One thing we wanted this blog to be is a space for new ideas and experimentation. The tools of the past have taken us as far as they can, but it is time we look at our problems from a different perspective. GDP per capita is quite useful but has its limitations. Take the US for example. GDP per capita is around $63,000 (World Bank 2021), but the median income in the Midwest is around $36,000 (FRED 2020). One Could look at GDP per capita and think “Wow! The US is doing really well. There must be very little poverty and even fewer problems over there.” But just because the US as a whole is growing, doesn’t mean all its citizens are included. Even the pie is getting bigger, that doesn’t mean everybody gets a bigger slice. Reducing our complex world to a set of indicators is helpful, but it can only take us so far. That’s why this week we are moving away from Quality Education to Decent Work and Economic Growth.
Each economy is different from the next. The French economy is different from the economy of Bordeaux, which is very different from the Indian economy and pales in comparison to the complexity of the global economy.
Any good prognosis requires a complete understanding of the problem at hand. But such diverse sets of problems require a much more nuanced approach. The methods and indicators used today are still useful, however, they lead to a narrow set of policy prescriptions. Understanding the economies of the 21st century will require some new ways of thinking.
Humand Development Index (HDI)
The first new indicator we’ll examine is the Human Development Index (HDI). HDI moves beyond economic growth and instead focuses on people and their capacities. HDI measures various indicators along three dimensions: long & healthy life, knowledge, and standard of living. As income continues to grow, it becomes less important in the overall score. This reflects the social nature of humans and disregards the idea of humans as efficiency-maximizers. Atop of this list is Norway due to: high-quality education systems, a life expectancy of 82 years, and a GNI of over $66,000. See the list of the top 20 countries below (Figure 1, UNDP 2021) Of course, HDI is just one way to measure economic growth, but there are others as well.
Every county wants to improve the lives of its citizens. No leader wants to see their people languish. But growth must be towards something fruitful, not just productive. For what cost does enrichment come, if no one is happy in their new life?
World Hapiness Report (WHR)
The World Happiness Report (WHR) is an innovative means of linking economic and social progress. Rankings are based on polls conducted in their respective countries pertaining to the quality of life of each respondent. Each person is asked to rank how good their life is on a scale of 0 to 10, 0 being the worst living conditions and 10 being the best. WHR is quite revealing because it shows that some middle-income countries, and indeed lower-income, are happier than some of the richest nations in the world. See happiest countries below (Figure 2, WHR 2020).
Genuine Progress Index (GPI)
Last but not least, is the Genuine Progress Indicator (GPI). Similar to HDI, GPI measures economic growth through three dimensions: social, economic, and the environment. Each dimension contains specific indicators that can positively or negatively contribute to the overall score. Economic progress, for example, can grow through consumption but is reduced through income inequality. Unlike HDI, GPI weighs all indicators equally instead of weighting certain variables, reflecting the holistic scope of the economics field.
The countries with the highest GPI ranking are mostly Scandanavian, with a few exceptions (Figure 3, Statistica 2021). This is due to their high standard of living and environmentally sustainable way of life. The point of these three indicators is to identify what we really consider as progress. It is not just about being wealthy or having modern credit systems. Instead, we should look to measure social well-being and our overall welfare.
There are infinite ways to measure the development of our ever-growing world. The same tools economists have used to examine and dissect the economy for decades are still used today. Indicators like GNI per capita, inflation, or debt-to-GDP ratio tell part of a story but exclude some major details. Many think of “the economy” as a complex set of numbers only experts can understand. But it is much more than that; it’s nations, small towns, and sprawling cities, and the world we all live in. The tools of the past have taken us as far as they can, but it is time we look at our problems from a different perspective. If development is to continue, we must begin to focus more on the quality of growth, not just quantity.
FRED. “Median Personal Income in Midwest Census Region.” FRED, 16 Sept. 2020, fred.stlouisfed.org/series/MEPAINUSMWA646N.
Helliwell, John F., Richard Layard, Jeffrey Sachs, and Jan-Emmanuel De Neve, eds. 2021. World Happiness Report 2021. New York: Sustainable Development Solutions Network.
UNDP. “Human Development Reports.” Human Development Index (HDI) | Human Development Reports, 2019, hdr.undp.org/en/content/human-development-index-hdi.
World Bank. “Gdp per Capita (Current Us$) – United States.” Data, 2021, data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=US.