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Money Isn’t Everything – Unless You Don’t Have Any

We’ve had a lot of people get in touch about how TOP plans to measure prosperity. This issue is important but complex, and there are no easy answers. Instead the focus needs to be on the even more important issue of making sure that the way our economy is run actually makes us all more prosperous.  

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GDP

There is a growing awareness that Gross Domestic Product (GDP) is a terrible measure of progress. Economists have known this for years – GDP was never designed to measure progress but it has become the default measure. GDP measures the sum of some transactions in the economy – including earthquake rebuilds, security to reduce crime and pollution clean ups. It excludes for instance the contribution made by the million people in New Zealand who work but are not paid – those doing childcare, eldercare and community care – and without whose efforts our society would collapse. So GDP tells us nothing about wellbeing, it is merely an indicator of how much of certain types of income the country receives. At best it is a partial indicator.

Of course, this doesn’t mean GDP is useless. People or countries with higher GDP do tend to do better on average. Richer countries and richer people are generally healthier and better educated.

To the poor of the world, and even the poor of our own country, money still is everything, or at least no money is. However, as income continues to grow this indicator as a measure of well-being starts to break down. A bit more income, or even a bit more wealth, starts to improve our wellbeing by smaller increments. Other stuff becomes more important, like the environment, our friendships and community.

Other measures of prosperity

With a growing awareness of the limitations of this single measure, experts are developing a number of other measures of prosperity. What these new measures show is very variable, depending on what the creator of the index thinks is important, and how they weight different elements. A small sample is below. 

Index

Measures

NZ Rank

Credit Suisse Global Wealth Report

Average wealth per person

5th

IMF income

Income per person (PPP)

30th

OECD income

GDP per person ($US)

18th

UN Human Development Index

Income, Education, Health

9th

Corruption Perceptions Index

How corrupt a country’s public sector is perceived to be

4th

Legatum Prosperity Index

Economic Quality, Business Environment, Governance, Education, Healthy, Security, Personal Freedom, Social Capital, Environment

1st

Gallup Wellbeing Index

Purpose, Social, Financial, Community, Physical

29th

World Bank Gini

Inequality of incomes

54th

Environmental Performance Index

Ecosystem vitality and human health as a result of the environment

11th

 

The Legatum and Gallup results are perhaps the most interesting as they attempt to measure similar things, but come up with very different outcomes. In the Legatum Index, NZ ranks highly, thanks to our open economy, good governance and ease of doing business, personal freedom and the strength of our personal relationships. Simply because of what this index includes, rich countries like New Zealand, Australia and the Northern European countries tend to dominate the top rankings.

On the other hand the Gallup Wellbeing Index is topped by Panama. It relies much more on reported data than the ‘objective measures’ used by Legatum. The poorer countries do better because they tend to report a much stronger sense of community and relationship.

So what can we conclude? Firstly money isn’t everything, unless you’ve got none. Secondly, prosperity is in the eye of the beholder. Indices like the OECD Better Life Index refrain from making overall judgements and simply provide a range of indicators. NZ generally scores above the OECD average, with the exceptions of housing affordability, educational attainment and long working hours.

What should we focus on?

Rather than focus on how we measure progress – which is certainly a far wider concept than GDP – the real challenge is working out how to align a broader concept of prosperity with the way decisions are made on a day to day basis. That includes the decisions of individuals, businesses, local authorities and the government.

At the moment we have a tax system that encourages anyone with spare money to invest to put it into a property rather than a business. This same system ensures that some people don’t pay all the tax they should. Closing the loopholes in the tax system is an important start to ensure that we have a more level playing field and that everyone gets a fair go.

We also have a situation where some businesses don’t pay the full cost of the pollution they create, and as a result we have more of those businesses (creating more pollution) than is ideal. The Resource Management Act and the various national policy statements that govern development are crucial in this respect. We need to make sure that any development makes us all better off. 

Showing 16 reactions

  • James Preston
    followed this page 2016-12-09 20:26:45 +1300
  • Gareth Cass
    followed this page 2016-12-08 10:37:22 +1300
  • Shirley Marriott
    followed this page 2016-12-07 13:02:58 +1300
  • Paul Robinson
    followed this page 2016-12-06 21:16:56 +1300
  • Ian Mitchell
    followed this page 2016-12-03 14:51:38 +1300
  • Alex Mann
    commented 2016-12-03 13:11:51 +1300
    Is anyone familiar with the Piketty Phenomenon? It appears that even when the economy grows not everyone enjoys the benefits of that growth. He points out that without some sense of regulation or manipulation the 80/20 rule automatically has income and benefits move to the 20%… I would be interested to see how the party will address these…
  • Duncan Anderson
    commented 2016-12-03 11:36:44 +1300
    NZ GDP per capita is @40k. Aust GDP per capita is @60k. That is a telling statistic.
  • Steve Smith
    commented 2016-12-03 09:08:22 +1300
    Gareth, please indulge me for few minutes. Imagine if there was an international company that was potentially as big as Facebook, Google, eBay and PayPal all rolled into one. Now imagine if that same company shared most of their revenue with the users of their services as a collaboration …. and that all the Early Adopters, and many of the major shareholders, of this enormously profitable company lived right here in New Zealand? No need to imagine because its already starting to happen! The income from this global community will fundamentally alter the average income/wealth of the New Zealand population. The potential for a boost in the government coffers from income tax on all these new Millionaires should be factored in when planning the future economy of New Zealand.
  • Susan Jones
    commented 2016-12-03 08:23:57 +1300
    I am enjoying reading intelligent comment, and learning at the same time.
  • Ray McKeown
    commented 2016-12-02 22:01:00 +1300
    At the very least we should look at a per capita measure. GDP is bad enough but when you grow the population by 2% and the GDP grows by 2% effectively nothing happened except more people! How do we efficiently measure the ‘wealth / wellbeing’ of NZ’ers. Should we only care about NZ’ers? How do we value the non-financial like clean air and water or even the ability to get a park at the beach and room to lie down? Many of us who could move overseas would probably be financially richer but somehow we value the other aspects of living here and stay.
  • Peter Carey
    commented 2016-12-02 20:39:54 +1300
    The RMA fails in an environmental sense because its based on precedent. If you neighbour is running a business that pollutes, you can too! What is needed is to take a step back and say what type of nutrient run-off or stocking rate can this catchment sustain (if we’re talking about farming) and still preserve its integrity? You have to allow for innovation and technology to make farming more efficient but at the end of the day it can cope with only so much. Even if regional councils say they are going to get tough haven’t seen too much of that in Canterbury so don’t hold your breath on that one!
  • Niki Gladding
    commented 2016-12-02 16:51:45 +1300
    Agree, great analysis. Now how do we mend our broken (or mutilated?) RMA so that it can do its job? Love to hear peoples’ thoughts on that…
  • Oliver Krollmann
    commented 2016-12-02 14:58:21 +1300
    I stumbled on the Legatum prosperity index a few months ago and decided to write a little post on the social networking platform Neighbourly about it. I called it “Maybe some good news for a change?” because I got a bit fed up reading all the articles and hearing all the so-called news telling us about how bad and hopeless everything is in New Zealand.
    If you look at all these different indices we’re consistently in the top 30, except inequality of incomes. So there’s already lots of good stuff to build and expand on, but there are also long-neglected issues that need addressing and swift and decisive action, like the article states.
    Can’t wait so see the first TOP policy being released next week. It’s been refreshing and very informative following the blog posts and reactions so far.
  • Jeanette Garnett
    commented 2016-12-02 14:48:41 +1300
    Love it, and just what I was hoping for
  • Oliver Krollmann
    followed this page 2016-12-02 14:42:44 +1300
  • Paul Dutch Sandkuijl
    commented 2016-12-02 13:48:15 +1300
    Excellent writeup!