director. Prof. Lord Richard Layard – Director of the Wellbeing Programme in the Centre for Economic Performance at the London School of Economics. The Commission was independent and its views did not necessarily reflect those of the Institute.

17. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - Appropriate areas for wellbeing analysis An important insight from the Commission was that Cost-Benefit Analysis (CBA) as practised in government departments is often flawed due to the need to find ‘shadow prices’ for things without a market value. e.g. better mental health or the enjoyment of outdoor spaces. In areas where such shadow prices predominate, a focus on wellbeing, rather than income or other material gain could be more appropriate and effective. e.g. health, caring for the elderly, the wellbeing of children, and public spaces. In other areas a focus on wellbeing may be less appropriate due to the presence of market prices e.g. transport policy, economic policy, some areas of education policy. Although it could still be insightful to understand if there are wellbeing concerns in these areas.

18. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - A wellbeing approach to Cost-Benefit Analysis Traditional Cost-Benefit analysis usually weighs up costs and benefits expressed in financial terms. Importantly the costs and benefits are both expressed in the same units (easy to compute). In wellbeing CBA, money is spent to generate wellbeing. Challenge is to find a common unit to compute benefits and costs in. This common unit is the Marginal Cost of Wellbeing How to calculate the marginal cost of wellbeing? = Rank all possible public spending projects in terms of the effect upon wellbeing and their cost. Undertake projects until the government has passed the last one it can afford, given its resources. The wellbeing gained in the last project (that at the margin) gives the marginal cost of wellbeing. e.g. if the final project costs £1 million and produces 500 more units of wellbeing across the population, the government knows that even with the least cost effective project it can generate an additional unit of wellbeing per £2,000 it spends.

19. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - A wellbeing approach to Cost-Benefit Analysis Traditional Cost-Benefit analysis usually weighs up costs and benefits expressed in financial terms. Importantly the costs and benefits are both expressed in the same units (easy to compute). In wellbeing CBA, money is spent to generate wellbeing. Challenge is to find a common unit to compute benefits and costs in. This common unit is the Marginal Cost of Wellbeing How to calculate the marginal cost of wellbeing? = Rank all possible public spending projects in terms of the effect upon wellbeing and their cost. Undertake projects until the government has passed the last one it can afford, given its resources. The wellbeing gained in the last project (that at the margin) gives the marginal cost of wellbeing. e.g. if the final project costs £1 million and produces 500 more units of wellbeing across the population, the government knows that even with the least cost effective project it can generate an additional unit of wellbeing per £2,000 it spends. The Marginal Cost of Wellbeing

20. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - A wellbeing approach to Cost-Benefit Analysis An unworkable idea? – NO This is already done in the health arena with Quality of Adjusted Life Years (QALYs). At present the Government values the marginal cost of a QALY at £30,000. All treatments for which the cost per additional QALY is less than £30,000 are approved. e.g. If a new medicine costs £60,000 and provides 2.5 additional years of healthy life (2.5 QALYs) then its cost per QALY is 60,000/2.5 = £24,000 and it is deemed cost-effective. Wellbeing calculation: If the government is faced with two projects: Project A: Free School Meals – Cost=£2 billion, Beneficiaries=700,000 pupils, Wellbeing per pupil=0.5 units (0-10 scale). Cost of wellbeing = £5,714.29 per unit of wellbeing. Project B: Construction of a Park – Cost=£100 million, Beneficiaries=50,000 visitors, Wellbeing per visitor=0.25 units. Cost of wellbeing = £8,000.00 per unit of wellbeing

21. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - A wellbeing approach to Cost-Benefit Analysis There are a number of further issues that need to be resolved when carrying out such analysis: • Interpersonal Distribution of Wellbeing - differential effects of policy at different levels of wellbeing. • Discount Rates (how to discount future wellbeing?) – more studies need to be done, one way could be to monitor change in two questions: ‘life satisfaction today’ and ‘life satisfaction five years from now’ both asked by Gallup. • The Length of Life and Number of Births - is every year in life of equal wellbeing value? And how far does the size of the population matter? * The most difficult issue however is working out how much a project effects wellbeing.

22. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - Implications for policy In order to devise effective policies to improve societal wellbeing governments need to understand where they can have a positive effect. This involves: • Understanding the wellbeing effects of certain activities. • Understanding how government can best encourage those activities.

23. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - Implications for policy Encouraging philanthropy and volunteering. Understanding the wellbeing effects of certain activities. Understanding how government can best encourage those activities. Ensure that young people and their parents are made aware of these opportunities. Reduce the bureaucratic burden of increasing the provision of such opportunities. A study of the National Citizenship Service programme found that it had a positive effect upon the young people who participated.

24. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com THE COMMISSION ON WELLBEING THE COMMISSION ON WELLBEING - Implications for policy Reducing the burden of unemployment Understanding the wellbeing effects of certain activities. Unemployment has a particularly deleterious effect upon wellbeing. In magnitude it is similar to the effect of bereavement (Jahoda et al, 1971) and twice as large as the effect of inflation (Di Tella, MacCulloch and Oswald, 2001) . The effect of unemployment is larger than the effect of the income loss alone. Understanding how government can best encourage those activities. Welfare in itself is not a substitute for work, as the effect of unemployment goes beyond income. Policy needs to focus on active measures to help people into work. These should be prioritised over spending on benefits alone, where appropriate.

25. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com Thank You Stephen.clarke@li.com Legatum Institute Foundation 11 Charles Street, Mayfair London W1J 5DW, UK Telephone +44 20 7148 5400 www.li.com www.prosperity.com The Legatum Institute Foundation is a registered charity (number 1140719), and a company limited by guarantee and incorporated in England and Wales (company number 7430903).