The growing income gap for the world as a whole has led to concerns about the impact of globalization on world inequality. Recent research argues for a broader economic view of inequality.
To study world inequality, economists traditionally use a country’s Gross Domestic Product (GDP) per capita to measure economic well-being. Previous research has shown that income changes have led to a growing or constant disparity between the per capita income of developed and developing nations. However, material gain is only one of the many aspects of life that enhance economic well-being. Overall economic welfare depends on both the quality and quantity of life: annual income and the number of years over which this income is enjoyed.
According to the recent study “The Quantity and Quality of Life and the Evolution of World Inequality,” by University of Chicago Graduate School of Business professor Gary S. Becker, Tomas J. Philipson of the Harris Graduate School of Public Policy Studies at the University of Chicago, and Rodrigo R. Soares of the University of Maryland, it is misleading to analyze the evolution of a country’s well-being (or difference in wellbeing across countries) based only on income, since life expectancy is an important dimension of welfare.
Becker, Philipson, and Soares developed a statistical model that accounts for the impact of longevity on the evolution of welfare across almost 100 countries from 1960 to 2000. Their model measures the growth of “full” income rather than per capita income—the growth in individual income plus the value placed on the growth of an individual’s life expectancy.
“Our life expectancy model is based on the fact that people value living longer,” says Becker. “National income accounts only take account of material goods that get transferred in the market.”
Unlike income changes, longevity changes since 1960 have reduced the disparity in welfare across countries. While life expectancy has been rising for all countries, poor countries have gained more in longevity than rich countries. Therefore, the change in inequality based on income per capita underestimates the convergence in overall economic welfare. Countries starting with lower income tended to grow more in terms of the “full” income measure than countries starting with higher income.
“Life expectancy gains have been a key component of welfare improvements throughout the world,” says Becker. “The picture of world inequality looks a bit less bleak when you take a broader economic view that accounts for the rise in life expectancy levels in poor countries.”
A Life Expectancy Model
To study economic welfare, Becker, Philipson, and Soaresanalyzed a hypothetical person who faced survival probabilities corresponding to a country’s average life expectancy at birth, and would earn in every period of life an income equivalent to the country’s average per capita GDP that year. The value of gains in life expectancy could then be calculated using national income and mortality statistics.
The authors used data on income and life expectancy from the Penn World Tables and the World Health Organization Mortality Database. Developed countries include Western Europe, Australia, Japan, New Zealand, countries from North America, and Western Europe. Developing countries include countries from Africa, Eastern Europe, Latin America, and Southeast Asia.
Longevity-adjusted income measures were used to reconsider what happened over time to cross-country inequality, and give monetary value to longevity gains experienced by different countries between 1960 and 2000. These estimated values were combined with traditional per-capita income data to assess the evolution of welfare in different countries, as well as the evolution of differences in welfare.
This technique allowed the authors to fill in the gaps in previous research that used GDP as a measure of “full” income. The authors suggest that GDP per capita does not reflect the full economic welfare enjoyed by the average person, which includes the value of leisure, household production, or non-traded goods.
A central part of Becker, Philipson, and Soares’ approach is assigning a monetary value to life based on the economic concept of “willingness to pay.” Willingness to pay can be defined as the estimated amount a person is willing to pay to reduce their risk of dying by 1 percent. Data on willingness to pay is based on hundreds of studies about peoples’ life choices. The authors used previous research on the economic value of risks to life to determine the marginal willingness to pay for longevity gains.
The authors used the estimated value of longevity gains to compute “income equivalent compensation” measures—the 2000 income that would give individuals the same welfare level observed in 2000 but with mortality levels from 1960. The authors find that the growth rates for “full” income for the period averaged 140 percent for developed countries and 192 percent for developing countries.
The total lifetime value (willingness to pay) of gains for an individual born in 1995 correspond to more than 3 times the value of GDP per capita for the United States, and more than 10 times the GDP per capita for countries like Chile and Egypt. These values correspond to permanent increases of more than 10 percent in annual income for the United States and more than 50 percent for Chile and Egypt.
Longevity gains are more important for developing countries in terms of average annual value as a percentage of the GDP. Gains correspond to 55 percent of the 1960 GDP per capita for the less-developed world and only 29 percent for the developed world.
Chile, Hong Kong, and Singapore experienced longevity gains with values above $3,200 in annual income. This gain corresponds to 90 percent of Chilean GDP per capita in 1960 while gains for Hong Kong and Singapore are more than 118 percent of their GDP’s per capita in 1960.
In some countries, such as Chile, Ecuador, Egypt, El Salvador, and Venezuela, longevity gains have been by far the most important factor in determining the welfare improvements of the country after 1960. On average, poor countries had a higher share of welfare gains due to increases in longevity. Overall evidence shows that longevity gains in the period between 1960 and 2000 helped reduce the disparity in welfare across countries.
How do changes in life expectancy break down by disease category? To address this question, the authors analyzed mortality data for thirteen major disease categories to understand the determinants of the cross-country convergence in life expectancy between 1965 and 1995 in the smaller number of countries that had such data.
To evaluate the contribution of each cause of death to the observed reductions in mortality, the authors constructed the survival rate that would have been observed in 1995 had mortalities for all causes of death but the one in question remained at their 1965 levels.
Since 1965, 110 percent of the convergence in life expectancy can be traced to improvements in the treatment of infectious, respiratory, and digestive diseases, congenital abnormalities, perinatal conditions, and “ill-defined” conditions. In other words, mortality of these causes of death fell more rapidly in poor than in rich countries. Among these, respiratory and digestive diseases played the most important role, leading to 60 percent of the convergence. The second most important disease category comes from “ill-defined” causes and conditions, which reflects the relative improvement of medical practice and record keeping behavior in developing countries.
Evidence suggests that the large changes in mortality observed in the developing world were due to the adoption of previously available technology and knowledge, such as educational health programs and basic interventions. On the other end of the spectrum, developed countries benefited from recent advances on the frontier of medical technology.
“Poor countries have certainly benefited from progress against certain disease categories, but it is necessary to recognize that in the late 1990s, the progress in economic well-being of some African countries was substantially reduced by the AIDS epidemic,” says Becker.
Importing Biomedical Advances
“Health is important internationally,” says Becker. “It is one area where poor countries can narrow the welfare gap even further by paying more attention to the health of their population.”
Becker suggests that developing nations spend more on health care, since they still lag behind rich countries on this dimension. For example, India’s new government has suggested that it will devote more resources to health care for the lower income part of the population, a policy move that Becker supports.
The international spread of knowledge is one of the driving forces in changes in longevity: knowledge developed in richer countries is applicable to poor countries. Poor countries have benefited from health care that those in the developed world take for granted, such as basic antibiotics, improved cleanliness, clean water, clean birth deliveries, and the isolation of infectious people.
Becker adds, “Globalization is not often thought of in terms of biomedical improvements. One of the unsung heroes of globalization is that it enables poor countries to improve their health by importing technology developed in richer countries.
Gary S. Becker is University Professor of Economics and of Sociology at the University of Chicago Graduate School of Business and the University of Chicago, Senior Fellow at the Hoover Institution.