Welfare vs. Income Convergence and Environmental Externalities

IMF Working Papers, December 7, 2017

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Welfare vs. Income Convergence and Environmental Externalities

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Bibliographic details

• Authors: Geoffrey J Bannister, Alex Mourmouras
• Published: December 7, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484331514.001

Summary

• Presents estimates of welfare by country for 2007 and 2014 using the methodology of Jones and Klenow (2016) which incorporates consumption, leisure, mortality and inequality, and extends the methodology to include environmental externalities.
• During the period of the global financial crisis welfare grew slightly more rapidly than income per capita, mainly due to improvements in life expectancy.
• Welfare convergence occurred in most regions towards advanced country levels.
• Introducing environmental effects changes the welfare ranking for countries that rely heavily on natural resources, highlighting the importance of the natural resource base in welfare.
• The methodology could provide a theoretically consistent and tractable way of monitoring progress in several Sustainable Development Goal (SDG) indicators.

Key findings and statistics

• Country welfare estimates provided for the years 2007 and 2014.
• Welfare grew slightly more rapidly than income per capita during the period of the global financial crisis, driven mainly by improvements in life expectancy.
• Most regions experienced welfare convergence towards advanced country levels.
• Incorporating environmental externalities alters welfare rankings for natural-resource-dependent countries, underscoring the role of the natural resource base in welfare assessments.

Methodology

• Uses the Jones and Klenow (2016) framework, which incorporates:
  • consumption,
  • leisure,
  • mortality,
  • inequality.
• Extends the Jones and Klenow (2016) methodology to include environmental externalities.
• Positions the extended methodology as suitable for monitoring multiple SDG indicators in a theoretically consistent and tractable manner.

Policy implications and interpretation

• Improvements in life expectancy can drive welfare gains that outpace income-per-capita growth, influencing convergence dynamics.
• Accounting for environmental externalities is crucial for accurate welfare rankings, particularly for countries heavily reliant on natural resources.
• The extended welfare metric can serve as a tool for monitoring progress on Sustainable Development Goals that relate to consumption, health, inequality, and environmental quality.

Subject classification and keywords

• Subject: Consumption, Environment, Greenhouse gas emissions, Health, Income, Income inequality, National accounts
• Keywords: Asia and Pacific, Consumption, convergence, environment, Europe, externalities, financial crisis, Global, Greenhouse gas emissions, income, income country, Income inequality, income share, life expectancy, log ratio, Middle East, natural resources, North America, per capita income, reference country, Welfare, WP

Content in this bundle

• Welfare vs. Income Convergence and Environmental Externalities, WP/17/271, December 2017
  • Welfare vs. Income Convergence and Environmental Externalities, WP/17/271, December 2017 (Markdown version)
  • Welfare vs. Income Convergence and Environmental Externalities, WP/17/271, December 2017 (PDF)