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 UK Prosperity Index

The first edition of the Central and Eastern Europe Prosperity Report

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 Economic Quality

Business Environment

Governance Education Health Safety & Security

Personal Freedom

Social Capital

Environment

1 Austria 15 11 20 15 11 25 9 23 15 122 Slovenia 20 30 60 38 23 35 14 20 22 13 Estonia 26 27 26 20 29 55 43 32 71 74 Czech Republic 27 26 30 34 24 27 27 28 78 325 Poland 34 37 45 36 33 47 21 39 85 466 Slovakia 36 46 49 48 30 46 23 43 86 347 Latvia 37 34 34 39 32 82 42 57 94 168 Lithuania 42 45 55 37 43 80 45 41 125 339 Croatia 43 61 89 44 37 56 31 38 113 30

10 Hungary 47 52 56 46 38 50 38 46 114 9311 Romania 50 65 41 64 47 85 46 48 97 6112 Macedonia 53 93 44 62 40 66 37 69 119 8513 Bulgaria 57 73 71 78 39 91 48 66 111 4114 Montenegro 58 96 52 59 52 69 35 54 117 12515 Serbia 66 101 102 70 46 86 40 59 127 10516 Albania 74 107 67 71 76 49 68 60 106 121

Global Rankings (1st to 149th)

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GDP per capita (PPP $), 2016

How much prosperity is delivered with wealth?

Austria strongest deliverer of prosperity in CEE

The only developed country in Central and East Europe, Austria also leads in both prosperity and wealth. Ranked at 15th globally in prosperity, Austria also has the 15th biggest positive prosperity surplus out of the 149 countries we cover. 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. Big prosperity surpluses are the true success stories.

Austria + 11%

CEE

Switzerland +13% Germany +13%

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Austria’s prosperity is broad based…

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

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West Europe CEE Austria 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 overall Social Capital score – which measures the strength of cohesion and networks in society – dropped by 8% over the past decade.

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.

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.

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Austria's Social Capital dropped by 8% since 2007

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.

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% o

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Austrians are growing increasinly tolerant

Ethnic minorities Immigrants LGBT groups

Economic not social change driving Social Capital decline

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 inter-household 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.

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Sluggish economic growth is straining social capital

Annual GDP per capita growth (%, right hand axis)

Sending financial help to other household

Donating to charitable cause

Social Capital: Austria compared with Norway

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.

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Helpingstranger

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Sending financial help to other household

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Diffenrence in Social Capital Patterns between Norway and Austria

Social Capital can be improved independently of economy

Social capital is affected by economic forces, but isn’t a function of those forces alone. It softens the blow of economic disruption, and can be improved independently of economic forces. Report highlights ways in which social capital can be strengthened: • Building institutional trust; • Anti-corruption measures; • Engagement of civil society, etc.

What Austria is going through is a decline in “Family & Community” and “Civic Engagement” social capital – policies need to address these variables.

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.

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The higher a country’s initial level of social capital, the smaller the economic shock

Austria

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Reversing Austria's Social Capital decline would raise its overall prosperity substantially

Improving Social Capital has big prosperity pay-off

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. Counterfactual: reversing Austria’s Social Capital decline over the past decade would see its global prosperity ranking in 2016 go from 15th to 5th.

5th place globally

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.

Social Capital: Learning to trust and help each other

Among all CEE countries, Lithuania has made the largest gains in Social Capital over the past ten years. More than anything, it is the surge in general trust – public trust in local police rose by 27 percentage points – that boosted its performance. This is helped by the Lithuanian government’s resolute anti-corruption 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. But Lithuania’s social capital was also boosted by “Family & Community” type of Social Capital including inter-household financial help, making friends -5% 0% 5% 10% 15% 20% 25% 30%

Can rely onfamily or friends

Helpingstranger

Volunteering

Voicingopinions

Donating

Treated withrespect

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Sending financial helpto other household

Trust inpolice

Change in percentage points, 2007-2016

Lithuanian Social Capital on the Rise

What is to be done in Austria?

Donations and inter-household financial help are proxies for broader

“Family & Community” and “Civic Engagement” social capital that

were shown to have weak resilience.

• 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.

AustriaFinland

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NorwaySlovenia

Switzerland

United Kingdom

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GDP per capita (PPP $), 2016

Austria can improve other areas of social capital that are less directly affected by the economy

Key Findings from the CEE Prosperity Report

•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 1

•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 2

• Social Capital, Governance, and Business Environment have a disproportionately large effect on CEE’s prosperity delivery.

KEY FINDING 3

• 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 4

•Countries with high initial levels of social capital experienced less severe economic downturns between 2007 and 2016.

KEY FINDING 5

•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.

KEY FINDING 6

Benefiting from accession to EU

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Albania Macedonia Montenegro Serbia

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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.

How to Measure Prosperity?

Selecting variables

• Through literature review and regression analysis we select 104 variables that have statistically significant and economically meaningful relationship with at least wealth or wellbeing.

Standardisation

• 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.

Weighting Variables

• Each variable is assigned a weight, based on their varying significance to prosperity.

Pillar scores

• In each of the nine pillars, variables’ distance-to-frontier scores are multiplied by their weights and then summed to generate countries’ pillar scores.

Prosperity Index score

• 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