Lecture 7:

Measures of
success:
The goals of
government

CCGL 9042
Dr. Larry Baum and Dr. Jack Tsao

Song 1 Song 2
 Outline
• What’s the goal?
• Popular measures
– GDP
– Others
• Other measures
– Economic
– Health
– Education
– Composite
 What’s the goal?
• Who should be helped?
– A whole country or region?
– The greatest number of people in a
country or region?
– Those at the bottom?
• Economic conservative-liberal divide
– Right (conservative)
• Seeks economic liberty, individual
opportunity, & low taxes.
• Feels taxing income cuts incentive and
innovation.
– Left (liberal)
• Seeks economic equality and income
redistribution.
• Feels shrinking government leaves poor
unprotected.
 What’s the goal?
• Which is the main goal?
– Wealth?
– Health?
– Other?
• When?
– Short term?
– Long term?
• How? Compare conditions to see
what helps or hinders so that we
can adjust policy.
– Compare countries.
– View a country over time.
– View the world over time.
 Earliest forms of mercantilism appeared in the ancient Republic of Venice.
Canaletto. Painting by Giovanni Antonio.

• Mercantilism (a form of bullionism) was popular economic and

political idea in 15th – 18th centuries, especially among European
Mercantilism empires, emphasising the measure of a nation’s success as
minimising imports and maximising exports to accumulate
monetary metals (gold, silver, other precious metals).
• Promoted colonialism, imperialism, and protectionist policies.
• A system of political unification “to make all economic activity
subservient to considerations corresponding to the state.”
(Mercantilism 1935, Eli Heckscher)
How we measure
success now
• High Gross Domestic
Product (GDP) growth rate
• Low unemployment rate
• Also
– Low inflation rate
– High wage growth rate
– High housing affordability (or
low, if you’re an owner!)
 GDP
• Gross domestic product
– Created for a report to US
Congress in 1934
– Value of all goods and services
made in a country, usually
within 1 year
– 3 ways to calculate (with ~same
result)
• Production
• Income
• Expenditure
 Production method
(GDP)
Production method
• Only counts value added
• If a company buys iron ore and coke
for $1.5 billion and makes steel
which it sells for $2.7 billion, the
company contributes $1.2 billion to
GDP.
• If a car company buys the steel for
$2.7 billion and other material and
parts for $7 billion, then makes cars
which it sells for $20 billion, the
company contributes $10.3 billion to
GDP.
 Income method
(GDP)
• Income method
– Wages
– Profits (plus corporate income
tax)
– Investment income (rent,
interest, dividends)
Expenditure method
(GDP)
• Expenditure method
– Consumer purchases of goods
and services
– Business investment in material
items
– Government spending for final
goods and services and for
investment in material items
– Net exports (exports minus
imports)
 GDP
• Most of the following slides show data from
2010-2014.
 GDP

• Darker: higher GDP. White: no data.

• US: high GDP may explain why news often focuses on this country.
• Poor parts of world visible on map as pale areas.
• Big countries (area and people): high GDP may not reflect situation for individuals.
 GDP growth rate

• But news talks about growth, not

level.
• “The economy grew at a rate of
2.4% in the 4th quarter last year.”
• Above quote refers to GDP growth
rate per year, usually for a
particular country.
 GDP growth rate

• Poor countries tend to grow faster.

• Growth varies greatly among countries.
Gross World Product growth rate
• Growth only since Industrial Revolution
• Great Depression only a blip
• Why did growth slow in recent decades?
– First countries to industrialize now grow
slowly but are big and thus dilute growth
rate of world?
– Earlier peak possible because then there
were no other countries that grew slowly
and were big?
• Growth recently ~3%/yr

Years before 2011

 Unemployment rate

• Percentage of job-seekers who can’t find work

• Data missing from many countries. Are data reliable even when available?
• Variation high among poor countries.
Unemployment rate
US
 Inflation rate
• Annual price increase in consumer items
• Inflation seems to relate to GDP growth.
• A few countries have high inflation.
 World wage
growth

• World wage growth ~2%/yr

• 2009 financial crisis only
affected wages a little
• Huge regional differences in
wage growth
 Housing affordability
Ratio of median flat price to median family income in 2015.

• Greener: more affordable

• Huge variation among countries
• Not strongly related to wealth or growth
Since it is hard to find rent data, data here are on price only.
 How good are these measures?
• Let’s examine GDP growth rate
first since it’s most often used.
• Where would you rather live:
Sierra Leone or Holland?
– In 2013, GDP grew 13% in Sierra
Leone but shrank 1% in Holland.
– But GDP/capita $560 in Sierra Leone
vs. $50,000 in Holland Sierra Leone Holland
• What’s the question we want to
answer?

https://www.pinterest.fr/pin/370984088032481597/ https://commons.wikimedia.org/wiki/File:Flag_map_of_the_Dutch_Language.png
 How good are these measures?
• If we want to find the most
successful country, we may look at
a level, like GDP/capita.
• But if we want to find which
countries are doing best at
improving, we may look at a rate of
change, like GDP growth rate.
• Let’s look at growth rate. How good
is GDP compared to other
measures?
Advantages of GDP
growth rate

• Easy to measure and

compare
• Gives a single number for
a whole country
 Disadvantages of GDP
growth rate
• High inflation raises GDP growth
rate without benefitting residents.
But can adjust for inflation:
constant or real GDP growth rate.
• Population growth dilutes benefit
of GDP growth. But can adjust by
using per capita GDP growth.
• Cost of living varies among
countries (a meal costs much
more in Iceland than India), thus
same GDP buys more in cheaper
countries. But can adjust with
purchasing power parity method.
 GDP corrections

Visualizing the Structure of the World Economy and Population in One Chart
https://youtu.be/CRfc85AIH3c (2:45)
 Disadvantages of GDP
growth rate
• Lumps together everyone in a country
• Raised by a single lucrative industry
even if it benefits only a small elite
• Angola
– Due to oil, GDP grew the fastest in the
world (11%/yr) in 2001-10.
– China’s biggest oil supplier (2010)
– But 43% of Angolans live on <HK$10/day
(2007-11, UNICEF).
• Turkmenistan
– 4th largest natural gas reserves in the
world
– Due to gas, GDP grew 12% in 2013.
– 3rd worst press freedom in the world
(Reporters Without Borders), thus hard to
get data, but reports of extreme
corruption and wealth concentration
 Disadvantages of GDP growth rate
• Vast Majority Income (VMI)
– Corrects for income inequality in GDP
– Mean income per capita of first 80% of the population in income distribution
VMI/GDP ratio

Source: Amr Ragb

 Disadvantages of GDP
growth rate
• Ignores volunteer or underground
economy, thus underestimates real
production.
• Ignores increase in quality of products
and services, thus underestimates
quality of life.
– A HK$4000 computer now does far more
than an HK$8000 computer did a
generation ago, but would be counted
50% less toward GDP.
– Electric light for one evening is much
better (brighter, safer, cleaner) than a
candle centuries ago, but counts much
less toward GDP because it is much
cheaper.
 Disadvantages of GDP
growth rate

• Unbeneficial production still raises

GDP.
– Natural disasters, epidemics, and wars
may raise GDP due to spending to repair,
treat, or fight.
– Japan built roads and railways to small
towns to boost economy (and votes in
small towns?).
• Ignores pollution produced by GDP
growth.
• Ignores asset value, thus
underestimates success of savers vs.
spenders.
“The government should pay people
to dig holes in the ground and then fill
them up.“
- John Maynard Keynes
 Disadvantages of
GDP growth rate
• In Hong Kong, GDP grew 57% from
2000 to 2015, but the Bauhinia
Foundation Research Centre’s
“well-being” index (of 11 factors)
grew 0%.
• The man who developed GDP in
1934, Simon Kuznets, himself
warned not to use it to measure
welfare:
“Distinctions must be kept in
mind between quantity and
quality of growth, between costs
and returns, and between the
short and long run. Goals for
more growth should specify more
growth of what and for what.”
Disadvantages of GDP growth rate

Kuznets also listed several other problems of GDP:

“The valuable capacity of the human mind to simplify a complex

situation… becomes dangerous when not controlled…. With
quantitative measurements especially, the definiteness of the result
suggests, often misleadingly, a precision and simplicity…. Economic
welfare cannot be adequately measured unless the personal
distribution of income is known. And no income measurement
undertakes to estimate the reverse side of income, that is, the
intensity and unpleasantness of effort going into the earning of
income. The welfare of a nation can, therefore, scarcely be inferred
from [GDP].”
 Trust in an
imaginary future

• Ideas such as voluntary exchange,

specialisation, private ownership, capital
accumulation, and pricing systems via
currency forms the basis of capitalism.
• Financial institutions such as banks can loan
more than the savings they hold (for example
$10 for every dollar they hold).
• Our economy survives and flourishes based
on our trust that the future will be better (the
trust of continued growth to repay the loan).
• In previous eras, people seldom wanted to
extend much credit because they didn’t trust
that the future will be better than the
present.

Reference: Chapter 16: The Capitalist Creed of Harari YN,

2015, Sapiens: a brief history of humankind
 Capitalism, the meme
• Capitalism is no longer just an economy doctrine.
It encompasses an ethic – a set of teachings
about how people should behave, be educated,
and think.
• For example, Britain declared war on imperial
China in the name of free trade to protect the
opium market. 40 million Chinese or 1/10th of
the population at the time were opium addicts.
• Harari argues capitalism has become a proxy for
supreme good because justice, freedom, and
even happiness all depend on economic growth
(specifically GDP growth).

Reference: Chapter 16: The Capitalist Creed of

Harari YN, 2015, Sapiens: a brief history of
humankind
Wow, so many problems with GDP! Any alternatives?
 Measures other than
GDP growth rate
• Economic
– Gini coefficient
– Poverty level
• Health
– Life expectancy
– Infant mortality
• Education
– Years of schooling
– Literacy
• Composite indices
– Human Development Index
– Social Progress Index
 Gini coefficient
• Developed by Corrado Gini in 1912
• Measures income inequality
• 0 is equality, 1 is inequality
• Ratio of area A to A+B
 Gini coefficient
• Let’s take a quiz
https://play.kahoot.it/v2/?
quizId=c53ab24c-6bb4-41
fb-8241-1b6e6177d472
 Gini coefficient
• In 2008
 Gini coefficient
• World Gini increased until ~half a century ago,
maybe because rich countries grew faster.
• But now poor countries grow faster.

https://ec.europa.eu/info/sites/info/files/economy-finance/00.keynote_milanovic.pdf
Poverty: national
• By country: % living below
poverty line (US$1.9/day)
• https://ourworldindata.org/grapher/share-
of-the-population-living-in-extreme-povert
y?tab=map&year=1981

• Many countries missing data

• Where has poverty declined?
• http://worldpoverty.io/
 Poverty: regional
• By region: % living below poverty line (US$1.9/day)

https://ourworldindata.org/extreme-poverty
 Poverty: global

• World: ratio of not poor to poor has rocketed.

 Life expectancy
• Correlates with general health
• Indirect measure of general quality of life
World life expectancy
 World life
expectancy
• Fastest growth was from 1900-1980
o Maybe since low hanging fruit picked
o Partly due to better sanitation,
vaccination, nutrition
• Slower growth since then
o Maybe since limiting factor is discovery
of new ways to improve health
o Steady, slower growth looks like it will
continue
o Expanding health care from rich to
include poor would raise life expectancy
Vaccination example:
Maurice Hilleman
• Born in the 1919 flu pandemic, in
which his mom and twin sister died.
• 7 siblings. He grew up poor, farming,
and almost died of diphtheria.
• PhD in microbiology, U. Chicago, 1944
• Made most of the vaccines we use
– MMR: Measles, mumps, rubella
– Hepatitis A & B
– 40 vaccines in total
• Saved many lives
– Maybe more than anyone else
– 17 million for measles, 2000-2014
– One person can help many. You
can do it, too. Maurice Hilleman (1919-2005)
Malaria example: Youyou Tu
 Infant mortality rate
• Correlates with general health
• Indirect measure of general quality of life
 World infant mortality rate
• Dramatic fall
• Everywhere

Source: http://commons.wikimedia.org/wiki/File:Infant_Mortality_Rate_by_Region_1950-2050.png
Health Adjusted Life Years
• Disability-adjusted life years: DALYs,
number of lost years of healthy life,
using weighting factors to reduce value
of life with disability
• Global Burden of Disease study:
http://vizhub.healthdata.org/gbd-compare/
• Can calculate impact of health
interventions on DALYs to direct
spending and effort to where it will do
the most good: Alzheimer’s vs.
measles, war vs. pain in the neck
• Might extend these measures beyond
health.
 Health Priorities
• Know the numbers to set priorities
• How many people are born or die each day?
– Births:
• 380,000
– Deaths:
• 170,000
• Maybe news should show those numbers instead of numbers like these:
 Education
• Learning-adjusted years of schooling:
LAYS, number of years of education in a high-performing cou
ntry
(like Singapore)
– Studies show some programs
don’t help
• Smaller class size
• More textbooks
– Studies show some programs
do help (~US$30/LAYS)
• Teaching by learning level,
not grade
• Structured lesson plans and
teacher monitoring
https://commons.wikimedia.org/wiki/File:Classroom_with_children_in_the_primary_school_of_Don_Puay,_Laos.jpg
http://documents1.worldbank.org/curated/en/801901603314530125/pdf/How-to-Improve-Education-Outcomes-Most-E
fficiently-A-Comparison-of-150-Interventions-Using-the-New-Learning-Adjusted-Years-of-Schooling-Metric.pdf
Which measure is best?

https://www.vox.com/future-perfect/2018/11/8/18052076/human-history-in-one-chart-industrial-revolution
Composite measures
• Each measure conveys part of the picture.
• More complete view if combine measures.
• Several have been compiled.
Human Development Index

• Created in 1990 for UN Development

Programme report “to shift the focus of
development economics from national
income accounting to people-centered
policies“ Mahbub ul Haq
• By Pakistani economist Mahbub ul Haq,
with Indian economist Amartya Sen and
others
• Haq wanted a single composite measure
to convince citizens and policy-makers to
evaluate development by improvements
in lives, not just by economics.
Amartya Sen
 Human Development Index
• 3 components: health, education,
economics
– Life expectancy (at birth, years)
– Schooling (mean and expected years)
– Gross national income (per person, PPP, US$)
Human Development Index
http://hdr.undp.org/en/data
 Human Development Index
• Highest
– Norway, Ireland, Switzerland, Hong Kong, Iceland
– Why?
• Natural resources?
– Norway has oil, so “yes”?
– But others have little, so unnecessary.
• Developed earlier? Other factors?
• Lowest
– Niger, Central African Republic, Chad, South Sudan, Burundi
– Why?
• Lacking natural resources? No: much in Niger and South Sudan, but still
low HDI
• Developed later? Other factors?
Inequality Adjusted HDI
Reduces HDI based on degree of inequality

Least inequality: Finland

Most
inequality:
Angola, and
generally
countries with
lowest HDI
 Social Progress Index
• Created in the last few years by several academics
• http://www.ted.com/talks/michael_green_what_the_social_progress_i
ndex_can_reveal_about_your_country
from 4:02 to 14:46.
• Includes many important aspects, including
freedom, lack of corruption, health, wealth, etc.:
https://www.socialprogress.org/
 Human Capital Index
• The contribution of health and education to
the productivity of the next generation of
workers
• World Bank announced the HCI in 2018.
• https://www.youtube.com/watch?v=iCUIAQkOwKw&list=PLopq6yGfmF
AviugLm8wSSNRrw8r2dQ5sR&index=8
(2:59)

• Highest is .9: Singapore (Hong Kong is 2nd)

• Lowest is .3: Central African Republic
 Happiness
• If happiness is our individual goal, why not
make average happiness a national or world
goal?
• But happiness seems so subjective
compared to GDP. How can we possibly
measure it and use it to direct government
policy? Is that a goofy idea? Let’s see.
• Bhutan has national goal to increase
happiness. But that’s a tiny kingdom.
 Happiness
• UK prime minister Cameron also liked the idea and started
measuring a UK happiness index in 2012.
• This seems a new fad. But it’s been around a while: US
Declaration of Independence in 1776, “all men are created
equal, that they are endowed by their Creator with certain
unalienable Rights, that among these are Life, Liberty and
the pursuit of Happiness.” (But US government hasn’t
gotten around to measuring it yet.)
• In 2019, New Zealand declared itself the first country to
measure success by its people’s wellbeing. Child poverty,
domestic violence, and mental health were budget
priorities.
 World Happiness Report
• A measure of happiness from questionnaires by
Gallup, a polling company
• UN resolution in 2011 invited countries to measure
happiness to guide policy
 World Happiness Report

Happiest countries: Scandinavia, Switzerland, Netherlands, New Zealand

Saddest countries: Afghanistan, South Sudan, Zimbabwe, Rwanda
https://towardsdatascience.com/visualizing-world-happiness-with-an-interactive-map-e33ebbaa3936
World Happiness Report
– 6 variables affected happiness:
• real GDP per capita
• healthy life expectancy
• having someone to count on
• perceived freedom to make life choices
• freedom from corruption
• generosity
– Mental health is biggest single factor
(can measures with DALYs)
 Happiness
Economist Jeffrey Sachs, in World
Happiness Report 2013:
“Man never did live by bread
alone, and we have learned—
painfully—that too focused a
pursuit of bread leads not only to
obesity but also to a starvation of
other human needs, including
social connections, psychological
balance, and virtue.”

Jeffrey Sachs, Economist

Can money buy happiness?
1. In low income range,
subjective well-being
rises with GDP per
capita.
2. But not much gain
beyond middle
income.
3. Subjective well-being
can be high despite
low GDP.

http://www.resilience.org/stories/2013-07-02/prosperous-equality
 Millennium Development Goals
• World development goals agreed by all UN member states
• Agreed in 2000 to be achieved by 2015
• Eight major goals
– Eradicate extreme poverty and hunger
– Achieve universal primary education
– Promote gender equality and empower women
– Reduce child mortality
– Improve maternal health
– Combat HIV/AIDS, malaria, and other diseases
– Ensure environmental sustainability
– Develop a global partnership for development
 Millennium Development Goals
• The MDGs had 21 specific targets.
• Just goals, not action
– How did declaring goals accomplish anything?
– It’s hard to know if they did.
– At least they focused effort of people,
governments, and other organizations.
• Some targets achieved, but some weren’t.
• Let’s look at some of them.
 Millennium Development Goals
Target 1A: Halve, between
1990 and 2015, the
proportion of people
living on less than $1.25 a
day
 Millennium Development Goals
Target 2A: By 2015, all
children can complete
primary school

X
 Millennium Development Goals
Target 4A: Reduce by two-
thirds, between 1990 and
2015, the under-five
mortality rate

X
 Millennium Development Goals
Target 6A: Have
begun to reverse the
spread of HIV/AIDS
by 2015
 Millennium Development Goals
Target 7C: Halve, by
2015, the proportion
of the population
without safe drinking
water and sanitation
 Millennium Development Goals
Target 8D: Resolve
debt problems of
developing countries
 Millennium Development Goals
Within Goal 8: http://www.mdgmonitor.org/mdg-8-develop-a
-global-partnership-for-development/
Overseas
development
Hong Kong?
assistance

Rich countries in UN
committed to give
>0.7% of GNP as ODA
since 1970s.
X
Millennium Development Goals

Beyond 2015: what should we do next?

https://www.youtube.com/watch?v=q5nFFTnUM4w (2:34)
Sustainable Development Goals

Jeffrey Sachs introducing SD Solutions Network – Hong Kong, 8/1/2018

Sustainable Development Goals
The Global Goals for Sustainable Development
https://www.globalgoals.org/

17 more goals for the next 15 years to build on the

MDGs, in 5 areas (remember them as REAL People):
• Prosperity
• Peace
• Partnership
• Planet
• People

Will setting goals accomplish anything?

http://sdgfunders.org/sdgs/dataset/recent/goal/good-health/
Conclusion

• What’s the goal?

o Compare countries.
o Follow them over time
to see what makes
them better or worse.
• Measures
o GDP
o Others
o Composite measures