The Well-being of Nations Chapter 1 Emerging Social and Economic Concerns.

The Well-being of Nations

Chapter 1

Emerging Social and Economic Concerns

“Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long run… “Goals for ‘more’ growth should specify more growth of what, and for what”. Simon Kuznets in The New Republic (1962).

Governments and societies seek economic growth but are also increasingly concerned about its impact on the natural and social environments. They are concerned about inequality, about the possibility of new forms of exclusion and poverty as the use of technology expands and, more generally, about the quality of life and health of children, the elderly and individuals and groups confronting economic and social disadvantage. Dealing with theseconcerns is made all the more complex by changing patterns of work, family life and community engagement.

Introduction

What is happening in some of these key areas of concern?

Recent decades have witnessed large increases in economic output across OECD countries with increases in standards of living and working conditions as well as in health and educational attainment. Although the rising tide of material wealth may not have raised all boats to the same extenteverywhere, levels of absolute poverty and deprivation have declined in OECD countries since the 1950s. While economic growth is not the only policy objective, it does provide the resources for tackling social exclusion, poverty and poor levels of health. Following extraordinary increases in economic output, concern is now turning more to the “quality” of economic growth and how to achieve further increases in well-being.

Three Layers of Well-being

Well-being includes economic well-being but also extends to the enjoyment of civil liberties, relative freedom from crime, enjoyment of a clean environment and individual states of mental and physical health.

GDP includes goods and services which do not contribute directly to well-being. These items are exemplified by so-called “Social Regrettables” arising from outcomes such as pollution, crime and divorce.

The World Values Study suggests that beyond a certain threshold of income per capita, increases in subjective well-being diminish for higher income (Inglehart, 1997).

Social objectives are broader than immediate increases in economic output because:

i) the evolution of total, and not just economic, well-being is ofimportance

ii) the long-term impact of economic, environmental andsocial trends needs to be factored into any analysis of current policy options.

Gross domestic product (GDP) has significant limitations as a measure of economic output. GDP captures current production of those consumption and investment goods and services accounted for in the National Accounts but excludes non-market household activity (such as parenting) and activities such as conservation of natural resources that contribute to future well-being through net additions to the capital stock of society. Aggregate measures of output and income, such as GDP, also fail to reflect social preferences concerning equity goals.

GDP as a measure of well-being

Several attempts have been made to arrive at a summary measure of well-being. One approach (Osberg, 2001) relates to economic well-being only, and brings together four main types of indicators:

1) Current per capita consumption flows2) Changes in capital stocks (including natural and human)3) Changes in income distribution4) Changes in economic risks.

Osberg (2001) measure of well-being

Trends in measures of well-being in some OECD countries appear to have lagged behind rising GDP per capita

Up to the 1980s, trends in per capita GDP for many OECD countries closely tracked trends in economic well-being, only to diverge since then.

Findings:

The main reasons for this divergence were environmental degradation, increased relative poverty and income inequality in some OECD countries.

The inter-relationship between well-being and human and social capital

Inter-relationship

On the “input” side are natural and physical capital as well as “human and social capabilities”. Human capital represents the knowledge, skills and health embodied in individuals and social capital refers to the norms and networks facilitating co-operation either within or between groups.

Political, institutional and legal (PIL) arrangements interact with human and social capital to influence well-being.

Human and social capital and political, institutional and legal also have their worn direct links with natural and produced capital.

Role of Institutions

A range of formal and informal civic, political and legal institutions underpin market activities and civic life. Institutions set the “rules of the game”. Such institutions, when working effectively, can allow countries at different levels of development to handle change and to achieve sustained economic growth

Rodrik (2000) describes five types of institutions which:1. Protect private property and contract enforcement.2. Moderate some business activities.3. Support macro-economic stability.4. Provide social insurance or protection.5. Manage social conflict.

Is well-being sustainable over time?

Sustaining well-being requires adequate investments in human and social capital

Since change in both the social and natural environments operate on long-term time Scales. Any degradation of the social environment is likely to occur gradually and affect some groups more than others.

This degradation might take the form of increased insecurity, higher incidence of anti-social behavior including and lower levels of personal well-being.