Beyond GDP

Would you rather have the economy grow at 12 percent or 5 percent?

That’s not a trick question. An interesting new report by the Boston Consulting Group tries to measure not just the rate of economic growth around the globe, but the relative quality of that growth and how effectively governments are able to translate expanding economies into improvements in their societies’ overall well-being.

While politicians and economists focus on per capita income and annual growth rates with an almost religious fervor, these numbers can mean very little to people in the real world. The study suggests that the answers to questions asked around the average dinner table — Can I afford to send my kids to school? Is the water safe to drink? Do I have access to health care? — tell us just as much about a society’s living standards. So, in addition to traditional macroeconomic indicators, the study examined 10 other dimensions of social and economic development that it argues are good indicators of a nation’s well-being, including health, education, employment levels, environmental protection, and civil society activity.

For example, looking at income inequality was a key factor in relative well-being in the study because it provided an important barometer of how widely economic progress was spread across a population, and how likely economic gains were to translate into better living standards for large numbers of people. Issues like education were included not only because education remains a core value in most societies, but because education has such a significant impact on income, health, and overall quality of life. Each of these 10 dimensions of well-being were undergirded by multiple data sets, ranging from mortality rates to levels of gender equality, with a heavy emphasis on information routinely collected by the World Bank and International Monetary Fund.

Since BCG has a good number of governments as clients, it avoided rank-ordering the results in a neat, tidy list for fear that it might embarrass some of the 150 countries it analyzed. But it isn’t hard to peel back the data. For example, although the United States is comfortably among the top 10 countries by GDP per capita, its overall ratings on well-being lag behind some 20 others. Why? Because of the yawning gap in America’s income equality, which has now reached its worst levels since the Great Depression, and its relatively poor health for a country with such high income levels. (Obesity and the incidence of HIV were a particular drag on U.S. health scores, and the IMF recently cautioned that growing income inequality in the United States may threaten the fundamental stability of its overall economic growth.)  

Norway sits atop the rankings with both very high levels of income and very high well-being scores. Indeed, Norway’s current function in the international community largely seems to be to make everyone else feel bad about how they are managing their own societies. Despite sitting on vast oil reserves, Norway actually produces 99 percent of its energy from hydropower. In the BCG study, it ranked near the top in terms of governance, income equality, civil society, and education. In short, you probably don’t want to sit next to Norway unless you want to walk away with a self-esteem problem.

Like Norway, Brazil has demonstrated that improving the well-being of a population requires more than trickle-down economics and pro-growth policy. Over the last decade, Brazil adopted a decidedly pro-poor approach to growth, and the results are impressive. While Brazil’s GDP growth averaged 5.1 percent over the last five years, the country saw an improvement in the basket of 10 measurements for living standards that one would have expected from a country growing at about 13 percent a year, according to the study. Similarly, Poland and New Zealand saw improvements in living standards that far outpaced their GDP growth.

In general, Eastern European states, including Romania and Albania, were over-achievers when it came to improving well-being more rapidly than GDP, while the Arab Gulf states were particularly poor at translating their considerable natural-resource wealth into better lives for their citizens. The data from Eastern Europe, a region with lively civil societies and strong social safety nets that date back to well before communism, may in essence be rapidly making up for the years lost under Moscow’s thumb. In contrast, the Gulf states, as relatively nouveaux riches, still suffer from deep social stratification, longstanding patterns of discrimination, sharp income inequality, and not very impressive levels of educational attainment. Indeed, with a few exceptions (including Norway, of course), natural-resource wealth often translates poorly into improved well-being for the countries surveyed — in no small part because many of these countries still suffer from bad governance and high levels of corruption. There is a good reason the "resource curse" remains firmly ensconced in the development lexicon.

The report should be of interest to more than development experts, as it has some serious foreign-policy implications. Take China, for example. For years, China has been held up as a shining example of rapid economic growth, and its GDP has boomed. Yet, like the Gulf states, China has dramatically under-performed relative to its GDP when it comes to delivering improved well-being to its own citizens. Over the last five years, China’s GDP growth averaged a phenomenal 12 percent, yet the report finds that its improvements in living standards are consistent with a country averaging just over 5 percent growth annually.

That’s a big difference, and it underscores several important points. Widespread corruption continues to bleed China and is helping fuel deep gaps in income inequality. The failure to effectively address corruption also means that China’s economic miracle isn’t reaching the Chinese population the way it could, and should. That in turn suggests that the Chinese government is going to struggle to meet the rising public demand — not only for ever more consumer goods — but for greater freedom of association and more transparent government. With China’s annual economic growth already cooling toward the 7-8 percent range, its government may find itself in an extended high-wire routine as it tries to hold power tight while delivering real results to its citizens.

This also suggests that U.S. policymakers need to do a better job of looking past GDP when assessing the relative stability of a country like China, or India for that matter. Traditional foreign policy calculations have hewn tightly to a country’s economic and military might, rather than "softer" issues like rights, institutions, governance, and public health. Yet as this study makes clear, well-being may have a lot more to do with realpolitik than most people think. The Soviet Union may well have been an economic and military juggernaut, but Moscow’s failure to improve the lives of its citizens ensured that it was an empire built on sand. That is a lesson the United States needs to heed both at home and abroad.