Of the Nobel prize, inequality and health

The Nobel prize awarded to Angus Deaton draws attention to the fact that in addition to financial inequality there is an even greater asset to people’s well-being – health. How have health indicators improved in Estonia alongside economic development?

At the end of last week this year’s Nobel prize winner in economics was announced – Angus Deaton, a professor at Princeton University, It is inevitable that the current trends in economy and science impact the awarding process and Deaton’s research topics – poverty, inequality, development economics – have been getting attention for a long time already. A good example of the popularisation of the topic of inequality is the book “Capital in the Twenty-First Century” by Thomas Pikkety which was published in 2013 and regardless of its 700 pages of economic science has sold as well as if it were a romance novel. Deaton’s neutral perspective is regarded as his great strength in the way he addresses inequality – he does not try to defend one or another side in his work, but takes a sober and rational approach in analysing both the positive and negative consequences of economic development. As formulated by Deaton himself, inequality is often the result of progress – not everyone can get rich at the same time and enjoy the fruits of greater well-being.

It is likely that Deaton has not won many friends among the spokespeople for development aid. He has sparked a lot of controversy with his analyses of developmental aid provided globally, which he regards to often be doing more harm than good. According to Deaton the development of poor countries is not hindered due to a lack of funds, but rather weak states and bad governance. It is undisputed that monetary, but also other types of material aid often reach the people in power instead of the public in countries with a non-functional democracy and/or institutions, who then distribute and use it as they see fit. Monetary aid also motivates dishonest state heads to hold on to their positions in the future. Monetary aid from abroad does not motivate the states to improve their tax collection, and as it is not their own, but others’ money that is stolen, large protests are not to be seen.

In his major work published in the same year as Pikkety’s “Capital” and titled “The Great Escape: Health, Wealth, and the Origins of Inequality” Deaton focuses on the economic progress of countries and the escape from poverty, which on the other hand has brought about an increase of inequality. It is notable in Deaton’s approach that instead of only focusing on the financial side of things, he addresses inequality on a much wider scale, looking at health and a longer life expectancy. Indeed – what good comes from money when you die in your 50s or suffer from a grave illness? Inspired by Deaton, we could ask how Estonia has converged with Europe in other factors determining the quality of human life besides the financial side of it.

There are probably few who doubt that Estonia is lagging somewhat behind the Western countries economically. Fast development did not only characterise the 90s, but also the last decade. While in 2004 GDP adjusted to purchasing power was 55% of the European Union average, last year it already reached 73%. While it is still a long way from our Northern neighbours, Finland and Sweden, exceeding the European Union average by 10% and 24% respectively, Finland actually even had a decline in the living standard when compared to the average in the course of ten years.

As for GDP, the country has increased its wealth, but what about poverty? An important indicator of poverty is the share of severely materially deprived people in the society among the total population. In its essence the dramatic-sounding indicator shows how many people have to make do without the conveniences most people are used to. By definition they are people who cannot afford at least four of the following: to pay rent or utility bills, keep their home sufficiently heated, handle unexpected expenses, eat meat or fish every other day, spend a week-long vacation away from home, a car, a television, a washing machine, a phone. The share of such people declined very fast during the boom years in Estonia, but increased sharply to nearly 10% between 2010–2012. Rapid growth of incomes and decrease of unemployment has significantly decreased the number of people in financial difficulties to 6% in 2014. It is also notable that at least in the recent 10 years, the number of people in poverty has remained below the European Union average in almost all of the years. Naturally, the share of severely materially deprived people in Finland and Sweden, the wealthy Nordic countries, is smaller at 2–3 percent.

When it comes to the convergence of Deaton’s health indicators, the infant mortality rate, at a shamefully high level as late as in the beginning of the 2000s, has decreased to the level of the Nordic countries and even lower than the respective figure for Sweden. There is also a significant improvement in Estonians’ average life expectancy. In 1990 the average person in Estonia died at 69 and a Swedish person at 78. While today the average life expectancy in Estonia is significantly lower than in the Nordic countries, the gap has been narrowing: in 2013, the average life expectancy in Sweden was 82 years, in Finland 81 years and in Estonia 76 years. Another indicator of health, the convergence of which to the Nordic countries Estonia needs to strive for, is healthy life years. While in Sweden a man has 71 healthy life years to look forward to, in Estonia the figure is only 51. Improving this indicator is important not only on the individual level, but it would also have a significant impact on the Estonian job market as well as social and healthcare costs.

Mihkel Nestor
Economic Analyst, SEB
 

Evelin Allas
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