Have you ever heard this joke? An economist is asked to describe his country’s situation in a single word. He answers: “Good.” Then he is as asked if he could describe it in two words. He answers: “Not good.”
I was reminded of that joke this week. I asked the celebrated economist Amartya Sen, who was visiting Brazil, how he would re-assess the Human Development Index (HDI) several decades after having created it. He answered that, nowadays, he understands this index as an invitation to deeper thought about the well-being of nations – as a doorway into thinking about the economy beyond conventional indicators like consumer spending or GDP.
I spend a good deal of my time thinking about how to measure economic indicators. I start from the premise that correct measurement is the straightest path to an accurate diagnosis, which is the basic material for making informed decisions (government policies, for instance).
There is evidence that traditional measures of economic performance, such as GDP and consumption, do not necessarily reflect the evolution of well-being in a society. An economy may experience strong GDP, income and consumption growth without seeing corresponding progress in well-being, as measured by, for instance, education, healthcare or income-inequality indicators. The process of economic development may create more inequality, more pollution, more working hours, more crime.
In fact, there is no clear evidence of a relationship between growth in GDP per capita and increased happiness (or increased well-being), as measured by opinion surveys (see the Summary in “Will GDP Growth Increase Happiness in Developing Countries?”, Working Paper IZA, no. 5595, March 2011, Andrew E. Clark and Claudia Senik). The data do not prove that over time, in the same country, people who get wealthier get happier – even though, in fact, people in richer countries tend to be happier.
The HDI, created in 1990 for several countries, seeks to contribute to our understanding of the economy through a simple gauge that takes into account these additional factors for well-being. The same can be said about Itaú’s recently-created Social Well-Being Index, which, adapting the HDI to Brazil, uses many important indicators – healthcare, sanitation, education, security and social inequality, among others – to measure more broadly and accurately the evolution of well-being in the nation since 1992. The index may be used as basic material for future studies.
Brazil has enjoyed historically high growth rates in recent years. But has this faster growth translated into gains in well-being?
The results show that, in many periods, evolution in well-being has not necessarily tracked GDP growth in Brazil. For instance, the loss of well-being before the Real Plan and the gain immediately afterwards were not paralleled by changes of similar magnitude in GDP. Only after 2002 did both GDP and the well-being index expand at similar rates. And since 2008, GDP growth has outpaced the well-being gains.
Broadly speaking, there have been important advances in the country’s quality of life in the past 20 years. Even without closely tracking changes in well-being, we can observe that economic growth has widened the population’s access to better living conditions. But what is the best path for development from now on?
The answer will depend on the society’s capacity to stretch its horizons and think about policies that will generate good results in the medium and long terms, rather than just in the short term. In a longer-term time horizon, good results depend more on the capacity to: i) deepen knowledge through education; ii) stimulate investment through security and adequate market incentives; iii) create the conditions for innovation and generate productivity gains, removing the hurdles facing businesses; and iv) replenish the government’s investment capacity so that the remaining gaps in infrastructure can be filled.
Just stimulating consumption, for instance, is not a long-term solution. The strategy of stimulating the economy in order to escape a recession – an important contribution from the legendary economist John Maynard Keynes, following the Great Depression in the 1930s – does not necessarily lead to development and sustainable improvement in well-being over time. In a recent interview (Vejamagazine, May 2, 2012) here in Brazil, Amartya Sen pointed out that “Keynesians are wrong in thinking that mere stimuli to demand will solve all economic problems. Keynes is only relevant when we are dealing with a recession. But he says very little about the government’s development role.”
In recent decades, the Brazilian economy has grown while income distribution has improved. This achievement was a consequence of stability (lower inflation and risk premiums), sounder institutions and a favorable international context. The result was a “new middle class” – the product of millions of Brazilians being incorporated into the so-called C income bracket – and fast growth in consumer spending. It also resulted in considerable improvement in the population’s well-being.
Looking ahead, Brazil’s well-being will depend on “well-doing”: the capacity to “do” more and better. More consumption is not enough. It will be crucial to provide incentives for investments (public and private) and productivity gains. Only then it will be possible to sustain economic growth and improve well-being, both trends Brazil has enjoyed in recent years.
Ilan Goldfajn is the chief economist at Itaú Unibanco