Thursday, September 27, 2018

GDP Growth Helps Poor Countries More Than Those That Are Already Rich

Money can’t buy you love, says the song, but can GDP buy prosperity? The question is an important one given the emphasis that the White House and Congress have placed on pushing GDP growth to its limits.

What do the data say? My favorite measure of overall prosperity is the Social Progress Index (SPI), which has just been updated for 2018. The SPI is a comprehensive measure of human flourishing that draws on a broad set of indicators of public health, education, safety, human rights and personal freedoms. It purposely omits purely economic indicators such as GDP, inflation, or income distribution, which makes it especially well-suited to address the question of how GDP is related to noneconomic indicators of prosperity.

The following chart shows the relationship between the SPI and GDP for the 146 countries in the SPI database. The horizontal axis measures 2018 GDP per capita using estimates from the July 2018 update of the IMF’s WEO database, expressed I 2011 constant dollars at purchasing power parity.

Clearly, there is a strong association between higher GDP per capita and the SPI measure of prosperity. The fit is especially close for countries with lower incomes. For a country like, say, Rwanda, with per capita GDP around $2,000, a couple thousand dollars more could make a big difference for the quality of life of the average citizen.

But how much do richer countries like the United States benefit from still more GDP growth? The answer is not so clear.

Consider the following chart, which shows the United States in relation to its closest peers, the high-income members of the Organisation for Economic Cooperation and Development (OECD), an invitation-only club of developed democratic countries.
The 21 countries in the chart all have per capita GDP of $35,000 or higher. They represent all of the early members that joined the OECD before 1975, with the exception that the chart substitutes high-income, late-joiner South Korea for the low-income original member Turkey. Clearly, the relationship between per capita GDP and the SPI is weak for these countries. The trend line has a slight upward slope, but the correlation between the variables is not statistically significant.

Interestingly, the United States has the lowest SPI score of any of the wealthy OECD countries. A check of subcomponents of the SPI shows that the United States performs especially poorly on measures related to population health, such as undernourishment, child and maternal mortality, and deaths from infectious diseases, life expectancy at age 60, deaths from noncommunicable diseases, and access to health care services. It is also an underperformer on indicators of environmental quality, personal safety, and access to basic knowledge. U.S. performance is substantially above the mean for only one subcategory category of the SPI, access to advanced education.

Looking over these data, it is hard to escape the conclusion that faster economic growth should not be the highest priority for U.S. public policy. That is especially true when measures taken in the name of faster growth risk damage to the environment through weakening of pollution standards and underfunding conservation measures. Increased growth that comes at the cost of exacerbating already high inequality would also be unlikely to improve broad measures of prosperity.

It would be far more beneficial to pursue policy changes to enhance the conversion of raw GDP into actual prosperity that is widely shared among the entire population. Universal access to health care, better public education, and stronger environmental protection are obvious priorities. There is no danger that better public policy in these areas would bring economic growth to a halt. In fact, a healthier and better educated population could be expected to improve growth in the long run. But pushing for growth at all costs, regardless of the human consequences, will only drag us down ever farther below the curve.

Previously posted to

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