“The welfare of a nation can scarcely be inferred from a measurement of national income.”
Simon Kuznets, creator of the concept of GDP, 1934
After decades of measuring economic progress in terms of income growth, national leaders are now paying much more attention to the quality of that growth. The shift stems from a growing realization that an impressive rise in gross domestic product per capita in the short term means little if living standards are undermined in the long term by poor health, underinvestment in education, a degraded environment, and a widening gap between rich and poor. What is important is for rising national income to translate into greater well-being for the population at large on a sustainable basis.
As a strategic advisor to businesses, The Boston Consulting Group has always recognized that maximizing short-term profits does not always equate to maximizing long-term value. Companies can maximize profits in the short term by milking their assets, but that is frequently value destructive. For governments, it is just as clear that focusing purely on growth in GDP—that is, on wealth—does not necessarily lead to the long-term well-being of their citizens.
To help us advise governments on successful long-term development strategies, BCG created the Sustainable Economic Development Assessment, or SEDA, an approach to systematically assessing and comparing the socioeconomic development, or level of well-being, of 150 nations across a range of dimensions. Using SEDA scores, we can measure how well a country translates its wealth, or income, into the overall well-being of its population. We can also assess a country’s progress in converting recent GDP growth into improved well-being, as well as its ability to sustain that growth into the future. The SEDA framework thus provides a basis for countries to benchmark themselves as they try to gain the most well-being out of their growth.
There are a number of interesting findings from the first version of SEDA. One is that countries with higher GDPs are not necessarily the best at converting their wealth into well-being for their citizens. A number of Eastern European nations, such as Albania and Romania, and such Southeast Asian countries as Indonesia, the Philippines, and Vietnam, score particularly high in converting wealth into well-being.
Other countries stand out for their success in translating recent GDP growth into gains in well-being for their populations. Brazil’s record has been particularly impressive in this regard. While it averaged GDP growth of 5.1 percent over the past five years, Brazil generated gains in living standards that would be expected of an economy expanding by an average of more than 13 percent per year. New Zealand and Poland are among the other countries whose recent progress in improving well-being is greater than their GDP growth rates would suggest.
Looking ahead, we identified key sustainability factors—the drivers that are likely to make current levels of well-being and recent progress sustainable. Again, we found considerable differences among nations, some of which are much better positioned than others to sustain progress.
Our main goal has been to develop a framework for providing strategic advice to governments, development organizations, and other important stakeholders in sustainable economic development. BCG’s SEDA is not alone in providing perspective for governments and stakeholders in their development efforts. The United Nations Development Programme, with its Human Development Index, has long focused on a range of indicators of living standards apart from income levels, such as life expectancy and adult literacy. And the World Economic Forum is expanding its influential annual Global Competitiveness Reports to include economic, social, and environmental sustainability.
While the indicators that make up SEDA could be used to produce another index, that was not our objective. Our aim was to create a diagnostic and benchmarking tool that can provide a big-picture perspective and yield insights that governments can act on.
Rather than focusing on one particular area, such as income, the business environment, or human resources, SEDA responds to calls from such eminent economists as Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi for a broad measure of development. SEDA measures ten different dimensions of social and economic development, including such factors as health, education, civil society, and environmental stewardship. These dimensions allow us to capture, in addition to measures of income, the main ingredients of well-being. Good performance on these dimensions is crucial if a country is to sustain improvements in well-being in the decades ahead.
BCG’s SEDA covers the 150 countries for which we were able to find sufficient consistent and reliable data. For each nation, we assessed the ten dimensions over three time horizons. The first horizon provides a snapshot of each nation’s current level of socioeconomic development, or well-being. The second provides a picture of each country’s recent progress in development. The third horizon, long-term sustainability, explores how well a country is equipped to continue to generate improvements in well-being in the future by assessing the key sustainability factors for socioeconomic development.
A distinctive feature of SEDA is that it allows us to assess the performance of nations in converting income into broad-based socioeconomic development (well-being). We do this by comparing each country’s current level of development against the level that would be expected given its per capita GDP level using a wealth to well-being coefficient. We also produce a growth to well-being coefficient by comparing five-year GDP growth with improvements in well-being during the same period. We calculate coefficients for the overall SEDA scores of countries as well as for each dimension of development. We therefore can identify dimensions on which countries are overperforming or underperforming given their income level and growth. We provide two examples—health in South Africa and education in Malaysia—of how a specific dimension can be analyzed in a given country.
Perhaps the most valuable feature of BCG’s SEDA is that it can help policymakers diagnose a country’s development strengths and weaknesses by benchmarking them against whichever nations they regard as peers. By providing insights into the underlying drivers of these strengths and weaknesses, SEDA can also provide valuable input in the creation of actionable development strategies at the national level.
SEDA can be used not just by governments and nongovernmental organizations, but potentially also by strategists at global companies, in particular those with diverse international investments and operations. SEDA’s insights into the potential long-term trajectory and sustainability of development in different countries could provide inputs into decisions related to a company’s future global footprint.
This report reflects the outcome of the first version of BCG’s SEDA. Constructing such an assessment is a challenging undertaking. A full understanding of the causal impacts and complex interplay of the social and economic factors that ultimately determine a nation’s ability to sustain improved well-being over the long term is far from complete. And data limitations are considerable. Still, the potential value for national strategies of a tool such as SEDA justifies the effort. We expect to continually refine the SEDA methodology and to share further results. We welcome input from policy practitioners, scholars, and, in particular, our government clients.