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.

How closely is well-being related to per capita GDP?

The relationship between a composite well-being index and per capita GDP in OECD countries is shown in the chart below. The well-being index has been derived by modifying and combining OECD indicators as described in previous posts (here and here). As might be expected, the chart suggests that well-being is generally higher in countries with high per capita GDP. For most countries, including the United States and Australia, there is not much difference between the well-being index and the picture of well-being presented by per capita GDP. There are some countries, however, in which well-being seems to be higher than would be expected (most notably New Zealand) and some in which well-being seems to be lower than would be expected (e.g. Luxembourg, Greece and Korea). In this post I want to explore whether some of those apparent anomalies may be attributable to the past income history or the countries concerned.

Note to the chart: Per capita GDP data is from Penn World Tables (rgdpl). The per capita income data is presented in log form because previous studies have suggested that this is appropriate in considering the relationship between well-being and income (for example, Stevenson and Wolfers, 2008).

Why might past income matter for current well-being? Past income is relevant because well-being is affected by wealth as well as current income. Some components of wealth are incorporated in the well-being index (e.g. the quality of housing) and others e.g. public infrastructure could affect several well-being indicators. Wealth may also provide peace of mind to individuals as a cushion against loss of income - for example as a result of ill health or unemployment. A study by Bruce Headey and Mark Wooden has shown, using Australian data, that wealth is at least as important to subjective well-being as is income (IZA Discussion Paper 1032, Feb. 2004).

In order to assess the extent to which past incomes matter I have used regression analysis to explain the well-being index in terms of two components of current per capita incomes: per capita incomes in 1970 and the growth in per capita income from 1970 to 2009. If income history is irrelevant to current well-being the estimated coefficients on the two components of income would be expected to be similar. In fact, the estimated coefficient on per capita income in 1970 is much higher (more than 1.8 times) the estimated coefficient on the growth component. (The standard errors of the estimated coefficients are fairly low and the difference between them is statistically significant at the 95% level. The regression explains about 76% of the variation in the well-being index. Anyone who wants further information on the regression results is welcome to contact me.)

The regression results have been used to decompose the well-being index in order to prepare the following chart.

The story that a comparison of the two charts tells me is that a past history of relatively high incomes helps to explain why New Zealanders score relatively highly on the well-being index. A past history of relatively low incomes also helps explain why Korea has a relatively low well-being score. However, the size of the relevant residuals suggests that past history doesn’t help explain the disparity between well-being and per capita GDP levels for Luxembourg and Greece.

The general picture that emerges is that the well-being index and per capita GDP generally convey similar information about relative well-being levels in OECD countries. In some of the countries where this is not so, the disparity can be attributed largely to income history. There do not appear to be any OECD countries with high levels of well-being that do not have either high current per capita GDP levels or a history of relatively high per capita GDP levels about 40 years ago. This suggests to me that over the longer term there can be no escaping the links between wealth creation and progress in improvement of well-being.

Perhaps we seek wealth to enjoy autonomy?

‘The question was whether it is more important to provide individuals with money or with autonomy. Our results suggest that providing individuals in nations with autonomy has overall a larger and more consistent effect on well-being than money. Money leads to autonomy (Welzel et al., 2003; Welzel & Inglehart, 2010), but it does not add to well-being or happiness.’

That is from the concluding paragraph of an article by Ronald Fischer and Diana Boer, ‘What is more important for national well-being: Money or autonomy?’, recently published in the Journal of Personality and Social Psychology.

The question of whether it is more important to provide individuals with money or autonomy strikes me as odd. Who has the power to choose whether individuals should be provided with money or autonomy? Governments don’t normally have that power.

I suppose it is possible to imagine a powerful paternalistic ruler contemplating whether to give his serfs a monetary bonus or to give them autonomy. It is clear from their article that when the authors refer to autonomy they are talking about a situation where individuals ‘can make their own choices in life’ rather than, for example, just choose what hobbies to pursue in their spare time. If our paternalistic ruler is contemplating giving his serfs the power to make their own choices in life, what he has in mind must involve economic freedom and opportunities for wealth creation.

When individuals have the opportunity to do so, they tend to use their own labour, skills and property for purposes that they value. Those purposes include cooperating with others for mutual advantage e.g. through specialization and exchange, and developing better products and more efficient technologies. Recognition of individual autonomy thus underpins the specialization, exchange and innovation that are integral to wealth creation.

The quoted passage refers to an article by Welzel and Inglehart in support of the proposition that ‘money leads to autonomy’. As discussed in my last post, one of the points made in that article is that in countries with higher levels of economic development (i.e. countries with higher self-expression values) people tend to achieve higher life satisfaction to a greater extent through activities that enhance autonomy (feelings of agency). Economic freedom leads to wealth and wealth leads to greater enjoyment of autonomy through pursuit of objectives further up the hierarchy of needs than survival and financial security.

The finding by Fischer and Boer that ‘money does not add to well-being’ doesn’t actually mean that income or wealth makes no contribution to well-being. It seems to me that what the finding means is that the contribution of income to well-being is encompassed in the contribution of income to individualism (self-expression values).

The authors’ research involved constructing indexes to compare negative psychological well-being, anxiety and burnout in different countries by combining the results of a large number of studies throughout the world. Statistical analysis was then undertaken to determine the extent to which these indexes could be explained by income levels or an indicator of individualism. When income and individualism were included separately in some of the analyses both of these variables were statistically significant, but when they were included together income became statistically insignificant. This suggests that the effects of income on well-being tend to be incorporated in the individualism (self-expression) variable.

I doubt whether that result would surprise many economists. First, it is well known that as incomes rise people tend to place a higher value on leisure (the income elasticity of demand for leisure is positive). Second as leisure increases, an increasing proportion of income tends to be spent on goods that are complementary to leisure (e.g. holiday packages). Third, goods that account for an increasing proportion of spending (goods with high income elasticity of demand) tend to be more strongly related to individual self-expression than to survival. Finally, increased wealth is valued for the options it provides as well as for the goods that are purchased with it. There are precautionary motives for accumulation of wealth e.g. as insurance against unemployment or ill health. People also value the option to be able to take advantage of opportunities (e.g. the holiday adventure of a lifetime) that may arise in future.

As I see it, the greater happiness of people in high-income countries can probably be attributed to greater satisfaction of fundamental human needs related to autonomy, relatedness and competence in those countries. When individual agency has been recognized, people have tended to use their autonomy for good purposes, establish better relations with others, become more competent and create wealth. The wealth is important only to the extent that it helps individuals to pursue purposes that they value – and to enjoy autonomy, good relations with others and a sense of achievement.

Is economic development and increased 'inner freedom' leading to greater selfishness?

‘As an evolutionary shaped capacity, agency is a particularly ‘human’ capacity. It is indeed a defining characteristic of our species … . ‘Human’ development is hence any development that promotes the most human trait—agency … . In the life course of individuals, human development is the maturation of a person’s agentic traits. Applying the same logic to the trajectory of societies, all changes that bring a larger number of people in the situation to more fully realize their agentic traits, is to be characterized as ‘human’ development’: Christian Welzel and Ronald Inglehart, ‘Agency, Values and Well-Being: A human development model’, Soc. Indic. Res. (2010).

Some explanation is required to relate that quote to the question I wish to discuss. ‘Inner freedom’ refers to feelings of individual agency. Individual agency involves the capacity of an individual to act purposefully to his or her own advantage. Individuals have feelings of agency when they feel that what they do has an effect on how their lives turn out. The quoted passage is suggesting that the level of human development is greatest in societies where a high proportion of the population feel that what they do as individuals has a substantial effect on how their lives turn out. That seems to me to be a very important point, but some people claim that there is a dark side to this freedom – namely greater selfishness.

What do we mean by selfishness? Noble behaviour that an individual perceives to be a constitutive part of his or her own interests (acting in accordance with perceived identity) is sometime referred to as selfishness (e.g. by Ayn Rand). I think that what the critics of freedom have in mind when they talk about selfishness is atomistic individualism - a situation in which individuals make choices without regard to social norms or to the effects of their behaviour on anyone else. I accept that definition for the purposes of this post.

What is the basis for the view that feelings of individual agency tend to spread and become more widespread with economic development? Welzel and Inglehart provide substantial evidence in support of this view in the article cited above. They establish that:

• Self-expression values are stronger in countries with higher levels of economic development (and cognitive mobilization). Self-expression values encompass gender equality, tolerant attitudes toward abortion, homosexuality and divorce; an emphasis on autonomy and imagination in education rather than obedience and faith; and attitudes favouring democracy and freedom of speech. It is more appropriate to attribute this increase in self-expression values to economic development than to westernization.

• As the contribution of greater financial satisfaction to overall life satisfaction has become ‘saturated’ to a greater extent in countries with higher self-expression values, people in those countries tend to achieve higher life satisfaction to a greater extent through activities that enhance feelings of agency. In the authors’ words, there is an increase in the ‘relative strength of agentic life strategy’.

• Average life satisfaction levels tend to be higher in countries in which the relative strength of agentic life strategy is high.

It is worth noting at this point that in countries in which a relatively high proportion of the population have strong feelings of agency, proportion of people who are satisfied with freedom also tends to be relatively high. Such countries also tend to have higher levels of economic freedom as well as more civil liberties. I discussed the links between different indicators of freedom in an earlier post.

The question I posed in the heading of this post stems from the concerns expressed by some critics that individual freedom has a dark side. According to this view, excessive individualism results in a diminished sense of community, a loss of higher purpose and increased risk of mental illness.

In the course of their analysis Welzel and Inglehart found that agency feelings and communion (a composite index combining people’s emphasis on family and friends as important life domains) are not competitive factors. In fact, their results suggest that these factors amplify each other’s impact on life satisfaction.

When I read that I decided to have a look at the data on the web site of the World Values Study in order to get a feel for the data. (This web site has an excellent facility for instant cross-tabulation of data.) I focused on surveys for 2005-07 and on combined data for a group of countries with high self-expression values: Australia, Canada, Finland, France, Germany, Great Britain, Netherlands, New Zealand, Norway, Sweden, Switzerland and United States. The data show that people with high feelings of agency do tend to place higher importance on family and friends. When I looked further, I found that people with high levels of agency also tend to place higher emphasis on unselfishness as an important quality for children to learn.

In addition, people with high feelings of agency are also more likely to identify with the statement: ‘It is important to help the people nearby’. The pattern of responses is shown in the chart below. (The chart has been constructed so that observations add to 100% on the depth axis.)

Some readers might respond by suggesting that the pressures of life in countries with high self-expression values tend to result in higher incidence of mental illness. That proposition is easier to assert than to test with available information enabling international comparisons of the incidence of mental illness. However, a recent study by Ronald Fischer and Diana Boer has brought together the results of relevant studies in many different countries (‘What is more important for national well-being: Money or autonomy?’, JPSP (2011). The results suggest that the incidence of negative psychological well-being tends to be lower in countries with high levels of ‘individualism’ i.e. countries where people tend to have high self-expression values and greater feelings of agency. The exceptions to the general pattern seem to be a few countries which apparently have relatively good mental health outcomes despite low ‘individualism’ scores (e.g. Nigeria, Pakistan and Indonesia).  I will write more about this study in a subsequent post.