Experimenting with a New "Welfare Index"

No.97
December 2000
Research Fellow Naoki Nagashima
Senior Associate Seiji Shindo

1. As a base for discussing government policies, the evaluation and perspective of changes in economic and social welfare are indispensable. For this purpose, it is necessary to develop a system to quantify welfare. Nevertheless, it is undeniable that a "welfare index" based on national income statistics such as per capita GDP is insufficient. However, there are no other viable alternatives at the present time.
2. It is only natural that economic and social welfare is comprised of a plethora of elements. Looking at welfare from the perspective of economic theory, there are various approaches such as the "Opulence Approach", focusing on individuals' financial resources and income; the "Utility Approach", focusing on utility (satisfaction); the "Potential Capability Approach", which concentrates on the potential for the realization of utility and results. With these various theories as a foundation, this report selects 18 economic and social statistics that are deeply connected to welfare.
3. After performing factor analysis on these 18 statistical indicators, three factors were extracted to express welfare: potential capability, efficiency, and vitality (technological progress). It is appropriate to interpret the first factor, i.e. the factor with the highest contribution to the 18 indicators, as "potential capability", the variance of which is extracted mainly from income, assets, time, information, and safety. As a result, the explanation of social welfare in this paper is closest to the "Potential Capability Approach".
4. Plotting the above three factors as a "welfare index", Japan's welfare level peaked in 1990 and has been in decline since. As "efficiency" and "vitality" have decreased, combined with this stagnation is the slackening-off of "potential capability". Despite an almost 10 percent growth in per capita GDP since 1990, the movement in welfare reveals results that confirm the reality of Japan's "Lost Ten Years".
5. Welfare economics points to "efficiency" and "equitability" as the primary factors in evaluating welfare. However, the prototype "welfare index" used in this report lacks the "equitability" factor, and also does not consider the important factor of incentive compatibility, which is necessary for determining future "efficiency". Data limitations also exist, but these are issues for future study.

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