Higher average incomes do not necessarily mean an improvement in average citizen’s well being

Introduction

Average income or Per capita income is achieved by dividing the total national income, which is measured by Gross Domestic Product (GDP), by the total population (Common & Stagl, 2005). Technically it is not average income as children and the economically inactive people are considered when calculating it. GDP per capita have been used over the years as a tool for measuring a country’s living standard.

Wellbeing is a subjective term, thus over the years despite the attempts measure wellbeing, it has never had a clear definition.In finding the wellbeing of a society, there are two approaches. One approach would be the hedonic tradition, which looks at happiness, life satisfaction, optimism and low negativity. The other is the eudemonic tradition of positive psychological functioning and human development (Dodge, et al., 2012).

Measures of Wellbeing

In the past, individuals, organisations and even government bodies have attempted to come up with more accurate ways of measuring a society’s wellbeing. One such measure is the Human Development Index (HDI), which was introduced in 1990 by the United Nations Development Programme (UNDP) in its annual Human Development Reports. HDI is calculated using three components that are basic necessities for the wellbeing of a society; longevity which is measured by life expectancy, knowledge which takes adult literacy rate into consideration, and standard of living which is measured by Real GDP per capita adjusted to Purchasing Power Parity (Todaro & Smith, 2011).

However the increase in globalisation has resulted in higher migration of labour and the UN has come to realise that literacy rates don’t accurately show the education levels of a country. Thus in 2010 November the UN introduced the New Human Development Index (NHDI). This was measured using Life expectancy at birth, mean years of schooling, expected years of schooling and GNI per capita (PPP U.S. $).

Norway, Switzerland, Australia, and Sweden was in the top ten highest GDP per capita in 2012 (The World Bank, 2013), and also they achieved high HDI as to qualify within the top 10 in the UNDP website too(United Nations Development Programme, 2012). Whereas Eritrea, Guinea, Central African Republic, Niger, Congo Republic and Burundi are represented among the worst 10 in GDP per capita (The World Bank, 2013), as well in the HDI data (United Nations Development Programme, 2012). This shows that higher GDP per capita, actually contributes to better living standards of people.

However, NHDI even though widely used as a wellbeing measuring tool, does not accurately show a person’s wellbeing or living standard. For example, it does not show the unemployment rates, crime rates, deforestation, pollution, fertility rates, life satisfaction or any other components which affect a person’s wellbeing.

As the hedonic approach became more popular, the Gallup World Poll started a survey, where participants were asked to rate their life satisfaction and happiness on a ladder, known as the Cantril ladder, where zero meant the worst possible life and 10 depicts the best possible life (Sachs, et al., 2013).

Comparing the data between the Cantril ladder and GDP per capita, it is evident that Denmark, Norway, Switzerland, Sweden and Australia are among the top ten on both.Likewise comparing the worst ten countries on both the Cantril ladder and GDP per capita, it is apparent that Congo Republic, Burundi, and Central African Republic are on both lists (The World Bank, 2013)(Sachs, et al., 2013). Again, this shows that countries with higher average incomes are more happy and satisfied with life, thus are more improved in wellbeing.

On the other hand, people have unlimited wants with very limited resources to satiate them. So their life satisfaction is at the cost of depleting limited resources. For example, people want better and bigger houses, as a result real estate firms cut down trees to make space. This satisfies the people’s wants in the short run, but in the future they lose the luxury of picturesque green scenery, and this also has negative spill over effects which ultimately lead to global warming and ozone depletion. Ultimately in the long run, the whole world will suffer.Due to the magnitude of effect the depleting Mother Nature could have on all countries, it is important to factor the environmental friendliness of an economy into their measure of wellbeing. A measure of wellbeing that factors this is the Happy Planet Index.

The Happy Planet Index (HPI) is a new measure of progress introduced by the New Economics Foundation (NEF) in 2006, with the main goal to focus on what matters: global sustainable well-being. The HPI depicts how well nations are faring in terms of supporting their citizens to live good lives now, while making surethat others could do the same in the future(Abdallah, et al., 2012). HPI is calculated using life expectancy, experienced wellbeing as measured using the Cantril ladder, and ecological footprint. Previously mentioned wellbeing indices were based on past data, whereas this measure shows the long term wellbeing, owing to this reason there is no apparent positive correlation between the HPI and the GDP per capita. For example, Costa Rica has attained the best HPI twice in a row by 2012 (New Economics Foundation, 2012), but their GDP per capita stands at $12,900, which is 12.6% of the highest GDP per capita that year (Central Intelligence Agency, 2013). Another observation would be that Qatar and Kuwait even though are among the top 10 highest GDP per capita,have two of the worst ecological footprint of 11.7 gha/capita and 9.7 gha/capita respectively, and thus are among the ten worst HPI (New Economics Foundation, 2012).

On the other hand, among the countries with the worst HPI, there are countries that were among the worst GDP per capita list too, like Niger and Central African Republic. This shows that for economies to maintain a decent level of wellbeing, a high GDP per capita alone is needed but that alone is not enough, rather a balance of income, health, past wellbeing and consideration of future wellbeing, by using resources at a similar rate as they are replenished, is necessary.

However there is a glitch in this measure of wellbeing too. It does not calculate the fertility rates, people living with HIV/AIDS, whether the country is in war, crime rates, etc. For example, Costa Rica has the highest HPI, but in 2013 (2012 information not available) it also had the 10^th highest Crime Index (Numbeo, 2013). When crime rates are high in a country there is always uncertainty and unrest among its citizen’s, so the HPI’s portrayal of Costa Rica as a society with better wellbeing is misleading.

The quest of wellbeing and happiness through material gains has always existed. Yet in contrast to the entire worlds’ attempts to measure their economic development, Bhutan has probably taken the right step by measuring their Economic growth by the Gross National Happiness (GNH), not GDP. The GNH Index is calculated using 33 indicators with 124 collective variables, so rather than limiting the people’s happiness to subjective wellbeing, Bhutan has successfully identified and incorporated some of many dimensions of happiness and wellbeing. The GNH goes beyond the Cantril ladder, HDI, Gross National Income (GNI), HPI, or Happiness Index, rather it uses all of these innovative measures and combines them and many others of their own localised measures to create the GNH Index. The GNH Index ultimately categorises the inhabitants as; 77%-100%: Deeply happy, 66%-76%: Extensively happy, 50%-65%: Narrowly happy and 0%-49%: Unhappy. This is again categorised to Happy above 66% and Not-Yet-Happy below that. Bhutan uses the GNH as they see that wellbeing of a nation should be seen in a holistic point of view, so simultaneous increase in material gains and spiritual development is necessary. Bhutan’s main aim is to bring the entire nation’s GNH above 66% GNH Index, thus making them a nation with people of universal values and meaningful lives (Sachs, et al., 2013). Believing that higher incomes alone is enough for wellbeing is moot, compared to Bhutan’s initiative to wellbeing.

Organisation for Economic Co-operation and Development (OECD) is a famous establishment, which was created after World War 2, to encourage unity and peace between countries, and to uplift the economies. Now it has 34 member countries, and influences 40 countries who are responsible for 80% of investment and global trade (OECD, 2014). This organisation have started to recognise how important social wellbeing is for an economy and is presently coming up with guidelines to measure subjective wellbeing.

Again like the many independent bodies, OECD has recognised that material gains, quality of life and sustainability are allsimultaneously needed to improve the standard of living in a society. Better Life Index which was introduced in May 2011 is the initiative that OECD has yet released, which identifies all of these dimensions. Wealth and Income, housing, and jobs and earnings show the material conditions of people in the society, whereas quality of life is complex, owing to the fact that OECD is intent on making the index as accurate as possible. The components that OECD uses for the quality of life are; subjective wellbeing, civic engagement and governance, literacy and skills, sociability, quality of environment, work life balance, personal security, health status(Organisation for Economic Co-operation and Development, 2011).Also OECD considers how sustainable the achieved level of standard of level is in terms of resource availability for the future generations.

Considering the Better life index, it is clear that Australia has topped all other OECD countries and achieved the best standard of living score. On the other hand, Australia is also among the top 10 nations according to the GDP per capita (The World Bank, 2013). This shows that a country with high GDP per capita is in a more likely position to achieve better wellbeing. However it also requires better policy formulation and efficient economic management to ensure that all dimensions contributing to better wellbeing are satisfied. For example, even though Denmark has the 9^th highest GDP per capita across the globe (The World Bank, 2013), compared to other OECD countries, its wellbeing performance for 2013 was not satisfactory hence they were ranked 22^nd on the Better life index list (Organisation for Economic Co-operation and Development, 2013).

Conclusion

All the economies have now realized or are on their way to recognizing that a society’s wellbeing cannot be measured by just their GDP per capita. Which is why as mentioned above many organisations have attempted to formulate better and more accurate measure to try to materialise the wellbeing of people into numbers.

For an economy suffering from poverty, a rise in income levels would mean better chances of access to education, more secure homes, better access to healthcare, access to clean water; basically better living standards. In this case, increase in GDP per capita positively correlates with the increase in wellbeing of the society (Sachs, et al., 2013). Thus it is accurate to say that high per capita income does have a hand in people’s wellbeing, but only up to a certain extent.  Researchers have found that income positively correlates with wellbeing only upto a GDP per capita of $10,000 per annum PPP, beyond that its only immaterial values that bring meaning to human lives.

Reference

Abdallah, S. et al.(2012)The Happy Planet Index: 2012 Report, London: The New Economics Foundation. Central Intelligence Agency (2013)The World Factbook. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html[Accessed 2 May 2014].

Common, M. & Stagl, S. (2005)Ecological Economics: An Introduction. 1st ed. Cambridge: Cambridge University Press.

Dodge, R., Daly, A. P., Huyton, J. & Sanders, L. D. (2012)The challenge of defining wellbeing. International Journal of Wellbeing, 2(3), p. 2.

New Economics Foundation (2012)Happy Planet Index. [Online] Available at: http://www.happyplanetindex.org/data/[Accessed 2 May 2014].

Numbeo (2013)Crime Index for Country 2013. [Online] Available at: http://www.numbeo.com/crime/rankings_by_country.jsp?title=2013-Q1[Accessed 2 May 2014].

OECD (2014)OECD- History. [Online]Available at: http://www.oecd.org/about/history/[Accessed 2 May 2014].

Organisation for Economic Co-operation and Development (2011)Measuring well-being and progress, s.l.: OECD.

Organisation for Economic Co-operation and Development (2013)OECD Better Life Index, s.l.: OECD Better Life Initiative.

Sachs, J. et al. (2013)World Happiness Report, s.l.: s.n.

Sachs, J. et al. (2013)World Happiness Report, s.l.: s.n.

Sachs, J. et al. (2013)World Happiness Report. [Online] Available at: http://www.earth.columbia.edu/sitefiles/file/Sachs%20Writing/2012/World%20Happiness%20Report.pdf[Accessed 29 April 2014].

The World Bank (2013)GDP per capita (current US$). [Online] Available at: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?order=wbapi_data_value_2012+wbapi_data_value+wbapi_data_value-last&sort=desc[Accessed 1 May 2014].

Todaro, M. P. & Smith, S. C. (2011)Economic Development. 11 ed. Harlow: Pearson Education Limited.

United Nations Development Programme (2012)Table 2: Human Development Index trends. [Online] Available at: https://data.undp.org/dataset/Table-2-Human-Development-Index-trends/efc4-gjvq[Accessed 29 April 2014].

WebFinance Inc. (2014)BusinessDictionary.com. [Online] Available at: http://www.businessdictionary.com/definition/per-capita-income.html[Accessed 1 May 2014].