What are the best economic models in the world? What are the worst?
In order to answer these questions, I compiled economic data from over 150 nations using the World Bank's Open Data Services. I've compared nations on several different metrics over longer-time frames. The ultimate goal is to use the data to understand what economic policies are more likely to lead to higher economic growth.
This article focuses on the best "Tier 1 Economies" since 1980. "Tier 1 Economies" for this exercise are higher-income developed nations, such as the United States, Germany (NYSEARCA:EWG), Spain (NYSEARCA:EWP), Japan (NYSEARCA:EWJ), and South Korea (NYSEARCA:EWY).
What is the "Best Economic Model"?
Before we go further, we must first define "best economic model". The "best economic model" is one that "increases the wealth of the average person at the most rapid pace." Not only would an ideal economic model grow citizens' wealth at a great pace, but it would also raise the standard of living for immigrants.
It's simple enough to define. The question of measurement is a bit trickier. I decided to focus on three metrics:
(1) GDP per capita growth (PPP),
(2) GDP growth, and
(3) Population growth
Since the goal is to find the economy that increases the wealth for the average person most rapidly, GDP per capita would seem like an ideal choice. I decided to use GDP per capita, based on purchasing power parity ["PPP"], using constant 2005 international Dollars. Unfortunately, there is one particularly notable flaw with GDP per capita: it can be distorted heavily by net migration.
As an example, let's say that a nation has 100 people with $100,000 per capita income. Due to enormous opportunities, 600 people immigrate into the nation over the next decade, with an average income of $5,000. It's likely that GDP per capita would fall significantly in this scenario, even if the average annualized wealth growth of everyone in the nation was sky-high at 5%. This is because the lower-income and lower-skilled immigrants would skew the data downwards. Indeed, the situations in the United Arab Emirates and Qatar are very analogous to this example.
For this reason, GDP per capita alone is not a sufficient measure of wealth creation. "Net migration" would be an ideal figure to examine alongside GDP per capita, but unfortunately, it's difficult to find a comprehensive data set with these figures. Instead, I decided to use population growth, which should at least be a reasonable proxy, so long as we're comparing "Tier 1 Economies" with one another.
I also decided to look at real GDP growth, since this would showcase why net migration might be high. For GDP, I looked particularly at GDP in constant 2000 US Dollars.
Defining Tier 1 Economies
Before jumping into the results, I'll define the Tier 1 Economies. I segregated economies into five different tiers, with Tier 1 being the highest level. The varying tiers are based on GDP per capita levels in all the nations.
These divisions might be somewhat arbitrary, but no matter how I divided them that would be the case. Portugal seemed like a reasonable cut-off point for the 1st Tier, with the Slovak Republic, Poland, and Estonia being the highest-wealth nations in the 2nd Tier.
Below is a list of all the "Tier 1 Economies" by my definition, as well as their GDP per capita levels in 1980 vs. 2011.
There were a few more nations that made my "Tier 1" definition, but I cut out of the results either due to insufficient data, size, or longevity. Qatar and Slovenia are the most notable omissions.
Also note that a few of these nations clearly would not have made a "Tier 1" list in 1980. South Korea, Oman, and Ireland (NYSE:IRL) all stand out as nations that would have likely been "Tier 2" in 1980, but due to rapid per capita income growth, are now amongst the top nations.
Now on to the results!
The chart below summarizes all thirty "Tier 1 Economies" based on the three metrics. I ordered them by annualized GDP per capita growth, but you can see the rankings for annualized GDP and population growth, as well.
You can immediately see how some of the nations with the most population growth (and likely the highest net migration) suffer in the GDP per capita rankings. The United Arab Emirates is particularly impacted, with -3.4% per capita growth. However, the U.A.E. experienced 6.8% annualized population growth, an astronomical rate over 3 decades! It also managed to sustain a 3.2% real GDP growth rate.
Otherwise, the GDP per capita rankings look pretty sound, so long as one makes mental note of distorting factors. In order to come up with a single way to rank all of these economies, I decided to create a scoring system that utilizes all these factors.
This is a very simple ranking system. I merely allocated 1/3 to each of the categories above:
1/3 to GDP per Capita
1/3 to Real GDP
1/3 to Population growth
I added together the rankings for all three categories and the nations with the lowest score are ranked the highest. For instance, Singapore (NYSEARCA:EWS) ranks 2nd in GDP per capita growth, 1st in GDP growth, and 4th in population growth. Add 2 + 1 + 4, to get a score of 7, which is the lowest score overall, so it is ranked #1.
Obviously, this is a very simplistic methodology, but the results actually seem reasonably accurate based on what we've observed.
Using these criteria, Singapore ranks as the #1 Tier 1 Economy since 1980, with Oman and South Korea taking 2nd and 3rd places. The bottom scorers are highlighted by Italy, Greece, and Denmark.
There are a few economies that might be arguably out of place. The UAE is certainly ranked too low at #11. Remember, the UAE started out at around a $123,000 GDP per capita figure in 1980. Hence, it was going to be almost impossible to improve that figure while its population increased nearly eight-fold. It's likely that UAE would, in reality, be closer to the top six or seven economies in the grouping. With the exception of some of the high population growth nations, (U.A.E., Saudi Arabia, and Israel), however, I'm very satisfied with these rankings.
It's worthwhile to note that the bottom 15 is filled with European nations (twelve of them to be exact!) In Europe, only Luxembourg, Ireland, Norway, Spain, and Finland managed to make the top 15.
The Best and Worst Tier 1 Economies
Based on this data, I would peg Singapore, South Korea, Oman, Hong Kong (NYSEARCA:EWH), the UAE, and Ireland as the most successful Tier 1 economies of the past three decades. Ireland is particularly intriguing because it's been hampered by the Eurozone Crisis over the past few years, and yet still has some of the highest growth in the overall 31-year timeframe.
Italy is by far the worst economy since 1980. Indeed, things have only gotten worse over time. Italy's per capita income growth was -0.2% for the period between 2000 - 2011, and the Eurozone Crisis will likely harm it further moving forward. Greece is arguably the second worst on the list, and few people would take much issue with that.
Germany, France (NYSEARCA:EWQ), Denmark, Japan, Belgium, and Switzerland (NYSEARCA:EWL) might duke it out for the next worst after Italy and Greece. Japan's inclusion might surprise a few people, but per capita income growth has stagnated since 1990, averaging a paltry 0.6% rate of growth. Switzerland is probably the next most surprising entry of that bunch, and I have no explanation of why it is ranked so low here. However, there aren't any distorting factors with Switzerland (such as there were with the U.A.E.) that might throw it off, so this low ranking seems legit.
Similarities with Frasier Institute Rankings
It's worth noting that many of the top ranked economies score well on the Frasier Institute's Economic Freedom of the World rankings. However, the correlations aren't perfect. For instance, South Korea is ranked #37 by the Frasier Institute, while Germany is ranked #31, and Switzerland is ranked #4. This goes a little bit against our data, which shows South Korea as #3 and Switzerland at #26 amongst Tier 1 economies.
On the other hand, Singapore, Hong Kong, Australia (NYSEARCA:EWA), the UAE, and Ireland are all ranked in the top 12 by Frasier and also scored well in my model. Meanwhile, our bottom scorer, Italy, was ranked all the way down at #83 by Frasier, putting it in more similar company to many "emerging economies" such as Mexico, Indonesia, Kenya, and Turkey. This suggests that the Frasier Institute rankings are not a bad source to understand which economies may be poised for higher growth
Nations that are implementing policies with similarities to Singapore, the UAE, Oman, Ireland, and Hong Kong may be able to improve growth in the future. What are the common characteristics between these nations? Tax policy immediately comes to mind as all of these nations are low-tax compared to most other developed nations, but there are probably other similarities as well.
Likewise, one might want to avoid nations with policies similar to the worst nations on the list, such as Italy, Greece, and Japan. Once again, tax policy seems to be a similar theme with many of the bottom 15 nations ranking high on the "world's highest effective tax rate" list.
The United States' performance was near the middle of the pack, but tax and entitlement program policies over the past decade have made it more similar to bottom-rung performers such as France and Germany. Digging deeper into the data, US GDP and GDP per capita have been on a long-term downtrend since the mid-1960s. This may be a sign that US growth will slow in the upcoming decades, without significant reforms.