Happiness as such is undoubtedly hard, if not the hardest, thing to evaluate and to quantify. Both GINI Coefficient and GDP trackers provide us with big picture of individual's or nations's l well-being that focuses on income and its distribution across the country. Cynics might say that those two are not an accurate measure of the country's well-being as there is more to happiness than an income alone. While to some extent this is true because high GDP means nothing if people cannot afford basic amenities or healthcare or if their opportunities in terms of education and employment are limited, it is not a terrible indicator after all. Income is related to the absence of poverty, unemployment and education levels, health and other opportunities that we value in life and that determine our well-being. As money is only a fraction of what is broadly perceived as happiness, what we really want to know is the actual quality of life as felt and reflected by individuals in the given society. In other words sustainable development is not about rising the income per se but more about raising human well-being which can be both measurable and hard to capture. Let's focus on those aspects that can be measured first.
We already know that in order to get the full picture we need to consider differences across the country, across the society. It is because in measuring the inequalities, and as we will later see - in analyzing world challenges, everything is synergistic, nothing exists in the vacuum. For that reason United Nations Development Program has invented so called Human Development Index or HDI which takes an average of three basic dimensions to determine human satisfaction in life therefore providing more holistic picture of human development.
The three areas it looks into are as follows:
At a first glance, the above map looks similar to the map gross domestic product per capita but if we look closer we will notice some striking differences. Angola in Africa for example, country known for its major hydrocarbons economy, strikes high on the income per capita but its education and health outcomes are still very low. The same applies to Equatorial Guinea with the rapid increase of GDP per capita over last couple of years due to its recent oil and gas discoveries. Why high GDP rates do not translate to the countries scoring high on HDI? Well, one of the reasons is the allocation of the revenue. Whether the rent collected from mineral deposits of the countries is used to support and improve living conditions or is it lost as a result of corruption or to a small group of the society like politicians or others in power.
World Happiness Report, that you will find on the sidebar, takes the HDI findings to a whole new level. It ranks 156 countries across six variables: GDP per capita, life expectancy, social support, generosity, freedom of choice and perception of corruption. It also includes the well-being of immigrants in 117 of those countries. Not surprisingly, countries that scored high on GINI Coefficient find themselves at the very of the top of the World Happiness list. Why do you think that is? Which of the variables mentioned above or your own plays the most crucial role in defining human happiness? How do you determine happiness? To me it is peace and security. Freedom from conflict.
Leave a comment below and share what in your opinion make a happy country!
The other side of the coin is human well-being measured in essence by simple 'Are you happy'? Now, there are two types of happiness:
The first one comes forth when asking someone emotionally How was your day? Were you happy? etc. It elicits mostly positive emotions. Similar like when we ask someone How are you? and in 99% we will hear I am good. To me this measure is not particularly objective as the answer to asking someone emotionally will very much depend on the cultural schema and so while in US you will most certainly hear back I am good thanks, in Poland in 80% of the time the answer will be closer to So, so, Tired etc. Perhaps more reliable dimension of happiness is therefore evaluative happiness. This is measured when we ask someone how do they evaluate their life, are they satisfied with their lives. It is more deep in essence and gives us better overview on where individual feel they are both on the social ladder and in the broader context of economic development. Here we can also learn about other aspects that matter to us such as social life and network, mental health, physical well-being, whether we are happy with our government etc.
We can see that more often than not high levels of happiness is the attribute of rich countries. But also of unequal countries like US when it comes to social inclusion. One important lesson for us is that income is only one aspect of happiness, relatively easily measured and evaluated but by no means exclusive when we want to find the real side of nation's well-being, stripped from numbers and data but focusing on these things in life that although hard to capture are the ones that keep us going.
The economic boom that we observed in the mid-18th century did not happen all at once. Just like it did not happen all over the world. It happened in one particular place on Earth. And that is England. Knowing this we can track back the roots of the modern economic growth and see the factors that contributed to its take off.
Nothing in the nature exists in the vacuum. There must have been some favorable conditions that triggered the initial burst of innovation and development. One might say that it was James Watt with his steam engine that pulled the trigger. While to some extent this is true, as technology advance plays a crucial role in economy, there were also other factors such as transport, market, exchange that together enabled the modern economic growth to happen. Professor Jeffrey Sachs from University of Columbia explains that for the Industrial Revolution in the mid-18th century to come about, it was first agricultural productivity that had to rise. Previously sowed by hand, thanks to Jethro Tull and his seed drill, seeds were now sowed in straight lines. Farmers began to learn how to improve their crops and provide nutrients for the soils. It was by no means scientific but more empirical approach I would say but it worked and it worked very well.
Simultaneously the process of urbanization started to accelerate, there was more trade, most remarkably textiles, that strengthened market economy. Rule of law came to the fore with the growing ownership and demand for property rights. With the breakthroughs initiated by Isaac Newton (gravity) already in 17th century and then continued by James Watt (steam engine), Eli Whitney (cotton production) just to name the few, people started to look at things differently. They began to change the way they were doing things and their mindsets, aspirations and motivations changed too. They now saw that more is possible. And they started to reach for it.
One last thing, that I would like to mention is the nature part in all that happened. We need to remember that none of the above would be possible without the favorable conditions of mother nature. Both the geographical location of England surrounded by fours seas that enabled international trade and its rich coal and steel deposits made it far more easier for the country to become major force on the world arena of economic development. The first steam engine by Thomas Savery (dating back to 17th century) burned coal to create motive force and was used to pump water out of the mines. But his invention would be of no use if there was no coal in England that could be later turned into the modern steel and coal industry.
Thanks to James Watt's improvements the door has opened for steam locomotives and railway transport to carry both passengers and traded goods. As we know England has excellent transport conditions with the river Thames connecting coal mines to London. This soon led to the staggering number of newly built canals and factory towns which in turn attracted local people searching for the employment. There was a drastic and dynamic shift from agriculture to industry and trade, widening rural-urban gap that I talked about in the previous post.
This shows us that nature and humans can work together. In fact we need both to achieve great things, to develop our full potential. It is humans that can use what nature offers us using efficient tools they created in a way that is beneficial for the development of humanity. But they should use these resources wisely and with respect to what is beyond our control but yet a number one determinant not only of our prosperity and growth but of our lives.
As we can see there were many things that came together to make the Industrial Revolution possible. The effective use of natural resources, spreading market economy, technological breakthroughs... they all changed the world in a unique way. What do you think, did it also divide the world? Or maybe we had started good but something happened later that gave rise to modern inequalities? Share your thoughts!
We have arrived at the point where we know that in order to see the full picture of the country's prosperity, we not only need to take into account the average level of income but also measure the inequality of income across the households and people within the country we are interested in.
So how do we do that?
There are multiple ways to measure the inequality of income within the country but the one I would like to focus on today is the GINI Coefficient. The general assumption behind this method is that 0 means perfect quality (everybody has the same income), whereas 1 means complete inequality (such that one person in the country owns everything). Both of the extremes are of course unrealistic and all of the countries find themselves somewhere in between.GINI Coefficientis used to measure the distribution of an income or wealth within a country but is not a measurement of an absolute wealth of a country.
Closest to 0 and thus the lowest inequality level tends to be in Western Europe and especially in Scandinavia (around 0.25). Countries like Sweden, Norway and Denmark have relatively equal income distribution and therefore a broad middle class. There are relatively little devastating differences within the society like super rich and very poor. USA on the other hand is quite unequal in income distribution when we compare it to Canada or Western Europe and especially countries in Scandinavia. Here we have many billionaires compared to a lot of very poor people so the gap between them is really vast. Of course the poverty levels in US are not extreme, to the extent like we see in developing countries, but if we compare it to the top 20%, the difference is devastating.
As it was perfectly put by Professor Jeffrey Sachs from the University of Columbia in New York 'Getting richer doesn't mean necessarily becoming more equal'. We can see it very clearly if we compare the map of GDP and GINI Coefficient distribution in the world. According to Professor Sachs there is no one pathway for development. He concluded that Northern Europe has chosen a pathway of becoming wealthier with a lot of social equality which is indeed true for Scandinavia but the same cannot does not apply to Poland for example. Right on the other side of the ocean, in the United States, the path of rising incomes alongside rising inequality is prevailing and the gap between very rich and very very poor widening.
Where do these inequalities come from?
Why is education so important in closing the gap of social inequality?
The answer to this has many layers and you will find them in many of my posts depending which aspect of social justice or gender equality we will be currently discussing. For now however, we need to remind ourselves that attaining higher education almost alway translates to higher income which in turn to the successful contribution to the modern economy. Young people who have the chance to attain it either by means of their own hard work or family's support and material situation will play important role in country's economic development in the future. Those who are less lucky are often stuck in their own communities, with no access to adequate training and in turn balancing at the very low income level employment.
There are other inequalities of course such as race, gender, religion etc. All of them lead to massive discrimination in the labor market and has an adverse effect on the country's economy. The origin and consequences of the above however will be discussed in more detail in future posts as they are complex and extremely important to understand in order to find the way to fight them and finally achieve the complete social inclusion without which sustainable development will not be possible.
We need to remember that although GDP helps us to categorize countries when it comes to economic performance, it does show us only the average for these countries with the omission of any extremes that can be found within their boundaries. If we are interested in a more detailed picture of country's prosperity, we need to look into countries' variation and even more so - their inequalities.
And for that we need a little journey in time...
Before the industrial revolution which marked the beginning of an era of modern economic growth, virtually the entire word was equal - equal in poverty. Most people lived in rural areas, almost 90% of world population worked in farming trying to make the ends meet within the boundaries of their own households. They grew food for themselves, their families and, if there was any surplus, for the local marketplace.
As the world had become more and more urbanized, the lives of these people have changed in fundamental ways leading to inequalities and differences within countries as well. Some people stayed in farms while others decided to move to urban areas in pursuit of a better life, income and opportunities. The widening gap led to more and more inequalities across the world leaving many people behind.
Though there is no clear definition of what 'urban area' stands for, we can agree that an urban area is a settlement where a few thousand people live in a relatively densely settled area with a threshold of about 2,000 to 5,000 people. Understanding the basic differences between these two groups allows us to realize the very nature of the inequalities within the countries and the consequences of these inequalities on the economic growth. The main differences between urban and rural settings are:
Everywhere in the world, urbanization is proceeding rapidly. It is the natural course of human history and the condition that needs to be fulfilled for the countries to grow and to gain economic power. As part of this process, a gross domestic product per capita is rising and so is the proportion of population working in the industry. Please take a look at this beautiful, interactive map of the world's urban population by UNICEF below which I encourage you to explore and hover over HERE.
When we look at urban population growth rates (HERE) we can see that urbanization in Africa is moving fast forward, especially in Sub-Saharan Africa. Many countries are in transition phase from moving from rural to urban area. First map to the right shows us the urban population distribution in the world. Interestingly, this map looks very much like the map of income per person with both North and South American highly urbanized and Africa still very rural. The general conclusion is that richer parts of the world tend to be more urban while poorer more rural. What is interesting however is that the urban population growth rates are the highest in Africa, sometime reaching over 5% annual increase (Uganda 5.4% in 2016).
We will see later on to what do we owe this increase but for now let's summarize with a simple conclusion - urbanization is happening and it is happening fast. Countries previously left behind are catching up. The world's urban population is estimated to rise from a current proportion of half and half to even 50% and 70% by 2030. The countryside is transforming too. New technologies are implemented and more industrial way of farming is adopted by increasing number of farmers. What does it mean for the environment? Can it be a win win situation or is it or a challenge for a sustainable development? We will try to answer these questions.
Economic development is about the nation's efforts to ensure political, social and especially economic well-being for its people. What hides behind these vast categories? Creating/retaining jobs, adoption of new technologies, effective tax base system and moving from agriculture-based to industry-based economy just to name the few. It should not however be used interchangeably with the notion of industrial development which is a more narrow areas and will be discussed later on. Economic development is closely linked to environmental issues as the economic growth largely depends on natural resources especially fossils such as carbon, oil and gas. The world has started to think about economic development in 1945 during post-war period of reconstruction. It was then when nations began to realize, reflect on and strive for social, political and economic stability which together they saw as a single key for success and prosperity.
Right next to growth of inflation, unemployment and interest rates, GDP is one of the key measures to gauge economic development. It can be seen as a simple, but not single, measure of the material wealth produced by an economy. Another one is a purchasing power and you can read about it here.
GDP indicates the total productions taking place within the geographic boundaries of any given country in a single year.
What is excluded from the above quotation is the deprecation of a capital (-> this would give us net domestic product), illegal sales of goods services (black market), sales of used good, intermediate sales (used to produce final goods), transfer payments made by government and sales of goods that were produced outside domestic borders.
Just to recap GDP:
The latter point reminds us that by 'product' or 'production' we do not mean buildings, landscapes, infrastructure etc. that may add up to the overall quality of life but rather the actual money flow from household to firms in exchange for goods and services in a given time period. Usually it is a year but if we are interested in measuring the dynamics of production or unemployment it could even be a quarter. In general, we are interested in getting a sense of the standard of living of a country. In order to do that we take the total production in the country over a given time period and divide it by the population, which gives us the gross domestic product per person (per capita). Why do we calculate it this way?
Larger countries produce more, because there are more people and therefore more workers, so if we simply were to compare countries in terms of the total production, we would find that indeed these countries would have higher production rates and hence GDP but we wouldn't learn a lot about each person's average contribution to the economic performance. And therefore it would be harder to estimate the average living standards and financial wellbeing of each person in a given country.
We need to remember that GDP per capita is not a measure of personal income nor does it take into consideration the income distribution across the country!
The World Bank keeps very systematic records on gross domestic product per person, and it classifies countries into three categories. These are:
Diving line of around $4,000 per person
Lower middle income
United Nations 4th Category
There is a subgroup within the low-income countries that not only lives in extreme poverty but the human conditions of disease, education levels and social and political instability are very bad. What is more these countries are at the greatest risk of both natural disasters such as droughts or floods as well as conflict and violence. Because these countries are highly vulnerable, the UN has classified them as the least developed countries. There are about 50 of them mostly located in tropical Africa. Other countries include Afghanistan, Nepal, Bhutan and Laos. Please note that these are all landlocked countries. It is not a coincidence. As we know economic development relies on the international trade, which in turn requires access to the sea and effective transportation systems. We will discuss the geographical determinants of nation's development in the next posts.
Summarizing, GDP is a good measurement if we want to know the overall condition of a country and its level of economic development. It for sure is a good starting point for cross-country comparisons but for a more comprehensive understanding we would need to include other indicators of social well-being such as education, healthcare etc. We will also learn the different ways to measure the above including GINI Coefficient and Human Development Index in the following blog posts.