Partner and Director, Sustainable Financial Institutions, Finance, and Investing
In 2012, we launched our Sustainable Economic Development Assessment (SEDA) as a diagnostic tool aimed at helping countries to sharpen their focus on the well-being (that is, the overall standard of living) of their citizens in shaping their national strategies. The driving force behind SEDA was the understanding that economic growth, while a necessary component of the goals of national leaders, should not be the sole driver of policymaking decisions. We defined well-being through ten dimensions—including governance, health, and economic stability—and posited that an in-depth assessment of well-being would provide useful insights into a country’s economic and social conditions and serve to guide its strategies.
Since SEDA’s launch, we have used it in our work with governments in more than two dozen countries on six continents—countries with broad disparities in population, wealth, and economic growth—as well as with development organizations and private-sector companies. The reaction to SEDA and the ways in which it has been used since its introduction have convinced us that it is a valuable tool that meets a real need. Our work has helped us understand where the insights from SEDA are particularly powerful and how that knowledge can be used to develop national strategies.
Government leaders have been particularly interested, for example, in examining how their countries are performing when it comes to converting wealth and growth into improved well-being and how they can learn from peers who may be doing this with greater success. A key SEDA finding: success in fostering well-being is not limited to wealthy nations or to those that are growing most rapidly. Nevertheless, our analysis reveals some similarities among countries growing at a similar pace in terms of what drives their improvement in well-being. To assess this dynamic in more detail, we zeroed in on three countries—China, Turkey, and Mexico—that represent the spectrum of GDP growth. Applying our approach to these three countries illustrates the opportunities and challenges that are present at varying levels of economic growth.
Our work with governments has made clear that as their citizens become better informed and connected, so does their own recognition of the importance of focusing not just on economic growth but also on well-being. But introducing well-being into the policy discussion is not enough. What is required is the integration of well-being into national strategies and policymaking. Therefore, it is necessary to understand what efforts to integrate well-being into national strategies look like in practice. So we examined four countries that have incorporated well-being into their strategic thinking in different ways. Two of these countries have been putting well-being at the center of their strategies for years: Norway, while lacking an explicit well-being strategy, has focused on raising living standards (an approach that has proven highly effective); Bhutan has explicitly focused on well-being and employed concrete metrics to assess its progress. In addition, we studied two countries that have more recently started to focus on well-being: Malaysia and the United Kingdom.
SEDA offers an objective measure of the relative standards of living experienced by people in countries around the globe. Rather than focusing solely on GDP per capita—the frequently used indicator of a country’s general welfare—SEDA assesses overall well-being. Our approach sheds light not only on current levels of well-being but also on the recent progress countries have made in raising the level of their citizens’ well-being.
In this report, which is based on the most recently available (as of late 2013) data, we update our initial 2012 assessments of 149 countries and reveal interesting new findings. One, in particular, is that while the list of leading countries, in terms of current well-being, is largely consistent with our 2012 findings, there were many changes when it comes to which countries are out in front in terms of recent progress.
Based on the use of SEDA over the past year, it is clear that the assessment yields critical information in a number of areas. While government leaders were often keen to understand how they stack up against top-performing countries around the world and the best practices in those countries, they were even more interested in how they performed relative to their peer group in terms of SEDA’s ten dimensions of well-being. The president of one African country with whom we worked, for example, found it very helpful to compare that country with other African countries. This comparison led to the identification of innovative approaches to improving education and health care, as well as initiatives that could support the growth of various sectors of the economy.
Another key area of interest was the relationship between wealth (as measured by GDP per capita in terms of purchasing power parity) and well-being, and between growth (as measured by GDP per capita growth) and improvements in well-being. These two measures essentially reveal how well countries are managing to generate well-being within the constraints of their wealth and their economic growth. Government leaders were particularly interested in examining how countries with economic-growth profiles similar to their own were improving well-being.
Certainly most governments aim to improve well-being within their borders and enact policies to support that goal. But our work with government leaders points to the value of an integrated approach—one that identifies the drivers of well-being and that creates mechanisms for factoring such insights into the formulation of national strategies. The ten dimensions used in our SEDA assessment are a good starting point for this type of approach, because they highlight areas in which gains have been most impressive and indicate areas in which progress has been lagging and which should become a priority for government action.
SEDA evaluates overall well-being by examining ten key dimensions: income, economic stability, employment, income equality, civil society, governance, education, health, environment, and infrastructure. (See Exhibit 1.) We look not only at a country’s current level of well-being but also at its recent progress—that is, how well-being has changed over the most recent five-year period for which data are available. Both the current level of well-being and recent progress are measured on a scale of 0 to 100, with 100 representing the highest level. (For more detail, see From Wealth to Well-Being: Introducing the BCG Sustainable Economic Development Assessment, BCG report, November 2012.)
How Well-Being Relates to Wealth and to Growth
On the basis of SEDA’s measures of a country’s current level of well-being and its recent progress, we are able to examine the relationships between wealth and current well-being and between growth and recent progress in well-being. We do this by calculating two coefficients in order to compare a country’s performance—relative to its income level (or GDP per capita)—with the global average.
The wealth to well-being coefficient compares a country’s SEDA score for its current level of well-being with the score that would be expected given its GDP per capita and the average relationship between worldwide current-level well-being scores and GDP per capita (as measured in terms of purchasing power parity). (See Exhibit 2.) The coefficient thus provides a relative indicator of how well a country has converted its wealth into the well-being of its population. Countries that sit above the solid line in Exhibit 2—meaning they have a coefficient greater than 1.0—deliver higher levels of well-being than would be expected given their GDP levels, while those below the line deliver lower levels of well-being than would be expected.
The growth to well-being coefficient compares a country’s SEDA score for recent progress (over the latest five years for which data are available) with the score that would be expected given its GDP per capita growth rate and the average relationship between worldwide recent-progress scores and GDP per capita growth rates during the same period. (See Exhibit 3.) The coefficient therefore shows how well a country has translated income growth into improved well-being. As with the wealth to well-being coefficient, countries that sit above the average line—those that have a coefficient greater than 1.0—are producing improvements in well-being beyond what would be expected given their GDP growth over the past five years.
A Snapshot of This Year’s Results
This year’s SEDA report revisits the countries we analyzed in our initial report and is based on data released in 2013 that reflect life on the ground in those countries in 2012. We had to eliminate Syria from our assessment this year owing to challenges in accessing full, reliable data (which reduced the total number of countries evaluated from 150 to 149). Our calculation of recent progress reflects changes between 2007 and 2012. We also enhanced our calculations this year in four dimensions (economic stability, employment, environment, and infrastructure). (See the appendix for our complete findings and a more detailed description of our methodology.)
In terms of current well-being, Western European countries performed well this year, as they did in our initial SEDA assessment, with Norway and Switzerland again holding the number-one and number-two spots, respectively; Iceland moved up from number four to number three. With the exception of Australia, Canada, and New Zealand, all of the top 15 are Western European countries. And every one of the top 15 countries scored above average when it came to converting wealth into well-being.
When we look at recent progress, the rankings are more dynamic, with a number of countries new to the top ten. The top three countries are Cambodia, Rwanda, and Iraq. Cambodia, which had high recent-progress scores in our first assessment as well, has continued to make strong improvements—particularly in terms of the environment and infrastructure (for example, enhanced access to clean water). Since our 2012 SEDA analysis, Rwanda has made significant gains in the areas of education and health, including a continued and sustained reduction in the prevalence of undernourishment. And Iraq has made progress in reducing income inequality and in increasing the effectiveness and quality of governance (albeit from low levels) as it moves through a postwar recovery. China, illustrating both the opportunities and challenges that come with rapid growth, holds the number-five slot.
Meanwhile, Brazil, the number-one country in terms of recent progress and growth to well-being in our initial SEDA assessment, is number nine this year—partly the result of lower economic growth—and its growth to well-being coefficient is the fourth best in the world (as shown in Exhibit 3).
No doubt there is a connection between economic growth and the ability to improve well-being. But through SEDA’s lens, we can also see that countries at all growth levels vary in how well (or how poorly) they convert growth into improvements in well-being (as shown in Exhibit 3).
To better understand this dynamic, we looked at the performance of three countries experiencing three distinct levels of economic growth (as measured by GDP per capita growth between 2007 and 2012). Those three countries are China, which has enjoyed hypergrowth; Turkey, which has had moderate growth; and Mexico, which has faced relatively low growth. All three countries boast comparatively large economies, have average or above-average growth to well-being coefficients, and represent different regions of the world.
To examine how these three countries performed relative to the rest of the world, we assessed their SEDA results in two different ways. First we looked at where these countries stand in terms of both current levels of well-being and recent progress in well-being. (See Exhibit 4.) Our analysis shows that countries with high current levels of well-being and low current levels of well-being can score well in terms of recent progress—although naturally there is more room for improvement if a country’s current level of well-being is low. Among the noteworthy exceptions are Poland and South Korea, which are top performers in both current well-being and recent progress. The three countries we studied in detail have similar (middle of the road) current well-being scores, but there is a much wider variation in terms of their recent progress.
Second, we examined how well these countries convert wealth and growth into well-being by assessing their wealth to well-being coefficient compared with their growth to well-being coefficient. (See Exhibit 5.) Through these measures, we see that China’s improvement in well-being is now keeping pace with its world-leading growth. Turkey and Mexico have an above-average growth to well-being coefficient, reflecting the fact that they are delivering improvements in well-being that exceed what would be expected given their growth rates. Other countries stand out on this measure as well. Brazil, for example, continues to do extremely well in terms of converting economic growth into recent progress in well-being. And Cambodia demonstrates strong performance in terms of converting both wealth and growth into gains in well-being.
While countries across the growth spectrum can excel at delivering improvements in well-being, that does not mean their approaches to fostering well-being will necessarily be similar. In fact, a common question in discussions over the past year was whether the approach to improving living standards should differ depending on the growth rate of an individual country. To address this question, we examined how all countries at three designated levels of growth performed across SEDA’s ten dimensions. Certainly there is no one-size-fits-all formula for elevating well-being. But our analysis did reveal some similarities among countries that have succeeded in increasing well-being in varying growth environments.
High-growth countries (defined as having compound annual GDP per capita growth of more than 5 percent) that have a good record of converting economic growth into improved well-being (defined as a growth to well-being coefficient greater than 1.0) have, on average, achieved this goal primarily through gains in infrastructure and health. Given that both infrastructure and health can require significant government funding, it is not surprising that countries experiencing rapid economic growth may have the budgetary flexibility needed to make those investments.
Meanwhile, low-growth countries (defined as having compound annual GDP per capita growth of less than 2.5 percent) that were above average at translating growth into improved well-being showed the most improvement in terms of the environment and civil society. This makes sense given that progress in both the environment and civil society may rely as much (or more) on well-crafted policies than on increasing expenditures.
For countries in the middle (those with compound annual GDP per capita growth rates between 2.5 and 5 percent), we did not observe strong patterns of improved well-being across the ten dimensions.
Well-being improvements in any given country, of course, can and will deviate from the averages we have noted for the high and low growth bands, particularly in light of the fact that each country has its own starting position in terms of the ten dimensions. A closer examination of China, Turkey, and Mexico bears this out. To understand what is driving the gains in well-being in each of these countries, we can look at how each of them scores along the ten SEDA dimensions. (See Exhibit 6.)
China’s Hypergrowth Presents Opportunities
China, with 10.6 percent average annual growth between 2007 and 2012, is the fastest-growing country we evaluated. The key challenge for countries experiencing this sort of expansion is to use their increasing wealth wisely and productively.
China’s strongest gains among the ten dimensions of social and economic development were in income and infrastructure, a fact that is consistent with the broader patterns we observed. Indeed, in the wake of the 2008 global financial crisis, the Chinese government used increased investment in infrastructure as a means to boost its economy. China also posted consistently solid recent progress across the other SEDA dimensions—with the exception of the environment and income equality. Its performance in these two areas reflects ongoing environmental challenges posed by the country’s rapid growth as well as the ongoing need to resolve income inequality issues in a meaningful way.
Turkey Makes Major Gains in Education
Turkey, which has boasted solid average annual growth of 3.5 percent over the 2007–2012 time frame, is among the top ten in translating growth into improvements in well-being. That progress has been driven by developments in two key SEDA dimensions: education and employment.
In particular, Turkey is a standout in education, generating the most progress in the past five years in that category of any country we assessed under SEDA. Turkey’s improvement in education reflects both a jump in the percentage of people enrolling in post–high school (tertiary) institutions and an increase in the average score of students who participate in the Program for International Student Assessment (a test coordinated by the Organization for Economic Cooperation and Development). Over the past decade, the government in Turkey has increased its education budget, which went from being the third-largest budget item in 2002 to being the single largest budget item in 2013. Meanwhile, the country’s strong showing in terms of employment is not surprising, given the relative health of the Turkish economy compared with the economies of other countries in the region.
Mexico Makes Progress Despite Modest Growth
For Mexico, a low-growth environment—1.8 percent average annual growth between 2007 and 2012—makes it critical to direct money and resources to areas in which they can have the largest impact. Low growth also requires Mexico’s leaders to identify opportunities to improve well-being that rely more on intelligent decision making than on growing budgets.
Counter to the broader patterns we observed across the growth spectrum, a key area of progress for Mexico has been infrastructure—the result of improvements in roads, railways, and sanitation facilities. But by some measures, Mexico’s performance has been consistent with the broader trends we identified. For example, Mexico showed the highest level of recent progress of all the countries we assessed in terms of the environment—particularly in the amount of land that is protected by the government and in the reduction of air pollution.
Mexico certainly faces some challenges, including those in the area of civil society (reflecting the country’s ongoing issues related to drug cartels). Regardless, Mexico has made great strides—emerging as one of the top 20 countries when it comes to converting economic growth into gains in well-being over the 2007–2012 time frame.
Certainly there are many countries that focus on well-being and on measuring it. Many fewer countries, however, have succeeded at integrating well-being into their policy and planning processes. All countries can benefit from a more explicit focus on integrating well-being into national strategies and policymaking. A few countries have already taken such steps, and it is useful to understand how their approaches have developed over time and what results their efforts have produced. Meanwhile, other countries are just now becoming more focused on measuring well-being, with the ultimate goal of using those measurements in government strategy and policy.
Well-Being at the Center of Policy Decisions
Consider Norway, which ranks highest in terms of its current level of well-being according to our SEDA assessment. While the country does not specifically measure well-being, the Norwegian government has maintained a strong focus on areas such as education and health. The country has high levels of labor participation by women, thanks to its child-care and maternity-leave policies. Norway has also managed its natural resources effectively, using money from those assets, for example, to build a sovereign wealth fund. The fund has a dampening effect on inflation by controlling the flow of money into the economy, while also allowing the government to diversify its assets beyond energy.
Such policies are clearly reflected in Norway’s top current well-being score. High levels of employment among women, for instance, have a positive impact in the SEDA dimensions of employment and civil society. And the benefits of the sovereign wealth fund contribute to the country’s economic stability (another SEDA dimension). So, while Norway has not focused on an explicit well-being metric, it is clear that well-being is implicitly woven into policy decisions.
Bhutan, in contrast, stands out for its approach to what the country has labeled gross national happiness (GNH). Over the past year, we received numerous questions and comments about Bhutan and what the country is actually doing about GNH. Many seem to have an incomplete picture of Bhutan’s efforts in this area, including the impression that the country’s focus on GNH is simply a feel-good effort—one that takes focus away from the country’s challenges, including low overall wealth levels.
That perception is far from accurate. While the philosophy of having happiness drive the country’s development strategy stretches back to the 1970s, over the past decade it has evolved into a sophisticated approach that links well-being to policy—including the creation in 2008 of an index that measures overall happiness in Bhutan. The index is built on national surveys that use 124 indicators to examine nine specific areas, including psychological well-being, community vitality, cultural diversity, health, and education.
In addition, the central-government planning body created in 2008 and tasked with overseeing policy—now called the Gross National Happiness Commission—not only organizes measurement of all the indicators in the index but has also developed a tool for estimating the impact of policies on happiness. By “scoring” every policy against the indicators that the Bhutanese believe support happiness, policies can be revised or refined to avoid negative impacts on—or, ideally, to give a boost to—GNH.
Bhutan’s focus on broad measures of well-being and its efforts to integrate those measures into policymaking are reflected in the country’s SEDA scores: the country has higher levels of well-being than would be expected given its income level and also has produced greater gains in well-being over the past five years than would be expected given its GDP growth.
New Tools for Measuring Well-Being
Any country wishing to better integrate well-being into its national strategy must first understand what constitutes well-being. And there are, in fact, a number of governments launching initiatives to measure and track the quality of life within their borders.
For example, since 1999, Malaysia has gathered data for, and published, a Quality of Life Index, which includes education, health, transportation, communication, and social participation. The country went a step further in December 2013, introducing the Malaysian Well-Being Index as one of the important yardsticks used to measure the country’s development. In addition, in September 2013, the government ran a series of focus groups in order to gather feedback during the drafting of the 2014 national budget. Participants in the focus groups discussed the effectiveness of government policies—not only in the context of economic growth but also in connection with how implementation could enhance the well-being of the general public. That dialogue contributed to the crafting of a budget that contains policies for bolstering well-being, including steps to strengthen security, improve environmental conservation and resource management, and increase the participation of women in the Malaysian economy.
Meanwhile, the U.K. has also undertaken an effort to zero in on well-being. The first step was a national debate on what matters to U.K. citizens. Following that, the government began developing new measures of well-being, releasing its first report on the subject in 2012, titled “Life in the U.K.” The study included the national well-being wheel of measures, covering a host of areas encompassing the economy, governance, natural environment, health, and education.
Focusing national goals explicitly on well-being—rather than just economic growth—sheds valuable light on priorities and opportunities for action. Many countries have implicitly focused on the well-being of their citizens when setting policy and allocating resources. Others have talked about well-being and left it at the level of intention, while still others are grappling with the challenge of measuring well-being.
Our viewpoint, based on our use of SEDA in many countries, is that national leaders everywhere will find it useful to track well-being systematically—even if it is through proxies or imperfect measures—and that making well-being an explicit goal and integrating it into national strategies will help sharpen priorities and improve the efficiency of policies.
This report was produced by BCG’s economic development topic area and represents the continuing collaborative efforts of BCG colleagues from our offices around the world. The authors would like to acknowledge the contributions of the following experts from BCG’s Public Sector, Global Advantage, and Strategy practices who serve on the steering committee of the BCG Sustainable Economic Development Assessment initiative: Knut Haanæs, a senior partner and managing director in the firm’s Geneva office and the global leader of the Strategy practice; Larry Kamener, a senior partner and managing director in the firm’s Melbourne office and the global leader of the Public Sector practice; and David Michael, a senior partner and managing director in the firm’s San Francisco office and the global leader of the Global Advantage practice.
The following BCG colleagues also provided invaluable guidance: Craig Baker (London), Richard Huang (Beijing), Okan Akgun (Istanbul), Eduardo León (Monterrey), Nor Azah Razali (Kuala Lumpur), and Burak Tansan (Istanbul). A very special acknowledgment goes to Teresa Espírito Santo (Lisbon), Per Karlsson (Oslo), Madeline Penny (Melbourne), and Shu Ling Heng (Singapore).