Does economic growth help people to thrive?

Yes! The proportion of people who are thriving tends to be higher in countries that have experienced greatest economic growth over the longer term. It may take several decades, however, for economic growth to be fully reflected in subjective measures of well-being. The proportion of people who are suffering also tends to be lower in countries that have experienced greatest economic growth, but there are quite a few countries that do not fit that pattern.


These observations are based on the definitions of ‘thriving’ and ‘suffering’ used in the Gallup World Poll. Gallup classifies respondents as "thriving," "struggling," or "suffering," according to how they rate their current and future lives on a ladder scale, based on the Cantril Self-Anchoring Striving Scale, where the bottom rating is ‘the worst possible life’ and the top rating is ‘the best possible life’. Further information on the survey and classification method is available here.

The following charts show the percentages of people who are thriving or suffering in 122 countries relative to per capita GDP levels in those countries. It is clear that the percentages thriving tend to be higher and the percentages suffering to be lower, in countries with relatively high per capita incomes i.e. those which have experienced greatest economic growth in the past.

The countries that do not fit the general pattern are interesting. Several former communist bloc countries are outliers in terms of lower percentages of the population thriving and a higher percentages suffering than would be expected on the basis of per capita income levels. Some African countries have much better outcomes and some much worse than would be expected on the basis of income levels. The outcomes that are worse than expected can be explained by factors such as civil unrest. Better than expected outcomes for African and Latin American countries in studies such as this are often attributed to national characteristics, such as a positive outlook on life (but that is not necessarily irrelevant to emotional well-being). The lower than expected percentages of people thriving in China, Singapore, Hong Kong and Taiwan might also be attributable to some extent to a more reserved outlook on life by Chinese people.

Another factor relevant to considering China, Singapore etc. is the rapid economic growth of these countries. As discussed in my last post, to the extent that well-being is affected by wealth (reflected in quality of housing, financial assets, human capital, public infrastructure, social capital etc.) as well as current income, countries with relatively high growth rates could be expected to have lower levels of well-being than other countries with similar per capita incomes. Regression analysis, comparable to that reported in my last post, suggests that growth prior to 1970 makes a substantially greater contribution to the percentage of people thriving than does growth in the periods 1970 to 1990 and 1990 to 2009. The results provide support for the view that is that it takes time for economic growth to be translated into forms of wealth that enhance well-being, rather than for the ‘unhappy growth’ hypothesis which I have discussed previously. The unhappy growth hypothesis implies that the estimated coefficients on growth in the most recent period could be expected to be negative, but I found the estimated coefficients on growth to be positive in respect of all periods. (The estimated coefficient for 1990 to 2009 is not significantly greater than zero at the 95% significance level, but the standard error is smaller than the estimate. Anyone who would like to see the results is welcome to email me.)

It would be appropriate to round off this discussion with a profound statement stressing the importance of economic growth to reducing human suffering and allowing more people to thrive, while acknowledging that wealth does not guarantee that anyone will thrive. However, I’m not in the right mood for writing profound statements.

How long does it take for GDP growth to be reflected in higher well-being?

In a paper written while he was at the World Bank, William Easterly found that changes in quality of life are surprisingly uneven as per capita income grows, despite the fact that a remarkable diversity of indicators shows quality of life across nations to be positively associated with per capita income. This finding might deserve to be called Easterly’s puzzle. (Bill Easterly is probably better known for his observation that foreign aid frequently fails to promote economic growth – but I don’t think that qualifies as a puzzle.)


One possible explanation, discussed briefly by Easterly, is that there may be ‘long and variable lags’ in the relationship between quality of life and economic growth. A related possibility, that is supported by some simple analysis I have undertaken for OECD countries, is that well-being is affected by wealth (reflected in quality of housing, financial assets, human capital, public infrastructure, social capital etc.) as well as current income. In this post I want to explore this possibility for a wider range of countries using the Legatum prosperity index. As noted in my last post, the Legatum prosperity index is highly correlated with the OECD’s well-being index.

To the extent that well-being is affected by wealth rather than current income, countries which have experienced rapid economic growth in recent decades could be expected to have lower well-being levels than those with similar income levels which have a longer history of relatively high per capita incomes. The following table provides results of regressions in which the Legatum prosperity index and various components of this index are explained by the log of per capita GDP in 1970, and the change in log per capita GDP from 1970 to 1990 and from 1990 to 2009. If the component of current income reflecting relatively recent growth has a similar coefficient to that reflecting income in 1970, it would be reasonable to conclude that capital stocks are not relevant to current well-being. (There are 92 observations in the regressions; 18 former Soviet block countries had to be omitted because of lack of lack of comparable per capita income data. Per capita GDP data is from Penn World Tables – the rgdpl measure.)

The results are consistent with the view that well-being is affected by wealth as well as current income. For the index as a whole, the estimated coefficient on the variable reflecting relatively recent growth is substantially lower than that on the variables reflecting past growth experience. The results for some components of the index also support that interpretation.

Economy: The estimated coefficient on relatively recent growth is actually higher than that on the variables reflecting previous growth experience. That result is to be expected because the economy variable is derived from a range of indicators of recent economic performance.

Entrepreneurship and opportunity: The low estimated coefficient on relatively recent growth is to be expected because an entrepreneurial culture takes time to develop. I usually think of causation running in the opposite direction – from an entrepreneurial culture to economic growth – but success often breeds success.

Governance: It may not appear to make a lot of sense to view low levels of corruption as a consequence of economic growth, rather than vice versa, but some of the indicators covered (e.g. political rights and regime stability) could reflect a build-up of institutional capital that has been fostered by economic success.

Education: As expected, the estimated coefficient on relatively recent growth is lower than on previous growth experience, reflecting the time it takes for improved education of young people to be reflected in the stock of human capital. Some of the indicators covered in the education variable reflect current enrolments rather than education levels of the population.

Health: Reasons for the low estimated coefficient on relatively recent growth would include investment required to improve sanitation and water quality, and the time required for training of health professionals.

Safety and security: As expected, countries with a long history of relatively high per capita incomes tend to have less violence. Low violence is conducive to economic activity and economic opportunities reduce the incentive to engage in criminal activities. The relatively low estimated coefficient on the recent growth variable suggests that economic growth has a greater positive impact on safety and security when it is sustained over a couple of decades.

Personal Freedom: Civil liberties, satisfaction with freedom and tolerant attitudes are strongly associated with a history of relatively high per capita incomes. The results do not shed much light on the effects of more recent growth experience.

Social Capital: Again, relevant indicators such as trust and perceptions of social support are associated with a history of relatively high per capita incomes, with greater ambiguity in respect of recent growth experience.

The regression results also indicate that the relevance of per capita income to explanation of the various components of the index varies considerably. Income history seems to be much more relevant to education and health outcomes than to personal freedom and social capital. Performance in relation to factors such as social capital helps to explain why some countries (e.g. New Zealand) have higher overall index scores while other countries (e.g. Greece) have lower overall index scores than would be predicted on the basis of income history.

Finally, to answer the original question, the results reported here suggest that it can take two or three decades for GDP growth to be fully reflected in higher well-being levels.

How close is the correlation between the Legatum 'prosperity' index and the OECD's 'better life' index?

The Legatum prosperity index provides an assessment of wealth and well-being in 110 countries. The authors suggest that it ‘produces rankings based upon the very foundations of prosperity’. (I am allergic to that kind of spin, but I am quoting the words here as penance for the unwarranted doubts I expressed on this blog in November 2009 about how much substance might lie behind this index. I eventually found the technical appendix I was looking for and satisfied myself that there is substance behind the ‘incredibly smooth’ presentation). The indicators incorporated in the study are factors that are known to be determinants of wealth and life satisfaction.


I have discussed the OECD’s better life index in several posts (most recently here).

There is some difference between the factors incorporated in the Legatum and OECD indexes. The factors included in the Legatum index are: economy, entrepreneurship and opportunity, governance, education, health, safety and security, personal freedom and social capital. The factors included in the OECD index are: housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety and work-life balance.

The two indexes are highly correlated. The simple correlation coefficient relating the averages of the factors included in the two indexes for OECD countries (excluding Luxembourg) is 0.95. (The Legatum index is not available for Luxembourg.) The correlation between the Legatum index and my modified version of the OECD index is 0.97.

The similarity of the two indexes is also apparent when they are graphed against per capita GDP. The chart below showing the Legatum prosperity index can be compared to a similar chart showing the modified OECD well-being index in the preceding post.

New Zealand and Greece are outliers in both charts. The Legatum index has New Zealand ahead of Greece on all criteria, with the greatest difference in social capital, governance and entrepreneurship and opportunity. The OECD index has New Zealand substantially ahead in terms of community, jobs, life satisfaction and housing.

Although the OECD and Legatum indexes appear to be quite different, they tell a similar story about well-being in OECD countries. An important advantage of the Legatum index is that it is available for a much larger number of countries.

How closely is well-being related to per capita GDP?

The relationship between a composite well-being index and per capita GDP in OECD countries is shown in the chart below. The well-being index has been derived by modifying and combining OECD indicators as described in previous posts (here and here). As might be expected, the chart suggests that well-being is generally higher in countries with high per capita GDP. For most countries, including the United States and Australia, there is not much difference between the well-being index and the picture of well-being presented by per capita GDP. There are some countries, however, in which well-being seems to be higher than would be expected (most notably New Zealand) and some in which well-being seems to be lower than would be expected (e.g. Luxembourg, Greece and Korea). In this post I want to explore whether some of those apparent anomalies may be attributable to the past income history or the countries concerned.

Note to the chart: Per capita GDP data is from Penn World Tables (rgdpl). The per capita income data is presented in log form because previous studies have suggested that this is appropriate in considering the relationship between well-being and income (for example, Stevenson and Wolfers, 2008).

Why might past income matter for current well-being? Past income is relevant because well-being is affected by wealth as well as current income. Some components of wealth are incorporated in the well-being index (e.g. the quality of housing) and others e.g. public infrastructure could affect several well-being indicators. Wealth may also provide peace of mind to individuals as a cushion against loss of income - for example as a result of ill health or unemployment. A study by Bruce Headey and Mark Wooden has shown, using Australian data, that wealth is at least as important to subjective well-being as is income (IZA Discussion Paper 1032, Feb. 2004).

In order to assess the extent to which past incomes matter I have used regression analysis to explain the well-being index in terms of two components of current per capita incomes: per capita incomes in 1970 and the growth in per capita income from 1970 to 2009. If income history is irrelevant to current well-being the estimated coefficients on the two components of income would be expected to be similar. In fact, the estimated coefficient on per capita income in 1970 is much higher (more than 1.8 times) the estimated coefficient on the growth component. (The standard errors of the estimated coefficients are fairly low and the difference between them is statistically significant at the 95% level. The regression explains about 76% of the variation in the well-being index. Anyone who wants further information on the regression results is welcome to contact me.)

The regression results have been used to decompose the well-being index in order to prepare the following chart.

The story that a comparison of the two charts tells me is that a past history of relatively high incomes helps to explain why New Zealanders score relatively highly on the well-being index. A past history of relatively low incomes also helps explain why Korea has a relatively low well-being score. However, the size of the relevant residuals suggests that past history doesn’t help explain the disparity between well-being and per capita GDP levels for Luxembourg and Greece.

The general picture that emerges is that the well-being index and per capita GDP generally convey similar information about relative well-being levels in OECD countries. In some of the countries where this is not so, the disparity can be attributed largely to income history. There do not appear to be any OECD countries with high levels of well-being that do not have either high current per capita GDP levels or a history of relatively high per capita GDP levels about 40 years ago. This suggests to me that over the longer term there can be no escaping the links between wealth creation and progress in improvement of well-being.