China meets the ‘new normal’

China Survey 2015Anyone who takes even a passing interest in China can’t have failed to notice a shift in mood of late. Gone are the decades of soaraway growth, when the economy expanded by an annual average of 10%, enabling around half a billion people to lift themselves out of poverty.

Instead, at the annual “two sessions” gatherings of legislators and political advisors this month, Premier Li Keqiang announced a growth target for this year of “around 7%”. That’s slightly down on the past two years’ target of 7.5% (although still pretty stunning for most countries). If that forecast holds true, it would see China recording its smallest expansion in a quarter of a century. But, as Premier Li also said (paywall), “it will by no means be easy for us to reach this target”. That’s the reverse of how things used to be. Throughout much of the long boom, the official growth target, typically 8%, was routinely overshot.

There’s a phrase for this change in pace in China – the “new normal”. These days, it’s rarely off the lips of Chinese leaders, from President Xi Jinping on down. What it essentially means is a shift towards slower but more sustainable growth.

As the OECD’s 2015 Economic Survey of China discusses, reaching this new normal will require some long-term transitions. Notably, the reliance on exports will need to give way to a greater role for domestic consumers. And the state will need to step back to allow more room for innovation and entrepreneurship. That will require reforms that Premier Li has dramatically described as “not nail-clipping” but “like taking a knife to one’s own flesh”.

There are shorter-term challenges, too – most notably, ensuring that the slowdown in growth is kept under control. This is not unlike a driver touching the brakes of a car on an icy road – in other words, not without risks. Part of this immediate challenge is the need to cope with some hangovers from the boom years. There are signs of these in many areas of the economy, but two areas are perhaps of particular interest.

The first is overcapacity in industry – in other words, too many businesses, especially in the state sector, have invested more in plant and production facilities than could be justified by their potential market share or profitability. The impact of this is evident in fierce price competition and industry inefficiencies.

It’s also evident in China’s hazy skies. What China’s own National Development Reform Commission has described as “blind” investment in steel mills and smelters has contributed to the air pollution estimated to be causing about 1.3 million premature deaths a year. The issue is attracting growing public concern. When Under the Dome, a documentary about air pollution by journalist Chai Jing, was released last month, it was reportedly watched by more than 150 million people online.

Unwinding overcapacity in industry will be tricky. Rationalising too quickly risks disrupting existing production and employment. Waiting too long only risks exacerbating current problems. And while the state has signalled that part of the solution will lie in a greater role for the private sector, this, too, is not without risks. “Private firms reportedly pollute more than their state-owned counterparts, in particular in the cement, steel and flat glass industries,” the OECD report notes.

A second hangover is to be found in China’s property market, where there is substantial overcapacity – the famed “ghost towns” are just one sign of this.

Over the past couple of years, China’s property market has been cooling, especially in smaller cities, many of which now have an excess of housing. The slowdown reflects a number of factors, including the broader economic cooling and measures by the government to restrict purchase. More recently, some of these restrictions have been eased, likely reflecting official concern that the market may be cooling too quickly.

The Economic Survey of China sounds a note of caution, suggesting that the “price correction ought to continue until the inventory overhang is worked off”. More affordable housing, it suggests, would allow more Chinese to realise their dream of owning a home – a possibility only since the 1990s. There are, as the Survey readily acknowledges, risks to such a strategy. But, it argues, the relatively low levels of household debt in China, among other factors, should help to contain these.

Still, there’s no doubt that the property market will continue to weigh on China’s economy for some time to come, perhaps especially in the provinces, where there are concerns about the level of debt built up some local governments to fund real estate and infrastructure projects. We’ll come back to that subject soon.

Useful links

The OECD’s 2015 Economic Survey of China is launched today in Beijing ahead of this weekend’s China Development Forum, where OECD Secretary-General Angel Gurría will be speaking.

A number of other OECD reports are also being released this week to mark 20 years of China and the OECD working together, including All on Board: Making Inclusive Growth Happen in China and China in a Changing Global Environment.

中国和OECD迎来20年合作伙伴关系

OECD work on China

网站 (中文) (The OECD’s Chinese-language site)

Stuck in a rut …

technique_to_cure_Qi_stagnation
Works for Qi stagnation

Few people can have been very surprised when the IMF announced this week that it was lowering its growth projections for this year. It feels like that’s been the story of the recovery in much of the OECD – a succession of disappointments and dashed hopes. Today, seven years after the financial crisis, growth remains well below where it was pre-crisis and unemployment well above.

All this begs a question: Is there something wrong with the economy? Some leading economists fear there is, and they’ve given it a name – “secular stagnation.” The expression was coined in the 1930s and famously revived in 2013 by Larry Summers, a former US Treasury Secretary. It may sound strange, but all it really means is “persistent stagnation.” Whatever you call it, it’s causing a lot of concern, including, no doubt, among the global movers and shakers at Davos this week.

What is persistent stagnation? As The Economist notes, it’s a “baggy concept” that’s hard to pin down. Still, there are a few ideas that crop up repeatedly. Most notable is the idea that it describes a period when interest rates can’t be pushed low enough to provide the economy with the stimulus that it needs.

To explain: In normal economic times, interest rates are among central banks’ most powerful weapons. When the economy’s overheating, central banks can raise rates, making it more expensive to borrow, which puts a brake on consumers and businesses; when the economy’s cooling, they can send rates back down to encourage consumers and businesses to borrow and invest more.

That weapon’s currently proving much less effective. Inflation is very low, as are real interest rates – in other words, the return on money once inflation is accounted for. Today, many economists believe the economy would need a real rate of interest well below zero in order to shift money out of what Martin Wolf calls the “global savings glut” and into productive investment. But because inflation is so low, that would require nominal (or advertised) interest rates to also go well below zero. And that, by general agreement, can’t happen.

Yes, it’s true that some national central banks, such as in Sweden and Denmark and, more recently, Switzerland, have experimented with negative nominal interest rates, as did the European Central Bank (ECB) in 2014. But the rates weren’t much below zero and usually didn’t apply to all the rates set by the bank. This “zero lower bound” limit on interest rates explains why central banks have sought other ways to boost the economy in recent years, most notably quantitative easing – a step the ECB is widely expected to follow this week.
So what’s causing this situation? There’s no shortage of theories, but broadly speaking a range of factors – often interrelated and self-sustaining – may be dragging down the economy, both in the short and longer term. Take unemployment: Despite some recent signs of improvement in the jobs market, joblessness remains worryingly high in many OECD countries. As time goes on, at least some of those without work risk seeing their skills become outdated, may lose the will to go on searching for work or may become unfairly stigmatised as “unemployable”. That robs the economy both of workers and of workers’ spending power.

Business investment is also an issue (albeit a complex one). In theory, the current low interest rates should make this an ideal time for businesses to borrow. In practice, this doesn’t seem to be happening, probably because of economic uncertainty and because many firms are already sitting on large stockpiles of cash.

There are longer-term drags on the economy, too, such as the slowdown in population growth and the ageing of our societies, which will leave a rising number of retirees dependent on a declining number of workers. And there’s widening inequality – as highlighted at Davos by Oxfam – which may play a role by reducing overall consumption, as Robert Peston notes: “The poor in aggregate spend more than the rich (there are only so many motor cars and yachts a billionaire can own, so much of the super-rich’s wealth sits idle, as it were).”

So, if interest rates won’t work to boost the economy, what will? An OECD paper released this week at Davos argues for a comprehensive stimulus package, especially in the euro area and Japan, where signs of stagnation are arguably strongest. It calls for action in four main areas: Encouraging investment by, for example, establishing public-private partnerships and reducing the incentives for firms to buy back shares; supporting SMEs and entrepreneurs; promoting trade by, for example, making customs procedures more efficient and liberalising the services sector; and raising employment by supporting job-seekers and encouraging women and older workers into the workforce.

Useful links

Escaping the Stagnation Trap: Policy Options for the Euro Area and Japan” (OECD, 2015).

Secular Stagnation: Evidence and Implications for Economic Policy,” by Łukasz Rawdanowicz, Romain Bouis, Kei-Ichiro Inaba and Ane Kathrine Christensen (OECD, 2014)

Infrastructure Versus Other Investments in the Global Economy and Stagnation Hypotheses:

What Do Company Data Tell Us?” by Adrian Blundell-Wignall and Caroline Roulet (OECD, 2014)

OECD Insights: From Crisis to Recovery (OECD, 2010)

Is inequality good or bad for growth?

Inequality and growthIf you’ve been following the income inequality debate, you’ll know there’s been much discussion of the question in the headline above. Until just a few years ago, it’s probably fair to say that mainstream opinion leaned towards the “good for growth” side of the debate. Yes, inequality might leave a bad taste in the mouth, but it was worth it if it meant a strong economy.

This case rests on three main arguments: First, inequality creates incentives for entrepreneurs. Second, wealthy types are a source of investment for the economy. Third, when the state tries to reduce inequality by taxing wealth and transferring it to the less well-off, some of these resources will be lost in the “leaky bucket” of bureaucracy and administration. From an economic perspective, that’s inefficient.

All these arguments have some merit, and indeed few would disagree with the idea that some level of inequality is necessary in a modern economy. But over the past couple of years, the bigger proposition – that inequality is good, or at least not bad, for growth – has come under increasing fire, including from the IMF, the OECD and even Standard & Poor’s. And now comes new research from the OECD indicating that “income inequality has curbed economic growth significantly”.

Much of the coverage of rising inequality has focused on the incomes of “the 1%”. But the OECD research, which was led by Michael Förster and Federico Cingano, indicates that it’s the situation of people at the other end of the earnings scale that has the biggest impact on growth. These lower-income households are not a small group. They represent some 40% of the population, comprising families that, from a social perspective, might be called lower-middle and working class.

Where overall inequality is higher in a society, a clear pattern emerges: People from such backgrounds invest much less in developing their human capital – essentially their education and skills. By contrast, it has almost no impact on the educational investment of middle-income and wealthy families. The implications for social mobility are clear – an ever-widening education and earnings gap between society’s haves and have-nots.

This gap is seen not just in the length of time people spend in education but also in their skill levels. At the risk of swamping you in data, this is strikingly evident in the chart below. It divides the overall population into three groups based on parental education background, or PEB (which is used to represent socioeconomic status) – high, medium and low levels of education. The chart then looks at the average numeracy scores of people from each of these three groups in the OECD’s Adult Skills Survey and charts them against levels of inequality as measured by the Gini coefficient (where 0 equals absolute equality and 1 equals absolute inequality).

b

Where inequality is relatively low (around 0.20), the gap in numeracy levels between the three groups is relatively modest. But, on the other end of the scale, where inequality is higher (around 0.36 – a little more than in the UK today and a little less than in the US), the score of people from poorer backgrounds is markedly lower; by contrast, the scores of people from middle and high-income families don’t change much.

How does this affect growth? As an economist might say, it’s “inefficient” – workers with higher skill levels can contribute more to the economy. If a large swathe of the population is unable to invest in its skills, that’s bad news for the economy.

Just how bad is clear from the OECD research. It estimates that rising inequality knocked more than 10 percentage points off growth in Mexico and New Zealand in the two decades up to the Great Recession. The impact of rising inequality was also felt – albeit not as strongly – in a number of other OECD countries, including Italy, the UK and the US and even in countries with relatively low levels of inequality like Sweden, Finland and Norway

To be sure, the debate over inequality and growth will certainly continue. Just last week (before publication of the new OECD paper), Nobel laureate Paul Krugman admitted he was a “skeptic” who remained to be convinced of the link. But the fact that the debate is happening at all is surely a good thing. Rising inequality is one of the most significant socioeconomic trends of our time. Understanding its possible impact on our societies and economies has surely never been more important.

Useful links

OECD work on income inequality and poverty

Focus on Inequality and Growth (OECD, 9 Dec. 2014)

Trends in Income Inequality and its Impact on Economic Growth (OECD Working Paper, 2014)

Institutions, Interconnectedness, and Inclusiveness: Three “I”s for better lives in Eurasia

Photo courtesy of H.E. Ms. Ingrid BROCKOVA , Permanent Representative of the Slovak Republic to the OECD
Photo courtesy of H.E. Ms. Ingrid BROCKOVA , Permanent Representative of the Slovak Republic to the OECD

Today’s post is by Marcos Bonturi, Director of the OECD Global Relations Secretariat

The world has had its eyes riveted on the tensions in Ukraine. The rest of the Eurasia region in particular is facing important economic and political challenges as a result of these tensions.

The region, at a crossroads between Russia, China, India and Europe, has had some success in the past couple of decades in transitioning from a planned to a market economy. Countries have enacted sweeping reforms to diversify their economies, improve the business climate and attract foreign direct investment. As a result, from 1995 to 2013, regional gross output more than doubled from USD 144 billion to almost USD 360 billion[1]. International investors have flocked to the region – between 1997 and 2013, net inflows of foreign direct investment increased more than six-fold, at an annual average rate of 12.4%[2]. During the financial crisis the region managed to maintain a strong GDP growth rate, which in 2013 was as high as 4.5%[3]. This upward growth trend has brought the majority of Eurasia countries into the middle income country bracket[4] and lifted about 32 million people out of poverty over the past decade[5] . Growth has been buttressed in many countries by access to vast natural resources – the Eurasia region holds mineral supplies of gold and bauxite, more than 125 years of gas reserves[6], 35 years of oil reserves[7] and 10% of the world’s agricultural land[8].

Yet international experience has shown that strong economic growth and generous resource endowments alone are not enough to guarantee social peace and prosperity, especially in a region as diverse as Eurasia. Since the collapse of the Soviet Union, the economic development of the region has been underpinned by rising commodity prices which have attracted investment in resource-rich countries such as Azerbaijan, Kazakhstan, Mongolia, Turkmenistan and Uzbekistan. This trend has made economies of the region highly susceptible to fluctuations in commodity prices and increased their dependence on the export of natural resources. It has also led to disparities in income per capita between resource-rich countries and resource-poor countries. While some resource-poor countries such as Armenia, Belarus, Georgia, Moldova and Ukraine have acquired middle-income status thanks to the industrial legacy of the ex-Soviet Union, others such as Afghanistan, Kyrgyzstan and Tajikistan are unable to exit the lower income brackets despite growing trade with their resource-rich neighbours.

To unlock sustainable peace and prosperity in the region, countries will need to widen their approach to economic reform and tackle three underlying obstacles to their development: institutions, interconnectedness and inclusiveness.

First, Eurasian countries need to strengthen their institutions and improve governance, both in the public and private sectors. Burdensome administrative processes, insufficient transparency and broad-based corruption – especially in the resource-rich economies –undermine public trust in institutions and stifle economic growth across the region. While for the low-income countries, building basic institutions and helping firms access financing is the most urgent priority, the middle-income economies of the region need to improve their regulatory frameworks to cut red tape and increase efficiencies. Innovation policies that heighten productivity will help the resource-rich countries diversify their economies and build a less commodity-dependent growth model.

Second, countries of the region need to boost their interconnectedness to regional and global markets.

Strengthening trade links, keeping markets open, investing in infrastructure, and integrating into global value chains are priorities across the region. For the resource-poor countries, this is especially critical as stronger linkages to global value chains will bring access to new markets, technologies and know-how, and drive job creation at home. Greater connectedness will also help the resource-rich countries diversify their economies and attract investment to the non-extractive sectors. Establishing mutually beneficial trade linkages with regional “heavyweights” can also help solidify relationships with powerful neighbours.

Third, governments must take action to ensure that rising national wealth is not highly concentrated in the hands of few, but is shared more equitably among all citizens. With inequalities and youth unemployment on the rise across the region, a first step to foster inclusive growth will be to reform Eurasia’s education and training systems, which often date from the Soviet era. Governments will also need to encourage a more transparent and open dialogue between the public and private sectors and reduce barriers to small- and medium-sized enterprise development, drivers of job creation and innovation.

The OECD stands ready to support countries in Eurasia to design and implement reforms that will enhance their transparency, inclusiveness and integration in the global economy, and ultimately pave the way for a peaceful and prosperous future for all of the region’s citizens.

The OECD’s Eurasia Competitiveness Programme was established in 2008 to help the Eurasia region overcome these transition challenges, develop more vibrant and competitive markets, and uncover its vast potential. High-level representatives from Eurasia and OECD countries will meet at OECD Headquarters in Paris from 24-27 November 2014 for the first Eurasia Week, to exchange perspectives on “Enhancing Competitiveness in Eurasia”, assess progress made, and agree on a roadmap for the region’s future reforms.

References

[1] OECD calculations based on World Bank data, 2014

[2] OECD calculations based on World Bank data, 2014

[3] OECD calculations based on World Bank data, 2014

[4] For the current 2015 fiscal year, middle-income economies are those with a GNI per capita of more than $1,045 but less than $12,746 (World Bank).

[5] OECD Calculations based on World Bank (2014) “Diversified Development: Making the most of natural resources in Eurasia”, Washington D.C. and World Bank World Development database.

[6] BP Statistical Review of World Energy 2014

[7] BP Statistical Review of World Energy 2014

[8] OECD calculations based on World Bank data, 2014

Recovery strengthening in OECD

Good news for the G7
Good news for the G7

For some time now, the dominant story in the world economy seems to have been this: Developed economies sputtering along; emerging economies powering ahead. Now, the pendulum looks to be swinging again.

According to the OECD’s latest economic projections, released this morning in Paris, growth in a number of developed economies seems to be gaining ground, and looks to have been ahead of forecasts in the first quarter of this year. By contrast, the large emerging economies appear to be losing momentum.

That mix of news is troubling for the global economy: Over the past few years, the emerging economies have been its main engine of growth and now account for around half of global economic activity. As they start to slow, global growth could turn increasingly sluggish.


Among the OECD countries, the United States is continuing to recover while growth in Japan has rebounded strongly. In the Eurozone, six quarters – that’s a year-and-a-half – of recession has come to an end, although economies in some countries continue to contract. The United Kingdom, too, looks to be performing strongly.

Of course, this isn’t to say that the developed economies are out of the woods yet: The recovery remains tentative and risks still lurk; for example Eurozone banks are sitting on a lot of bad debt and remain short of capital. And a number of factors, including the continued hangover of the financial crisis and unfavourable long-term demographic trends, means the overall performance of developed economies will be below par for years to come. “Reforms to boost growth, rebalance the global economy and reduce structural impediments to job creation remain vital,” says the OECD.

What’s happening in the emerging economies? One issue is the threat of a return to normality in developed economies. Since the crisis struck, many OECD economies have held down interest rates at extremely low levels and have pumped money into their economies through quantitative easing. But amid strengthening signs of recovery, the U.S. the Federal Reserve, or central bank, has been signalling that it wants to begin returning to business as usual this autumn. A rise in long-term rates in the U.S., coupled with signs of recovery, has led many investors to pull out of emerging economies, which in turn is putting pressure on their currencies and raising borrowing costs.

More broadly, many of the emerging economies are now facing long-term issues that won’t stall growth but do threaten to slow it. Demographics – or ageing populations – are part of the picture as is slow momentum on reforms that could raise economic productivity. That’s not to say that we’re seeing an end to “shifting wealth” – the rebalancing of the global economy towards emerging and developing economies. But, as The Economist put it recently, “its most tumultuous phase seems to have more or less reached its end.”

Useful links
OECD work on economies

Development in Asia Demands Huge Sacrifices

Click to download
Click to download

In today’s post, Christian Goebel, Professor of Chinese Studies at the University of Vienna talks to Rosa Gosch of Sustainable Governance Indicators (SGI) about a new study he co-authored for the Bertelsmann FoundationAssessing Pathways to Sustainable Growth – Need for Reform and Governance Capacities in Asia

Professor Goebel, why are some Asian nations successful while others fail?

First, we must define success. In our analysis of development in China, Indonesia, Singapore, Malaysia, India, South Korea, Vietnam and Japan, we comprehend success not only as economic growth in terms of per capita income, as is often the case. Social development, gender equality, equal access to education, environmental policies and the quality of democracy are equally important. We found that the Asian countries started with economic development, then moved into the social and environmental realm and finally, in some cases, into democratic development. How did they do this? Most governments first developed their executive capacity and only later became more accountable and sometimes more democratic.

Is there a common path for development in Asia?

There isn’t a single recipe for all countries. Development is highly idiosyncratic. Our analysis of Asia, however, shows that countries with strong governments that exhibit high executive capacity tended to be more successful than those with weak executive capacity. The governments of all the countries in our sample first invested in the improvement of executive capacity, and only afterwards in executive accountability and the quality of democracy. With the exception of India, where change has been more decentralized, government has been the main actor in bringing about economic and social change in each case. If there is an Asian model, then it is characterized by a pro-business government that increasingly seeks to govern markets as its executive capacity grows, and which prioritizes social and environmental issues that are beneficial for economic growth over those which are not.

What policy areas did you look at in your study?

We looked at economic policies, which include the transformation from an agrarian economy to a knowledge economy, innovation policies, and social policies like poverty reduction programs and education policies. We also had a close look at issues of gender equality, access to education, and environmental protection. In total, we examined nearly 150 different indicators for every country.

You group the countries in your study into four categories: long-standing democracies (India, Japan), young democracies (South Korea, Indonesia), one-party autocracies (China, Vietnam), and “electoral autocracies” (Malaysia, Singapore). Did regime type affect the performance of the countries?

No, at the aggregate level it didn’t. We didn’t find that democracies are doing better than non-democracies, for example. One of the most successful countries according to the SGI is Singapore, which is not a democracy. China is another example that is developing fast without being democratic. On the other hand, we have India and Indonesia, where development is less impressive despite them being democracies. So it’s not really the presence of democracy but the quality of democracy that matters for development. However, increasing the quality of democracy is very difficult because this requires knowledge, skills and financial resources. High quality of democracy and high executive capacity seem to feed into each other.

So, contrary to the situation in the OECD, policy performance and quality of democracy aren’t correlated in Asia?

That’s true. But that doesn’t mean that democracy doesn’t matter. We arrived at this conclusion because Singapore performs better than Japan, and China better than Indonesia. In the OECD, only democracies were analyzed, and high quality democracies perform better than low quality democracies. The same is true in Asia. Here, however, we have autocracies with high executive capacity, and they perform better than democracies with low executive capacity. This means that democratic quality can help you fine-tune the system only if you have the fundamentals in place.

In which policy areas did the Asian countries perform particularly well?

Nearly all countries did very well in the development of per capita income, poverty reduction, access to education, and access to social welfare. Most children in Asia are today able to access basic education, and the number of years of education has also increased. The gap between boys and girls in access to education has decreased, so there is more gender equality, especially at primary and secondary school level. Interestingly, South Korea – run by a female president today – is among those nations where girls and women don’t have equal access to university education.

Which other shortcomings did you come across?

The developmental models pursued in Asia demand huge sacrifices, notably in the form of inequality and environmental destruction. About half of the countries in our sample are highly unequal; the gains from economic growth are not distributed equally. China, Singapore and Malaysia, for example, have for a long time been very unequal societies with Gini coefficients above 0.45. And the developmental achievements are made at high environmental costs. Moreover, even the established democracies display serious deficits in democratic quality, especially in dimensions such as government accountability, media freedom and even civil rights.

What does your study tell us about future development in Asia?

Our explanations lead us to think about how countries develop and what kind of strategies can be chosen. It is very likely that some of the countries have learned from Japan and from each other. A report like ours should not be taken to say: This is how the world functions. We have discovered regularities, but these are not laws of nature. It should lead us to think: Are these actually good developments? Are there alternatives? We call these developments successful, but the price people pay in terms of social dislocation or environmental pollution can be huge.

What surprised you the most when examining governance in Asia?

We didn’t expect Indonesia to stay democratic, that Indonesians would keep embracing democracy the way they do. The fundamentals are not very good: executive capacity is low, corruption high, rule of law not very strong, and the country is just recovering from the second crisis that affected its economy very severely. Despite this, the country is holding on to democracy. Indonesia has the largest Muslim population in the world. That tells you something about the alleged incompatibility of Islam and democracy – even when democracy is under stress.

Useful links

OECD work on public governance

Professor Dani Rodrik of Harvard University discusses Asian growth models here

Pursuing growth: Enough on its own?

Going for Growth 2013
Going for Growth 2013

Does money make us happy? Phrased a little more subtly, this question has been bugging economists for years. For much of the 20th century, most of them would probably have replied yes. But in the 1970s, doubts began to show, in part because of the work of the American economist Richard Easterlin.

The “Easterlin paradox” appeared to show that as economies developed there was very little change in “self-reported (or “subjective”) well-being” – in other words, even though countries were getting richer, people didn’t seem to be getting happier. Significantly, the appearance of Easterlin’s work in the 1970s coincided with a period of rising environmental concern. Not only did the social benefits of growth come to be questioned but so too did the cost to the planet.

In the years since, all this has fed into an argument that pursuing economic growth – as measured in rising GDP – is not enough in itself. It needs to be balanced against other issues, such as access to health and education, inequality, environmental sustainability and people’s own judgement of the quality of their lives.

If you want an example of how these ideas have now entered the mainstream, look no further than the latest edition of the OECD’s Going for Growth, released today in Moscow. Since it began in 2005, the OECD project has sought to identify ways to promote growth in leading economies, focusing on areas such as employment policies, education and regulation. But as well as offering policy recommendations, this year’s report examines their wider implications – these policies may be good for growth, but are they also good for society and the environment?

These issues are reflected in another OECD project – the Better Life Index. The BLI reflects a shift in thinking on well-being and progress, based on the notion that while economic growth is necessary for development, it’s not sufficient. Accept that, and you also have to accept that, to establish the state of a society, you need to do more than just measure its GDP (which simply represents the total of the goods and services a country produces).

But what should you measure? Here’s where things get complicated. Over the past 20 years or so, several indices have emerged aimed at measuring the progress of societies, nationally and internationally, encompassing a range of measures, such as levels of health, education, inequality, personal happiness, safety, and so on. Are such indices useful? Debate rages. Advocates say they present a balanced, nuanced picture; critics say they’re too subjective, and depend too much on what researchers decide is important and not important. By contrast, they argue, at least GDP is a hard, objective number.

Those critics may feel buoyed by what looks to be a bit of an academic backlash to Easterlin’s work: “The fact is, the richer you are, the happier you are,” crowed one critic;  “Can We Kill The Easterlin Paradox Now Please: It’s Wrong,” added another. Such rejoicing may be premature: There’s a lot of honest difference of opinion among academics over how best to research this area, which is generating a great deal of diverse work. As of now, the consensus seems to be that, once a society reaches a certain level of development, more money doesn’t add up to much more happiness.

Still, it is interesting to see how – for all its flaws – many of us can’t help but link GDP (and related numbers like GNP and GNI) to wider issues. Indeed, we may have reasonable grounds for doing so: As the German researchers Jan Delhey and Christian Kroll reported last year, “for an economic indicator never intended to assess national well-being, the GDP is surprisingly successful in predicting a population’s subjective well-being.”

But, interestingly, the two researchers did find an indicator they liked even more: “One measure actually does a better job: the OECD’s Better Life Index which is particularly effective when it comes to predicting subjective well-being in the richest OECD countries.”

Useful Links

OECD Better Life Index Blog

OECD and the G20