Why Well-Being Should Drive Growth Strategies

The 2015 Sustainable Economic Development Assessment

By Douglas BealEnrique Rueda-Sabater, and Shu Ling Heng

Government leaders increasingly speak of boosting the well-being of citizens—rather than bolstering GDP growth—as their primary mission. But the conventional yardsticks of per capita GDP and growth are too narrow to evaluate the full measure of well-being. What’s needed is a broad diagnostic tool designed specifically to help governments set priorities and formulate development strategies.

We developed BCG’s Sustainable Economic Development Assessment (SEDA), a comprehensive diagnostic tool based on objective data, for just that purpose. SEDA’s design reflects the need of governments to pursue a balanced approach to raising the overall well-being of their citizens—one that is focused on economics, critical investments, and the social and environmental factors that ensure sustainability of progress over time.

Our latest assessment includes 148 countries plus Hong Kong1 Notes: 1 For the sake of simplicity, we refer to all those entities as "countries." , which is a special administrative region of China. Our findings include both compelling stories and warning signs. Among the highlights:

  • Some countries—Norway, Rwanda, and Poland in particular—are standouts in terms of either creating high levels of, or making significant progress in, well-being for their citizens.
  • Many countries that score low in terms of either wealth or well-being are not making much progress. In addition, we find that more than half of the world's population live in countries that are weak—and falling even further behind—in sustainability.

Defining Well-Being

SEDA defines well-being through three fundamental elements that comprise ten dimensions. (See Exhibit 1.)

  • Economics, which includes income, economic stability, and employment
  • Investments, which includes education, health, and infrastructure
  • Sustainability, which covers two aspects: the environment dimension and social inclusion, which comprises the income equality, civil society, and governance dimensions

For each country, we calculated four measures that provide different insights into those nations’ relative levels of well-being:

  • The current level offers a snapshot of well-being today on a scale of 0 (the lowest level) to 100 (the highest).
  • Recent progress examines how well-being has evolved during the period of 2006 to 2013. This metric is also measured in relative terms, on a scale of 0 to 100.
  • Wealth to well-being compares a country’s current level of well-being with the level that would be expected given the nation’s per capita income level. The expected level is represented by a coefficient of 1.0, which is based on global averages.
  • Growth to well-being compares how well a country has converted its economic growth into improvements of well-being with the level that would be expected, which is also represented by a coefficient of 1.0 based on global averages.

Good News—and Warning Signs

One of the most striking insights revealed by our analysis is that countries with midrange current-level scores, such as China and Indonesia, are making the most progress—rather than countries starting from the lowest positions. This is counterintuitive, as one might expect the countries with low current levels to have the greatest room for improvement.

What’s more, layering income levels shows that while low- and middle-income countries as a group made more progress than high-income countries, middle-income countries are making the fastest progress overall. This suggests that the often-discussed “middle-income trap”—the notion that countries plateau once they hit some middle range in terms of income—does not apply when looking at a country’s trajectory through the lens of well-being.

But these findings also reinforce concerns over the slow gains in recent progress of many low-income countries. This is particularly true in the sustainability element, where countries with high current-level scores are also making the most progress, pulling away from the pack, while weaker performers are falling further behind. This widening gap—which is not apparent when more common measures, such as GDP, are used—raises questions as to what is required to produce sustainability improvements and what can be done to help those lagging performers catch up.

Some Countries Lead—While Others Make Big Strides

All but one of the ten countries with the highest current-level SEDA scores are in Western Europe; the exception is Singapore.

Top performer Norway continues to pull further ahead thanks, in part, to further reduction in inequality. Norway posted the highest scores in employment, income equality, and civil society as well as top-ten scores in both income and governance. The nation also exemplifies divergence in sustainability, boasting among the highest current-level and recent-progress scores in that element. This reflects Norway’s highly developed and still-improving social institutions. Case in point: the country has recently increased the length of paternity leave for new fathers so that new mothers can return to the workforce more rapidly. And Norway’s already good Gini coefficient, a measure that reflects income inequality, further improved during our study period.

The list of countries that made the most overall recent progress in well-being is more varied. Standouts include nations in Africa, Asia, and Europe; Indonesia is one of the few countries that show very strong recent progress in two of the three SEDA elements.

Four of the top ten countries in terms of recent progress are in Africa, with Rwanda attaining the highest overall score. The nation posted recent-progress scores in line with the median—or above the median—in every dimension, and it was among the top ten countries in governance, health, and economic stability. Indeed, over the past several years, Rwanda has taken positive steps—which have been widely regarded as successful—toward reforming macroeconomic policies and commercial laws.

Countries Wresting the Most from Wealth and Growth. A country’s well-being, of course, is affected by both its wealth and GDP growth rate. The wealth-to-well-being and growth-to-well-being coefficients take this into account.

Countries with a wealth-to-well-being coefficient greater than 1—those that sit above the line in Exhibit 2—are converting their wealth into well-being at a better rate than expected. Countries with a coefficient below 1 (those sitting below the line) are doing worse than expected. Vietnam is among the top performers in converting wealth into well-being, with a much higher current-level score for well-being than other countries at similar income levels.

Countries with a growth-to-well-being coefficient greater than 1—those that sit above the line in Exhibit 3—are making progress at a rate that is greater than one would expect given their growth rate. Those below the line are producing improvements that are less than one would expect.

Poland Emerges as a Top Performer. Poland boasts the highest growth-to-well-being coefficient in our analysis. The country’s strong showing is due to robust gains in a number of dimensions, including employment, civil society, governance, and environment.

The Environment, China, and India. China is converting its economic growth into the kind of gains in recent progress that would be expected in light of the country’s rate of GDP growth—a solid accomplishment given the torrid pace of that growth. And while the country still lags the rest of the world in its current-level scores in four dimensions—economic stability, income equality, governance, and environment—it is making progress that exceeds the median in the first three. But China has the lowest current-level score for environment of any nation in our ranking, and it’s falling even further behind.

In fact, our results reveal a negative correlation between economic growth and environment in general. Still, while some other fast-growing nations also drive economic growth at the expense of the environment, there are notable exceptions. Poland, for example, posted strong GDP growth but still managed to be among the top countries in terms of recent progress in the environment.

India has also experienced healthy growth in recent years and is making progress well above the median in the investments element—a good sign for longer-term development. And while India’s progress during the period we studied, 2006 to 2013, was below the median in a number of dimensions—especially in economic stability and employment—the nation has further improved its already good record on income equality, thus contributing to significant poverty reduction. Still, India’s track record of converting GDP growth into well-being is weaker than China’s. And as in China, part of the challenge stems from recent-progress scores that are below the median in environment.

The U.S. and Germany Have Similar Growth Rates but Different Well-Being Stories. Our results highlight the fact that countries with similar growth rates can chart very different paths for well-being. The U.S. and Germany, for example, each posted an average annual growth rate of 1.1 percent during our study period. But while the U.S. was just below average in its ability to convert growth into well-being, Germany was well above average. Among the reasons: strong improvement in employment and the environment. In fact, Germany generated gains in well-being that would be expected of an economy expanding by an average of more than 6 percent per year.

Zeroing in on Patterns Across Clusters of Countries

Just as SEDA can shed insight on individual countries, it can also reveal commonalities—and striking differences—between clusters of countries:

  • 2 Notes: 2 We define oil-rich countries as those that receive rents from oil that are equivalent to more than 10 percent of GDP in 2012.  perform below average at converting both wealth and growth into well-being—and governance is a major area of weakness. One potential reason for the connection is that substantial revenue from oil and gas relieves governments of the need to tax, thus reducing their obligation to be accountable.
  • Sub-Saharan African countries, as a group, are making strong advances in health: their recent progress in that dimension is well above that of the rest of the world. In fact, 19 of the top 20 countries with recent progress in health are in sub-Saharan Africa. This contrasts with the less-impressive progress and very low current levels of well-being in the other two investment dimensions—education and infrastructure.

Moving From Diagnosis to Action

Certainly SEDA sends clear signals to governments about where they should focus their attention. But that knowledge becomes even more powerful when coupled with a clear blueprint for action. To that end, BCG has developed an approach designed to help guide governments, at both the national and subnational levels, as they craft and implement economic-development strategies aimed at fostering growth, promoting employment, and paving the way for improvements in well-being.

The approach is based on five principles—a foundation that draws on BCG’s extensive work with governments and private-sector organizations around the world:

  • Be clear about the specific goals of the effort. Thinking through the fundamental objectives of an economic-development effort helps to frame it and ensure that it is placed in the right context.
  • Follow the hierarchy of economic-development interventions. To prioritize actions, governments should start by considering steps that will remove obstacles—often with immediate impact—and by creating a foundation for overall economic activity. At the heart of this imperative is the philosophy of “first, do no harm.”
  • Think beyond tangible sources of advantage. Countries or regions should look beyond industrial bases and other existing, tangible assets and leverage core capabilities and skills that exist within their borders.
  • Treat economic development as a team sport. Successful economic development requires a wide range of players, such as civil-society organizations and companies in the private sector. Effective steps must be taken to get these various stakeholders to collaborate actively.
  • Build the strategy with an eye toward execution. Ambitious goals can be a catalyst for change, but pragmatism is crucial for success. This means focusing on steps that are feasible, able to be implemented, and supported by political will.

In addition to the principles, the approach has two features. The first is a framework that allows governments to match their goals and priorities—some of which stem from our SEDA diagnostic—with key strategies. The second element is a tool kit of several dozen tactics and hundreds of concrete actions that have been successfully employed as part of development efforts around the world.

Prosperity—the well-being of an entire population—is an ambitious goal that most nations pursue more or less explicitly. While many countries at the middle levels of our well-being measure are making good progress, our analysis has raised a significant flag of concern for the plight of low-income countries that have low current levels of well-being. Our hope is that SEDA’s perspective on well-being can help individual countries address their challenges and also spark a global conversation on well-being strategies. At the same time, we aim to harness our economic-development approach to help government leaders in their search for the appropriate mix of strategies, tactics, and action to deliver real progress.

Why Well-Being Should Drive Growth Strategies