Nobel Prize–winning economist Joseph E. Stiglitz found himself stumped. Last February, speaking by video link to the Scottish Parliament’s economy committee, Stiglitz was asked by a lawmaker what he thought of the Legatum Prosperity Index. “Uh, I’m not sure I know the detail,” replied the baffled Columbia University professor. “There are a lot of indices out there.”
Indeed. While I might have wished that Joe Stiglitz knew particularly about that one (I’m the president of the Legatum Institute, which publishes the Prosperity Index—and he knows about it now!), it’s a fact that recent years have brought an avalanche of indices for measuring the relative strengths of nations and their progress (or decline) over time. This is important work not only for economists who care about development but also for executives who head up globalizing firms. As someone who has spent an inordinate amount of time studying these indices and the methodologies behind their conflicting rankings, I offer four things to keep in mind.
First and most fundamental, all of them proceed from the belief that simply measuring economic output offers too little insight into how to boost economic competitiveness—let alone citizens’ well-being.
Start, then, by blaming Simon Kuznets for our index mania. He’s the economist who told Congress in 1937 that the U.S. needed a single measure to capture the economic production of individuals, companies, and government. A few years later, the mighty metric known as gross domestic product (GDP) was born. At the same time, give Kuznets credit. He himself conceded that GDP would not tell the whole story of a nation’s well-being.
Fast forward. In 1972 the new King of Bhutan declared that his country would henceforth measure its progress in terms of “gross national happiness.” This idea of gauging national performance beyond GDP spread. In 1990, the UN launched its Human Development Report, which included factors such as gender equality, education, and health. The tempo has only quickened.
The index game is about prescription, not just description.
Since then we’ve seen, for instance, the Opacity and Opportunity indices, both published by the Milken Institute, in California; the Competitiveness Index from the World Economic Forum; and the Social Progress Index from Social Progress Imperative. Germany’s Bertelsmann Foundation puts out the Transformation and Status indices. The Fraser Institute, in Canada, examines wealth, health, and education as primary drivers of prosperity. And of course there’s Legatum’s Prosperity Index, which paints a picture of wealth and well-being by looking at 89 variables, a mix of objective and subjective data, and eight subindices.
Second, many indices have a battle cry. If your passion is less corruption, you want Transparency International. If it’s reining in spending, see the Default Index. I had breakfast not long ago with the affable Bill Neukom, an ex–general counsel for Microsoft, who argues that the rule of law is the cornerstone of any healthy society. Neukom has launched from Seattle—you guessed it—the Rule of Law Index.
Third, this game is about prescription, not just description. As one example, the Economist reports that over the past decade some 2,000 liberalizing reforms have been initiated around the world thanks to the World Bank’s Doing Business index.
Finally, count on more indices to come. I hear Santa Monica has one in the works—which reminds me of something columnist George Will once said to me about his summers in southern California: “It’s temperatures fluctuating wildly between 72 and 74, and baseball every night.” Hard to see the prescriptive potential there. I might have to check it out.
