Economic success

Economic success

How is economic success determined? Some people thing that USA and China are the two most successful countries economically. They are definitely economic superpowers as it can be seen from Table 1 which shows GDP but this is partly because of their population, especially in the case of China. Economic size is different than economic success. Others regard growth as economic success. Growth is the way that will eventually lead to economic success in the long run but is not economic success. Stock markets like growth. It shows that something is rising, fast in the case of high growth. It does not show the level that it has reached.

A first indicator of economic success is GDP per capita in nominal values (Table 1). By this measurement, USA is among successful countries although not at the top of the list while China is not. GDP per capita should be adjusted at purchasing power parity which takes into account the cost of living. Rent for a two bedrooms apartment in an average neighborhood, dinner for two at an average restaurant, the cost of staying one night at an average hotel, is not the same in all countries. One reason for this is differences in exchange rates. These are determined by supply and demand for a country’s currency.

GDP per capita ppp (Table 1) is the most important indicator of economic success but is it enough? Definitely not. A second indicator should be a measurement of income inequality, like Gini coefficient (Table 2). This can be calculated before or after income redistribution which is done by taxes and transfer payments. The second is appropriate. The first can be regarded as auxiliary. A third indicator that goes hand in hand with income inequality is unemployment level (Table 3). Income inequalities and high unemployment levels create a variety of problems in a society that range from crime to unhappiness and decrease of economic welfare.

Two other indicators that should be seen together is the level of taxes (Table 2) and the size of public sector (Table 4). Some countries with big public sectors have low tax rates. These are figures of the government involvement in economic matters. Instead of tax rate, government revenues or expenditures (Table 3) could be shown. These three figures are closely related. The difference between expenditures and revenues is budget surplus or deficit.

Fifth Way is close to the Libertarian perspective of minimal government involvement because government involvement is reducing freedom. No state is impossible. A night watchman state is too small. So how small should a state be? As all things, this depends on time and place, the circumstances that a country faces at a certain time.

We use three cases Norway, Ireland, Switzerland. These are all small countries and definitely no economic superpowers but undoubtedly economic successes since they are at the top of GDP per capita list. In both tables (nominal and ppp), Norway and Switzerland are one after the other with Switzerland first. This means that the cost of living in both countries is approximately equal. Ireland is a little lower in nominal figures but much higher in ppp figures because the cost of living is lower compared to the other two countries. In addition to these three small countries, 5 from G7 are shown. Economic indicators for these 8 countries are as follows;

 

GDP per capita (ppp) Gini % Unemployment % Tax rate % % public sector
Ireland 83,203 31.9 4.8 30.8 17.9
Switzerland 68,060 32.5 2.5 27.8  13.8
Norway 65,510 26.8 3.8 54.8 37.8
United States 62,794 41.5 3.5 27.1 15.8
Germany 53,074 31.4 3.2 44.5 12.9
Canada 48,130 34.0 5.6 31.7  19.9
United Kingdom 45,973 34.1 3.9 34.4 21.5
France 45,342 32.3 8.1 47.9 24.9

 

Japan and Italy could be included since they are also members of G7. Australia is close although not a member. Based on these, Switzerland is probably a more preferable model than Norway because it has lower unemployment and lesser government involvement although income inequality is a little higher. Compared to Ireland, Switzerland has slightly lower government involvement, lower unemployment, almost equal income distribution and lower GDP per capita. This is a static picture. Some countries may be in a downwards economic cycle or facing economic problems. The same figures for the past 10 or 20 years would show a more complete picture. This is still not the whole picture.

Countries with higher taxes and revenues have higher spending. Government investment should lead to higher growth in the future. Some people claim that tax rates in certain countries are high because of transfer payments (Table 4). Transfer payments are irrelevant because their redistributive effect is already included in Gini coefficient measurement, if it is calculated after taxes and transfer payments. Perhaps one country spends more than another in education and health services as a percentage of GDP. What matters is if satisfactory education and health services are available to everyone. Nothing is free, someone has to pay, the user, the taxpayer or both.

At last, the composition of GDP should be examined. This could show that economic success is not because of doing things right but instead special circumstances. One example is oil reserves. In this case the country is still successful economically but the model can’t be followed by others because they do not have the unique conditions. Additionally, cannons (Table 4)and prisons do not add to economic welfare. To be precise, in terms of economic welfare, it is not what the country produces but what it consumes. The difference is trade. If a country produces weapons and trades them for cars or olive oil, its economic welfare will increase.

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