TCS Daily


A Real Development Agenda

By Fredrik Segerfeldt - July 22, 2004 12:00 AM

This year's version of the United Nations Development Programme's Human Development Report has just been published, ranking the countries of the world according to a Human Development Index (HDI). As in many other welfare comparisons among countries, Sweden and the rest of Scandinavia rank high. And as every year, we will hear people argue two points: (1) that high taxes produce the best welfare in the world and (2) that growth is not that important for the well-being of ordinary people. However, there are serious objections to be made as regards both these conclusions.

First of all, HDI is not an objective measurement of the well-being of industrialized countries. Rather, according to Haishan Fu, head of the statistical division of UNDP, the aim of the report and the index is to advocate certain policies in order to influence mainly developing countries in the right direction. According to Fu, HDI is not very useful when comparing rich countries. Thus, according to the UNDP itself, it is not at all justified to use the HDI as a basis for claims of the superiority of the Scandinavian model.

There are, however, more problems with the index. The HDI is made up of four indicators: life expectancy, adult literacy rate, education and GDP per capita. But it does not give equal weight to all factors. Instead, HDI measures GDP per capita as a logarithm, giving economic wealth less and less relative weight as income levels go up. That is a methodological choice more strongly influenced by ideology than by care for people's well-being.

The truth is that prosperity, and thereby economic growth, is a much more important factor than high taxes when it comes to explaining how welfare has improved in different countries over time. We define welfare as life expectancy and infant mortality, two indicators used by many indexes and comparisons, including the HDI. Evidence for this claim can be found at three different levels.

True, Sweden has higher taxes than other countries, as well as high life expectancy and low infant mortality. But the claim that taxes are responsible for these results is a foregone conclusion. Compared with eight other West European countries, Sweden scored even better in 1960, when the country had lower taxes but higher GDP per capita than the other countries on average. High taxes can thus not be the explanation to why Sweden has higher life expectancy and lower infant mortality than other countries.

Sweden in relation to eight other West European countries

GDP/capita (USD, PPP)

Taxes

(% of GDP)

Life expec-tancy (years)

Infant mortality (promille)

1960

+18%

-0.9

+3

-8.5

2001

-4%

+10.2

+2

-1,4

Sources: OECD, UNDP and Human Mortality Database.

The reasons Sweden, despite lower GDP per capita, still scored better in 2001 than the other countries are probably two: a time-lag before the consequences of less economic resources have an impact on long-term welfare indicators and differences in lifestyle. Either way, Sweden has lost its welfare lead as taxes have gone up.

Among 12 OECD countries over 30 years, there is a strong positive correlation between economic prosperity and high life expectancy. In contrast, there is no significant correlation between high taxes, or rather public expenditure as percentage of GDP, and life expectancy.

A graphic display of a large number of the world's countries shows that the correlation between economic prosperity and high life expectancy/low infant mortality is strong, whereas the correlation between the public's share of total health expenditure and these welfare indicators is weak, if existing. To put it simply, growth gives longer lives whereas large public sectors do not.

Child survival and wealth in the world's countries

Source: World Health Chart 2001

Welfare measurements or comparisons that disregard, ignore or give low priority to economic wealth, in terms of GDP per capita, therefore make a serious mistake. There is ample evidence that a positive development of the gross national product is a precondition for us to live longer and for more infants to survive their first year. Taxes do not pay for health care, money does. This should be kept in mind when hearing about the UNDP report and the comments that will follow.

Fredrik Segerfeldt is a senior advisor and Fabian Wallen is an economist with the Confederation of Swedish Enterprise.


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