Tuesday, November 25, 2008

Analysis Of The Disparities Between Nations - Part I

Well, the video did set me thinking on one angle. Scandinavia (Sweden, Finland, Norway and Denmark) pays a lot of attention to inequality. Throughout Europe there is a strong thread of socialism in society. This can be witnessed in the high tax rates and excellent social security systems.

For example, primary and secondary education is free in Finland and in some cases even undergraduate education can be free. Tuition fees at undergraduate levels are quite nominal throughout Europe in government funded schools. And if you can prove your financial difficulties, then state aid is assured. Compared to our own socialist experiment, we would expect that government funded schooling = poor quality education. However, the bulk of the population in Finland goes to the government funded schools. If the quality of education were poor, then a market for private schools would have emerged. But from what I know, it is not the case.

However, this does not mean everything is hunky dory. There is one section of people that really finds it hard to make ends meet. My observation is that this section is dismissed as "bums" or "drug addicts". The argument is that, if they are in their plight inspite of all that the government does for them, well, it cannot be helped. In that sense it can be pretty tough for a few. It is not a perfect world but broadly, the western European nations appear to have done a good job.

But how do we test this or quantify this? The most commonly used metric for inequality is the Gini index. The Gini index is based on the Gini Coefficient which is calculated as follows. Let us play around with some statistics.

The data was taken from Human Development Reports. I had to make one assumption to smooth over data issues. The Population and GDP Per Capita figures in the excel sheets are for 2005. When I try to access the Gini Index data for 2005 it links to the 2007-08 data. I have assumed that the situation has not changed too much in the past 3 years in terms of inequalities.

Here is a list of top 15 nations in the Gini Index. I have also included the US and the BRIC countries. The analysis is based on a sample of 126 countries.

The Scandinavian countries are all in the top 10. But other than Japan, the rest of the company is not exactly enviable. Slovakia, Bosnia and Herzegovina(!), Hungary, Ukraine... Purely from casual reading we know these nations are not exactly the kind of nations that the world wants to emulate. Therefore, it appears that most of the equitable nations in the world are equitable because they appear to make everyone poor! The Hindu rate of growth!

Let us look at the BRIC countries. Amongst the BRIC countries we seem to be doing the best. We are at 54 while China is at 93 (yay!?) and Brazil at a really low 116. However, doing good on the Gini scale may not be such a great thing as the previous table suggested. That great model for the world (not anymore?) US is at 71. So only do nations that have low prosperity end up with a high Gini score? How do we measure prosperity?

One measure applied for prosperity is GDP per capita. GDP per capita has some flaws since it is an aggregate measure. But since we are taking that and Gini index into account, it should be an interesting exercise.

This makes more sense doesn't it? The ones whom we thought as not worthy of emulation have low GDP per capitas. Bosnia and Herzegovina has $2500, Slovakia at $8616, Ukraine at $1761. The Scandinavian countries stand out here too. Sweden has $39,637, Denmark at $47,769, Finland at $36,820 and Norway at a whopping $63,918.

Looking at the BRIC countries, there does seem to be an inverse relationship between Gini Coefficients and GDP Per Capita. Can we not grow without increasing inequality? (Afterthought, the same analysis will be better done with PPP adjusted GDP Per Capitas)

Let us do one thing. Let us take the nations with the highest GDP Per Capitas and check out their Gini Indices. Remeber when it comes to Gini Index, lower is better.



Interestingly, among the top 25 GDP per capitas we have countries like Qatar, Kuwait, Bahrain. These countries are there on the strength of their natural resources and comparing them is really not going to help us. Let us drop them and build a new table. And the BRIC countries were left out in this one.

(I could have skipped it, but really just wanted to illustrate a point. I also wanted to show how thinking processes really are iterative. When we read from textbooks, we read the end result of a thought process. Unfortunately, the thinker rarely gets to that stage without many a slip betwixt the cup and the lip.)

Okay, last one, I promise. This one shows the GDP Per Capita rank and Gini Index rank for nations.



A cursory glance seems to satisfy the hypothesis that the most prosperous are quite unequal. Let us look at those that have done really well. I define "successful" nations as those whose difference between Gini ranks and GDP Per Capita ranks is not greater than 10. (It is an arbitrary cutoff)

Those are: (Drumrolls please)

Norway, Denmark, Sweden, Netherland, Austria, Finland, France, Canada and Germany.

And what do you know. Barring Canada, the rest are in Europe. I know that they have a strong socialist philosophy. But how come socialism works for these people while it does not work for Czech Republic, Bulgaria, India, China?

Or wait, are these metrics developed in Europe? (!) Is it the result of a built-in bias in the metrics?

For a moment let us discard the "skewed metrics" theory. The question that remains is:

What went wrong with the socialism of India, China, Czech Republic, Bulgaria, Slovakia, Russia yet works for these countries?

PS: I had a fun 2 hours playing around with data. Another delectable tool for data handling is GapMinder. Check it out! Playing around with data could lead to interesting observations and voila you have a theory of your own!

PPS: What was the purpose of all this? In addition to raising some questions, I also wanted to demonstrate how to go about thinking about national development. I also observed that in the western world, there is a lot of obsession with development and growth. Maybe we could take a lesson or two from that.

13 comments:

Naveen Eluru said...

Nice work dude.. Impressive analysis!

themiddler said...

Hi Boss!

Thanks for the comment! Have been quite fascinated by the completely different world that Europe is. It is not necessarily better, just quite different.

Prahalad Mukundan said...

hey really good da!
have always wondered about this high taxation system in those countries.
Quite an interesting analysis!

themiddler said...

@Prahalad

They have high taxation, but there is a guarantee of getting the services from the government. I think that is what makes it work.

As a result of the high taxation and guaranteed social security, saving tendency is also lower than us.

Anand said...

I think their savings tendencies are lower because they don't have an SBI which gives them solid 10.5% a year :) But yeah, tax goes to the government, not to the ruling party. That works

Frame said...
This comment has been removed by the author.
Frame said...

Highly impressive analysis.

The question posed is equally interesting. One probable answer for the Indo-Russian thing would be Corruption(?). Since the incentive of the worker individual did not depend on the quality of effort, he gave up(?) The psychological motivation of nationalism can only stay for a revolution.. not a generation... Eventually, the rich also lost faith in the system..

Guthi said...

Hey! Nice post. :)

Maddy said...

Very cool! As I have always said, the blossoming of Middle into his MBA studness was a phenomenon just waiting to happen.

When you're comparing GDP per capita, shouldn't the ol' PPP come in somewhere? Perhaps percapita GDP/PPP would be interesting to compare the Gini index with. This should take the shine off Scandinavia a bit in any case :)

Part 1, eh? Nice!

C-lay said...

Hey Middle ...awesome analysis !!
It would be good at this point to analyze the inequality existing in the world (country to country) rather than inequality existing within a country.
The modern monetary system was biased to begin with..as it started just after the second world war...the IMF and world bank lend to countries like any bank lends to individuals...they set interest rates depending on the credit worthiness ...wat this means is that rich (imperialist) countries get loans at cheap rates and the erstwhile colonies have to pay huge interest rates which are near impossible to pay back.It is the classic case of rich getting richer...ob inequality..I agree with frame ...corruption is a big issue :) Any thoughts middle ??

C-lay said...

I had another interesting thought macha .... all the good/successful Scandinavian and European countries that you have mentioned are maaajar pot smokers :)
thinking out of the box here :)

Shankar said...

nice post .... like you said ppp/gini index comparison will be better ... totally new concepts for me ... wish I could provide more useful comment ... i will keep thinking ......

Karthik Sivaramakrishnan said...

Fascinating! Great work.