The economics of wellbeing

Professor Arthur Grimes looks at statistics highlighting our economic strengths and weaknesses in the lead-up to New Zealand's first Wellbeing Budget.

image of Professor of Wellbeing and Public Policy Arthur Grimes
Professor of Wellbeing and Public Policy Arthur Grimes asks if statistics back up Fred Dagg's appraisal in the lead-up to New Zealand's first Wellbeing Budget.

In 2019 we will have New Zealand’s first Wellbeing Budget, so how well is New Zealand doing as a country relative to other nations? In some respects, Fred Dagg’s words are appropriate: "We don’t know how lucky we are". In other respects, the words of my old school reports are apposite: "Could do better"!

Comparisons are odious

A number of international organisations collate measures of wellbeing across countries. While comparisons are odious, they can also be useful in highlighting country strengths and weaknesses. Let’s take a look at a few of the more prominent measures. They differ in what they cover and in how we rate as a country. These differences show the importance of defining what we mean by wellbeing when designing public policy.

Our starting point is a simple measure: how much New Zealanders can purchase, on average, out of their market incomes. In national accounts parlance this measure is called per capita Gross National Income (GNI) measured at purchasing power parity.

New Zealand is the 34th richest country according to GNI per capita (Norway, at 6th, is the richest OECD country; Australia ranks 21st.) New Zealand’s ranking doesn’t look too good – though a number of countries above us are either major oil producers (Qatar, Brunei, Kuwait, Norway, UAE, Saudi Arabia, Bahrain, Oman) or tax havens (Liechtenstein, Andorra). Ignoring these special cases, New Zealand shifts up to 24th – still hardly in the top rank of countries.

Money isn’t everything

A founder of national accounts, Simon Kuznets, was clear that GDP is not a measure of national welfare. In the early 1970s, two later winners of the Nobel Prize in Economics – William Nordhaus and James Tobin – introduced their Measure of Economic Welfare which recognized that GNP includes damaging production (e.g. the creation and subsequent clean-up of pollution) while it ignores beneficial production such as the value of leisure time and of unpaid work. They succinctly stated: “maximization of GNP is not a proper objective of policy. Economists all know that”.

Marilyn Waring further developed many of the issues raised by Nordhaus and Tobin. In particular, she showed that measures such as GDP devalued the contributions of women to society, since many contributions of women are not conducted through the market and so are not included in the national accounts.

However the warnings of Kuznets, Nordhaus, Tobin and Waring have too often been forgotten by policy-makers. So what should we look at instead?

Rank indicators

Several internationally comparable indicators of wellbeing that are broader than GDP have been compiled. A long-standing initiative, the UNDP’s Human Development Index (HDI) was developed, in part, by another Nobel Prizewinner, Amartya Sen.

The HDI combines measures of national income, education and longevity together to form an index. It recognizes that a long life is important in addition to a rich life, while education has both income-generating benefits and wider societal and personal benefits. According to the HDI, New Zealand ranks 16th in the world (Norway is top; Australia is 3rd).

But the HDI still misses out important aspects of life: housing, social connections, etc. A broader index is provided by the Legatum Institute. Legatum groups together outcomes for 9 ‘pillars’ of wellbeing. On this measure (the Legatum Prosperity Index) New Zealand ranks 2nd (Norway is again top; Australia is 9th). The combination of items in this index is a mixture of outcomes (e.g. health) and inputs (e.g. business environment) and a critique of the index is that inputs and outcomes cannot meaningfully be weighted in relation to each other.

In an effort to escape rankings based on arbitrary weights – while still making international comparisons possible – the OECD developed its Better Life Index (BLI). The BLI provides summary outcome measures (and ranks) for each of the 38 OECD countries across 11 wellbeing ‘domains’. Reflecting the fact that different people place greater emphasis on some domains than others, the OECD refrains from combining the domains into a single index.

Nevertheless, the BLI website enables users to provide their own weights across domains to construct their own aggregated index. If we weight each domain equally, New Zealand ranks 11th within the OECD (Norway top; Australia 3rd). In a future Wellblogging column, we will examine which domains New Zealand does well in and in which we "could do better".

Life satisfaction measures

Many wellbeing researchers use a life satisfaction measure (one of the BLI domains) as an over-arching measure of wellbeing. On this measure (which we will also explore further in a future column), New Zealand rates 8th within the OECD.

Norway is again top while Australia lags at 10th. They might be luckier than us, but they’re not quite as happy! New Zealand also rates slightly above Sweden (9th), and well above USA and UK (15th and 18th respectively). To paraphrase Monty Python: “we might have been brought up in a shoebox, but we were happy”.

So what can we make of New Zealand’s wellbeing from this quick tour of wellbeing indicators? We are not particularly rich – 34th in the world, but we score pretty well on other wellbeing measures (between 2nd and 16th depending on your pick). On average, this seems about right – most of us would far rather live in New Zealand than in many of the countries that are ‘richer’ than us.

But the words "on average" disguise a lot! In a future Wellblogging column we will look at how wellbeing varies within countries – New Zealand doesn’t look too flash. We will also look at sustainability of wellbeing measures – again New Zealand "could do better".

And what does all this mean for the 2019 "wellbeing budget"? It means that policy-makers had better define clearly what they mean by wellbeing; otherwise almost any sort of policy could be justified as boosting some (important or trivial) aspect of wellbeing.

  • Dr Arthur Grimes is Professor of Wellbeing and Public Policy at the School of Government, a Senior Fellow at Motu Economic and Public Policy Research, and was formerly Chief Economist and Chairman of the Reserve Bank of New Zealand. This commentary was published on the Newsroom website.