The Wealth of Nations Index and the global position of Poland

Karol Zdybel

Measuring the wealth of societies is considered the Holy Grail of economics. The idea to reflect the level of wealth with a single value sounds extremely encouraging. Ideally, this figure should allow for both international and historic comparisons. We would like to know just how much better (or worse) our lives are compared to those of our parents’ generation or those of our neighbours. For this purpose, it would be most convenient to only confront two numbers.

Unfortunately, our reality turns out to be rather disappointing in this respect. Suffice to say no one has come up with an appropriate method of measurement so far. After all, we could be deluding ourselves that some economic genius would eventually come up with a proper index. We know, however, that it will not happen, ever. The issue lies within the task itself, which we set before the measurement method of our dreams – it is impossible, and brighter economists are aware of that. All in all, economics does not study material goods, but the process of satisfying human preferences, and these are subjective, intense, and impossible to aggregate.

And yet, in spite of these obvious reservations, people continue to design methods of comparing the wealth of societies. We at the Warsaw Enterprise Institute also took it upon ourselves. We are aware that the Wealth of Nations Index or WNI (Wskaźnik Bogactwa Narodów – WBN) that we developed is conventional, full of simplifications, analytical compromises, and plain artificialities. However, this applies to other similar measures too. The awareness of the imperfections of some indices (e.g., the still most commonly used: GDP per capita) leads to attempts to create new ones, which themselves turn out to be highly imperfect as well. Therefore, we are not claiming that the WNI is better than existing formulas. It is simply different – it shows the economic reality in a way that has not yet been undertaken.

The idea

The concept behind the index is simple: every year, citizens of Europe benefit from a stream of goods and services. They decide to purchase a part of them personally. The rest of those goods and services are provided by the government, regardless of their will. WNI is simply the sum of these two components: private and public. This is how the general classification of the WNI was created. We treat the private component with full trust in citizens and add one Polish zloty to another zloty. In this respect, there is no room for paternalism: we consider expenditure that citizens make on their own to be the best basket of goods and services from their point of view. In other words, we assume that an outside observer could not have spent the money better than the interested parties did themselves.

The public component, on the other hand, is evaluated on the basis of the quality of government spending. Whenever the government acquires goods on behalf of and for its citizens, it acts as an agent in someone else’s cause. A good agent will make a good purchase, a bad agent – a bad one. The concept that was present from the very beginning when preparing the WNI was to apply already existing criteria of effectiveness to public expenditure. In the absence of an independent decision of the consumer, who would decide on the allocation of resources in the economy with his or her own wallet, the evaluation of the government’s decisions must be undertaken by an external body. Therefore, we take into account public expenditures in the WNI not by adding up their values, but according to the qualitative criterion. In other words, the higher the deterrent potential of a country’s armed forces, the greater the value of military spending. The better universities place in international rankings, the more expenditure on higher education is worth. The better the reputation of healthcare in a country, the higher the value of government activity in this regard – and so on.

The approach chosen by the Warsaw Enterprise Institute could, however, be subject to the accusation of bias. Private citizens’ consumption and investment choices are treated with complete confidence, while government spending is scrutinised with great suspicion and filtered using a variety of external criteria – how can you even do that? Then it might be quite right to say that the WNI is prejudiced against the government. To counterbalance this bias and give the state and private citizens a level playing field, the WNI places more weight on public services than the nominal amount of spending. For the purposes of this index, we take it at face value that governments are operating in areas where private initiative would produce noticeably worse results. For this reason, in the design of the WNI, the state’s consumption and investment expenditure are not treated as equivalent to the corresponding private expenditure. They receive an initial bonus. When the state is operating efficiently, one zloty spent by the government will be worth more than one zloty spent by Mr Smith. Still, the low quality of government spending may nullify this advantage. The question that therefore remains open is: who makes use of this advantage and who is squandering it?

Indicator of public expenditure quality

To answer the above-stated question, we constructed an intermediate measure: the public expenditure quality index. Again, the idea was simple. Public expenditure can be divided into several basic categories. Their best-known classification is called the Classification of the Functions of Government (COFOG) and was developed by the OECD. It is true that some of them (e.g., expenditure on general administration) do not directly meet the needs of citizens, which is why they were not included in the indicator we came up with. Nevertheless, most public spending falls into intuitively understandable categories such as national defence, education, infrastructure, and environmental protection. Regardless of the work done by the OECD, these categories are often the subject of international comparisons, professional studies or opinion polls. The Numbeo website on the other hand aggregates, for example, opinions on most countries in the world in terms of environmental pollution, traffic intensity, healthcare, and a multitude of others.

The idea behind the WNI was to collect as many evaluations, indices, and studies as possible relating to individual COFOG categories, and then aggregate them. This made it possible to obtain an overall indicator of the quality of public spending, ranging from 0 to 100 points. It is divided into seven subcategories assessed on the same scale: (i) national defence, (ii) internal security, (iii) infrastructure and public transport, (iv) environment, (v) healthcare, (vi) education, and (vii) universities. Thus, the approach to public expenditure used in the process of creating the WNI consisted in taking into account the effects of expenditure in European countries, and not – as is the case with GDP – adding them up.

Private economy is doing well

What immediately grabs the eye is the relatively high position of Poland in terms of the private component. The private part of the Polish economy per capita (PPS 17.6 thousand) is second only to three countries in the CEE region: the Czech Republic (21.9), Lithuania (20.8) and Estonia (19.6). At the same time, it is slightly larger than, for example, its Slovak (16.8) or Hungarian (16.9) equivalent. Furthermore, Poland is clearly ahead of Latvia (16.3), Greece (third from the end – only 16.1 thousand) and Croatia (15.4). It may come as a surprise that Romania with the result of 17.1 thousand PPS ranks just behind Poland and should the trends from the last few years continue, Romanians will soon be able to spend more from their own wallets than Poles.

On the other hand, the disparity between Western Europe and the countries of Central and Eastern Europe is still considerable. Private economy per capita in countries such as Germany, Austria, the Netherlands or Denmark is still 50-70% larger than east of the river Oder (the natural German-Polish border). Another issue entirely is that this gap has significantly narrowed since 2015, although it seems that bridging it is a matter of distant future (though – as the case of Romania shows – not unattainable)

The environment and universities are keeping Poland down

In terms of the public component of WNI, Poland ranks worse. Poland obtained a result of 58.6, which means that the quality of public spending is only second to (and very clearly so) Romania (48.9) and Bulgaria (50.9), while Hungary obtained an almost identical result (58.9). On the other hand, the disparity between other countries in the region – such as the Czech Republic, Slovakia, Lithuania, and Croatia – is quite significant. The lowest result among the four countries mentioned is that of Lithuania (66.3), and it is still several percent higher than the result of Poland. Interestingly, this is even though in recent years Poland has considerably improved in such subcategories as internal security, infrastructure or even healthcare, and one should bear in mind that the last two have been regarded as typical Polish weaknesses for a very long time. However, due to disastrous results in terms of environmental protection and – particularly! – in higher education, Poland is effectively being pulled to the bottom of the ranking in terms of the quality of public spending. Suffice it to say that the best universities in Poland are recognised in international rankings as equal to the best universities in Hungary, Latvia or Cyprus – countries smaller than Poland by an order of magnitude, if not two orders. At the same time, academic institutions in Spain, Italy and (especially) the Netherlands easily beat their fellow universities from the country on the Vistula river.

The public sector in Denmark and Finland scored highest

The proud first place in terms of the quality of public spending went to Denmark (90.7). Finland was second, followed by Austria and the Netherlands. Characteristically, the Danish results in all seven categories exceeded the threshold of 90 points – this is the only such case in our index. For comparison purposes, Poland exceeded this threshold only in the education category. Interestingly though, some countries famous for their active involvement of the state in providing services to citizens achieved rather average results. France (76.5) scored at the level of the Czech Republic, Slovenia, Estonia and Portugal, mainly due to low internal security scores and only moderately good results in higher education. The total score of Belgium is similar (75.9), pulled down by national defence, internal security, and environment. Italy’s results look even worse. With a total score of 66 points and very unequal results in individual subcategories, Italy is places between Lithuania and Ireland.

The WNI scores also show that the absolute amount of public expenditure per capita is a good predictor of their quality. The chart below illustrates this fact. Countries that spend a lot on public services are generally able to obtain services of a distinctly higher quality. At the same time, the chart suggests that within the group of countries with low and moderate public spending per capita (up to EUR 6,000 per person), the spread of their quality around the trend line is significant. Some countries do well above what is expected for their spending level. Others are doing worse than the prediction suggests – this group includes Poland, the position of which is marked in red.

Amount of public spending per capita [EUR]

and the index of public expenditure quality [0-100]

Overall result:

Austria ahead of Denmark, the Netherlands and Germany

Addinig up the private and public components gives a full indication of the Wealth of Nations Index. Austria is ahead of Denmark, the Netherlands and Germany in this classification (the WNI does not include Luxembourg, Cyprus or Malta; Ireland is also excluded from the classification described here, more on this below). All of these countries are characterised by a sizeable private economy and high-quality public services. The gap between the four countries in the lead and those that follow is rather significant. Austria scored 100 points (this year’s result will also be a reference point for future editions of the WNI), Germany in the 4th place – 94.3 points, and Belgium in the 5th – only 89.1 points.

As already mentioned above, in terms of the size of the private economy, Poland ranks higher in Europe than in terms of quality of public spending. The latter, although low, was not able to determine Poland’s result (60.2). In the general WNI classification, it ranks 18th, ahead of such countries as Romania (56.2), Latvia (58.3), Croatia (57.5), Greece (57.6) and Hungary (58.5), while losing to Slovakia (60.4) by a fraction of a point. However, the gap in relation to Austria is considerable: Poland’s total score in the WNI is three fifths of the Austrian one. Compared to other countries in the region, it does look quite good, although it is significantly lower than in the case of Estonia (70.1), Lithuania (70.3), and – very clearly –the Czech Republic (75.6).

A word or two are due in this place to discuss Ireland. Ireland scored 146.6 points and definitely won in the classification; however, the specificity of the Irish national income means that I am not mentioning it in this study. Ireland’s GDP per capita benefits from the depreciation of intellectual and non-intellectual assets transferred in large numbers to this country, as well as from other accounting and legal efforts that companies use to optimise taxation. This situation is so commonplace in this island nation and puffs up conventional GDP so much that the Irish central bank even invented and calculates a special so-called Modified Gross National Income (GNI*) to adjust for it at least partially. Unfortunately, up-to-date GNI* statistics are not available. Still, the exclusion of Ireland from this article does not mean that it was not calculated and presented in the WNI. The index’s website provides complete data on Ireland, which ranks first in the ranking available online. All the same, the score of this country was appropriately annotated.

Compares to other indices

It also turns out that the WNI strongly correlates with other measures alternative to the GDP. It should come as no surprise that countries with high (low) WNI scores also score high (low) in terms of HDI – the Human Development Index. This measure takes into account GDP per capita expressed in purchasing power parity, as well as life expectancy and the duration of education. This structure is designed as to allow HDI to reflect the quality of life in the world in a fuller way than ordinary GDP. As the WNI includes a large part of GDP per capita calculated according to the purchasing power parity (i.e., the part constituting private spending of citizens), and at the same time this amount is the basic component of HDI, the relationship between the two is not surprising.

HDI 2020 and the Wealth of Nations Index

(2020; with the exclusion of Ireland)

It is also interesting that the WNI shows a slight yet noticeable relationship with the historical values of the Index of Economic Freedom developed by the Heritage Foundation from the US. As today’s prosperity is the result of conditions that have been conducive to it taking place over an extended period in the past, the Index of Economic Freedom was averaged for the years 2012-2020 (non-aggregated data for these years is provided by the Heritage Foundation on its website). And subsequently, it was compared to this year’s edition of the WNI.

The Heritage Foundation's Index of Economic Freedom

(2012-20 average) vs the Wealth of Nations Index

(2020; with the exclusion of Ireland)

On the one hand, it can be argued that there is a certain relationship between economic freedom (or at least its version as measured by the Heritage Foundation) and the WNI, but on the other hand, the scattering of the results around the trend line indicates that the former is only one of many determinants of the WNI.

How much will the pandemic change?

Finally, what is noteworthy is the fact that the index prepared by the Warsaw Enterprise Institute intentionally presents the situation of countries before the outbreak of the coronavirus epidemic. The data for the epidemic period used to prepare it are to a large extent not available yet. More importantly, the pandemic is still ongoing, and its effects can only be fairly assessed sometime after it ends. May the next year’s edition of the WNI be created under normal circumstances. It will then reflect the shock that the past several months have been for European countries and will allow for interesting comparisons with the results of the current edition.

WBN results

The Wealth of Nations Index (for EU country and UK)*
RANKCOUNTRYTOTAL SCOREADVANCEMENT/
DECREASE FROM 2015
1IRELAND146,6
0
2AUSTRIA100
0
3DENMARK98,8
up2
4NETHERLANDS95,1
0
5GERMANY94,3
down2
6BELGIUM89,1
up1
7FINLAND87,3
up2
8SWEDEN86,1
down2
9UNITED KINGDOM85,8
down1
10FRANCE81,5
0
11ITALY76,9
0
12SPAIN75,9
0
13CZECH REPUBLIC75,6
0
14SLOVENIA74,2
0
15PORTUGAL70,5
up1
16LITHUANIA70,3
up2
17ESTONIA70,1
down2
18SLOVAK REPUBLIC60,4
down1
19POLAND60,2
up3
20HUNGARY58,5
up1
21LATVIA58,3
down1
22GREECE57,6
down3
23CROATIA57,5
0
24ROMANIA56,2
0
25BULGARIA46,9
0
* cyprus, luxembourg, malta are not included.
GDP per capita (PPS), private economy
RANKCOUNTRYPRIVATE SPENDING
PER CAPITA (PPS)
ADVANCEMENT/
DECREASE FROM 2015
1IRELAND51 652
0
2AUSTRIA30 574
0
3DENMARK29 565
up2
4GERMANY28 913
down1
5NETHERLAND28 768
down1
6BELGIUM27 305
0
7SWEDEN25 604
0
8UNITED KINGDOM25 461
0
9FINLAND25 158
0
10FRANCE24 229
0
11ITALY23 542
0
12SPAIN22 436
0
13CZECH REPUBLIC21 935
0
14SLOVENIA21 551
0
15LITHUANIA20 826
up1
16PORTUGAL20 081
down1
17ESTONIA19 601
up1
18POLAND17 638
up2
19ROMANIA17 121
up4
20HUNGARY16 940
up1
21SLOVAK REPUBLIC16 797
down4
22LATVIA16 340
0
23GREECE16 105
down4
24CROATIA15 428
0
25BULGARIA13 167
0
Public spending scores
RANKCOUNTRYPUBLIC SPENDINGADVANCEMENT/
DECREASE FROM 2015
1DENMARK90,7
0
2FINLAND88,7
0
3AUSTRIA85,9
0
4NETHERLANDS84,6
up1
5UNITED KINGDOM80,9
up2
6SWEDEN80,5
down3
7GERMANY80,4
down1
8ESTONIA76,6
0
9FRANCE76,5
up1
10BELGIUM75,9
down1
11CZECH REPUBLIC75,7
up2
12PORTUGAL74
0
12SLOVENIA74
down1
14SPAIN72,1
up5
15CROATIA69
down1
16SLOVAK REPUBLIC67
down1
17LITHUANIA66,3
up1
18ITALY66
up2
19IRELAND64,2
down2
20LATVIA63,5
down4
21GREECE63,1
up1
22HUNGARY58,9
down1
23POLAND58,8
up1
24BULGARIA50,9
down1
25ROMANIA48,9
0
Public spending scores – Military potential subcategory
RANKCOUNTRYMILITARY POTENTIALADVANCEMENT/
DECREASE FROM 2015
1FRANCE93,6
up6
2CZECH REPUBLIC93,1
up3
3UNITED KINGDOM91,9
0
4SWEDEN90,9
down2
5DENMARK90,1
down4
6GREECE87,7
up17
7ITALY87,2
up13
8GERMANY87,1
0
8SLOVAK REPUBLIC87,1
up4
10FINLAND85,5
down5
11BULGARIA85,3
up10
12SLOVENIA84,4
up1
13CROATIA84,3
down4
14AUSTRIA81,9
down10
15LITHUANIA78,7
up1
16HUNGARY77,4
up3
17NETHERLANDS76,9
down2
18ESTONIA76,6
down8
19POLAND75,7
down5
20LATVIA74
down9
21SPAIN72,8
up4
22ROMANIA70,6
up2
23PORTUGAL70,5
down5
24ROMANIA64,9
down7
25IRELAND40,7
down3
Public spending scores – Internal security subcategory
RANKCOUNTRYINTERNAL SECURITYADVANCEMENT/
DECREASE FROM 2015
1AUSTRIA99,2
0
2SLOVENIA97,1
up4
3DENMARK96,4
down1
4FINLAND94,5
down1
5CZECH REPUBLIC93,4
up2
6ESTONIA91,8
up3
7PORTUGAL90,7
up4
8CROATIA90,1
down3
9NETHERLANDS89
up5
10ROMANIA88,2
0
11SLOVAK REPUBLIC87,8
down3
12POLAND85,5
up4
13GERMANY83,8
down9
14GERMANY83,4
up1
15SPAIN82,7
down3
16LITHUANIA78,9
up2
16LATVIA78,9
up4
18IRELAND78,4
up5
19BULGARIA78,2
0
20BELGIUM77,5
down4
21GREECE73,5
up4
22UNITED KINGDOM72,5
down1
23SWEDEN71,9
down10
24ITALY71,4
down2
25FRANCE67,8
down1
Public spending scores – Infrastructure and public transport subcategory
RANKCOUNTRYINFRASTRUCTURE
AND PUBLIC TRANSPORT
ADVANCEMENT/
DECREASE FROM 2015
1NETHERLANDS99
0
2GERMANY97
0
3FRANCE94
up1
3UNITED KINGDOM94
0
5AUSTRIA93,9
up3
6SPAIN93
down1
7BELGIUM92,4
down1
8DENMARK91,3
up1
8SWEDEN91,3
down1
10FINLAND75,9
0
11ITALY88,6
0
12CZECH REPUBLIC85,4
up5
13PORTUGAL84,2
down1
14HUNGARY82,6
up5
15POLAND82,1
up8
16IRELAND81,1
down3
17SLOVENIA80,2
down3
18GREECE79,5
down2
18SLOVAK REPUBLIC79,5
up4
20CROATIA78,7
0
21LITHUANIA77,8
down3
22ESTONIA77,7
down7
23LATVIA77,2
down2
24ROMANIA72,8
up1
25BULGARIA71,5
down1
Public spending scores – State of the environment subcategory
RANKCOUNTRYSTATE OF THE
ENVIRONMENT
ADVANCEMENT/
DECREASE FROM 2015
1FINLAND100
0
2DENMARK90,8
up5
3AUSTRIA88,6
up6
4IRELAND88,2
up1
5NETHERLANDS87,9
up5
6GERMANY86,8
up2
7SWEDEN85,9
down5
8UNITED KINGDOM82,9
down2
9PORTUGAL81,5
down5
10ESTONIA81,3
down7
10FRANCE81,3
up4
12SPAIN80
up3
13SLOVENIA76
down2
14BELGIUM74,7
up7
15ITALY72,7
up9
16GREECE70,8
up2
17LITHUANIA69,6
down1
18CROATIA68,3
down6
19CZECH REPUBLIC68,1
down6
20SLOVAK REPUBLIC65,2
down3
21LATVIA64,6
down1
22POLAND57,2
0
23HUNGARY57
down4
24ROMANIA50,5
up1
25BULGARIA46,8
down2
Public spending scores – Healthcare subcategory
RANKCOUNTRYHEALTHCAREADVANCEMENT/
DECREASE FROM 2015
1DENMARK99,3
0
2FRANCE98,3
up2
3AUSTRIA97,9
up3
4BELGIUM97,4
down2
5SPAIN97,2
up6
5NETHERLANDS97,2
down2
7FINLAND97
0
8GERMANY96,8
down4
9SWEDEN95,7
down1
10UNITED KINGDOM95
down1
11PORTUGAL94,3
up2
12CZECH REPUBLIC93,7
0
13ITALY91,9
up2
15ESTONIA72,1
down4
15LATVIA87,6
up4
16CORATIA86,5
up2
17SLOVAK REPUBLIC85,1
down3
18POLAND84,8
up6
19SLOVENIA83,4
down3
20GREECE83,3
0
21IRELAND83,2
up1
22LATVIA81
down5
23ROMANIA75,8
up2
24HUNGARY75,3
down1
25BULGARIA71,7
down4
Public spending scores – Schooling subcategory
RANKCOUNTRYSCHOOLINGADVANCEMENT/
DECREASE FROM 2015
1FINLAND97,5
0
2DENMARK96,5
up1
3SWEDEN94,8
up7
4BELGIUM94,7
up3
5ESTONIA94,4
down3
6POLAND92,6
up6
7SLOVENIA92,5
down3
8NETHERLANDS92,2
down2
9UNITED KINGDOM91,5
0
10GERMANY91,1
up1
11CZECH REPUBLIC91
up6
12LATVIA90,9
up4
13AUSTRIA90,7
up1
14PORTUGAL90,4
down7
15FRANCE90,1
down2
16IRELAND80,9
down12
17SLOVAK REPUBLIC88,5
up6
18CROATIA87,4
0
19SPAIN87,3
down4
20ITALY86,3
down1
21LATIVA86,1
down1
21HUNGARY86,1
0
23GREECE85,8
down1
24BULGARIA76,9
0
25ROMANIA74,9
0
Public spending scores – Higher education subcategory
RANKCOUNTRYHIGHER EDUCATIONADVANCEMENT/
DECREASE FROM 2015
1UNITED KINGDOM100
0
2DENMARK96,6
0
3SWEDEN94
up1
4ESTONIA93,9
down1
5FINLAND92,6
up4
6IRELAND91,8
up2
7NETHERLANDS91,5
up3
8BELGIUM91
down3
9SLOVENIA86,7
down3
10AUSTRIA85,8
up2
11LATVIA85,6
down5
12LITHUANIA83
down1
13CROATIA77,3
0
14FRANCE75,9
up3
15PORTUGAL74,4
up1
16GERMANY72,9
up3
17SLOVAK REPUBLIC70
down3
18CZECH REPUBLIC69,7
0
18GREECE69,7
up3
20HUNGARY66,9
0
21BULGARIA62,5
down6
22SPAIN58,4
up1
23ITALY53,1
up1
24ROMANIA35,1
down2
25POLAND31,2
0