BackA new way of measuring welfare
A new way of measuring welfare
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Economists have periodically expressed their dissatisfaction with using gross domestic product (GDP) as an index of well-being. Per capita income is a better measure, but it doesn’t take into account the vast inequalities in income distribution. Hence, the search for an alternative, ranging from a quality of life index to the World Bank’s human development indicators. Charles Jones and Peter Klenow combine data on consumption, leisure, inequality and mortality to arrive at a measure of welfare.
The authors illustrate the utility of their model by comparing the US with France. In 2000, France had a per capita GDP of just 70% that of the US. Consumption per person in France was even lower—66% of the US.
On the positive side, though, life expectancy at birth was higher than in the US, inequality was substantially lower and—here’s where it really matters—the average Frenchman worked 1,591 hours in a year compared with 1,836 for the average American. This is what the researchers found: “Rather than looking like 66% of the US value, as it does based solely on consumption, France ends up with consumption-equivalent welfare equal to 97% of that in the US. The gap in GDP per person is almost completely eliminated by incorporating life expectancy, leisure, and inequality." The authors use their metric for computing welfare for a broad set of 134 countries.
They find that almost all the gap in per capita income between the US and Europe is removed if adjustments are made to per capita consumption for leisure, inequality and mortality. Most developing countries, though, are much poorer than their per capita income levels suggest. For instance, India’s per capita income in 2000 was 6.6% that of the US. But it scored even lower on welfare, which was 3.5% that of the US. Similarly, while China’s per capita income in 2000 was 11.3% of the US, its welfare was a much lower 5.3%. But perhaps the most striking difference between the per capita income and welfare measures is illustrated by Hong Kong and Singapore. While both these city-states had similar levels of per capita income in 2000, at around 82% of the US, their levels of welfare were very different. Hong Kong’s welfare index was 90% of the US, while Singapore’s was 44% of the US. The authors say that’s because of Singapore’s low consumption share, the result of having a very high investment rate. As the paper points out, “Working hard and investing for the future are well-established means for raising GDP. Nevertheless, these approaches have costs that are not reflected in GDP itself".
Nevertheless, developing countries can hope to grow more rapidly on the welfare scale—all they have to do is increase life expectancy. In fact, welfare gains averaged 2.5% per year between 1980 and 2000 in contrast to income growth of 1.8% for the world. On the other hand, it’s possible for the most developed countries to regress in terms of welfare. The US, for instance, saw its welfare fall between 1980 and 2000 because of rising inequality and lower leisure time.
The results are interesting and underline the fact that growth in GDP is not enough. As the authors themselves note, “Even more ambitious, but conceivable, would be to try to account for some of the many important factors we omitted entirely, such as morbidity, the quality of the natural environment, crime, political freedoms, and intergenerational altruism."
Write to simplyeconomics@livemint.com
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