Wednesday, July 27, 2011

Is the incidence of depression higher where a high proportion of the population are 'suffering'?

Before being willing to guess the answer to that question I expect most readers would want to know how I define suffering. For the purposes of this exercise, I am using the definition of suffering adopted by the Gallup World Poll. Gallup classifies respondents as "thriving," "struggling," or "suffering," according to how they rate their current and future lives on a ladder scale, based on the Cantril Self-Anchoring Striving Scale, where the bottom rating is ‘the worst possible life’ and the top rating is ‘the best possible life’. Respondents are classified as suffering if they have poor ratings of their current life situation (4/10 and below) and negative views of the next five years (4/10 and below). They are more likely to report lacking the basics of food and shelter, more likely to have physical pain, a lot of stress, worry, sadness, and anger. They have less access to health insurance and care, and more than double the disease burden, in comparison to "thriving" respondents.

So, do you think the incidence of depression is likely to be higher in countries where a high proportion of people are suffering? By now, you are probably thinking that must be a trick question. Given the way Gallup defines suffering, surely it must be reasonable to expect the incidence of depression to be higher in countries with relatively high levels of suffering.

However, that doesn’t seem to be so when the Gallup data are compared with the results of a recent study of the incidence of depression in 18 countries. The study, by Evelyn Bromet (and 21 co-authors) recently published in BMC Medicine involved face to face interviews of over 89,000 adults using the WHO’s Composite International Diagnostic Interview. I don’t know what that means exactly, but it sounds impressive. This looks like a reliable study.

The authors report that the incidence of major depressive episodes (MDE) was greater on average in the higher income countries than in the low-to- middle income countries included in their study. That is what attracted my attention initially and the reason why I thought it might be interesting to plot the incidence of MDE against Gallup estimates of the percentage of populations who are suffering, as shown below.

The chart doesn’t seem to show any evidence of a positive relationship between prevalence of MDE in the last 12 months and the percentage suffering. Similarly, a graph plotting lifetime prevalence of MDE against the percentage suffering showed no obvious positive relationship.

The data depicted in the chart suggest there is no simple relationship between income levels and prevalence of MDE. For example, the prevalence of MDE seems to be relatively high in the United States and relatively low in Japan, Germany and Italy.

The findings of the study reveal several things about depression that I was not previously aware of. The incidence of MDE among women is, on average, about twice that for men. The average age of onset is the mid-20’s. The strongest demographic correlate in high-income countries was being separated from a partner, whereas in low-to-middle income countries it was being divorced or widowed.

Depression is obviously related to emotional well-being, but the links seem to be complex. For example, I don’t know how to relate data suggesting that only 2 percent of the population in Brazil are suffering with data suggesting that about 10 percent had a major depressive episode in the last 12 months. Over the last few years I have gained some understanding of correlates of well-being, but that doesn't seem to help much in understanding the incidence of depression.

Postscript 1
Cameron Lau of International Business Times talks about the depression study here. However, seems to have his facts twisted when he claims that depression rates in rich countries far outpace those in poor countries.

Postscript 2
I have just remembered a recent study by John Helliwell and Shun Wang that sheds considerable light on the incidence of depression in different countries. These authors have been able to explain 58% of the variance of 117 average suicide rates drawn from different years in 50 countries around the world using only four key variables: social trust, membership in community organizations, strength of religious belief, and the divorce rate. They comment: ‘The first three variables act to reduce suicide, while higher divorce rates are associated with higher suicide rates. The effects of social trust are large and statistically significant. Moving 10% of the population from generally untrusting to generally trusting, a shift of … less than one standard deviation for the sample data, would be predicted to lead to a … drop in the suicide rate, more than 10% of its average value’ (‘Trust and Wellbeing’, IJW, 2011, p. 50).

Data from World Values Surveys for 2005-6 indicate that the percentage of the population who think that most people try to take advantage of them (ratings of 1 to 4 on a ten point scale) is much higher in Brazil and the Ukraine (shown to have a high incidence of depression in the above chart) than in Japan, Germany and Italy (which have a relatively low incidence of depression).

However, lack of trust does not seem to explain the relatively high incidence of depression in the United States, where the percentage of the population who think that most people try to take advantage of them is about the same as in Japan, Italy and Germany.

Friday, July 22, 2011

Do Australian political leaders lack vision?

I ended my last post asking why the major political parties in Australia seem to be finding it more difficult to promote sensible policies. One possible explanation I hear quite frequently is that our political leaders lack vision. The argument seems to be that the policies of the major parties are too easily blown around by powerful interest groups because the leaders are no longer anchored to a set of values that their parties stand for.

The argument is expressed most often about the prime minister. I often hear people ask: Who is the true Julia? What does she really believe in? What does stand for? (A recent example is in the remarks by Paul Gardner here.)

I am not about to become an apologist for the prime minister, but it seems to me that those questions are unfair. Julia Gillard tells an authentic story about her origins, the use she made of the educational opportunities available to her and the values she holds relating to opportunity and responsibility. Why can’t more people accept that she means what she says when she argues that ‘Labor's modern mission’ is ‘to spread opportunity with a matching sense of responsibility’?

One of Gillard’s problems is that her espousal of opportunity and responsibility seems vague and out of kilter with the leftist views she is known to have held in the past. Some people might feel that she is using the language of opportunity and security as a cover for statism and wealth redistribution.

The leader of the opposition, Tony Abbott, has a somewhat different problem stemming from his background. Abbott makes no secret of the fact that in his youth he was strongly influenced by Bob Santamaria, a catholic political ideologue, who was a particularly divisive figure in Australian politics. The problem that poses for Abbott is that some people think the values he has espoused are a cover for paternalistic conservatism.

So, what values has Abbott espoused? In his book, ‘Battlelines’, Abbott poses the question: “How can Australians, individually and collectively come closer to being their ‘best selves’ and what can the Liberal Party do to bring this about?” (p79). That question seems to me to imply a strong set of values relating to individual aspirations. The doubts that some people have about Abbott stem from the possibility that he may be inclined to impose a social conservative’s view of what it means to be ‘one’s best self’ rather than respecting the rights of every individual to live according to their own views of what it means to be ‘one’s best self’.

It seems to me that the claim that our political leaders lack vision is garbage. The values that Gillard and Abbott currently espouse deserve to be recognized and considered on their merits, even if there are be grounds for suspicion that both are still influenced by their respective ideological histories.

There should be more focus on the similarities and differences between the values that Gillard and Abbott espouse . It seems to me that Gillard’s ‘opportunity and responsibility’ is closely allied to allowing and helping people to come closer to being their ‘best selves’. The difference is that Gillard puts more emphasis on spreading opportunity while Abbott would probably put more emphasis on encouraging greater productivity and individual excellence. There is still potential for the major parties to compete for votes on the basis of their emphasis of different values even though the old political divide based on attitudes toward the role of the state have greatly diminished.

So, if lack of vision is not the problem, what is? The prime minister has failed to ensure that ‘opportunity and responsibility’ are reflected in policy development outside of education and social welfare. For example, the national broadband network seems to be as much about reducing opportunity for people in the big cities, by restricting competition, as it is about expanding opportunities for people in regional areas. Health policy seems to be more about attempting to reduce risk factors through greater government regulation, rather than encouraging individuals to take greater responsibility for their own health.

The leader of the opposition has adopted a small target strategy. Rather than promoting new policies to encourage greater productivity, he continues to recite the mantra he took to the last election about ending the waste, repaying debt, stopping the new taxes and stopping the boats.

What are the incentives for politicians to adopt small target strategies? What role does the media play in this? Why don’t journalists do more to hold political leaders to account for lack of consistency between their high ideals and the policies they adopt? Is there anything that ordinary people can do to raise the level of political debate in this country?

Jim Belshaw - an historian, economist, management consultant and blogger - has suggested in a comment below that there is a lack of good policy ideas and that people like me (and himself) have something to answer for in that regard. Jim has also posted a more extensive comment on his blog.

Wednesday, July 13, 2011

Should politicians be required to meet competency standards?

‘Until philosophers are kings, or the kings and princes of this world have the spirit and power of philosophy, and political greatness and wisdom meet in one, and those commoner natures who pursue either to the exclusion of the other are compelled to stand aside, cities will never have rest from their evils’ – Plato, ‘The Republic’.

Plato proposed that the philosophers and warriors who are guardians of his ideal state should live in poverty. I can see some merit in that idea. I find it difficult, however, to see much merit in the breeding program that Plato suggested for producing guardians. Plato suggested that individuals should be deceived into thinking that they were participating in a lottery for the selection of their partners, but the lottery would be rigged by a breeding committee in an attempt to produce the best offspring.

If those are the serious proposals of a great philosopher, then it seems to me we might have reason to be concerned about the quality of public policy that philosopher kings might seek to implement. The great philosopher sets out to devise a system that would ensure that we are not governed by numpties and ends up, unwittingly, demonstrating what life might be like if we were governed by numpties. (I am indebted to Shona for introducing me to the word, ‘numpty’. According to one online dictionary, a numpty is a person ‘who, sometimes unwittingly, by speech or action demonstrates a lack of knowledge or misconception of a particular subject or situation to the amusement of others’. Others dictionaries that are less inclined to mince words suggest that a ‘numpty’ is a fool. Either way, it is probably a good idea for Australians to know what a numpty is before visiting the UK.)

There seems to me to be a lot more merit in the suggestion that politicians should be required to meet minimum competency standards than in the idea of breeding philosopher kings. This suggestion has arisen as a result of a discussion I have been having with Shona about political institutions. (Our discussion of politics began in a recent post.)

As a discussion starter, Shona suggests that politicians should be required to have a Master of Politics – something like an MBA for politicians. The degree would include practical work and be politically unbiased. It would cover a range of topics including political science, debating and language skills, law, economics and presentation. Shona noted that there could be a problem in ensuring that all politicians earn their MP degrees from reputable academic institutions. It would be necessary to find a way to stop some of them from just purchasing a degree on the internet.

When asked why she included presentation in her proposed course, Shona explained as follows:

‘Interestingly, I have just read and reviewed a large number of technical reports as part of my work. What infuriates me in doing so is the poor presentation, continual mistakes and many inconsistencies. Remind you of anything? I get angry with myself as a woman, looking at Julia Gillard and being distracted by a jacket too tight, poor make-up or dodgy hair, as opposed to focusing on what she has to say. When men do this it makes me very very angry. But I also notice the nose hairs, bad mannerisms and appalling body language of her male counterparts – so I’m not just judging the women. Presentation matters. Bad presentation distracts the reader/listener from the content/message. People would be more inclined to listen to what politicians have to say if they shine their shoes and clip their nose hair.’

In order to provide an example of how Australian politicians could present themselves in order to distract people from what they are saying it seems appropriate at this point to link to an interview of Sir Les Patterson.

The concern I have with the development of some kind of formal qualification for politicians is that it might tend to reinforce problems stemming from the similar backgrounds of many politicians. These days many seem to come from political families, study law at university and become party apparatchiks before standing for election. Mark Latham raised a related question in a recent article: ‘how can the Labor Party, having professionalised its ranks in the 1980s now look so unprofessional in office?’(‘A party without a point’, AFR, 30 June).

By coincidence, I am currently reading Vernon Smith’s book, ‘Rationality in Economics’, which has a useful discussion about wisdom of crowds and the characteristics of groups that enable good information aggregation. Smith (citing Suroweicki) suggests that four characteristics of groups enable good information aggregation outcomes: diversity, independence, decentralization and an aggregation principle to process private knowledge and yield group outcomes.

Does that mean that candidates for election should all do different work placements for a year – for example, as police, teachers, child care workers, hospital staff or garbage collectors? I am not confident that would produce better outcomes.

Mark Latham suggests, in the article mentioned above, that the Labor Party’s problems stem from a collapse of its policy-making culture. A particular problem for Labor has been the narrowing of the political divide following the end of the Cold War. Another contributing factor he mentions – the recent tendency for reformist ideas to be seen as an electoral liability – has inflicted both sides of politics.

So, that leaves me wondering whether competency of politicians is a fundamental problem in Australia. The basics of the system seem to me to be OK. Voters choose on the basis of criteria that are important to them. Political parties have strong incentives to find candidates who are acceptable to voters. The system should be able to weed out politicians who do not meet minimum competency standards.

Yet it would be hard to claim that in our political system everything is for the best in the best of all possible worlds. What is the problem with Australian politics? Why are the major parties finding it more difficult to promote sensible policies?

The web page I have linked to claims that the interviewer of Sir Les Patterson was Clive James. The interviewer was certainly not Clive James, whose web page can be found here.
Shona tells me that the interviewer was Clive Anderson. He is indentified as Clive Anderson in the description of the relevant video here.

Monday, July 11, 2011

Is the 'great big new carbon tax' a good idea?

I am using that emotive description of the new tax because I have previously suggested on this blog that a great big new carbon tax might not be a bad idea if it replaced other taxes that are having adverse effects on economic incentives. So, how good is the carbon tax package announced by the prime minister yesterday?

The first point that needs to be recognized in assessing the package is that it only makes sense if it is viewed as a signalling exercise. By itself this package will have a small impact on carbon dioxide emissions in Australia, a tiny impact on the world-wide emissions and an almost negligible impact on the stock of global emissions and global climate. Its impact depends almost entirely on the extent to which it may help to encourage people in other countries to take similar action to reduce their carbon dioxide emissions. If there is sufficient action by other countries more investors may come to expect that development of more efficient alternative technologies is likely to become a profitable venture.

The incentives that the tax provides for development of more efficient alternative technologies are the critical factor in whole exercise. If the world community ever gets serious about making substantial reductions in global emissions, the economic cost will be massive unless low-cost technologies are developed for energy generation and/ or removal of carbon dioxide from the atmosphere. Unfortunately, the proposed tax is unlikely to induce many people to rush into investing in development of new technology.

The tax cannot credibly be claimed to be anything other than a modest step by a small country. The longer term promises about the extent of reductions in emissions that are aimed for have little credibility. At best, the proposed carbon tax provides a weak signal of Australia’s willingness to participate in global action to reduce greenhouse gas emissions. The signal would be stronger if there was bipartisan support for the tax – but even if it is introduced and remains in place it will not amount to much in a global context.

Why don’t we hear the government arguing that ordinary people should be prepared suffer some pain in order to save the world from a climate disaster? The government is not talking about pain. It seems to have reasoned that since it will be obvious to almost everyone that the contribution of the tax to saving the world will be extremely modest and contingent on similar action by other countries, the tax can only be justified to Labor’s traditional voters if they suffer no pain. The package is being sold to the government’s traditional supporters as a redistribution measure that will actually improve their lot at the expense of the big polluters. And it is all being done in the name of ‘tax reform’!

Could anyone object to a new tax being used to fund reforms that will make the overall tax system more efficient? I imagine that such a proposal would have widespread support. The question that must be asked, however, is whether the proposed increase in the tax-free threshold should be viewed as a reform.

My concern is that the proposed tax relief will do very little to improve the work incentives faced by people with low incomes because it will leave effective marginal tax rates largely unchanged. The government has missed an opportunity to undertake some meaningful tax reform that might raise productivity. If this carbon tax package can be sold as economic reform, then the meaning of economic reform has changed beyond recognition and new words will have to be found to describe policy actions that will raise productivity.

In proposing to raise the tax threshold the government can claim to have followed a recommendation of the Henry review.
However, there is a strong case that greater tapering of welfare benefits would be a better way to tackle poverty traps.The relative merits of increases in the tax free threshold and greater tapering of welfare benefits as means of reducing poverty traps was discussed by David Ingles in a paper for the Australia Institute last year. Ingles suggested:  'In general, the recommendations of the Henry Tax Review are a slight improvement on the current situation but they do not address really fundamental issues and lack a coherent underlying rationale'.
In my view, Ingless goes too far in suggesting that the recommendations of the Henry review lack a coherent underlying rationale, but I can't see a coherent rationale in the way the government is cherry picking the recommendations of that review.

Friday, July 8, 2011

Why not think up a new political system?

Shona has a suggestion for a new project for me. Regular readers of this blog will remember Shona as the person who wrote some guest posts about volunteering. Shona suggests that I should invent a new political system.

This is what Shona wrote:

I just had my meeting with our local MP. Actually, Bruce was a ‘no show’ so he asked his minion to talk to me. I wouldn’t have minded talking to the minion if that is what Bruce had asked me to do originally. I was surprised that Bruce had asked me to talk, although I did write a very long email to him a few months ago. The appointment was set up 5 or 6 weeks ago and clearly his schedule has been overrun with his new responsibilities.

Bruce’s new responsibilities involve looking at social policy. His focus is on social issues that have become institutionalized (with groups representing them) and not the broader picture. That is a big mistake in my opinion.

In my discussion with said minion, I suggested that it didn’t matter what party was in power, we have people who don’t know anything about a subject leading policy. And there is no long term strategic thinking.

It makes me wonder whether this political system we have ever satisfies anyone. Are there any good examples of political systems anywhere in the world? Our political system is based on the British system which is hundreds of years old. If we were to start from scratch, what sort of system would we establish? It also strikes me as very bizarre that a head of a government agency has to be qualified to do that job, but a politician who directs and takes responsibility for the agency doesn’t have to have any qualifications! Shouldn’t there be some sort of competency system for politicians?

I am appalled by current politics. I don’t want to be forced to choose between existing political parties or leaders. Maybe you could invent a new political system from scratch for discussion – a system to perpetuate our happiness, and then perhaps compare it with what we have now. You could write thoughts on everything from competency criteria for politicians to voting systems. We could come up for a great name for it - the Winton System rather than the Westminster?

My immediate response was to start thinking up reasons why it is not a good idea to start from scratch in thinking about what kind of political system we should have. I don’t think it is possible for anyone (not even me) to understand how some political system that they thought up from scratch would work in practice. It is difficult to predict how politicians, judges, the media, interest groups and the public might respond to the incentives we might seek to incorporate in a new system until we actually see how they respond. Many people may tend to be less self-interested in their role as citizens than in normal market behaviour, but few are angelic. It is probably much easier to predict how people would respond to changes to a system in which norms of behaviour have already been established.

The suggestion of looking around the world to borrow ideas that work is sensible. I understand that is what the Americans did when they had the opportunity to start from scratch to invent a new political system. Australians did the same thing in developing a new constitution at the time of federation.

My starting point in thinking about political reform is to acknowledge that the Westminster system has one very good feature – it usually enables governments to be held accountable for their actions and to be voted out of office if they become unpopular. I think some of the argy-bargy that many people dislike about politics is an inevitable result of the role of the opposition and media in holding governments accountable. But the system does not reward politicians who are seen to offer unfair criticism. Politicians run the risk of losing votes if they are seen to be excessively negative or unnecessarily destructive

Added to the normal argy-bargy, some of the bad odour associated with federal politics in Australia at the moment seems to me to stem from the unusual situation in which we find ourselves. It is difficult for voters to hold the government accountable for the policies it is adopting because there was no clear winner after the last election. That means that the policies that the government has been implementing are the result of negotiations with minor parties and independents, rather than policies that it took to the people at the last election, or even policies that it can honestly claim to be in the interests of the community as a whole.

My next point is that in thinking about political reform we need to recognize that politics has inherent limitations as a way of getting things done. A lot of the disappointment about outcomes in a wide range of areas seems to me to stem from attempts to achieve things through the political process that would be better left to the private sector or voluntary co-operation. Why take money from people in order to provide them with services when they could obtain better value for money by buying them privately? The only answer that makes any sense is to make the distribution of services fairer – but governments do not need to be involved in actual provision of services in order to do that. As far as I can see there is no more reason to think that governments would be good at running schools or hospitals than farms, shopping malls or chook raffles.

A major problem inherent in politics as a way of getting anything done is that it involves giving some people the power to push other people around. People don’t mind when the pushing is obviously justified. There are not many people who mind being required to obey laws to respect lives and property of others, or being required to pay taxes to defend the country against potential foreign aggression. Politics becomes particularly objectionable when people get pushed around in order to provide benefits for some group that happens to be politically powerful.

In order to enjoy politics you have to either enjoy pushing other people around or enjoy pushing back. I think our main priority should be to contain politics to those aspects of life where it is actually necessary – so the pushing and shoving doesn’t intrude into aspects of life where it is unnecessary.

So, rather than start with a blank piece of paper I think it is probably better to look at the political system we have and to consider how it could be improved. The competency of politicians might be a good question to consider first. Should politicians be required to meet competency standards?

Wednesday, July 6, 2011

Does economic growth help people to thrive?

Yes! The proportion of people who are thriving tends to be higher in countries that have experienced greatest economic growth over the longer term. It may take several decades, however, for economic growth to be fully reflected in subjective measures of well-being. The proportion of people who are suffering also tends to be lower in countries that have experienced greatest economic growth, but there are quite a few countries that do not fit that pattern.

These observations are based on the definitions of ‘thriving’ and ‘suffering’ used in the Gallup World Poll. Gallup classifies respondents as "thriving," "struggling," or "suffering," according to how they rate their current and future lives on a ladder scale, based on the Cantril Self-Anchoring Striving Scale, where the bottom rating is ‘the worst possible life’ and the top rating is ‘the best possible life’. Further information on the survey and classification method is available here.

The following charts show the percentages of people who are thriving or suffering in 122 countries relative to per capita GDP levels in those countries. It is clear that the percentages thriving tend to be higher and the percentages suffering to be lower, in countries with relatively high per capita incomes i.e. those which have experienced greatest economic growth in the past.

The countries that do not fit the general pattern are interesting. Several former communist bloc countries are outliers in terms of lower percentages of the population thriving and a higher percentages suffering than would be expected on the basis of per capita income levels. Some African countries have much better outcomes and some much worse than would be expected on the basis of income levels. The outcomes that are worse than expected can be explained by factors such as civil unrest. Better than expected outcomes for African and Latin American countries in studies such as this are often attributed to national characteristics, such as a positive outlook on life (but that is not necessarily irrelevant to emotional well-being). The lower than expected percentages of people thriving in China, Singapore, Hong Kong and Taiwan might also be attributable to some extent to a more reserved outlook on life by Chinese people.

Another factor relevant to considering China, Singapore etc. is the rapid economic growth of these countries. As discussed in my last post, to the extent that well-being is affected by wealth (reflected in quality of housing, financial assets, human capital, public infrastructure, social capital etc.) as well as current income, countries with relatively high growth rates could be expected to have lower levels of well-being than other countries with similar per capita incomes. Regression analysis, comparable to that reported in my last post, suggests that growth prior to 1970 makes a substantially greater contribution to the percentage of people thriving than does growth in the periods 1970 to 1990 and 1990 to 2009. The results provide support for the view that is that it takes time for economic growth to be translated into forms of wealth that enhance well-being, rather than for the ‘unhappy growth’ hypothesis which I have discussed previously. The unhappy growth hypothesis implies that the estimated coefficients on growth in the most recent period could be expected to be negative, but I found the estimated coefficients on growth to be positive in respect of all periods. (The estimated coefficient for 1990 to 2009 is not significantly greater than zero at the 95% significance level, but the standard error is smaller than the estimate. Anyone who would like to see the results is welcome to email me.)

It would be appropriate to round off this discussion with a profound statement stressing the importance of economic growth to reducing human suffering and allowing more people to thrive, while acknowledging that wealth does not guarantee that anyone will thrive. However, I’m not in the right mood for writing profound statements.

Monday, July 4, 2011

How long does it take for GDP growth to be reflected in higher well-being?

In a paper written while he was at the World Bank, William Easterly found that changes in quality of life are surprisingly uneven as per capita income grows, despite the fact that a remarkable diversity of indicators shows quality of life across nations to be positively associated with per capita income. This finding might deserve to be called Easterly’s puzzle. (Bill Easterly is probably better known for his observation that foreign aid frequently fails to promote economic growth – but I don’t think that qualifies as a puzzle.)

One possible explanation, discussed briefly by Easterly, is that there may be ‘long and variable lags’ in the relationship between quality of life and economic growth. A related possibility, that is supported by some simple analysis I have undertaken for OECD countries, is that well-being is affected by wealth (reflected in quality of housing, financial assets, human capital, public infrastructure, social capital etc.) as well as current income. In this post I want to explore this possibility for a wider range of countries using the Legatum prosperity index. As noted in my last post, the Legatum prosperity index is highly correlated with the OECD’s well-being index.

To the extent that well-being is affected by wealth rather than current income, countries which have experienced rapid economic growth in recent decades could be expected to have lower well-being levels than those with similar income levels which have a longer history of relatively high per capita incomes. The following table provides results of regressions in which the Legatum prosperity index and various components of this index are explained by the log of per capita GDP in 1970, and the change in log per capita GDP from 1970 to 1990 and from 1990 to 2009. If the component of current income reflecting relatively recent growth has a similar coefficient to that reflecting income in 1970, it would be reasonable to conclude that capital stocks are not relevant to current well-being. (There are 92 observations in the regressions; 18 former Soviet block countries had to be omitted because of lack of lack of comparable per capita income data. Per capita GDP data is from Penn World Tables – the rgdpl measure.)

The results are consistent with the view that well-being is affected by wealth as well as current income. For the index as a whole, the estimated coefficient on the variable reflecting relatively recent growth is substantially lower than that on the variables reflecting past growth experience. The results for some components of the index also support that interpretation.

Economy: The estimated coefficient on relatively recent growth is actually higher than that on the variables reflecting previous growth experience. That result is to be expected because the economy variable is derived from a range of indicators of recent economic performance.

Entrepreneurship and opportunity: The low estimated coefficient on relatively recent growth is to be expected because an entrepreneurial culture takes time to develop. I usually think of causation running in the opposite direction – from an entrepreneurial culture to economic growth – but success often breeds success.

Governance: It may not appear to make a lot of sense to view low levels of corruption as a consequence of economic growth, rather than vice versa, but some of the indicators covered (e.g. political rights and regime stability) could reflect a build-up of institutional capital that has been fostered by economic success.

Education: As expected, the estimated coefficient on relatively recent growth is lower than on previous growth experience, reflecting the time it takes for improved education of young people to be reflected in the stock of human capital. Some of the indicators covered in the education variable reflect current enrolments rather than education levels of the population.

Health: Reasons for the low estimated coefficient on relatively recent growth would include investment required to improve sanitation and water quality, and the time required for training of health professionals.

Safety and security: As expected, countries with a long history of relatively high per capita incomes tend to have less violence. Low violence is conducive to economic activity and economic opportunities reduce the incentive to engage in criminal activities. The relatively low estimated coefficient on the recent growth variable suggests that economic growth has a greater positive impact on safety and security when it is sustained over a couple of decades.

Personal Freedom: Civil liberties, satisfaction with freedom and tolerant attitudes are strongly associated with a history of relatively high per capita incomes. The results do not shed much light on the effects of more recent growth experience.

Social Capital: Again, relevant indicators such as trust and perceptions of social support are associated with a history of relatively high per capita incomes, with greater ambiguity in respect of recent growth experience.

The regression results also indicate that the relevance of per capita income to explanation of the various components of the index varies considerably. Income history seems to be much more relevant to education and health outcomes than to personal freedom and social capital. Performance in relation to factors such as social capital helps to explain why some countries (e.g. New Zealand) have higher overall index scores while other countries (e.g. Greece) have lower overall index scores than would be predicted on the basis of income history.

Finally, to answer the original question, the results reported here suggest that it can take two or three decades for GDP growth to be fully reflected in higher well-being levels.

Sunday, July 3, 2011

How close is the correlation between the Legatum 'prosperity' index and the OECD's 'better life' index?

The Legatum prosperity index provides an assessment of wealth and well-being in 110 countries. The authors suggest that it ‘produces rankings based upon the very foundations of prosperity’. (I am allergic to that kind of spin, but I am quoting the words here as penance for the unwarranted doubts I expressed on this blog in November 2009 about how much substance might lie behind this index. I eventually found the technical appendix I was looking for and satisfied myself that there is substance behind the ‘incredibly smooth’ presentation). The indicators incorporated in the study are factors that are known to be determinants of wealth and life satisfaction.

I have discussed the OECD’s better life index in several posts (most recently here).

There is some difference between the factors incorporated in the Legatum and OECD indexes. The factors included in the Legatum index are: economy, entrepreneurship and opportunity, governance, education, health, safety and security, personal freedom and social capital. The factors included in the OECD index are: housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety and work-life balance.

The two indexes are highly correlated. The simple correlation coefficient relating the averages of the factors included in the two indexes for OECD countries (excluding Luxembourg) is 0.95. (The Legatum index is not available for Luxembourg.) The correlation between the Legatum index and my modified version of the OECD index is 0.97.

The similarity of the two indexes is also apparent when they are graphed against per capita GDP. The chart below showing the Legatum prosperity index can be compared to a similar chart showing the modified OECD well-being index in the preceding post.

New Zealand and Greece are outliers in both charts. The Legatum index has New Zealand ahead of Greece on all criteria, with the greatest difference in social capital, governance and entrepreneurship and opportunity. The OECD index has New Zealand substantially ahead in terms of community, jobs, life satisfaction and housing.

Although the OECD and Legatum indexes appear to be quite different, they tell a similar story about well-being in OECD countries. An important advantage of the Legatum index is that it is available for a much larger number of countries.