Greater Competitiveness Does Not Have to Mean Greater Inequality

Turns out the U.S. is an outlier when it comes to creative paths to prosperity

Last week, I discussed how the nations of the world stack up in terms of innovation, the Creative Class, and a new overall measure of creativity and competitiveness, the Global Creativity Index (GCI). Today, I look at the bigger picture of economic prosperity, examining the connections (or lack of connections) between competitiveness and happiness, socioeconomic inequality and overall social and economic progress.

Let’s start with a basic question: Do more creative and innovative economies gain an edge in economic development and competitiveness? The short answer is yes.

There is a close relationship between the GCI and the standard measure of economic output (gross domestic product per capita), as the graph above shows. The statistical correlation between the two is considerable (.84). The GCI is also closely associated with the Global Competitiveness Index—which includes factors associated with economic output, innovation, efficiency, and business climate among others—developed by Harvard professor Michael Porter for the World Economic Forum. The correlation between the two is substantial (.79) as well.

Joseph Schumpeter long ago showed how innovation and entrepreneurship come together to set in motion the “creative destruction” that drives economies forward. Are more creative economies also more entrepreneurial? Again, it appears that they are. The GCI is also closely associated with a recent Global Entrepreneurship Index, which covers 54 nations worldwide. The index shows the wide disparity in entrepreneurial activity across the nations of the world. Canada, Israel, and the United States have the highest levels of entrepreneurial activity, while Denmark, Finland, France, Germany, and Japan have the lowest. The correlation between the GCI and the Global Entrepreneurship Index is considerable (.81).

Economic competitiveness is one thing, but what about broader concerns for happiness and well-being? To get at this, we examined the connection between the GCI and a comprehensive measure of happiness and life-satisfaction collected by the Gallup Organization’s World Poll (see the scattergraph below).

The two are closely related. The GCI is closely associated with life satisfaction (with a correlation of .74). The United States has a level of life satisfaction (7.3) that is roughly in line with its GCI score (.911). The countries above the line—Denmark, Finland, the Netherlands, Ireland, Switzerland, New Zealand and Canada—have higher levels of life satisfaction than their GCI scores would predict. The countries below the line—Singapore, the United Kingdom, Taiwan, Hong Kong and Korea—have lower levels of life satisfaction than their GCI scores would predict.

Many argue that the shift to a knowledge-intensive creative economy exacerbates levels of inequality, as once high-paying, family supporting manufacturing jobs inevitably decline and the labor market splits into higher-pay, higher-skill knowledge and professional jobs on the one hand and lower-pay, lower-skill service jobs on the other. There is clear evidence that this is happening in the U.S.: the average after-tax incomes for the top one percent of American households rose by 281 percent between 1979 and 2007, compared to an increase of 25 percent for the middle fifth of households and 16 percent for the bottom fifth, according to the Congressional Budget Office’s analysis.

But is this the case everywhere? Do more innovative and creative economies necessarily lead to greater levels of economic inequality?

To get at this, we examined the relationship between the GCI and a standard measure of income inequality, the Gini Index. While it may come as a surprise to those familiar with the case of the United States, we find that the GCI is in fact systematically associated with lower levels of socio-economic inequality—and hence greater equality—across the nations of the world. The correlation between inequality and the GCI is actually negative ( -.43).

Take a look at the scatter-graph above, which plots the association between the Gini measure of income inequality and the GCI. It shows a noticeable split in countries above and below the fitted line. On the one side are countries like the U.S., U.K., Singapore, and to a lesser extent, Australia and New Zealand, where high levels of creativity, productivity and economic competitiveness go hand in hand with higher levels of inequality. But on the other side are a large number of countries—largely Scandinavian and Northern European nations along with Japan—where high levels of creativity combine with much lower low levels of inequality. There appear to be two distinctive paths for high creativity economic development. For every high-creativity, high-inequality nation there is a high-creativity, low-inequality counterpart. This is a lesson the Obama administration, the Congress and U.S. policy makers need to hear: It is possible to design an economic system that is innovative and competitive, but that causes far less severe socio-economic divides than we are experiencing today.

I’ve now looked at the standing of the United States and the nations of the world on various measures of innovation, creativity, talent, competitiveness and prosperity. The notion that America is in danger of being surpassed by China or the BRICs is clearly overwrought. The United States retains a commanding lead over China and the BRICs on technology and innovation. It also scores quite well on our broad overall measure of creativity and competitiveness, the Global Creativity Index, ranking behind only Sweden. The global reality fits much better with Fareed Zakaria’s notion that the U.S. will remain the world’s most dominant power but alongside the “rise of the rest.” America’s biggest threat comes from its lagging performance on developing its creative class. This is reflected in and magnified by its high level of inequality. Taken together, these two factors underpin the deepening cultural and political divide which in turn shapes its political dysfunction and gridlock.

It’s time to reframe the dialogue over America’s economic future. Our analysis has identified the key factors that shape the competitiveness, happiness, well-being and broad prosperity of nations. Countries with greater levels of creativity (measured on the GCI) have higher levels of economic output, entrepreneurship, and overall economic competitiveness. More creative nations also have higher levels of human development, life satisfaction, and happiness. And perhaps most importantly, highly creative nations are less likely on balance to suffer from the deep class divides that beset the U.S. and U.K. The Scandinavian and Northern European countries as well as Japan combine high levels of innovation and creativity with much lower levels of inequality. This is in line with the views of Ronald Inglehart, who has identified a new model of economic, social, and political development combining high levels of economic performance with cultural values that favor secularism and self-expression, and a post-materialist politics concerned less with narrow interests and more with public goods.

A high-road path to prosperity is not only possible, it’s already working in some of the world’s most advanced, competitive and prosperous nations. Economic growth increasingly turns on the full development of each and every single human being. Real sustainable economic prosperity can and must benefit the many, not just the few.

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