Prosperity in Central
and Eastern Europe Austria
2016
A Legatum Institute Prosperity Report
The Legatum Institute
The Legatum Institute is an international think
tank and educational charity focused on
understanding and measuring prosperity.
Over the past ten years, the Prosperity Index
team has acquired a vast amount of experience
in the design of indices - the collection,
standardisation, and presentation of data – and
their application in both the policy and business
fields.
The Legatum Prosperity Index™, the Institute’s
signature publication, measures prosperity as
more than just the accumulation of material
wealth, but also the joy of everyday life and the
prospect of an even better life in the future.
The Prosperity Index team has extensive
experience in using indices to inform practical
recommendations in helping people lead more
prosperous lives.
The third edition of the
Africa Prosperity Report
The tenth edition of the
Legatum Prosperity
Index™
The first edition of the
Central and Eastern
Europe Prosperity
Report
The first edition of the
UK Prosperity Index
The Legatum Prosperity Index™
The Legatum Prosperity Index™ is a global measure of prosperity
– wealth and wellbeing – across 149 countries globally, of which
16 are in Central and Eastern Europe.
The Index measures prosperity through the annual assessment
of each country’s performance across 104 variables that form
the nine ‘pillars’ (or sub-indices) of prosperity: Economic Quality,
Business Environment, Governance, Education, Health, Safety &
Security, Personal Freedom, Social Capital, and Natural
Environment
• The Index combines both objective and subjective data,
measuring not only how prosperous a country is, but how
prosperous its citizens feel.
• 2016 is the Index’s tenth edition. With a decade of data, the
Index is a unique global benchmarking tool, providing
governments with an insight into where they have delivered
for their citizens, where they have not, and why.
• Tracking performance over time, particularly in the context of
peer nations, the Index is also a powerful tool for citizens to
hold their governments to account.
Central and Eastern Europe Prosperity Rankings
CEE PI
Rank
Country
PI Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Austria
Slovenia
Estonia
Czech Republic
Poland
Slovakia
Latvia
Lithuania
Croatia
Hungary
Romania
Macedonia
Bulgaria
Montenegro
Serbia
Albania
15
20
26
27
34
36
37
42
43
47
50
53
57
58
66
74
Global Rankings (1st to 149th)
Economic
Business
Safety & Personal
Governance Education Health
Quality Environment
Security Freedom
11
30
27
26
37
46
34
45
61
52
65
93
73
96
101
107
20
60
26
30
45
49
34
55
89
56
41
44
71
52
102
67
15
38
20
34
36
48
39
37
44
46
64
62
78
59
70
71
11
23
29
24
33
30
32
43
37
38
47
40
39
52
46
76
25
35
55
27
47
46
82
80
56
50
85
66
91
69
86
49
9
14
43
27
21
23
42
45
31
38
46
37
48
35
40
68
23
20
32
28
39
43
57
41
38
46
48
69
66
54
59
60
Social
Capital
Environment
15
22
71
78
85
86
94
125
113
114
97
119
111
117
127
106
12
1
7
32
46
34
16
33
30
93
61
85
41
125
105
121
Austria strongest deliverer of prosperity in CEE
How much prosperity is delivered with wealth?
90
Prosperity Index Score, 2016
Germany +13%
The only developed country in Central
and East Europe, Austria also leads in
both prosperity and wealth.
Switzerland +13%
80
Ranked at 15th globally in prosperity,
Austria also has the 15th biggest positive
prosperity surplus out of the 149
countries we cover.
Austria + 11%
70
60
CEE
Over-delivery: shows us that prosperity
is more than just income or wealth, and
that some countries, like Austria, are
able to deliver more prosperity given
their wealth levels.
50
40
30
0
20.000
40.000
60.000
80.000
100.000
120.000
GDP per capita (PPP $), 2016
140.000
160.000
Big prosperity surpluses are the true
success stories.
Austria’s prosperity is broad based…
Economic
Quality
85
80
Environment
Business
Environment
75
70
65
60
55
Social
Capital
Governance
50
45
Personal
Freedom
Education
Safety
& Security
Austria
Health
Visegrad
Germany
People in Austria enjoy a safe and free
society, high standards of education and
health services, stable economic structures
with low level of unemployment and near
absence of poverty.
Despite recent local corruption scandals,
Austria in general enjoys a highly transparent
and stable political system, its clean and
effective governance is the envy of most of
its neighbours to the east.
…
but Austria underperforms other wealthy countries in prosperity
To begin with, among countries at similar level of wealth, Austria has the smallest prosperity
surplus in 2016.
and has lagged behind its neighbours in growing prosperity
105
104
Prosperity Score, 2007=100
…
103
102
101
100
99
2007
2008
2009
2010
West Europe
2011
CEE
2012
Austria
2013
2014
2015
2016
Germany
Moreover, while prosperity has been growing in CEE and Germany, it stagnated in Austria,
creating a sense of stasis.
Social Capital decline is behind underperformance
Austria's Social Capital dropped by 8% since 2007
102
Austria’s overall Social Capital score – which
measures the strength of cohesion and
networks in society – dropped by 8% over
the past decade.
Social Capital score, 2007=100
100
98
It is rare for social capital to experience such
large movements – Austria’s drop was the
10th largest across the 149 countries covered
by the Prosperity Index.
96
94
92
90
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Excluding Austria’s Social Capital sub-index
would raise its 2016 global ranking from 15th
to just shy of the top 10, at 12th place.
What is Social Capital?
One of the Prosperity Index’s nine sub-indices – and a central one.
The Prosperity Index defines Social Capital into Four categories:
Trust: A central component of social capital is “trust”, which we can think
of as encompassing social trust and institutional trust. The first refers to
how widely and easily citizens trust each other. The second refers to the
degree to which citizens trust public institutions.
Family and Community: The CEE experience shows us that higher levels
of trust between immediate family and friends can compensate for low
levels of wider trust. We can refer to this component as “family and
community”, which measures the strength of informal networks connecting
families and friends together.
Civic Engagement: Social networks can also work through more formal
networks, such as volunteering and other charitable activities. We can
think of this component as “civic engagement”, which measures the
strength of formal bonds between citizens.
Civic Participation: Finally, we can think of the links between citizens and
public officials as the “civic participation” component. This measures how
involved and connected citizens are with their governing group.
Economic not social change driving Social Capital decline
Sluggish economic growth is straining social capital
80%
78%
74%
68%
70%
60%
50%
40%
30%
53%
51%
34%
20%
0,7
4
69%
3
2
0,6
1
0,5
48%
45%
0,4
0
-1
0,3
-2
0,2
-3
0,1
-4
8%
-5
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Annual GDP per capita growth (%, right hand axis)
10%
0%
0,8
Annual % growth
90%
% people with affirmative answer
% of people thinking Austria a good place for...
Austrians are growing increasinly tolerant
2007
2008
2009
2010
Ethnic minorities
2011
2012
Immigrants
2013
2014
2015
Sending financial help to other household
2016
Donating to charitable cause
LGBT groups
Contrary to recent headlines about the rise of populism and
heated debate on immigration, tolerance in Austrian society has
been rising, becoming the most socially liberal country in CEE.
A sluggish economy both necessitates and limits interhousehold financial support and charitable donations. It is these
two components that account for the overall decline in Social
Capital.
Survey responses from Gallup World Poll: nationally representative sample of ~1,000 respondents conducted annually.
Social Capital: Austria compared with Norway
Diffenrence in Social Capital Patterns between Norway and Austria
Helping
stranger
20%
Donating
Trust in
police
15%
10%
5%
Can rely on
family or friends
Treated with
respect
0%
-5%
Making
friends
Volunteering
Sending financial help
to other household
Voicing
opinions
Both having high level of Social
Capital, Norway (6th) and
Austria (15th) have very similar
patterns in most indicators
under the sub-index.
It is only in Donating and
Sending financial help to other
households, that the two
countries are significantly
divergent.
In
both
measurements, Norway is 17
percentage points ahead of
Austria.
Social Capital can be improved independently of economy
Economic Quality Score, peak to trough
The higher a country’s initial level of social capital, the smaller the economic shock
0%
Social capital is affected by economic
forces, but isn’t a function of those forces
alone.
-2%
-4%
It softens the blow of economic disruption,
and can be improved independently of
economic forces.
Austria
-6%
-8%
-10%
-12%
30
35
40
45
50
55
60
65
70
Report highlights ways in which social
capital can be strengthened:
• Building institutional trust;
• Anti-corruption measures;
• Engagement of civil society, etc.
Social Capital Score, peak
Austria’s economic decline was large given its social capital starting point (as it
falls slightly below the trend line), but the general tendency implies that it
would have been larger still if its initial social capital were weaker.
What Austria is going through is a decline
in “Family & Community” and “Civic
Engagement” social capital – policies need
to address these variables.
Improving Social Capital has big prosperity pay-off
Reversing Austria's Social Capital decline would raise its overall prosperity
substantially
Predicted Prosperity Index Score
79
78
77
76
5th place globally
75
74
Besides being a component of
prosperity itself, Social Capital has
crucial links to other sub-indices
(trust in the business world and in
governance, for example) that
amplify its effect on overall
prosperity.
73
72
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Predicted path of Prosperity Index score above is the application of a regression coefficient to the reversed trend of Austria’s observed
Social Capital score decline between 2007 and 2016. The coefficient was estimated from an OLS regression of the PI on Social Capital
sub-index with year fixed effects, on the panel of CEE countries between 2007 and 2016: 0.68, significant at 1%. R2 0.81.
Counterfactual: reversing Austria’s
Social Capital decline over the
past decade would see its global
prosperity ranking in 2016 go
from 15th to 5th.
Social Capital: Learning to trust and help each other
Lithuanian Social Capital on the Rise
Trust in
police
Among all CEE countries, Lithuania has made the largest
gains in Social Capital over the past ten years.
Sending financial help
to other household
Making
friends
More than anything, it is the surge in general trust – public
trust in local police rose by 27 percentage points – that
boosted its performance.
Treated with
respect
Donating
This is helped by the Lithuanian government’s resolute anticorruption
programme,
synthesising
cross-sector
cooperation, better defined legal framework and
institutional design, as well as the implementation of
transparency-enhancing technology such as e-government
services.
Voicing
opinions
Volunteering
Helping
stranger
Can rely on
family or friends
-5%
0%
5%
10%
15%
20%
Change in percentage points, 2007-2016
25%
30%
But Lithuania’s social capital was also boosted by “Family &
Community” type of Social Capital including interhousehold financial help, making friends
What is to be done in Austria?
Have you volunteered your time to an organization in past year?
YES
Austria can improve other areas of social capital that are less
directly affected by the economy
45%
40%
Donations and inter-household financial help are proxies for broader
“Family & Community” and “Civic Engagement” social capital that
were shown to have weak resilience.
Ireland
Netherlands
35%
Slovenia
Switzerland
France
Austria
Finland
United Kingdom
30%
25%
Norway
•
Strengthen what’s there: perhaps lower levels in these variables
reflect a move towards more “institutionalised” support – not
bad in itself, but trades-off social capital.
•
Build what isn’t: volunteering is another form of this social capital
and is lower in Austria (28%) than many other European
countries. Help with time rather than money.
20%
15%
10%
5%
0%
0
20,000
40,000
60,000
80,000
GDP per capita (PPP $), 2016
100,000
120,000
Key Findings from the CEE Prosperity Report
KEY FINDING 1
• Central and Eastern Europe’s convergence on Western Europe has been much faster in terms of prosperity than income alone. Most
CEE countries deliver a prosperity surplus
KEY FINDING 2
• Central and Eastern Europe has one of the world’s largest deficits in social capital and this is holding back further prosperity growth.
KEY FINDING 3
• Social Capital, Governance, and Business Environment have a disproportionately large effect on CEE’s prosperity delivery.
KEY FINDING 4
• In an environment of slower global growth and one that is increasingly hostile to EU integration, CEE’s success depends on
improving its own ability to deliver prosperity.
KEY FINDING 5
• Countries with high initial levels of social capital experienced less severe economic downturns between 2007 and 2016.
KEY FINDING 6
• Young Central and Eastern Europeans are more pro-business, better educated, have higher social capital and are more demanding
of their governments - therein lies the opportunity to unlock prosperity, but also the challenge.
Benefiting from accession to EU
Business Environment
120
115
110
105
100
95
90
2007
2008
2009
Albania
2010
2011
Macedonia
2012
2013
2014
Montenegro
2015
2016
Serbia
Business Environment score, 2007=100
Social Capital score, 2007=100
Social Capital
150
140
130
120
110
100
90
2007
2008
Albania
2009
2010
2011
Macedonia
2012
2013
Montenegro
2014
2015
2016
Serbia
Governance
Governance score, 2007=100
115
EU accession has been a huge boost for prosperity
in applicant countries. In order to comply with the
acquis communautaire, a range of policy and
institutional reforms need to be implemented,
which in turn improve performance in Governance,
Business Environment, and Social Capital.
110
105
100
95
90
2007
2008
Albania
2009
2010
2011
Macedonia
2012
2013
Montenegro
2014
2015
Serbia
2016
How to Measure Prosperity?
Selecting
variables
Standardi
sation
Weighting
Variables
Pillar
scores
Prosperity
Index
score
• Through literature review and regression analysis we select 104 variables that have statistically
significant and economically meaningful relationship with at least wealth or wellbeing.
• We adopt distance-to-frontier approach to normalise variables of different units of measurement,
by comparing a country’s performance with the best and worst scenarios of the entire sample.
• Each variable is assigned a weight, based on their varying significance to prosperity.
• In each of the nine pillars, variables’ distance-to-frontier scores are multiplied by their weights and
then summed to generate countries’ pillar scores.
• The Prosperity Index score is determined by assigning equal weights to all nine pillars for each
country. The mean of the nine pillars’ scores yields a country’s overall Prosperity score.
Methodology: Social Capital