Income Inequality Is Strongly Linked to How Well Countries Convert Wealth into Well-Being

Income Inequality Is Strongly Linked to How Well Countries Convert Wealth into Well-Being

Income Inequality Is Strongly Linked to How Well Countries Convert Wealth into Well-Being

The FINANCIAL -- Countries with high levels of income inequality tend to have a weaker record at converting national wealth into well-being—and their people tend to be less happy than would be expected—than those with lower levels of income inequality, according to a new report by The Boston Consulting Group (BCG). 

BCG also found that it is difficult for countries to significantly improve how they convert wealth into well-being, a fact that likely stems from the difficulty of improving inclusiveness and the strength and vitality of a nation's institutions (as reflected, for instance, in the rule of law), both of which are essential to conversion. The findings are based on the firm’s latest Sustainable Economic Development Assessment (SEDA), which provides a measure of relative well-being in 162 countries.

The fact-based, comprehensive analysis revolves around ten key areas, or "dimensions," in three categories:  economics, investments, and sustainability. SEDA scores countries on a relative basis in terms of their current level of well-being and their recent progress in well-being from 2006 to 2015. These measures also allow us to assess how countries differ in converting wealth and growth into well-being.

“Well-being of citizens, now more than ever, is an important measure of a country's development," says Vincent Chin, a BCG senior partner and coauthor of the report. "Citizens, jaded with the status quo, want change. They want governments that can deliver and convert wealth into well-being. Although economic growth has lifted  GDP per capita in many countries around the world, income inequality has increased—and that has a very real connection to the well-being and overall happiness of people around the world.”

The Challenge of Income Inequality

Three separate analyses using SEDA showed that there is a clear negative correlation between income inequality and how well countries are converting wealth into well-being. Previous SEDA work has found a similar connection between the SEDA dimensions of civil society and governance and the ability to convert wealth into well-being. The bottom line: more inclusive societies are better able to harness their wealth.

The report also examined the connection between income inequality and happiness, finding that countries with low levels of income inequality tend to have higher levels of happiness than would be expected.

These findings have clear implications for policymakers. A country's institutions have a direct bearing on income equality—as well as on civil society and governance. And those institutions are often difficult to transform, a point underscored by the fact that our work over the last several years has shown that the ability of a country to harness its wealth to create well-being changes little over time. Taking action to enhance those institutions and improve inclusiveness is likely to improve both income equality and a country’s overall ability to convert wealth into well-being.

Well-Being in 35 Major Countries

BCG has worked on SEDA for five years and has collected almost a decade's worth of longitudinal data. In addition to providing updated performance figures for all 162 countries in our dataset, the 2017 report also zeros in on 35 major countries representing 86% of the global economy and 79% of the world's population.

Among the key findings this year and in past years is the fact that we find no evidence of a relationship between GDP and a county’s ability to convert wealth into well-being. Indonesia, for example, converts wealth into well-being at an above-par rate compared with South Africa, even though the two countries have similar levels of per capita GDP.

Similarly, we do not find a connection between GDP growth rates and a country's ability to convert growth into well-being improvements. Among mature economies, Canada, Germany, Russia, Sweden, Switzerland, the UK, and the US all grew at an average rate of 1% to 2% from 2006 through 2015—but only Germany and Switzerland were able to convert that growth into well-being improvements at above-par rates.

Meanwhile, Vietnam, China, and Indonesia, all of which grew at healthy rates over that period, converted growth into well-being improvements at slightly above-par rates. India was not far behind, converting its rapid growth into well-being gains at a rate nearly in line with the average.