Widely regarded as
the richest country in
the world, the U.S.A.
ranks at the bottom
when the wealth of
nations is measured
in terms of "every-
thing that makes life
worthwhile". The
Nordic countries
rank at the top.

    
   
Better than Money
   
Established notions of wealth are challenged
by alternatives to Gross Domestic Product

IT HAS BEEN SAID that, ”Money isn’t everything— but it will do until something better comes along.” Something similar might be said of GDP, Gross Domestic Product-- except that something better may have already come along, in a variety of forms and with the potential to turn established notions of human wealth upside down.

GDP is a statistical index that is commonly used to measure the wealth of nations. Among economists, politicians, journalists and other opinion-makers, per capita GDP has become a standard by which nations are compared with each other, and by which the development of individual nations is charted.


Not everyone agrees that GDP is the most suitable index for defining and measuring human wealth. Leading economists have stressed that it was never intended to serve such purposes.



The United States’ reputation as the richest country on earth is based largely on the size of its GDP. That monetary figure also provides the rationale for ongoing efforts to alter the socio-economic systems of Nordic and European countries to become more like the United States’.

But not everyone agrees that GDP is the most suitable index for defining and measuring human wealth, especially when the real-life circumstances of individual human beings are considered. Many leading economists, including Nobel Laureates James Tobin and Amartya Sen, have consistently emphasized that GDP was never intended to describe the development of societies or the well-being of individuals.

GDP is defined as the market value of the (known) goods and services produced within a nation during a given year. That leaves out a lot, including everything that cannot be measured in terms of money, and includes a lot that can hardly be described as wealth. This was pointed out by Senator Robert F. Kennedy nearly forty years ago, in remarks concerning the related concept of Gross National Product (GNP) which was then widely used for the same purpose as GDP:

"It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonders in chaotic sprawl. It counts napalm and the cost of a nuclear warhead."
"Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our Gross National Product. . . counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonders in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts [the weapons of mass murderers], and the television programs which glorify violence in order to sell toys to our children.

"Yet the Gross National Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile."


The United States owes its high ranking mainly to the longer working hours of its labour force.
 
 
 
 
 
 
 
 
 
 
The minimum wage in the U.S.A. is about half of Norway's.
Doubtful benefits
   
Senator Kennedy’s tragic death a few months following these remarks illustrates their validity. His assassination led to increased expenditures for medical and funeral services, police and judicial processes, news production and security costs, sales of Kennedy memorabilia, etc. Clearly, none of that increased the well-being of Senator Kennedy, nor of his family, friends and admirers; and it is likely that only his most ferocious enemies felt that his murder benefitted the nation as a whole. But all of the additional goods and services resulting from his murder had the effect of increasing both GNP and GDP. According to those measures, the United States had become wealthier.

As the accompanying diagram indicates, the United States ranked second after Norway in terms of GDP* for year 2003. The latter's first-place ranking is due primarily to the income from its North Sea oil industry, which is large in relation to the population of about 4.5 million. However, that monetary advantage does not result in a top ranking on more comprehensive indexes of human wealth (see below).

The United States owes its high ranking mainly to the longer working hours of its labour force. U.S. workers spend an average of about 25 per cent more time on the job than their counterparts in the Nordic countries, for example. Productivity levels are roughly the same; Sweden's is actually a bit higher than the United States'. Thus, the U.S. labour force spends 25 per cent more time at work, and this is reflected in the total value of goods and services expressed in the GDP. But that does not necessarily translate into a 25 per cent improvement in the lives of individual workers, a fact that is reflected in the alternative measures presented below.

"[One] big difference between the Nordic countries and the U.S. is the wage spread," noted Norwegian economist Stein Reegård in 2001. "The lowest-paid workers in the U.S. have very low incomes, indeed. The minimum wage there is equivalent to 45 Norwegian kronor per hour, and that is the actual wage for many millions of workers. The minimum wage in Norway is twice as much, 90 kronor per hour, and even that level is regarded by [Norway's leading confederation of labour unions] as too low." (For more on this, see "Commentary: Stein Reegård".)
    
GDP comparisons
To enable international comparisons, GDP is adjusted for variations in price levels in the various countries, by applying so-called Purchasing Power Parities. The countries are then ranked on a scale which is constructed by setting the average for OECD countries at a value of 100.But there are problems even with this method of correction.
    GDP is also subject to other imperfections such as under-reporting of "black" labour and unpaid housework, and complete neglect of the consumption of capital and natural resources.
    Comparisons of GNP must therefore be regarded as approximate and somewhat uncertain.
Per capita GDP
2003
  
Norway
United States
Ireland
Switzerland
Canada
Denmark
Netherlands
Austria
Belgium
Australia
Finland
United Kingdom
Japan
France
Sweden
Germany
Italy
New Zealand
Spain
Portugal
Greece
   
For the next fifteen countries on the list, from Ireland to Italy, per capita GDP varies only by roughly five per cent. That degree of variation is of no significance, according to the OECD and the statistical bureau of the European Union, due to differences in methods of calculation and unsynchronized business cycles. These fifteen countries may therefore be regarded as more or less identical with respect to GDP.
   
  


Diagram
Colour Code







Advances in data-gathering and methodology provide a basis for alternative measures.
 
 
 

Recognized limitations
   
As Senator Kennedy’s remarks from nearly forty years ago indicate, the contradictions and limitations of GNP and GDP as measures of wealth have been understood for quite some time, and efforts have been made to develop more humanly relevant alternatives. Until fairly recently, however, those efforts have been hampered by a lack of suitable data and inadequate statistical methods.

But especially since the start of the 1990s, there have been major advances in data-gathering and methodology which provide a basis for alternative measures. Developed primarily by statisticians and social scientists, the new indexes include a number of generally recognized human values that are ignored in the calculation of GDP, for example: a long and healthy life, satisfying natural and work environments, enjoyable recreational pursuits, democracy, political participation, personal security, low crime rate, family and social networks, social solidarity, relative absence of internal strife, and limited differences on the basis of class, gender, region and ethnic identify.

As the last item on this list suggests, the new indexes have an egalitarian bias: One of the key assumptions on which they are based is that equality between human beings and the resources at their disposal is a positive value that must be taken into account when assessing wealth. Thus, a nation's ranking depends to a significant extent on how evenly its resources are distributed among the entire population, the severity of class differences, the extent of poverty (especially among children), access to adequate health care, education and housing, and other factors relating to equality/inequality.

  A key assumptions is that socioeconomic equality is a positive value that must be taken into account when assessing wealth.
There are now about two dozen generally acknowledged indexes for measuring human wealth-- often referred to as general welfare-- in more comprehensive terms than GDP. They include national indexes developed in Australia, Canada and The Netherlands, and measures such as the U.N. Human Development Index which are designed for international comparisons.

The kind and number of variables they include vary in accordance with their purpose and the availability of data. Measures intended for internal use by developed nations tend to be more detailed and specific than those designed for international comparisons, which have to contend with wide variations in the quality and extent of statistical data and procedures.


The U.S.A. ends up on the bottom of the list, below all of the European countries. WISP takes into account a broader range of variables than GDP.
Index of Social Development
   
The most comprehensive measure yet devised for international comparisons is the Weighted Index of Social Development (WISP), developed by Prof. Richard Estes at the University of Pennsylvania in the United States. WISP is based on forty social indicators within ten categories, and it has been used to compare 162 countries for the period 1970-2001. The ten categories are: education, health, national economy, demography, natural environment, gender equality, social chaos, cultural diversity, military expenditures, and traditions of general welfare.

When seventeen developed countries are ranked according to WISP, Sweden and the three other Nordic countries in the comparison end up on top. The United States ends up on the bottom, below all of the European countries.

This is because WISP takes into account a broader range of variables than GDP. Especially advantageous for the Nordic countries are such factors as employment frequency, education level, number of patents, income distribution, infant mortality, life expectancy, gender equality and level of foreign aid.

By contrast, the United States ranks poorly on many of WISP's key indicators. The U.S. rate of infant mortality, for example, is higher than in all countries of the European Union. Other factors that lower the United States' ranking are its inequitable and inadequate healthcare system, huge income gaps, and widespread poverty.
    
WISP is based on 40
indicators within
ten categories:
  education, health,
national economy,
demography, natural
environment, gender
equality, social chaos
cultural diversity,
military expenditures,
and traditions of
general welfare.
  

  
Weighted Index of
Social Development
2001
   
Sweden
Denmark
Norway
Finland
Germany
Austria
Italy
Belgium
Spain
United Kingdom
Netherlands
France
Ireland
Switzerland
Greece
Portugal
United States
       
The United States' bottom ranking is a consequence of its severe income inequality and related poverty.
  
Human Poverty Index
   
Poverty is the focus of the United Nations' Human Poverty Index which is intended primarily for the comparison of developed countries on the basis of four key variables: probability of living beyond age 60; proportion of adults with basic literacy; percentage of population with disposable incomes less than half the median income; and proportion of labour force unemployed for at least twelve consecutive months.

Once again, the Nordic countries are ranked at the top, along with The Netherlands, and the United States at the bottom. Ireland, whose high GNP has often been cited in recent years to illustrate how low Sweden has fallen in "the general-welfare league", appears less successful when viewed from the perspective of the Human Poverty Index; its WISP ranking is also quite low.

The United States' bottom ranking is, of course, a consequence of its severe income inequality and related poverty. The percentage of the population living in poverty is higher in the U.S. than in all countries of Western Europe, among others.

If the extent of poverty is calculated according to the United States' own official definition, i.e. a specific income level, the percentage of those living in poverty is three times greater in the U.S. than in the Nordic countries.
   
The Human Poverty Index is based on four key variables: probability of living beyond age 60; proportion of adults with basic literacy; percentage of population with disposable incomes less than half the median income; and proportion of labour force unemployed for at least twelve consecutive months.
U.N. Human
Poverty Index
2001
  
Sweden
Norway
Netherlands
Finland
Denmark
Germany
France
Spain
Japan
Canada
Belgium
Australia
United Kingdom
Ireland
United States
      
The ZUMA Index
relates only to the
European Union,
and therefore does
not include U.S.A.,
Norway, etc.
   
EU member-states compared
   
An index for comparing the member-states of the European Union has been developed at the Centre for Survey Research and Methodology (ZUMA) in Germany. This measure is based on 25 indicators which include: per capita GDP, expenditures on education as percent of GDP, rate of female employment, unemployment, infant mortality, size of railway system, emissions of carbon dioxide and sulphur dioxide, percentage of personal income spent on food, average life span, number of physicians per 1000 inhabitants, ready access to water, noise and air pollution, environmental damage, etc.

Once again, the three Nordic countries in the EU are ranked at the top, together with The Netherlands and Austria. Ireland, despite its impressive GDP, once again ends up near the bottom.
      
The ZUMA Index is
based on 25 indicators,
including GDP, educa-
tion expenditures,
female employment,
infant mortality, green-
house gases, average
life span, environ-
mental damage, etc.
ZUMA Index
EU Countries
1997-1999
    
Sweden
Denmark
Netherlands
Austria
Finland
Germany
France
United Kingdom
Belgium
Italy
Portugal
Ireland
Spain
Greece
      
Whether Finns are
really less satisfied with
their lives than the
Swedes, or whether
they tend to respond
differently to this sort
of question, is not
possible to tell.
   
Happiness Index
  
The foregoing indexes are all based on variables which lend themselves to more or less objective measurement-- income, years of education, infant mortality rate, etc. But one of the two variables which make up the Happy Life Expectancy Index inclusion is highly subjective-- individuals' assessments of their overall life quality. Typically, interview subjects are asked to rank their level of satisfaction on a scale of 1-10 in answer to the question: "How satisfied are you with your life in general?"

Average life expectancy is assumed to be an indirect measure of objective factors such as work environment, life style, access to healthcare, etc.

The results of this index differ substantially from the preceding two. While Sweden remains near the top, the neighbouring Nordic country of Finland drops to 17th on the list of 22 countries. That decline in relation to the WISP and ZUMA indexes is due largely to a higher mortality rate, which is apparently related to lifestyle and dietary factors.

Other interesting results are that the United States moves up above the median level on this index, and Ireland even higher.
   
Interview subjects are
asked to rank their level
of satisfaction on
a scale of 1-10.
Happy Life
Expectancy
1990s


Netherlands
Sweden
Switzerland
Australia
Ireland
Denmark
United Kingdom
United States
Norway
Austria
Belgium
France
New Zealand
Japan
Canada
Spain
Finland
Germany
Italy
Greece
Portugal
Russia
     
Anyone interested in comparing nations is advised to use a variety of measures to develop a comprehensive view of what life is "really" like.
   
Again, Happy Life Expectancy is the most subjective of the measures presented here, and it is difficult to interpret the results with any degree of certainty. But it does serve to underline the fact that all such indexes are based on assumptions about what is important to measure. In that sense, all indexes of wealth or general welfare are inevitably biased; that includes GDP, a fact which becomes evident when it is compared with these alternative indexes.

With regard to the alternatives to GDP that have emerged in recent decades, there has developed a general consensus on a concept of general welfare with a set of basic components that include: education, employment, work environment, income, material standard, housing, recreation, transportation, social relations, personal safety and security, political resources, and health. Each of these can be further refined into various subcomponents.

This provides a theoretical framework. But then there are the practical problems of gathering data that are accurate, reliable, comprehensive, relevant and comparable. As noted, this is difficult to achieve even with a relatively simple measure like GDP.

It follows that anyone interested in comparing nations is advised to use a variety of measures to develop a comprehensive view of what life is "really" like for the human beings who live in them. It is likely that many of the new alternatives will continue to be refined and become more useful in the years ahead.
  
  
Admirers of the U.S. model of society tend to resist any evidence that "the world's richest nation" is not nearly as rich as its GDP makes it out to be. Often, these are the same interests that for decades have been attempting to undermine the Nordic model.
Political dynamite
  
From the findings presented here and elsewhere (see References), it is clear that Sweden and the other Nordic countries provide their citizens with a comparatively high quality of life, whatever their GDP. This is especially remarkable in the case of Sweden, given the severe economic crisis of the 1990s that resulted from the imposition of alien neo-liberal policies (for a discussion of that disaster and other matters relating to the Nordic model, see "The Price of Everything").

The same findings indicate that the reverse is true of the United States, widely regarded as the standard by which all other nations are to be judged (and usually found wanting). In other words, GDP does not correspond very well with "everything that makes life worthwhile". This is further illustrated by the diagrams in the Appendix.

In fact, research has shown that, once a basic standard of living has been achieved, additional increments of GDP have only marginal effects, and that among developed countries there is essentially no relationship between GDP and quality of life (see Donovan & Halpern in References).

In all of this lies the potential for political dynamite. Admirers of the U.S. model of society tend to resist any evidence that "the world's richest nation" is, in many ways, not nearly as rich as its GDP makes it out to be. Often, these are the same interests that for decades have been attempting to undermine the Nordic model, whose alleged economic deficiencies are "proved" by reference to international comparisons of GDP.

Among the Nordic countries, Sweden has been subjected to the heaviest pressures to remake itself in the image of the United States. This is due in large part to the structure of its economy, which is more heavily dominated by large international corporations whose leaders tend to regard the United States as the measure of all things.

The debate over how to measure wealth and general welfare has just begun, and will no doubt intensify as knowledge and awareness of alternative measures spread.
Peter Malmqvist, a respected market analyst, has observed that, "The United States has an enormous influence [on the Swedish business community]. Top business leaders seem to place great value on recognition from that direction, and it is the U.S. business press which acts as the 'competition judge'. Even Business Week, a rather superficial magazine, has a big impact if it publishes something about a Swedish corporation or its chief executive."

The Swedish business press is likewise inclined, of course, and so is most of the establishment press. The leading daily newspaper, Dagens Nyheter, has defended economic inequality by arguing that, "Income differences are certainly fair and justified, if they arise from the free choices of responsible adults". The assumption appears to be that the poor have freely chosen their poverty-- a point of view that is well-adapted to the U.S. model, but inimical to the Nordic model.

The debate over how to measure wealth and general welfare has just begun, and will no doubt intensify as knowledge and awareness of alternative measures spread. Thus far, the new indexes have been dismissed by devotees of GDP with arguments that reflect an infatuation with the United States and a near-total disregard of the Nordic countries' extraordinary human progress, but very little understanding of the issues involved.

— Al Burke   
4 July 2004   

Note: This article is based to a large extent on the work of Swedish social scientists, including Prof. Joachim Vogel. The illustrations are adapted from Vogel & Wolf.
  
  
  
  
  
  
   
References


Berger-Schmitt, R. 2002. "Unterschiede in den Lebensbedingungen halb der Europäischen Union kaum verringert." ISI Nr. 27, Mannheim: Centre for Survey Research and Methodology (ZUMA).

Donovan, N. and Halpern, D. "Life Satisfaction: The State of Knowledge and Implications for Government." Paper presented at the Conference on Well-Being and Social Capital, Weatherhead Center for International Affairs, John F. Kennedy School of Government. November, 2003.

Estes, Richard. 2003. "Social Development Trends: Sweden in Comparative Perspective." In: Välfärd och ofärd på 90-talet. Stockholm: Statistics Sweden.

Estes,Richard. 2004. At the Crossroads:Dilemmas in International Development. Dordrecht: Kluwer Academic Publishers.

Hagerty,M, et al. 2001. "Quality of Life Indexes for National Policy: Review and Agenda for Research." Social Indicators Research, Vol.55/No.6.

Veenhoven, Ruut. 1996. "Happy Life Expectancy.A comprehensive measure of quality of life in nations." Social Indicators Research, Vol.39/1-58.

Vogel, Joachim, et al. 2003. European Welfare Production: Institutional Configuration and Distributional Outcome. Dordrecht: Kluwer Academic Publishers

Vogel, Joachim and Wolf, Michael, "Sverige i täten." Välfärd, Nr. 1/2004. Stockholm: Statistics Sweden.
  
   



Appendix. The Limits of GDP

As noted in the main text, a nation's Gross Domestic Product bears no relation to a broad range of factors that are generally regarded as vital to human well-being. The diagrams below illustrate several such discrepancies.

The Nordic countries (blue colour) tend to form a cluster with similar values on the various dimensions, as do the countries of middle Europe (green) and southern Europe (red). The United States (yellow) is in a class by itself.
   

Income Inequality
Infant Mortality
    
Per capita GDP in U.S. dollars (vertical scale) is compared with income inequality, which is expressed in relative terms using a statistical device known as a GINI coefficient. The diagram shows that the U.S.A. has high income but great inequality, which is least among the Nordic countries (blue).
     
      
Per capita GDP compared with infant mortality per 1000 live births. The figure for Sweden is about 2.5, compared with 6.2 for the United States. Even Greece, the poorest of the EU member-states ("GR" in red ellipsis), has a lower rate than the United States'.
Average Life Span
Social Development
Average life span is about 77 for the United States, compared with 80 for Sweden and Switzerland. Per capita GDP compared with the Weighted Index of Social Development, WISP (see main text). The United States is ranked as the least developed, despite its superior GDP.
     
Return to top of page