Central and Eastern European (CEE) countries have seen faster prosperity growth than Western Europe, with most of them now delivering a prosperity surplus, finds the inaugural CEE Prosperity Index study published by the Legatum Institute and sponsored by Erste Group Bank. However, the region also displays one of the world’s largest Social Capital deficits, which in turn adversely impacts the Governance and Business Environment pillars. A Social Capital deficit is significantly correlated with higher levels of corruption, weaker rule of law, and poorer business regulation. One source of hope for propelling prosperity delivery in the region may come from young people, who tend to have much higher levels of Social Capital than their older compatriots.
“Prosperity, as defined in the Legatum Institute’s report, which Erste Group is proud to have sponsored, is not the same as material wealth. We embrace this thinking because it’s not enough for a country to be wealthy, if it doesn’t also deliver a good quality of life for its citizens.
Seen through this lens, over the past decade Central and Eastern Europe has done remarkably well in terms of catching up with the rest of Europe. We’re not there yet. But one of the most valuable findings of this report is that those who will move things forward — young people across the region — are educated, energetic and reform-minded citizens. This is also our experience in the region; and one of the reasons why we continue to believe that these countries will generate even more prosperity over the coming decades,” says Andreas Treichl, CEO of Erste Group.
Faster CEE prosperity convergence to Western Europe at 87% vs. income convergence at 47%
The Legatum Prosperity Index™ ranks nations over nine areas: Economic Quality, Business Environment, Governance, Education, Health, Safety and Security, Personal Freedom, Social Capital and the Natural Environment. It goes beyond macroeconomic indicators to measure prosperity holistically, as a function of both material wealth and social wellbeing.
The CEE Prosperity Index finds that while average income in the region remains far behind that of Western Europe, prosperity has converged at a much faster rate. Through improvements across the nine pillars, the region’s prosperity is now at 87% of the Western European average compared to 47 % for income. As a matter of fact, CEE is currently ranked as one of the most prosperous regions in the world. On several measures such as Education and Natural Environment certain CEE countries even outperform Western European peers.
However, there remains considerable variation in prosperity within the region. Some countries, like Austria and the Czech Republic, are delivering prosperity surpluses while others, like Hungary and Romania, are delivering deficits. Poland is delivering as much prosperity as we would expect given their income. A prosperity surplus means the respective country is able to deliver more prosperity relative to its wealth levels.
CEE has one of the world’s largest deficits in Social Capital; combined with low Governance and Business Environment scores, this is holding back further prosperity growth
While prosperity performance of CEE countries varies widely, the study finds that those differences stem from the same sources: lower levels of social capital, weaker governance, and worse business environments than countries in other regions.
“One of our study’s central findings is that CEE countries’ ability to deliver a prosperity surplus is limited by the region’s defining and damaging characteristic: one of the world’s largest social capital deficits,” explains Shanker Singham, Director of Economic Policy and Prosperity Studies at the Legatum Institute.
Low social capital means that the bonds and trust between citizens and citizens and institutions are substantially weaker than elsewhere in the world.
Low Social Capital feeds into other areas such as Governance and Business Environment. When people do not trust that their fellow citizens are playing by the rules or that institutions are enforcing those rules fairly, Governance and Business Environment deteriorate. In CEE Social Capital, Governance, and Business Environment have a disproportionately large impact on prosperity delivery – 87% compared to 43% for the rest of the world.
“Correlations between Social Capital, Governance, and Business Environment matter. They show that transition towards full liberal market democracies cannot happen without a solid basis of trust. The clear implication for policy-making is that transparency, accountability and responsiveness need to be improved if these countries are to deliver more prosperity to their citizens,” Shanker Singham concludes.
CEE countries are challenged to advance prosperity under their own steam; youth can unlock further prosperity growth, but brain drain must be reversed
In a global environment that is less favourable to economic growth, and a European environment increasingly hostile to integration, the region’s prosperity depends increasingly on its own ability to deliver more prosperity relative to its income.
One source of hope is the region’s young population. “In an analysis of 13,000 individuals across the region, our study found that young Central and Eastern Europeans have much higher levels of social capital than older people. They are also more driven, better educated, more pro-business, and more demanding in terms of the reforms and policies needed to grow their region’s prosperity,” says Shanker Singham.
At the same time, the young are also more inclined to emigrate. This presents both opportunity and challenges. Diasporas contribute money through worker remittances, as well as knowledge they acquire abroad. Together, these flows of money and idea are a brain gain for the region. But the region’s young are best able to contribute to their home countries’ prosperity if they stay. For them to stay, they need to feel that hard work pays off, that they can make a difference, that they belong, and that they have a political voice. Otherwise, as more and more young people leave, the region risks a brain drain, and an acceleration in its aging and shrinking population.
About the Legatum Institute
The word ‘legatum’ means ‘legacy’. At the Legatum Institute, we are focused on tackling the major challenges of our generation—and seizing the major opportunities—to ensure the legacy we pass on to the next generation is one of increasing prosperity and human flourishing.
We are an international think tank based in London and a registered UK charity. Our work focuses on understanding, measuring, and explaining the journey from poverty to prosperity for individuals, communities, and nations.