A. Michael Spence on how governance improves countries' well-being

For decades, GDP was the measure of all things. Government leaders relied heavily on GDP growth—or the lack thereof—as a barometer of their policies' success. But over the past several years, measures such as well-being (essentially, the quality of life in a given country) have taken on increasing importance. Among the most vocal supporters of that broader view is A. Michael Spence, Nobel laureate and professor of economics at the Stern School of Business at New York University.

As chairman of the Commission on Growth and Development from 2006 to 2010, Spence helped lead an effort to understand which policies and strategies drive rapid and sustained economic growth and poverty reduction. This effort was based on the view that rising prosperity and expanding economic opportunity create the opportunity to address difficult challenges such as environmental degradation, poverty, and the wide disparity in living standards within and across countries.

Source: Australian National Audit Office

Spence's work underscores one of his core beliefs, that governance and smart policy making play a critical role in raising levels of well-being. In 2001, he was the winner—along with economists George A. Akerlof and Joseph E. Stiglitz—of the Nobel Memorial Prize in Economic Sciences for work in the area of asymmetric information. Recently, Spence and BCG senior partner Douglas Beal met to discuss the increasing attention being paid worldwide to well-being, the critical role of governance in raising living standards, and what government leaders can do to maximize the impact of their policies. Edited excerpts of their conversation follow.

Many governments have begun to think beyond GDP as a measure of development and growth. Obviously, measuring and understanding [broader factors such as well-being] is a first step, but how do governments build well-being into national strategies?

As you said, the first thing to do is to decide what matters in the context of your own society. Then you try to measure it and then you look at whether you're making progress on the things that you think are important. At that point, there's an element of creativity. You look for ways to move the needle on the ones that matter.

That all sounds pretty straightforward. But I think what's different is that in the past we have not had a set of measures that were more or less agreed upon—until the work that you and your colleagues did. The fallback position has been to pay sporadic attention to a few items and a lot of attention to growth and unemployment.

Our study shows that the single biggest factor that distinguishes the countries that do the best in terms of overall well-being from the rest of the world is the quality of governance. You've done a lot of work on the linkage between governance and economic growth. Do you want to talk about that?

There's a reason economic growth gets a lot of focus for early-stage developing countries. That is because it's a necessary condition for making progress on a lot of other things. It deserves not to be the only metric, for sure. But it certainly deserves a lot of attention and gets it. Governance is probably the single most important input to that.

Some people think there are economic traps—that you can be so poor that even with good policies there's no way to invest your way out of [that position]. I think the traps are more political-economic. You get into a situation where you can't bring people together around the fairly draconian sacrifices that have to be made to jump-start this process [of making economic progress]. And that's why governance is so important.

Sometimes leaders have really good ideas that fail to then achieve impact to the public. Sometimes this is due to short-term thinking or inaction. How do leaders overcome this, and how do they translate their ideas into impact?

I think what leaders do that is creative is they find a set of things that bring people together. They somehow suppress [the tendency for] contentious disagreement and bring out [the unity around] shared values that then can be coalesced around a vision. And that vision can then be turned into a game plan or strategy.

This may be a little optimistic, but one of the shared values that I think people have is that almost everybody wants their children and grandchildren to have at least the same opportunities, if not greater ones, that they have. And they are prepared to make extraordinary sacrifices in order to sustain a plausible path that leads in that direction. I think leaders take advantage of that and pull people together around things like that.

In light of the Paris agreement on climate change and the uncertain economic environment globally today, how do you view the tension between environmental progress and economic growth?

I'm inclined, based on recent work, to believe that the trade-offs are less severe than we might have thought. That if done smartly—and again, exercising some creativity—moving on to a more energy efficient, lower-carbon path can be accomplished in a way that doesn't really damage growth.

There have been a lot of studies done by the World Bank and the IMF that demonstrate a correlation between financial inclusion and economic growth. But what about the impact of financial inclusion on other social factors, like income equality, civil society, and governance? Do you see a linkage between financial inclusion and those factors? And if so, where do those linkages exist?

I would say the linkage between financial inclusion and things like economic opportunity, rising incomes, the ability to invest [and so on] is stronger than the [link between financial inclusion] and growth. I'm not saying that financial inclusion doesn't have a positive impact on growth, but I think its initial, large impact is on things like employment or creating businesses.

There are other things that go along with [financial inclusion], things such as having an identity, being able to legally own property and borrow with the property as collateral. The absence of those things, including access to a bank account and the ability to borrow, are elements of noninclusiveness. It's almost as if, in some countries and societies, there are a bunch of people who can't join the modern economy because they don't have the most fundamental tools.

You're spending a lot of your time now looking at overall well-being, alternative measures to growth, and [the issue of how growth can be redefined]. What do you hope is the future of this topic, and in what direction do you think it will go?

What I'd like to see, kind of in stages, is a fairly broad pattern of generating data and producing it regularly, annually at least, a kind of report card. There are subjects on the report card. In the business world they call it a dashboard. I think you get a lot of the benefits by having good data, regular reporting on the dashboard and, as you've said many times, the setting of government priorities [based on that]. I'd like to see that happen over the next few years. I think it would be terrific.

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