Economic freedom and quality of life: evidence from the OECD's your better life index.

Author:Nikolaev, Boris
  1. Introduction

    Measures of material standards of living such as gross domestic product (GDP), or household and individual income, dominate national debates about social and economic progress. Economists have used such measures as a proxy for well-being despite limitations long recognized by social scientists. (1) GDP, for example, does not take into account environmental externalities and the depletion of natural resources; it does not recognize social and economic inequalities or the value of nonmarket work such as raising a child or volunteering; it increases after a natural disaster or health epidemic as infrastructure is renewed and new patients are diagnosed. More importantly, GDP is a poor measure for quality of life because it fails to account for the crucial dimension of psychological well-being.

    The measurement of social and economic progress, however, is undergoing a fundamental change. Some have called it a revolution (Frey 2010), and others have called for a revolution (Layard 2005). In 2008, for example, the French president, Nicolas Sarkozy, formed a commission of twenty-five members, including five Nobel Prize laureates, that produced the most comprehensive study on measuring quality of life to date (Stiglitz, Sen, and Fitoussi 2009). (2) The so-called Sarkozy Report, a 292-page document, represents a "remarkable breakthrough in economist's [sic] thinking about the direction in which economic measurement needs to go." (Easterlin and Sawangfa 2010, p.1) The commission recognizes that quality of life is a much broader concept than economic production and living standards, and its key message is that there must be a shift from measuring economic production to measuring people's well-being.

    Such a shift is now happening and gathering momentum. In Britain, for example, a coalition led by Prime Minister David Cameron is starting to measure general well-being by asking people how happy, anxious, and satisfied they are with their lives. For the past couple of years, the OECD has published an index on well-being, Your Better Life Index, which includes eleven different dimensions of quality of life: housing, income, jobs, community, education, civic engagement, environment, health, work-life balance, safety, and life satisfaction. Most of these categories are constructed using both objective measures (e.g., life expectancy) and subjective ones (e.g., self-reported level of health). Similarly, Gallup is now conducting surveys in 140 countries that ask people about their life-evaluation and emotional states. In the United States, the Rockefeller Foundation launched a project in 2010, The State of the USA, which aims to create a national dataset of key indicators that go beyond GDP.

    This paper provides some preliminary evidence on the relationship between economic freedom and quality of life and is thus exploratory in its nature. The first part of the paper examines a dashboard of indicators for quality of life from the OECD's Your Better Life Index and how they relate to the Economic Freedom of the World Index (EFWI) (Gwartney et al. 2012). Some of these indicators, such as household income and unemployment rate, have been studied extensively in the literature. Others, such as social support networks, crime, and work-life balance, have received little or no attention so far. Thus, instead of concentrating on particular outcomes, the goal of this study is to provide a more holistic approach and present a comprehensive set of well-being indicators, which individually may be less robust, but as a whole will hopefully be convincing and suggest some important patterns for future research. One advantage of using this new index is that selected indicators for quality of life can be evaluated on the basis of inequality across genders and income classes, which is something that previous studies rarely take into account due to lack of data.

    Furthermore, the majority of previous studies emphasize the importance of economic freedom in promoting higher material standards of living through faster rates of capital investment (Hall et al. 2010; Gwartney et al. 2006), more rapid economic growth, and lower unemployment and poverty rates (Azman-Saini 2010; Heckelman et al. 2009; Feldmann 2007; Scully 2002; Grubel 1998). The evidence in this paper, however, suggests that economic freedom may play an even more important role in promoting quality of life through other dimensions of well-being. Higher level of economic freedom, for example, may help strengthen social networks, improve the quality of the local environment, encourage more people to pursue higher education, and discourage people from engaging in socially destructive behaviors such as crime. These areas are still largely underresearched in the economic freedom literature. Only one study, for example, explores the effect of economic freedom and social capital, measured by the generalized level of trust in society, and finds a positive link between the two (Berggren and Jordahl 2006). In addition, only a few papers look at the effect of economic freedom on education and health. In one of them, Hall et al. (2010) suggest that economic freedom may encourage higher investment in human capital, which may lead to better educational outcomes. Similarly, Stroup (2007) finds that countries with more economic freedom tend to have a higher adult literacy rate, longer life expectancy, lower mortality rate, and better disease prevention. Finally, there is an emerging literature on the relationship between economic freedom and happiness (e.g., see Gropper et al. 2012; Ovaska and Takashima 2006; Veenhoven 2000), which is still in its infancy.

    The relationship between these variables is always uncertain because it is difficult to isolate the effect of economic freedom from the effect of other variables, such as income, even with standard econometric techniques. What makes causal inferences especially difficult in this study is that the OECD's Your Better Life Index contains data for only one year. Thus, in the second part of this paper, I use a large dataset from 1970 through 2010 to explore the cross-country and longitudinal relationship between economic freedom and the Human Development Index (HDI). I find that the positive effect of economic freedom is strong and long lasting. Interestingly, changes in the EFWI also have a strong and positive effect on human development over both the short run (five years) and also the long run (ten years). II. II.

  2. Approaches to Measuring Quality of Life

    The Sarkozy Report identifies three conceptual approaches to measuring quality of life. The first approach is based on the notion of subjective well-being. This approach views people as the best judges of their own condition. It is linked to the philosophical tradition of utilitarianism and has a strong appeal because it recognizes the popular view that the end goal of human existence is to be "happy" or "satisfied" with one's life. Based on extensive research evidence, the commission agrees that subjective well-being can be measured in a reliable and meaningful manner. Nevertheless, since subjective well-being has different dimensions-cognitive evaluations of one's life, positive emotions such as joy and pride, and negative emotions such as joy and worry-the commission suggests that each of these aspects should be measured separately to gain a complete appreciation of people's lives. (3)

    The second approach to measuring quality of life is based on the notion of capabilities. This approach views people's lives as a combination of various "doings and beings" (functionings), and of the freedom to choose among these functionings (capabilities). Some of these capabilities may be quite elementary, such as being adequately nourished and escaping premature mortality, while others may be more complex, such as having the literacy required to participate actively in political life. The foundations of the capability approach, which has strong roots in philosophical notions of social justice, reflect a focus on human ends and on respecting the individual's ability to pursue and realize the goals that he or she values; a rejection of the economic model of individuals acting to maximize their self-interest heedless of relationships and emotions; an emphasis on the complementarities between various capabilities; and a recognition of human diversity, which draws attention to the role played by ethical principles in the design of the "good" society. (Stiglitz et al. 2009, p. 42)

    The third approach is developed within the economics tradition and is based on the notions of fair allocations. This approach is common in welfare economics and requires weighing the nonmonetary dimensions of quality of life (beyond the goods and services traded on the market) in a way that respects people's preferences.

    The capabilities and fair allocations approaches favor measurement of people's objective conditions and the opportunities available to them. Although these objective features can be instrumental to one's happiness, both of these conceptual approaches consider the expansion of people's functionings and freedoms as intrinsically valuable. And while the list of objective features depends on value judgments, there seems to be a universal agreement across individuals, cultures, and times about the most important aspects that determine quality of life. The commission identifies eight dimensions important to quality of life: health, education, economic well-being, work, political voice, personal relationships, environment, and security (Stiglitz et al. 2009, pp. 45-58). Finally, the commission recommends that each dimension for quality of life should be evaluated on the basis of inequality across people, socioeconomic groups, and generations.

  3. Economic Freedom and Quality of Life in the OECD Countries

    This section describes the data that are used for the analytical part of this study....

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