Abstract
Selected Issues
Quantifying Consumption-equivalent Welfare in New Zealand1
1. New Zealand presented its first Wellbeing Budget on May 30th, 2019. This represents the culmination of substantial work over the past few years to integrate parts of the OECD Framework for Measuring Well-Being and Progress into the New Zealand public sector.2 The Budget is part of a broader strategy embodied in the Treasury’s Living Standards Framework (LSF): to consider a range of indicators and factors, beyond purely economic objectives, in policy decision making. The framework focuses on “four capitals” (natural, human, social and financial/physical) that promote wellbeing in 12 dimensions: civic engagement and governance; cultural identity; environment; health; housing; income and consumption; jobs and earnings; knowledge and skills; time use; safety and security; social connections; and subjective wellbeing.
2. The Wellbeing Approach is part of a tradition that has sought to move “Beyond GDP” to broader measures of economic welfare. Although income per capita is a common measure of economic success, it has long been recognized to leave out important dimensions of both economic achievement and wellbeing. The Stiglitz commission report (Stiglitz and others, 2009), for example, proposed alternative indicators of economic performance and social progress. The IMF has recently focused on the implications of income distribution (Ostry and others, 2014 and Clements and others, 2015), and gender (Kochhar and others, 2017). The Sustainable Development Goals (SDGs) at the core of the post-2015 Development Agenda (United Nations, 2015), also recognize the many dimensions of welfare including equality, education, gender and environmental protection.
3. A common challenge for these approaches is to accurately measure multidimensional welfare outcomes in a simple index. Summary measures that attempt to capture differences in dimensions of welfare across countries have been developed, including the Human Development Index (HDI) (UNDP, 2009), the Inclusive Development Index (IDI) (World Economic Forum, 2017), and the Multidimensional Poverty Index (Alkire and Foster, 2011). More recently, baseline indices have been developed to measure progress in the SDGs (Schmidt-Traub and others, 2017 and Sustainable Development Solutions Network and the Bertelsmann Stiftung, 2018). However, these indexes often aggregate the different indicators of wellbeing in an ad-hoc manner, making it difficult to know exactly what is being measured, and how these change across countries or over time (Ravallion, 2012).
4. One recent approach is to measure consumption-equivalent welfare. This approach attempts to put an economic value (in terms of consumption) on different aspects of welfare, which allows for a theoretically consistent aggregation to come up with a single index that can measure differences in consumption-equivalent welfare across countries and over time. Jones and Klenow (2016) developed an index that includes consumption itself, and life expectancy, leisure and inequality, and used it to measure consumption-equivalent welfare across countries from 1980 to 2007. Bannister and Mourmouras (2017) extend the index to include the costs of greenhouse gas emissions and sustainability (through adjusted net savings, World Bank, 2011) and extend the calculations to 2014. The virtue of the measure is that it presents a scalar index of consumption-equivalent welfare and its components that can be tracked and measured over time; the drawback is that it covers only a relatively narrow set of wellbeing indicators. However, these indicators can be mapped into some of the 12 dimensions of New Zealand’s Living Standard Framework to cover at least part of its focus on wellbeing (Table 1).
New Zealand: Mapping Consumption-Equivalent Welfare (CEW) Indicators Into Living Standards Framework (LSF)
New Zealand: Mapping Consumption-Equivalent Welfare (CEW) Indicators Into Living Standards Framework (LSF)
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|
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|---|---|
| Consumption | Income and Consumption |
| Life Expectancy | Health Knowledge and Skills Safety and Security |
| Leisure | Jobs and earnings Time use |
| Inequality | Social connections Subjective Wellbeing |
| Greenhouse gas emissions | Environment |
New Zealand: Mapping Consumption-Equivalent Welfare (CEW) Indicators Into Living Standards Framework (LSF)
|
|
|
|---|---|
| Consumption | Income and Consumption |
| Life Expectancy | Health Knowledge and Skills Safety and Security |
| Leisure | Jobs and earnings Time use |
| Inequality | Social connections Subjective Wellbeing |
| Greenhouse gas emissions | Environment |
5. How does New Zealand fare in the calculation of this welfare index? Figure 1 shows the welfare index on the vertical axis compared to national income on the horizontal axis for 165 countries in 2017, both in the natural logarithm of percent of the U.S. level. Countries along the 45-degree line have the same relative position in welfare and income compared to the United States. Poorer countries tend to be below the 45-degree line, with lower relative welfare than income. This is because they generally consume less out of their income, have lower life expectancy, less leisure or more inequality. New Zealand, on the other hand, is part of a group of upper income countries with higher relative welfare than income. New Zealand’s consumption-equivalent welfare was 83 percent of the U.S. level in 2017 while its income was 68 percent of the U.S. level.
Consumption-Equivalent Welfare vs. Income, 2017
(Log of percent of US level)
Citation: IMF Staff Country Reports 2019, 304; 10.5089/9781513514765.002.A002
6. Where does New Zealand’s welfare advantage come from? Figure 2 presents the consumption-equivalent welfare index with its five components.3 New Zealand scores better than the United States on life expectancy and inequality, but behind the United States on consumption and leisure, and very close to the U.S. level of greenhouse gas (GHG) emissions.4 Table 2 presents the relevant data and indexes for New Zealand, the United States and some other comparator countries. Relative to its peers in the table, New Zealand has a lower welfare index because it falls behind in the overall level of consumption and has higher hours worked, but it compares favorably on life expectancy, inequality and greenhouse gas emissions.
New Zealand, Welfare Index in 2017
(US level = 1)
Citation: IMF Staff Country Reports 2019, 304; 10.5089/9781513514765.002.A002
New Zealand: Welfare Indicators, 2017
New Zealand: Welfare Indicators, 2017
| Welfare per cap. (percent of US) | Income per cap. (percent of US) | Life Expectancy (years) | Consumption (% of US level) | Hours worked (per person/year) | Gini Coefficient | GHG emissions (tons per cap.) | |
|---|---|---|---|---|---|---|---|
| New Zealand | 83.2 | 68.5 | 81.7 | 66.3 | 941.7 | 33.8 | 17.6 |
| United States | 100.0 | 100.0 | 78.5 | 100.0 | 836.4 | 41.7 | 20.2 |
| Other comparators: | |||||||
| Australia | 101.0 | 88.2 | 82.5 | 77.2 | 868.1 | 36.6 | 33.2 |
| Canada | 100.0 | 81.1 | 82.5 | 74.5 | 866.2 | 34.5 | 29.5 |
| Denmark | 101.8 | 86.9 | 81.0 | 72.0 | 709.0 | 27.8 | 9.6 |
| Finland | 101.6 | 74.9 | 81.4 | 71.4 | 759.0 | 27.7 | 12.7 |
New Zealand: Welfare Indicators, 2017
| Welfare per cap. (percent of US) | Income per cap. (percent of US) | Life Expectancy (years) | Consumption (% of US level) | Hours worked (per person/year) | Gini Coefficient | GHG emissions (tons per cap.) | |
|---|---|---|---|---|---|---|---|
| New Zealand | 83.2 | 68.5 | 81.7 | 66.3 | 941.7 | 33.8 | 17.6 |
| United States | 100.0 | 100.0 | 78.5 | 100.0 | 836.4 | 41.7 | 20.2 |
| Other comparators: | |||||||
| Australia | 101.0 | 88.2 | 82.5 | 77.2 | 868.1 | 36.6 | 33.2 |
| Canada | 100.0 | 81.1 | 82.5 | 74.5 | 866.2 | 34.5 | 29.5 |
| Denmark | 101.8 | 86.9 | 81.0 | 72.0 | 709.0 | 27.8 | 9.6 |
| Finland | 101.6 | 74.9 | 81.4 | 71.4 | 759.0 | 27.7 | 12.7 |
7. How has New Zealand’s consumption-equivalent welfare index changed over time? Figure 3 shows that both welfare and income grew significantly relative to the U.S. level from 2007 to 2017. From 2007–2014 the index moved parallel to the 45-degree line: welfare grew at the same pace as income. From 2014 to 2017 there was a significant improvement in both welfare and income, but welfare grew more quickly. Table 3 shows the annual rates of growth of welfare and income and the components of the welfare index from 2007 to 2017 and over the sub-periods. Welfare growth was much higher than income growth in 2014–17, because of improvements in life expectancy, higher consumption (which grew more quickly than income over this period) and declines in inequality.5
New Zealand: Progress in Welfare Over Time
(Log of percent of US level)
Citation: IMF Staff Country Reports 2019, 304; 10.5089/9781513514765.002.A002
New Zealand: Growth of Welfare, Income, and Components, 2007–2017
(Annual percentage change)
New Zealand: Growth of Welfare, Income, and Components, 2007–2017
(Annual percentage change)
| components of welfare index | |||||||
|---|---|---|---|---|---|---|---|
| Welfare | Income | Life exp. | Cons. | Leisure | Inequality | GHG | |
| 2007–17 | 2.3 | 1.6 | 0.5 | 1.6 | -0.2 | 0.5 | 0.0 |
| 2007–12 | 1.3 | 1.4 | 0.3 | 1.4 | -0.3 | -0.1 | -0.1 |
| 2012–14 | 1.1 | 2.1 | 0.1 | 1.4 | -0.5 | 0.0 | 0.2 |
| 2014–17 | 4.9 | 1.6 | 1.1 | 1.9 | 0.0 | 1.9 | 0.0 |
New Zealand: Growth of Welfare, Income, and Components, 2007–2017
(Annual percentage change)
| components of welfare index | |||||||
|---|---|---|---|---|---|---|---|
| Welfare | Income | Life exp. | Cons. | Leisure | Inequality | GHG | |
| 2007–17 | 2.3 | 1.6 | 0.5 | 1.6 | -0.2 | 0.5 | 0.0 |
| 2007–12 | 1.3 | 1.4 | 0.3 | 1.4 | -0.3 | -0.1 | -0.1 |
| 2012–14 | 1.1 | 2.1 | 0.1 | 1.4 | -0.5 | 0.0 | 0.2 |
| 2014–17 | 4.9 | 1.6 | 1.1 | 1.9 | 0.0 | 1.9 | 0.0 |
8. Several broad lessons flow from this analysis:
Income growth, to the extent that it increases consumption opportunities, continues to be key to welfare improvements. This underscores the importance of implementing and maintaining policies that support equitable and inclusive growth. New Zealand does relatively well on inclusion, with a Gini coefficient on a par with its peers, if somewhat below the higher-achieving Nordic countries. But the overall level of income and consumption is lower than peers, and New Zealanders have a relatively higher labor input to produce that lower level of income.6 This underscores the need to improve productivity. In sum, New Zealand’s living standards framework does well in recognizing the importance of income and consumption in wellbeing but should explicitly recognize the importance of improvements in productivity as the third key component in this equation.
A second lesson from the index is the importance of improvements in life expectancy. In New Zealand’s case an improvement of 1.5 years in life expectancy at birth from 2007–2017 yielded growth of 0.5 percent per year in welfare. While New Zealand is at the upper edge of the distribution in life expectancy on average, there are sub-groups in the population for which important improvements in life expectancy could still be achieved that would have a significant impact on welfare. As highlighted in Table 1, in addition to improvements in health service delivery, there are other components that enter into improvements in life expectancy in an important way, including education and safety. Thus, the broad approach in the LSF is appropriate for contributing to consumption-equivalent welfare, and in turn, consumption-equivalent welfare could be a good summary indicator of success in achieving some of the wellbeing goals of the LSF.
Third, further work would need to be done to fully incorporate New Zealand’s wellbeing indicators into the consumption-equivalent welfare framework. Empirically mapping improvements in the specific indicators in the LSF for health, education and skills, and safety and security into improvements in life expectancy would allow for a quantification of the consumption-equivalent welfare benefits. For example, the relationship between health spending and life expectancy has been extensively studied (see Jaba and others, 2014), as has the relationship between education expenditure and life expectancy (Reynolds and Avendano, 2018). Similarly, the mapping of indicators on better jobs and earnings and time use into higher consumption and a better trade-off between consumption and leisure would allow for an assessment of how changes in these indicators affect consumption-equivalent welfare. Finally, assessing the value of environmental benefits, as has been done for example with contingent valuation studies (Carson and Hanneman, 2005), would allow for an assessment of environmental policies.
References
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Prepared by Geoffrey Bannister (APD).
The OECD Framework for Measuring Well-being and Progress can be found at: https://www.oecd.org/statistics/measuring-well-being-and-progress.htm
In this formulation, the index is the multiple of its components.
The relevant metric for the GHG index is the level of greenhouse gas emissions per unit of consumption. Data for greenhouse gas emissions is for 2012.
It is worth noting that these movements are all relative to the U.S. level. For inequality, for example, New Zealand’s Gini coefficient rose from 30.94 to 33.81, but U.S. inequality rose much more quickly with the Gini coefficient rising from 26.71 to 41.67.
The measure of hours worked per person per year has to be interpreted with care since it picks up the combined effects of hours per employed person, participation rates and employment rates. Nevertheless, it remains true that overall and labor productivity in New Zealand is well below OECD countries, a fact that has been attributed to distance from markets and low investment in innovation (de Serres and others., 2014).
