What makes a nation prosperous? A statistical analysis Part 1.

Oh how I wish someone would
remake this game.

Greetings Citizens,

We are very lucky to live in a republic that possesses a bounty of riches, even with the worst economic conditions that have existed in a century, the denizens of this great land are still extremely well off when compared to the rest of the world. And that raises a question citizens. Why are we prosperous?  Some would say it is our natural resources, and yes natural resources matter, but there are nations that have abundant resources yet are still pour.  Is it our size, which is able to command large segments of market share?  There too you can see populated nations that are very pour, and the US is rare in the fact that we have such a large population and are so wealthy.  How about technology, education, demographics, or government?  The answer is that it is all of these thing and more.  A while back, before I had lost my data due to a hard drive crash; I had reams of data analysis the most economically prosperous nation to find the answer.  I have started the work again, but realized that it would be hard to get weeks’ worth of data reentered an analyzed in a weekend.  Instead I decided to do short posts updating my research and personal edification.  And the question is why nations are prosperous?

                Before we start we have to think about where we will get our data from.  Progressives general decry using GDP as a measure of prosperity, because such data shows the value of the free market which is something the hard left despises, but GDP is the best way to measure prosperity.  Things such as well-being or a happiness indexes, favored by the hard left, are far too subjective to be of any real use, and moreover, just because an individual is ‘happy’ does not mean they wouldn’t wish to improve their material condition.  You could take the happiest man in Ghana, who for the sake of argument, is happier than anyone in the United States and I would be willing to wager a healthy sum, that if given a chance, he would jump at the opportunity to have the standard of living that an American does.  GDP works, relatively well because it is a calculated on what is produced or adds value to society.  Now I must caution you, that GDP can be manipulated to show growth when it doesn’t exist and that there are ways to goose GDP.  China comes to mind, ignoring the obvious fact that many of Chinas' provinces are fudging their economic numbers to look better than the national average; there is a more fundamental flaw that China perfectly exhibits.  That is that malinvestment, i.e government spending or government directed private spending, can show positive GDP growth numbers when in fact that what is being produces adds little to no real economic value at that time. We must keep this in mind when looking at GDP, it can be goosed or cooked, but despite this fact, it still is one of the better ways we have of measuring prosperity.

                Now for my research I focus on GDP per capita; as GDP alone doesn’t indicate a nation’s wealth and well-being.  Once again, a nation like China, may have the 2^nd largest economy in the world, and while certainly an impressive feat, their GDP PPP per capita shows them to slightly better off than nations like East Timor, or Bosnia, or Nambia. Whereas the United States has a third of the population but almost 6 times the GDP per person when compared to China.  This means that the United States has more disposable wealth, or power, relative to its population base. In fact, using IMF data as they have the most up to date data that I have found, and keeping in mind that I will be using GDP PPP, the United States ranks 7^th in the world for GDP per capita; and it is the only nation with a population over 100 million in the top 20 most prosperous nations.  This of course changes when using World Bank or CIA data, but for the sake of my arguments the IMF serves just fine for research. I will be predominantly focusing on these economies, as they are the most successful, but for now I will cast a larger net.

                I went and downloaded a lot of world data to analyze, GDP, Population, Corruption levels, Freedom levels, and Democracy levels.  The question is why?  Because resources alone don’t dictate whether or not a nation is prosperous.  Russia is the 2^nd largest oil producing nation in the world, and based off that alone they should be very prosperous like the nations of Qatar or Brunei, yet their GDP per capita is 54^th.  The question is now, why? There are plenty of nations with natural resources, yet their people are impoverished.  This caused me to look at a bunch of other data sets try to see if there is a correlation amongst htem, and one thing that was very obvious about Russia was that they ranked very poorly in terms of corruption and democracy. 

                I pulled all the data I could find and then organized it into these charts.  It should be noted that the higher the number the better.  So a nation with a corruption level of 9 has less corruption than one with a level of 8.  Here are two charts.  The top one plots corruption along the x axis, and shows the effects that an increase of corruption has on the democratic level of a nation and its GDP per PPP.  The second chart is the reverse, it plots the affects of decreasing democratic levels on societal corruption and GDP.

 

                It is pretty apparent that there is some correlation between the two, though there is nations like Singapore that fare poorly in terms of democracy but very well in terms of corruption.  The first chart shows that nations with very low corruption levels tended to have very high levels of democracy, and high GDPs, while nations with high levels of democracy were not necessarily free from corruption.  Nations with a democracy level of 9 had low levels of ocrruption, but we see a percipitous drop even moving over to the lowest level.  Now, being ranked higher in either category generally means that a nation will posses a better GDP per capita.  So what does this mean? The democracy chark shows more drastic changes at first glance, but I concluded that corruption made a bigger differnce in a nations GDP PPP.  How? I calcualted the slope of the axis for each chart, this would give me a visual representation of what would have a greater impact on a nations standard of living; outside of using a statistical analysis which I will do in the future. The corruption chart was steeper,  measuring a $ 5,765 decrease in GDP PPP for every increasing level of corruption versus a $ 3,767 decrease for every decreasing level of democracy.  It is also interesting to note that any nation with a corruption level of 7 was pretty close in terms of GDP per PPP. And any democracy level lower than a seven had little affect on a nations subsequent GDP PPP, at least visually on the chart.  Why is that?  Because economics cares little about democracy that's why. Let me explain.

Now I would need to do a statistical analysis of this data, and at some point I will.  But at first glance it appears that for economic prosperity you need two things, outside of natural resources or a favorable location, and that is democracy and low corruption.  Corruption and democratic failing will be tolerated up to a point, but after that point is reached there are precipitous declines in a nations GDP PPP.  That is why a nation likes France, with a somewhat dysfunctional electorate system according to the democracy index, 7.77, and mild corruption problems, 7, still has a relatively high standard of living.  Things could definitely improve for France, but it isn’t so bad as to make doing business in that country in tolerable.  Then you have nations like Singapore, which has somewhat low levels of democracy, 5.89, but has very low corruption issues, 9.2.  This goes to show that while democracy is generally good for business, corruption matters more.  A businessman would rather do business in a nation run by an honest dictator that a corrupt democracy.  Why?  Because when corruption levels are low doing business is easier and businessmen are less worried that they will wake up one day and find their assets seized, ala Argentina.  Argentina is a great example of why corruption matters more than levels of democracy.

Now before I continue I must say that it isn't that democracy doesn't matter, it does, but simply that corruption is the biggest factor; and while despotic nations are also often the most corrupt, just because a nation is democratically inclined does not mean necessarily mean that corruption will not be an issue.  Argentina is a great example of this fact. Argentina is by all accounts a democracy, admittedly a flawed one according to the democracy index but a democracy none the less, the freedom index rates it a free nation, and their human rights record has improved from the dirty war years.  However, their government, outside of adopting ill-thought out socialist leaning policies, is corrupt.  I mean very corrupt, they have the nations of Greece, Bangladesh, Syria and numerous third world nations as bed fellows. Argentina seized pensions, democractically of course, a few years ago; ostensibly to guarantee pensions funds, businesses and international markets recognized it for the simple cash grab that it was. And at the turn of the millennia the nation defaulted on its debt obligations, once again doing so via the democratic process.  Argentina has a history of not playing by the rules and doing whatever is in its short term benefit, sacrificing long term well-being.  Democratic nation or not business frown on this sort of behavoir, it drives businesses away and it will ruin a nation economically.  Argentina at one point had a GDP per capita similar to Germany, France, and Canada at the turn of the last century.  It now has a GDP per capita about half of France.

                So how does this relate to the United States?  Well citizens, our republic fares pretty well. We are solidly democratic, though we are nearing flawed democratic status, and corruption levels are lower than many, but we have had an alarming trend over the last decade with ever increasing levels of corruption. At the turn of the millennia we had a corruption level of 7.6, we are now at 7.1.  Personally, anything less than an 8 for our nation is pathetic, and the fact we are trending the wrong way is not good.  It shouldn’t be surprising considering the increase of government intrusion in our lives due to the war on terror, but progressives would be dismayed, or would simply ignore, the fact that the largest increase in corruption occurred under Obama.  This isn’t meant to exonerate the former president, but it isn’t hard to pinpoint why corruption has increased so dramatically in the United States.  Two words or all that it takes, “Stimulus Bill”.  Corruption is a growing problem in the United States and it certainly has started to affect our prosperity.   

Of the top ten countries in GDP PPP, the US is the 5^th worst in terms of corruption, and if you look at our neighbors you will see that those more corrupt than us, outside of Taiwan, are oil producing nations. It isn’t a stretch to assume that the abundance of oil allows these nations a more comfortable buffer when dealing with corruptions’ negative impact on their economy than would otherwise exist.  Corruption has become a drain on this nation; the housing and debt crisis are just the latest manifestations of the malignant tumor that is corruption. The question is, how do we fix it? Well a healthy dose of Mises will certainly give you many ideas on what can be done? There are other blogs where you can go to realize that you are not the only citizen that cares about a prosperous America.  As for myself I will write more about what makes nations prosperous and what can be done for our republic in the near future.

Humbly yours,

Cogitans Iuvenis