Sunday, July 3, 2011

How close is the correlation between the Legatum 'prosperity' index and the OECD's 'better life' index?

The Legatum prosperity index provides an assessment of wealth and well-being in 110 countries. The authors suggest that it ‘produces rankings based upon the very foundations of prosperity’. (I am allergic to that kind of spin, but I am quoting the words here as penance for the unwarranted doubts I expressed on this blog in November 2009 about how much substance might lie behind this index. I eventually found the technical appendix I was looking for and satisfied myself that there is substance behind the ‘incredibly smooth’ presentation). The indicators incorporated in the study are factors that are known to be determinants of wealth and life satisfaction.

I have discussed the OECD’s better life index in several posts (most recently here).

There is some difference between the factors incorporated in the Legatum and OECD indexes. The factors included in the Legatum index are: economy, entrepreneurship and opportunity, governance, education, health, safety and security, personal freedom and social capital. The factors included in the OECD index are: housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety and work-life balance.

The two indexes are highly correlated. The simple correlation coefficient relating the averages of the factors included in the two indexes for OECD countries (excluding Luxembourg) is 0.95. (The Legatum index is not available for Luxembourg.) The correlation between the Legatum index and my modified version of the OECD index is 0.97.

The similarity of the two indexes is also apparent when they are graphed against per capita GDP. The chart below showing the Legatum prosperity index can be compared to a similar chart showing the modified OECD well-being index in the preceding post.

New Zealand and Greece are outliers in both charts. The Legatum index has New Zealand ahead of Greece on all criteria, with the greatest difference in social capital, governance and entrepreneurship and opportunity. The OECD index has New Zealand substantially ahead in terms of community, jobs, life satisfaction and housing.

Although the OECD and Legatum indexes appear to be quite different, they tell a similar story about well-being in OECD countries. An important advantage of the Legatum index is that it is available for a much larger number of countries.

1 comment:

Dave Giles said...

Nice - I must take a closer look at the LPI.