Leaders around the world increasingly recognize that GDP alone cannot give a full picture of a country’s performance. The well-being of citizens is an even more important measure. The Boston Consulting Group’s Sustainable Economic Development Assessment (SEDA) is a powerful diagnostic designed to provide leaders with a perspective on how effectively countries convert wealth, as measured by income levels, into well-being. SEDA also helps identify specific areas where a country is lagging behind others, even after taking into account its income level and growth rate.
SEDA defines well-being through three fundamental elements that comprise ten dimensions.
- Economics – Income, Economic Stability and Employment
- Investments – Health, Education and Infrastructure
- Sustainability – Income equality, Civil Society, Governance and Environment
The wealth-to-well-being coefficient compares a country’s current-level SEDA score with the score that would be expected given the country’s GDP per capita. The expected cur- rent-level score is based on the relationship between GDP per capita and current-level well-being scores among all countries in our analysis. (See Exhibit 2.) The coefficient thus provides a relative indicator of how well a country has converted its wealth into the well-being of its population. Countries that sit above the solid line in Exhibit 2 —meaning that they have a coefficient greater than 1.0—deliver higher levels of well-being than would be expected given their GDP levels, while those below the line deliver lower levels than expected. New Zealand sits above Japan in the Exhibit 2.
To understand how countries stack up in terms of well-being, and to see whether they are gaining ground or falling behind, it is helpful to examine both current-level and recent-progress SEDA scores. Countries in the upper-left quadrant of Exhibit 5 below have high current-level scores for well-being, but their recent-progress scores are below the median—meaning that they are in good shape but have been losing ground relative to the rest of the world. Those in the upper-right quadrant have scores that are above the median for both current level and recent progress— their well-being levels are relatively high and have been improving. Those in the lower-right quadrant have relatively low current-level scores but recent-progress scores that are above the median—what we describe as weak but improving. Those in the lower left are the most challenged: they have poor current-level and recent-progress scores, meaning that they have relatively low well-being already and have been losing more ground.
Check out the website:
Angus Deaton, has won the Nobel prize in economics for his work charting global developments in health, wellbeing and inequality. He is perhaps best known for the Deaton Paradox – that sharp shocks to income do not appear to cause equally large shocks to consumption.
In his most recent book, The Great Escape: Health, Wealth and the Origins of Inequality, Deaton argues that analysis of economic data shows that while most people in the world have gained in terms of health and wellbeing from higher national incomes, there are many groups that have missed out. See video interview below from the FT.
In the interview he discusses a number of charts including “Life Expectancy and GDP in 1960 and 2010” which shows the significant increase in Inequality in 2010. Another shows the “height of women against national income” – it stresses the importance of health care in the early years. One of Deaton’s main themes is that economic growth does not necessarily produce improved quality of life, especially when income is distributed very unequally – as is the case in today’s United States. So for example, in spite of lower economic growth in France than in the United States, because of a less unequal distribution of income, “all but the top 1 percent of the French population did better than all but the top 1 percent of the American population”.
Although a few years old, this graph from The Economist does highlight New Zealand as a country which has one of the highest levels of well-being but a low level of GDP per person to go with. The trend line shows that the higher the GDP per person the better the level of well-being. Ultimately the challenge for politicians is to try and get their country to the top left of the graph – i.e. higher well being for less GDP per person.
A lot has been written about this over the last year. I can recommend Diane Coyle’s book GDP: A Brief but Affectionate History.
Gross domestic product, the total money value of goods and services sold, has become fundamental to economic policy in most countries. But there are other essential assets, qualities and conditions that GDP can’t measure, like the health of the environment or society. Paul Solman of PBS News looks at another way of measuring progress that takes more of these variables into account. In the video there is an excerpt of a speech by Robert Kennedy which says it all.
ROBERT KENNEDY: It counts napalm and it counts nuclear warhead, yet the gross national product doesn’t allow for the health of our children, the quality of their education, or the joy of their play. It measures everything in short, except that which makes life worthwhile.
The New Zealand General Social Survey of 2012 showed some interesting facts regarding wellbeing:
An estimated 87 percent of people were ‘satisfied’ or ‘very satisfied’ with their lives overall.
Four aspects of life were important in determining people’s overall life satisfaction: health, money, relationships, and housing.
In 2012 an estimated:
* 60 percent of New Zealanders rated their health as ‘excellent’ or ‘very good’
* 52 percent had ‘more than enough’ or ‘enough’ money to meet their everyday needs
* 69 percent had not felt lonely in the last four weeks
* 67 percent had no major problems with the house or flat they lived in.
– 21 percent of New Zealanders had good outcomes in all four of these (ie excellent or very good health, more than enough or enough money, never felt lonely, and no major housing problems).
– 98 percent of those with four good outcomes were satisfied or very satisfied with their lives overall.
– 5.4 percent of New Zealanders did not have a good outcome in any of the four aspects of life. Of these people, 56 percent were satisfied or very satisfied with their lives overall.
This has become popular with a lot of governments worldwide especially in the UK and USA. Late last year I attended a conference at the University of Waikato and Professor Les Oxley took a session entitled
“Is GDP an appropriate measure of wellbeing?
….. and is anything else better?”
Traditionally we have used Gross Domestic Product as it measures:
– The total value of final goods and services produced in the economy
– The total of incomes earned in producing that output
The final purchases by households, business, and government by summing consumption, investment, government spending, and net exports
Historically origins of GDP
In the 1930’s, in response to the information gap revealed by the Great Depression, Simon Kuznets developed a set of national income accounts.
In the 1940’s, World War II planning needs were the impetus for the development of product or expenditure estimates (gross national product); by the mid-1940’s, the accounts had evolved into a consolidated set of income and product accounts, providing an integrated birds-eye view of the economy.
In the late 1950’s and early 1960’s, interest in stimulating economic growth and in the sources of growth led to the development of official input-output tables· In the late 1960’s and 1970’s, accelerating inflation prompted the development of improved measures of prices and inflation- adjusted output.
However there are negatives to GDP as a measurement which was outlined by President Kennedy in 1968.
“The Gross National Product counts special locks for our doors and the jails for those who break them … the destruction of the redwood and the loss of our natural wonder in chaotic sprawl … Yet (it) does not allow for the health of our children, the quality of their education, or the joy of their play … the beauty of our poetry or the strength of our marriages … it measures everything, in short, except that which makes life worthwhile.” President Kennedy 1968
Les Oxley produced a comparison of wellbeing between the USA and France – Are GDP and other measures highly correlated?
* GDP was not designed to measure wellbeing, especially at the individual level
* We continue to use it because we can measure it quite easily and use it for comparisons over time and space
* BUT it can mislead and potentially lead to mismanagement
* There are alternatives to complement GDP
* The complements are not freaky or the realm of weirdos in and out of economics – they are becoming more mainstream and the problems of using GDP for purposes for which it was not intended are becoming public
* Some of the best minds are trying to shift us away from SOLE use of GDP as an INDIRECT measure of wellbeing
I am off to the beach again for a few days – back again on 19th January.