Would you rather be a rich person in a poor country or a poor person in a rich country?

A few months ago, Dani Rodrik asked readers of his blog the old question: “Would you rather be poor in a rich country, or rich in a poor country?”
He added the following specifications:
Assume you care only about your own consumption
Define poor and rich as someone who is the in the bottom or top decile of a country
Define poor and rich country analogously as a country in the bottom or top decile of the distribution of per-capita incomes across countries.
Some time later he told readers that the correct answer is that a poor person in a rich country is three times better off than a rich person in a poor country. He used average incomes in each decile (for 2004 PPP adjusted) to assess whether people would be better off. So far so good.

However, Rodrik received several comments along the following lines:
Though monetarily a poor person in a rich country might be better off, this says nothing about the actual welfare of this person. There are numerous studies showing that happiness is directly correlated to relative income.

Those comments may seem fair enough. But are they supported by what people say about how satisfied they are with their lives?

In order to test this I have used data on percentages of lower, middle and upper income groups who are satisfied with life as a whole for 66 countries. The data was sourced from surveys conducted over the period 1999 - 2002. (See: Ronald Inglehart et al, Human Beliefs and Values, Siglo XXI Editores, Mexico, 2004, A 170.)

Observations for each country were ranked according to average income as a percentage of U.S. levels in 2000. The relevant averages for each quintile of countries are presented in the table below. (There are 14 countries represented in the first quintile and 13 in each of the others. Australia is in the fifth quintile and New Zealand is in the fourth quintile.)

The data in the table suggest that, despite status considerations, the probability of a lower income person in a high-income country being happy is about 60 percent greater than the probability an upper income person in a low-income country being happy (100x(71.3 - 44.6)/44.6 = 60). Rodrik’s answer is still correct, although the margin is smaller under the assumptions of the calculation that I have made.

Another interesting point suggested by the data in the table is that it matters a great deal more whether you are rich or poor if you happen to live in a low-income country - where incomes of the poor are more likely to be close to subsistence levels . In low-income countries (first quintile) the probability of an upper income person being happy is about 66 percent greater than the probability of a lower income person being happy (100x(44.6 – 26.9)/26.9 = 66). By contrast, the corresponding figure for high-income countries (fifth quintile) is about 23 percent.

How does probability of happiness vary with income level?

It has often been observed that cross-country comparisons show a strong positive relationship between average income levels and average happiness levels up to about 50 percent of U.S. income, with no clear relationship after that.

However, a different picture emerges when we group countries according to income levels and look at percentages of people who claim to be satisfied with life as a whole. I have used data on percentages of lower, middle and upper income groups who are satisfied with life as a whole for 66 countries. The data was sourced from surveys conducted over the period 1999 - 2002. (See: Ronald Inglehart et al, Human Beliefs and Values, Siglo XXI Editores, Mexico, 2004, A 170.) Observations for each country were ranked according to average income as a percentage of U.S. levels in 2000.

The results are shown below. The average percentages for countries in the 5th quintile (average income of 76 percent of the U.S. level in 2000) who are satisfied with life as a whole is considerably higher than for the 4th quintile (average income of 46 percent of the U.S. level).

What is the role of individual responsibility?

It is obvious that humans do not always act in ways that they would be willing to endorse “at the highest levels of reflection”. Does this provide justification for individual behaviour to be moulded by governments through external incentives or regulations? According to Glen Whitman, an economist, some new paternalists think it does (Policy Analysis No 563, Cato,2006). In Whitman’s words, the old paternalists said: “We know what is best for you, and we’ll make you do it”, whereas some of the new paternalists say: “You know what is best for you and we’ll make you do it”.

Some of the new paternalists do not propose the use of coercion. (See, for example: Richard Thaler and Cass Sunstein, ‘Libertarian paternalism’, AEA Papers and Proceedings, 93(2), May 2003.) But many paternalists still do advocate the use of coercion.

There are good reasons to be wary of approaches involving paternalistic coercion:
First, such approaches disregard the importance of autonomy as a basic psychological need that a person seeks to satisfy in order to flourish.
Second, as economists Bruno Frey and Alois Stutzer have pointed out, such “benevolent dictator” approaches disregard the fact that “people have preferences for processes over and above outcomes” (Should national happiness be maximized). People like to be involved in decisions affecting their own well-being.
Third, as Glen Whitman points out, the new paternalism neglects the possibility that people can deal with their own self-control problems. For example, people reward themselves for good behaviour and punish themselves for bad behaviour and they make commitments to change their own behaviour.
Fourth, learning to act in ways that we can endorse at our highest levels of reflection may be a necessary part of the process of actualizing potential and hence integral to human flourishing.

It is not possible to consider whether one endorses one’s own actions without accepting that one is responsible for them. The notion of accepting responsibility for one’s own actions is arguably why we have we have a concept of ‘self’. In the words of the philosopher Daniel Dennett: “The self is a system that is given responsibility, over time, so that it can reliably be there to take responsibility, so that there is somebody home to answer when questions of accountability arise” (Daniel Dennett, Freedom Evolves, 2004, p 287). This is consistent with the idea that a person is a responsible agent who identifies with her or his own actions, past present and future. This concept has been espoused by the economist, Robert Sugden, as an alternative to the assumption in neoclassical economics that people act on consistent preferences (‘The opportunity criterion: consumer sovereignty without the assumption of coherent preferences’, The American Economic Review, 2004).

In considering whether or not we endorse our actions we obviously consider, among other things, what consequences they have. If we can’t endorse our own actions because we don’t like the consequences we clearly have reason to change our behaviour.

It follows that whenever a government relieves people of the need to accept the consequences of their own actions, or inactions, it is tempting them to evade personal responsibility and thus potentially subverting their efforts toward self-improvement.

Does income inequality lead to happiness inequality?

It seems reasonable to expect that the difference between the probability of happiness of people on upper incomes and those on lower incomes would depend on the degree of income inequality in the country in which they live.

This proposition can be tested simply by calculating the gap between the percentage of upper and lower income people who claim to be satisfied with life in each of a large number of countries and then ranking them by the gini coefficient (or some other measure of income inequality) and calculating gap averages for groups of countries. I have used data on percentages of lower, middle and upper income groups who are satisfied with life as a whole for 66 countries. The data was sourced from surveys conducted over the period 1999 - 2002 (see Ronald Inglehart et al, Human Beliefs and Values, Siglo XXI Editores, Mexico, 2004, A 170).

The results are shown below.




If income inequality causes happiness inequality we should expect to see lower average gaps between happiness of people on upper and lower income in countries with relatively low levels of income inequality. That is not what the chart shows.

Similar results have been found in a study by Jan Ott. In a study covering 64 countries this researcher found that inequality of income tends to go together with higher levels of happiness and more inequality of happiness. The correlations are not substantial, but the result challenges conventional wisdom. (See: ‘Level and inequality of happiness in nations’, Journal of Happiness Studies, 2005, p 408-9).