Economy (mis)meaured

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I must admit that I myself fell into the trap several months ago, on my way to Nicaragua: “I’m visiting the poorest country in Latin America.” By GDP per capita, my statement was true (excluding Haiti from Latin America): Nicaragua has just $1,004 per capita GDP, or just $2.70 per person, per day! In comparison, the lucky bastards in Honduras ($4.54) or Guatemala ($7.26) are rolling in dough. Who knows what the Guatemalans do with the extra $4.51.

My belief in Nicaragua’s poverty was easily reassured when I arrived at my new office in Costa Rica, where everyone seems to know that Nicaragua is the poorest country in Central America. My coworkers spend all day researching Central American economies, and they would certainly know.

So naturally I was surprised to find that by many standards of “development,” Nicaragua ranks ahead of Honduras and Guatemala. Nicaragua has higher life expectancy at birth and lower under-five mortality rates. It also beats Guatemala in literacy by 8 percentage points. The UN’s composite Human Development Index ranks Nicaragua ahead of both Guatemala and Honduras in overall development.

But what about $2.70 vs. $7.26?! It’s amazing how much we can read into these little numbers and create incredible stories around them as if they summed up countries. Poorest country in Latin America. We may say that without any regard for income distribution, food availability, education standards, social mobility, and a number of other characteristics that determine people’s opportunity in life.

In fact, GDP completely misses one of the most important characteristics of the economy, specifically how well a country focuses its resources and productive activity to benefit its people. A quick example: the United States spent $5,711 (per capita) on health care in 2003 compared to $2,317 for Great Brittain. These figures are essentially per capita GDP in health care. Should we celebrate our high health care GDP? No! The object of health care is good health, not high bills. Our health care system is broken, and the high cost is a reflection.

So spread the good news (or bad if you live in Guatemala): By many measures, Nicaragua is not as screwed.

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One Response to “Economy (mis)meaured”

  1. phil Says:

    Very good Sam.

    Two points I’d like to tack on:

    1) Any GDP / capita number below $10 per day seems unimaginably small to Western eyes and we tend to see them all as equally minuscule. But there is a huge difference in quality of life within that range. Development economists typically draw lines at $1, $2 and $4 per day as significant.

    2) What you are pointing out is the inability of a metric (GDP / capita) to measure quality of life. You are absolutely right. Still, if I were only allowed one metric to describe a country I’d choose that one. It’s the best we have.

    If I could have a second, I would choose the Gini coefficient — the measure of wealth distribution. This is often ignored, but vitally important to understanding an economy. Incidentally, Honduras and Guatemala have very high gini coefficients. Could the relatively “high” GDP / capita simply not be well distributed in those countries?

    Low Gini coefficents : Denmark, Japan
    High Gini coefficients: South Africa, Namibia, Brazil

    http://en.wikipedia.org/wiki/Gini_coefficient

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