Rod McNaughton: We can't take prosperity for granted

Prosperity isn't just about owning nice things or having large bank accounts. It's also about trusting and looking after each other.

Social components rather than the economy drive our top-five ranking, but they are under threat

This year's Legatum Prosperity Index has ranked New Zealand against 142 nations on their wealth and wellbeing in eight categories. Overall, New Zealand ranked fifth in the world, down two places since the index was last released in 2009.

We now rank first in education and second in both governance and social capital; but on other measures, including economic performance, the country ranked between 15th and 20th in the world.

Has New Zealand really become less prosperous over the past five years? Certainly not. The index shows that the values underlying the ranking have all increased on average, so in absolute terms Kiwis are better off than they were in 2009.

There has been a bit of jostling between countries for their position in the top 10, but the differences between these countries in absolute terms is small. New Zealand slipped from third to fifth place between 2009 and 2010, and has been in either fourth or fifth place since then. Among the top countries, only Norway's ranking is consistent as the most prosperous country in each of the last five years.

More important than the overall result is the composition of the score: social components drive New Zealand's prosperity, while economic components along with health and a few others are much weaker. The health index ranks New Zealand 20th in the world, and safety and security is ranked 15th, down from eighth place in 2009.

The index's publishers attribute this decline, the largest for New Zealand, to "increases in demographic pressures, human emigration and group grievances".

New Zealand's economic performance is ranked 17th in the world, up from 19th in 2009. However, changes in the economic prosperity of other countries will greatly influence New Zealand's economic future. The index reveals a rapid increase in relative prosperity among Asian countries, and a drastic fall in the United States and Europe.

There are now four Asian countries in the top 20 on the economic component of the index: China (7th), Thailand (12th), Taiwan (16th), and South Korea (19th).

In the past five years, China moved up from 34th to 7th place, while the US fell from 12th to 24th, accompanied by five European countries that also fell out of the top 20.

The fate of the US and Europe is a reminder for New Zealand of how tenuous economic prosperity can be, and the need to maintain diverse overseas markets. Of particular interest for policymakers in New Zealand, the index identifies a positive relationship between social capital and both entrepreneurship and innovation output. Cohesive societies where people get along, trust each other and help each other out are also ones where entrepreneurship thrives.

Trust aids the sharing of ideas and helps to establish credibility with investors who are looking for assurances before funding risky endeavours.

However, social capital cannot be taken for granted. Despite starting from a high base, New Zealand has had one of the largest declines, with the average score in this category falling 2.6 per cent because of declines in volunteerism, donations and marriage rates.

Finally, while at 15th place New Zealand does well on entrepreneurship, its innovation output is less than expected, especially in terms of exporting high technology in which it ranks 46th.

One reason is relatively low R&D expenditures per capita, ranking 20th in the world.

There is much about which New Zealand should be proud. From a small population base Kiwis have created one of the most prosperous economies in the world. However, it is not alone in this; Norway, Switzerland and Sweden (which rank above New Zealand) and Denmark (just below), all have fewer than 10 million residents.

Small is beautiful, but it can also be precarious, and New Zealand will need to work hard to stay in the index's top five.

Rod McNaughton is the University of Auckland Business School's professor of innovation and entrepreneurship.