Saturday, April 19, 2008

Would you rather be a rich person in a poor country or a poor person in a rich country?

A few months ago, Dani Rodrik asked readers of his blog the old question: “Would you rather be poor in a rich country, or rich in a poor country?”
He added the following specifications:
Assume you care only about your own consumption
Define poor and rich as someone who is the in the bottom or top decile of a country
Define poor and rich country analogously as a country in the bottom or top decile of the distribution of per-capita incomes across countries.
Some time later he told readers that the correct answer is that a poor person in a rich country is three times better off than a rich person in a poor country. He used average incomes in each decile (for 2004 PPP adjusted) to assess whether people would be better off. So far so good.

However, Rodrik received several comments along the following lines:
Though monetarily a poor person in a rich country might be better off, this says nothing about the actual welfare of this person. There are numerous studies showing that happiness is directly correlated to relative income.

Those comments may seem fair enough. But are they supported by what people say about how satisfied they are with their lives?

In order to test this I have used data on percentages of lower, middle and upper income groups who are satisfied with life as a whole for 66 countries. The data was sourced from surveys conducted over the period 1999 - 2002. (See: Ronald Inglehart et al, Human Beliefs and Values, Siglo XXI Editores, Mexico, 2004, A 170.)

Observations for each country were ranked according to average income as a percentage of U.S. levels in 2000. The relevant averages for each quintile of countries are presented in the table below. (There are 14 countries represented in the first quintile and 13 in each of the others. Australia is in the fifth quintile and New Zealand is in the fourth quintile.)

The data in the table suggest that, despite status considerations, the probability of a lower income person in a high-income country being happy is about 60 percent greater than the probability an upper income person in a low-income country being happy (100x(71.3 - 44.6)/44.6 = 60). Rodrik’s answer is still correct, although the margin is smaller under the assumptions of the calculation that I have made.

Another interesting point suggested by the data in the table is that it matters a great deal more whether you are rich or poor if you happen to live in a low-income country - where incomes of the poor are more likely to be close to subsistence levels . In low-income countries (first quintile) the probability of an upper income person being happy is about 66 percent greater than the probability of a lower income person being happy (100x(44.6 – 26.9)/26.9 = 66). By contrast, the corresponding figure for high-income countries (fifth quintile) is about 23 percent.

No comments: