We’re alright, actually

15/11/2013 § 7 Comments

There is much gnashing of teeth and rending of garments over New Zealand’s economic performance. It’s a staple of political and economic commentary. We have low per-capita incomes, we need to be in the top half of the OECD, we need to catch up to Australia, brain drain is killing the country, business owners need to focus on their businesses rather than buying motorboats, etc.

I’ve been looking recently at Legatum Prosperity Index. What it says is, we’re alright, actually:

  • 5th overall out of 142 countries
  • 1st in education
  • most efficient life satisfaction of the top ten countries (satisfaction / income).

Back to basics. The point of economic activity is utility/satisfaction/welfare. We aren’t playing with these little pieces of coloured paper to make them happy — it has already been conclusively established that they are fine. So what we really want to know is whether we are producing satisfaction.

Now, yes, GDP does correlate with a whole mess of other indicators. Money gives us the ability to pay for healthcare, to make environmental improvements, to pay for digital watches. But it doesn’t perfectly correlate, and there appear to be diminishing marginal returns to GDP gains (natch’). So if GDP doesn’t measure what we are really interested in, can we do better measurement?

That’s where the Legatum Index comes in. There are a number of these alternative indices — this just happens to be the one a colleague sent. It uses 89 variables to create 8 sub-indices, which are then combined into a single aggregate measure. The method is described in brief, and then in more detail (pdf). I’m still not sure that I could replicate it from the available information, but it’s reasonably clear what they’ve done. Instead of using one statistic — GDP — they’ve taken a whole lot of statistics measuring different things and run them through a blender. We can quibble over the weightings applied or the inclusion of this or that statistic — and sensitivity analysis would tell us how important those things are — but they are trying to get a better, more complete picture.

Is more data better? Well, it changes the story. Instead of performing poorly because of low incomes, New Zealand performs well because of the other 88 pieces of data. Our health performance suffers — a worrying 20th. Safety and security is 15th, again a bit of a concern. But overall, y’know, we’re alright. There are worse places to be. Which, of course, makes sense given the number of people here who are from elsewhere.

A composite index does something else: it allows people to make their own decisions based on their preferences. If healthcare is really, really important to you, then New Zealand probably isn’t where you should settle. If your preferences line up with Legatum’s, then life’s pretty sweet. If governance, social capital and education are your main concerns, then you really can’t do any better.

So when the next round of wailing and self-flagellation starts, take comfort that it ain’t all bad.


UPDATE: A reader pointed me to the University of Otago’s Public Health Expert blog, which (on the same day) described some of New Zealand’s successes (h/t Tony):

The good news is that according to the OECD “New Zealand performs exceptionally well in overall well-being, as shown by the fact that it ranks among the top countries in a large number of topics in the “Better Life Index” [1]. What follows are a list of some of the specifics – both good and not so good.

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§ 7 Responses to We’re alright, actually

  • Michael Reddell says:

    Or one could look at the revealred preference of NZers. The Legatum Index rates NZ ahead of Australia, but neither NZers nor Australians at the relevant margins do. We’ve had decades of a substantial net outflow of NZers to Australia (and very little net flow of Australians the other way).

    It is always good to have more data collected, but overall the message is pretty clear – we mostly lose people to places that have higher incomes than we do (and where people can get in – notably Australia) and attract them from countries that on almost any measure are worse off than we are.

    NZ is not all right, although each of those who make a move (in or out) presumably expect to better themselves as a result of the move.

    • Revealed preference is always a good place to look, although then we are investigating not just the index but also the preferences about the components of the index. But let’s look…

      Stats NZ gives the migration statistics: http://www.stats.govt.nz/browse_for_stats/population/Migration/IntTravelAndMigration_HOTPSep13.aspx

      We can divide immigration and emigration into OECD and non-OECD, as a proxy for ‘good’ and ‘bad’ places. Coarse, yes, but defensible. And, if NZ is a rotten place, then anywhere else in the OECD should be better.
      OECD countries: http://www.oecd.org/general/listofoecdmembercountries-ratificationoftheconventionontheoecd.htm

      Long-term Arrivals, year to Sep 2013: 91,187, of which 50,393 are OECD.
      Long-term Departures, year to Sep 2013: 76,013, of which 61,783 are OECD.

      So, NZ is on balance ‘better’ than the Rest of the World. It is ‘worse’ than the OECD on average by 11,390. But that’s only 0.25% of the NZ population. That’s well within a plausible range of assortative migration — people moving places that better match their preferences — rather than a wholesale indictment of the country.

      • Michael Reddell says:

        For any one year I would probably agree, but the net outflow of NZ citizens has been both persistent and large by international historical standards. We don’t see such large outflows of citizens of countries such as Australia, Norway or the US (altho the UK is a bit of an exception to that story).

      • Well, no, not really: http://www.stats.govt.nz/browse_for_stats/population/Migration/IntTravelAndMigration_HOTPSep13.aspx
        The year to Sep 2013 was towards the high end of the ten-year figures. It’s probably a reasonable representation.

        I didn’t see in the statistics information on citizenship — do you know where I can find it? What I’ve seen in Kiwi families is young ones going abroad and then returning home. Some stay away permanently, but lots do not.

        But just because NZ citizens are leaving doesn’t make it a bad place. First, we have this index and other research saying that NZ does pretty well on lots of things that matter. Secondly, what we see in the migration statistics is lots of people moving around the developed world — NZers going to London and Mebourne; Australians, British and others coming here. NZ is a net loser, but only by a fraction of a percent per year. Yeah, it would be great to do better, but the place isn’t falling apart.

  • Grant says:

    Great post Bill.
    The point of economic activity is utility/satisfaction/welfare.

    I think that those leading economies, like technocrats if any kind, often can’t see the wood for the trees and the means to the end becomes an end in itself. Totally understandable because they are fallible humans like the rest of us but we need political processes to remind them of their raison d’etre.

    • I’d suggest that ‘what gets measured gets managed’, but I also wonder if technocrats and politicians are more focused on money than other people, and what effect that has.

      Imagine a country with two classes of people: money-focused and artistic, self-expression-focused. If a technocratic job pays better money, then money-focused people would take those jobs. They would then set policy according to their preferences, and not necessarily represent the importance of self-expression to others. And further, if those jobs represent 10% of employment, then a minority preference could set policy.

      In a hypothetical world, of course.

  • Michael Reddell says:

    Here is the link to the citizenship data http://www.stats.govt.nz/infoshare/SelectVariables.aspx?pxID=310ee002-ec25-456d-acbb-e7e89421d1a3.

    Something like 700000 NZ citizens (net) have left since 1979 – a huge share of the native population, and more akin to Eastern European experiences than those of really well-performing economies (so more than just the same thing we see all across the developed world).

    Are we falling apart? Well, no, but we are doing pretty badly and – on a trend basis – slowly getting worse (eg GDP per hour worked comparisons). But there are many worse (almost all with lower incomes) places too.

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