Improving Lives of People is the True Goal of Innovation 225.0

Innovation is broadly defined as bringing something new to market successfully.

Thus, by definition, successful innovation – be it from technology or from new ways of organizing work – have people as its subject and object.

In turn, successful innovation is the best and sustainable way to create value-added from total factor productivity (TFP) that creates wealth for an economy.

With wealth, equity and human development are the best measures of a society’s welfare as we note in the table below.

It is interesting to see how the Philippines measures up over the past 17 years. The table below sets a starting frame of reference for the new Aquino administration.

The table above shows a select list of most and least innovative countries with five metrics:

• GDP per capita at purchasing power parity (PPP);
• Gini coefficient;
• Human Development Index (HDI);
• Gross GDP (PPP); and
• GDP per capita growth rate.

A quick analysis. The first three metrics are varying measures of people’s well-being measured in terms of wealth, equity, and human development, respectively.

Regardless of the direction of causation, there is a clear correlation amongst the three metrics, i.e. the higher the per capita wealth, the higher the potential for equity and development.

In conclusion, it seems that an economic plan for the Philippines that prioritizes the growing per capita GDP, that in turn is often a direct function of innovation and the consequent accumulation of total factor productivity, will best benefit the people.

Definition of the Table Metrics. Below are short descriptions and significance of each metric (paraphrased mainly from Wikipedia).

Purchasing power parity. PPP translates the nominal Gross Domestic Product in terms of the price in a specific country for a common basket of goods. Non-tradable components of the local economy like agriculture produce, rent or services are valued at a similar international price for comparability in indexing welfare.

Gross Domestic Product. The GDP is a measure of a country’s overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. Usually, it is expressed in one currency like the US$ for comparability.

For Column 1, the per capita GDP shown is the gross GDP shown in Column IV divided by the country’s population. Likewise, I used per capita to make this wealth metrics comparable across the countries.

Column IV shows the United States as the biggest country in the list. China is just 61% of the US but with about four times the population, the net effect is China’s per capita GDP is only 14% of the US.

Column V shows the growth rate of per capita GDP from 1990 to 2007.

The Philippines has a per capita GDP of US$3,521 based 2009 IMF data, number 15 in this list.

The Philippines per capita GDP growth rate of 4.9% over the 17 years from 1990-2007 is in the bottom 1/3 of the list.

China with 12.4% growth has already overtaken the Philippines, Vietnam, which had been devastated by the war as of 1975 is set to over take the Philippines with a 13.3% average growth in the same period.

Gini coefficient. From Column II among the metrics, the Gini is commonly used as a measure of inequality of income or wealth.

The smaller the Gini coefficient, the more equal the distribution of wealth in a country. In a previous post on South Korea, I have concluded that the failure of communism came about because its lack of freedom – a requirement to enforce wealth redistribution – stifled innovation.

The Philippines Gini coefficient of 44.5 is very close to the United States and surprisingly of China, at 46.9, that has become an unequal society of late. As in a previous post, China is in a one-off transition to a capitalist economy under one-party guidance.

Developed democratic capitalist states like Denmark with Gini at a Scandinavian 24.7, the United Kingdom’s at 36.0 and Australia’s similar 35.2 indicate a level of equity in the economy while still allowing a high level of innovation.

Communist countries like Cuba and North Korea do not collect data on equity though the ideology advocates redistribution; they are also among the least innovative, and low GDP per capita, countries in the world.

Looking at other countries in the globe like Bolivia (60.1) and Niger (50.5), it seems that innovation also suffers with extreme inequality in traditional societies.

Human Development Index. From Column III among the metrics, the HDI from the United Nations is a comparative measure of life expectancy, literacy, education and standards of living for countries worldwide.

The HDI is used to measure the impact of economic policies on quality of life.

Like the Gini coefficient, the Human Development Index of the UN is also very highly correlated with the GDP per capita (PPP). The issue that we are not discussing here and now is causation, i.e. whether high GDP per capita improves equity and human development or the other way around.

Conclusion. I think a balanced and pragmatic approach that will work better than an ideological one starting from where the country is now in terms of GDP, equity and human development.

What is clear from a careful study of the five metrics is that we need to act now and be proactive in getting the Philippines move up in the table above.