Prosperity Index Shows That Democracy Still Works Best

With the Cold War well behind us, the real choice between systems lies in a growing variation in the form of capitalisms. Choices now range from the Chinese Leninist model ? essential centrally planned exploitation of the greed gene ? to various kleptocracies, divergent Anglo-American systems and varied forms of European capitalism.

None of these systems are likely to excite the most rabid Hayekian, especially now that the once free market haven Hong Kong is being integrated into the Chinese command and control system. But still, according a new study by my colleagues at the Legatum Institute, when it comes to delivering the best economic environment for people and families various forms of liberal capitalism still perform best.

The Legatum Prosperity Index found that all the more prosperous places ? not only by income, but by quality of life, environment, education and health care ? almost exclusively are democratic states. ?Prosperity,? the report concludes, ?is found in entrepreneurial democracies that have strong social fabrics.?

This is a critical point given the current focus and admiration for the more centralized, state-controlled models emerging in places like Russia, China and Brazil. As an emerging country, China may enjoy the highest rate of growth but overall still does not provide most of its citizens anything close to what we might consider the ?good life.? China, the Legatum study found, still lags behind in a host of factors besides democracy, ranging from poor health care and a degraded environment to an overweening state role in the private sector.

In contrast, without exception, the most prosperous states are not so much the fastest-growing economies but those democracies that have been able adjust successfully to the emerging reality. At the top of the list are the northern democracies, led by Scandinavian countries Norway (#1), Denmark (#2), Finland (#3) and Sweden (#6). These are joined by other small, compact cold-weather states such as the Netherlands (#9) and Switzerland (#8). Rounding out the top 9 on the list are three resource-rich Anglo-American states, (#4) Australia, (#5) New Zealand and (#7) Canada.

All these countries sell either resources ? Norway, Australia and Canada ? to emerging Asian super-powers or expertise and services. Most countries possess powerful niches that drive their economies and promote exports to developing countries. These include green technology (Denmark), motor vehicles, telecommunications, pharmaceuticals and forestry (Sweden), information technology (Finland), engineering and finance (Switzerland), business services , chemicals and plant science (Netherlands). The tiny Netherlands, for example, is China?s second largest European trading partner.

The ability to shift gears also can be seen in Germany which improved its ranking to 15 due in part to rising industrial exports to emerging economies. Like the Scandinavian countries, Germany economy has also become significantly less regulated in the past decade. They are no longer the ultra generous social welfare states imagined by some liberals , but increasingly adapted to a tougher global marketplace.

In this sense these northern states resemble the old Hanseatic trading cities of 13th century northern Europe, which created, in the words of historian Fernand Braudel, a ?common civilization created by trading? from England to Russia. At its peak the League included dozens of cities across Northern Europe. Like the old Hansa, today?s version share largely Germanic or Nordic cultural roots, and have found their niche by selling high value goods, to distant burgeoning markets in Russia China, and India.

This strong performance contrasts dramatically with the emergence of what might called ?a second Europe? made up of what I call the Olive Republics. These countries ? Spain, Portugal, Italy, and Greece ? remain functioning democracies but without the kind of effective governance found in their better managed, more fiscally responsible northern neighbors. These states have all fallen in over the past year in the Legatum rankings , falling into the 20s and even 30s ? something very rare for long established European economies.

Once again, the critical issue lies with adjustment. In contrast to the northern powers, the Olive Republics do not appear to be adjusting well to the general shift of global demand to the east. After all, besides a great history and culture, how much do these countries have to sell the Chinese, Indians and Brazilians ? Trips to Barcelona or expensive Italian food may be popular among the new rich of Shanghai or Singapore, but its Volvos, Mercedes, BMWs, not Fiats, that crowd the streets. In high tech, increasingly dominated by the U.S. and Asian countries like India and South Korea, the only big player along the Mediterranean is now greater Tel-Aviv.

What about the other big Western democracies? Most rank between the ascendant Hansa and the depressed Olive Republics. The mega-giant of the liberal democracies, the U.S., ranks 10th, followed by the 13th ranked United Kingdom, 18th ranked Japan and 19th ranked France. All these countries retain strong technological prowess and entrepreneurial savvy, but have proven more adept at consuming goods and services from the rising Asian powers than selling to them. Governance, particularly fiscal management, also generally has been less impressive than among the Hansa states.

But perhaps the best proof that democracy remains an economic asset can be found not in Europe or North America, but among the developing economies. China may dominate the world?s current trajectory through its huge population and expanding economy but its level of prosperity still lags that of democratic Australia and New Zealand. It also ranks well below demonstrably more democratic countries (albeit imperfectly liberal) like #17 Singapore, #22 Taiwan and #27 South Korea. These are emerging as the Hansa of Asia, selling high-technology products and services to the emerging Asian powers . If China ever could achieve some level of democratic governance say of South Korea, the world would need to really watch out.

Similar patterns can be found across the rest of the developing world.In the Middle East, the relatively tolerant United Arab Emirates (#30) that leads the list. The only legitimate constitutional democracy in the region, Israel (#36), soars way ahead of repressive but oil-rich Saudi Arabia (#49) not to mention such stark autocracies as Syria (#83), Iran (#92) and Yemen (#105).

In sub-Saharan Africa, democracies such as Botswana (#52) and (#66) South Africa generally lead the pack, while resource rich, but dictatorship ridden Zimbabwe ranks a meager 110. In Latin America, liberal democracies such as #28 Uruguay, #32 Chile and #33 Costa Rica sit on top while minerals rich but autocratic Venezuela (#75) and Bolivia (#82) sink closer to the bottom.

Of course, it?s fashionable today in some circles to toast autocracy ? particularly among our growing ranks of Sinophiles on both right and left. But the Legatum study suggests that democracy, not top-down dictatorship, remains the surest way to build a prosperous society. True, sometimes a dictatorship can spark faster growth in the short and even medium run but only democracies have proven capable of steering countries beyond rapid growth and into true, sustained prosperity. For this reason, democratic capitalist countries remain at the apex of the global economy outperforming challengers by the measure that most matters: delivering a secure, healthy and affluent life to the vast majority of their citizens.

This article originally appeared at Forbes.com.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Photo by Rob Boudon