Is “gross domestic product,” or GDP, still the best way to measure a country’s economic wellbeing and identify potential markets for your products? Economists have long argued that, as a measure of a country’s success, GDP is simply too one-dimensional to serve as a complete gauge of a nation’s progress and market conditions. So move over GDP, and make room for the Social Progress Index.
This new metric, developed by noted Harvard Business School professor Michael Porter in collaboration with economists at the Massachusetts Institute of Technology (MIT) and leading international organizations, measures countries by their ability to provide basic human needs and freedoms to their citizens. Launched in April 2013 with much fanfare, the idea came out of a working group of the World Economic Forum, a think-tank and conference organizer, which wanted to interpret economic progress in a different and more meaningful way.
The working group was influenced by the writings of three noted economists – Amartya Sen, Douglass North and Joseph Stiglitz. The index is derived from data collected by the World Health Organization, the World Bank, and other institutions.
Paraguay announced in May that it would be the first country to start using the index to measure the success of some of its government programs. Others may follow.
What is a successful country?
According to Michael Green – Executive Director of the Social Progress Imperative, a non-profit created to promote the new index – governments, economists and businesses will for the first time be able to examine a country’s wellbeing independently of economic variables. By excluding those variables, we can now look at how well countries at different levels of income are delivering on their citizens’ needs, he says.
The group’s report, released in April, presents the results of an initial sample of 50 countries that together make up three-quarters of the world’s population. It defines social progress, as “the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential.” The primary goal of the Social Progress Index is to “provide a rigorous tool to benchmark and stimulate progress within participating countries.”
The index’s proponents point out that while economic growth does help wellbeing, it is just one factor. South Africa and Costa Rica, for example, have similar levels of GDP, but Costa Rica ranks higher on social progress. Similarly, Ghana has a lower GDP than Nigeria, yet it does better in this for its citizens. The conclusion: economic growth alone is insufficient to guide a country’s development.
Why GDP doesn’t tell the full story
Although European countries continue to be beset by economic woes and intractably high unemployment rates, they are, according to the index, still among the best places to live. Four of the five top countries in the index are European, with Sweden coming in at No. 1. In North America, the USA ranks sixth behind Canada at No. 4. The UK, Switzerland, and Germany fill in the rest of the top five.
Digging deeper into the 52 factors that the index looked at, we can see some interesting anomalies. For example, while the USA spends the most per capita on health care, it ranked 16th in the Foundations of Wellbeing category, which includes life expectancy, number of cancer cases, CO2 footprint, availability of quality health care, literacy rates, and broadband availability. Not surprisingly, the USA ranked first in the Opportunity category, which takes into account such criteria as personal freedoms, freedom of choice, and access to higher education, among others.
While Spain’s unemployment rate hit a record 27.2% in the first quarter of 2013, the country ranked 10th overall in social progress, evidence that economic numbers alone do not measure quality of life. The corollary is China where, despite GDP growth of more than 7% over the past decade, it ranks 32nd overall in the index, one place ahead of Russia and well below the median.
At the bottom of the list, all but two countries – India (43rd) and Bangladesh (42nd) – are in Africa. While many score well in terms of opportunity, particularly personal rights, equality and inclusion, they rank poorly in terms of basic human needs. Only two African countries ranked above the bottom ten: South Africa (39th) and Botswana (35th).
What can business learn from these results, besides the fact that Sweden is the most socially advanced country in the world? According to the index’s supporters, the results hold a number of key findings.
First, economic development is necessary but not sufficient for social progress. They note that it is possible to achieve a high level of social progress at a relatively modest income level. For example, Bulgaria ranks 20th in terms of GDP, but ranks 3rd in air, water, and sanitation.
Second, a country’s overall level of development masks social and environmental strengths and weaknesses. While there is a strong correlation between the index scores and other human-development indices, there are significant differences in the social progress among countries with similar development levels, especially for high- and medium-income countries, largely due to poor performance on environmental indicators.
Third, at a disaggregated level, the index shows areas of underperformance and success for countries at all income levels. The index’s model allows disaggregation down to the level of social components, enabling it to reveal a far more complex pattern of country performance than is apparent in the overall scores. For example, Sweden performs relatively poorly on the Shelter component because of weakness in affordable housing, but rivals Switzerland in both access to basic knowledge and access to higher education. Nearly all rich countries perform poorly on ecosystem sustainability.
Other findings have implications for trade and investment, e.g., many poorer nations performed better than expected despite their low levels of income. Rwanda is 46th overall and 48th in terms of GDP, but ranks 9th in Primary School Enrollment. Indonesia is 38th overall, and 38th in terms of GDP, but ranks 27th in terms of Access to Information and Communications.
Surprisingly, the Shelter component has the least clear relationship with per capita income. Australia ranked 7th overall and 6th in terms of GDP, but 22nd for Shelter. Sweden, which was 4th in terms of GDP, ranked 12th for Shelter. In contrast, China scored well on Shelter, ranking 8th, while its overall score was 32nd.
Access to Information and Communication, in contrast, is the Social Progress Index component that most highly correlates to GDP per capita. The UK and Sweden perform well largely because of access to information and opportunity factors, e.g., freedom over life choices. Of the top 10 countries in the overall rankings, nine are also ranked top 10 in terms of Internet Users in that country, an extremely high correlation.
For businesses in the environmental services or energy sector, the index results show that ecosystem sustainability – the measure that looks at a number of components including CO2 emissions per capita and energy use – is negatively correlated to GDP per capita: the richer countries tend to have the worse scores. Countries rich in natural resources were at the bottom of the ranking – United Arab Emirates, Kazakhstan, USA, Canada, Australia, and Russia. Switzerland is the best-performing European country but still comes in 31st on the measure.
What these results tell us is that systematic measurements of social progress can lead to a better understanding of the underlying causes of economic development and market conditions, beyond GDP and traditional macroeconomic indicators. Rather than the index being a consequence of economic development, it can be its key driver. Education, health, and sense of opportunity, for example, will have a positive impact on business conditions, consumers, and long-term productivity growth.
Proponents argue that, in the absence of sophisticated ways of measuring social progress, countries will continue to lack the framework and data to understand socio-economic relationships empirically. As a result, current traditional measures, such as GDP, will tend to obscure opportunities for businesses and governments to redirect capital toward societal challenges. By understanding a society’s pressing problems, businesses will be able to find new economic opportunities, they say.
At the end of the day, the main value of the Social Progress Index seems to be its ability to provide both policymakers and the private sector with a better set of assessment tools for determining a country’s success in improving its overall wellbeing. The architects of the index say that the most exciting potential for their work, which will take another two years to develop, is that it can turn current thinking on its head. It’s not economic growth that gives you wellbeing, it’s the other way around – wellbeing creates economic progress. If a country is more stable and more at peace, if it has an educated and skilled labor force, strong environmental laws and affordable housing, then clearly it’s a better to place to do business. And in countries that are behind in key areas, this only creates new business opportunities.
The Social Progress Index is not without its critics, and it’s unlikely to replace GDP as the key indicator of economic growth and health anytime soon. But for those seeking a fuller picture of a country’s metrics and market potential, the index might be worth taking a closer look at.