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“Beyond GDP”: The sustainability indicators debate (GDP per Capita (What…
“Beyond GDP”: The sustainability indicators debate
Alternatives to GDP
HDI
1990: First Human Development Report Index - based on Sen's Capabilities Approach
Dimension 1: Health: A long healthy life (Life expectancy at birth)
Dimension 2: Education: Knowledge (Actual years of schooling of average adult, likely years of schooling of the average child)
Dimension 3: Income: A decent standard of living (adjusted GDP per capita)
HDI 2014: Only makes sense in
relative terms
e.g:
Comparisons with other countries
How you’re doing compared to your past or compared to the UN benchmarks
The top 5 countries are the same as when using GDP but there are differences, but there are other differences:
E.g. New Zealand is around 30th in terms of GDP, but in the top 10 for HDI rankings
Qatar 1st in income index but 31st in HDI due to poor education outcomes
Classification:
0-0.5: Low HD
0.5-0.8: Medium HD
0.8-0.9: High HD
0.9-1.0: Very High HD
Top 5:
Norway
Australia
Switzerland
Netherlands
United States
Bottom 5:
Sierra Leone
Chad
Central African Republic
Congo
Niger
Subjective Wellbeing Tests
Individuals are asked to state their wellbeing in surveys
Personal subjective perspective (so alternative to objective approaches)
Responses can be aggregated across regions &/ or a country
UK Example: Office for National Statistics (ONS, 2011):
Questions about life-evaluations are based on the (0 to 10) ladder-of-life scale
Overall, how satisfied are you with your life nowadays?
We can see that Latin American countries have relatively low incomes but high happiness, whereas ex-soviet countries don’t(Inglehart et al. (2008)
Suggests that GDP doesn't tell us much about happiness on its own
Clark et al. (2008) show that in the US, GDP per capita has been steadily rising, whereas average happiness levels have stagnated
Their explanation for this was that each person has a 'set point' of happiness which they return to after a short-term boost in happiness following a change in income
GDP per Capita
What it tells us
The long-standing criticism within academic circles is that GDP doesn’t tell us about the broad wellbeing of people in a country
We therefore need to look at alternative measures of wellbeing
More novel critique (came about after Brundtland Report 1987) is that even if GDP tells us about development, it doesn’t tell us anything about the future path of development
We therefore need to look at alternative measures that assess what the future path will be like
GDP aims to tell us an invidivuals wellbeing by assuming that higher income = higher wellbeing
We know there are issues with this - for example, a rich family may have more stress from huge credit card bills, or from sitting in traffic on a long commute into the centre of the city - another issue is that there's no indication of the carbon footprint of rich compared to poor
It has strong correlations with socioeconomic factors such as life expectancy, quality of health and education, poverty, social institutions etc., hence considered as worthy of use
What it includes and excludes
GDP = C + I + G + NX
It's a measure of all the money spend on consumption and all the money saved
Consumption is an incomplete measure of our wellbeing
The savings element is where we can look at sustainability - it's an observation of wealth and what we expect the future to look like
It doesn't, however, include any information about how assets are being used up to fuel current consumption - e.g. doesn't tell us if we're over-farming to the extent where the level of consumption won't be possible in 20 years time, for example
The founder of GDP Simon Kuznets said himself that 'the welfare of a nation can scarcely be inferred from a measurement of national income'
Excluded
Domestic labour (it’s a productive activity but not counted)
Childcare (if you give up work to look after children, this is a valuable, productive activity according to GDP, this has no value)
Volunteering (not paid and therefore not in GDP)
Leisure time (quality of the time is not valued)
Services from natural capital (sometimes they’re in GDP but they’re hidden within the framework e.g. pollination services – output of crops is higher due to bee pollination) problematic for decision makers because it implies that bees don’t matter for farming
Included
Wellbeing-reducing activities (car accidents, smoking, divorces – e.g. puts a lot of psychological costs on couples and households but from the point of view of the national accounts, it increases GDP – money spent on solicitors or two separate households)
In some cases, losing natural capital services is counted as a benefit e.g. Oil Spill – increasing GDP as cleaning up pollution involved a lot of economic activity (unless it was all volunteer-based)
History/Why it's still in use
History:
National accounting (leading to GDP statistics) has roots in the Domesday Book (1085-86) and then the 18th century desire to calculate the wealth of a country
William the Conquerer wanted to know how much money they could take in the form of taxation
Saw use of national accounting in the 1930s and 1940s as a result of macroeconomic policy priorities
It was the era of the Great Depression – they needed to intervene into the economy – they therefore needed to measure the economy
Second World War: Economies needed national accounting framework to thing about the economy in terms of mobilising war resources
Progress on developing framework proceeded up to 1953 when the ‘SNA’ was developed (System of National Accounts)
This was an international standard of how we should all measure GDP
Why it's still in use:
- Technical Reasons
GDP relatively well-established statistical measure
Difficulty of assigning money values to some desired adjustments
We want to remove uncertainty in measurements, therefore we stick with what we know rather than trying something uncertain
- Economic Reasons
Increasing GDP important esp. when currently relatively low-income
Fall in GDP cause real problems for people’s lives at whatever income level
If GDP goes down, people lose their jobs therefore it does matter to people in their economic lives
- Political Factors
GDP main measure of economic and political success?
If GDP is decreasing, they may not get elected next time therefore there’s a drive to improve it
Can it be corrected?
Idea: Correct GDP for a
range of further costs and benefits
of economic development
Nordhaus and Tobin (1972):
Measure of Economic Welfare
(MEW)
MEW took national output as a starting point, but adjusted it to include an assessment of the value of leisure time and the amount of unpaid work in an economy, hence increasing the welfare value of GDP.
They also included the value of the environment damage caused by industrial production and consumption, which reduced the welfare value of GDP. MEW can be seen as the forerunner of later attempts to create a sophisticated index of sustainable development
Daly and Cobb (1989):
Index of Sustainable Economic Welfare
(ISEW)
= personal consumption + public non-defensive expenditures - private defensive expenditures + capital formation + services from domestic labour - costs of environmental degradation - depreciation of natural capital
Balanced by such factors as income distribution and cost associated with pollution and other unsustainable costs
Argument
: Why try and adapt it when you can use completely alternative indicators e.g. HDI or subjective Wellbeing Tests
Issues:
Economic Issue 1: ‘No one would look just at a firm's revenues to assess how well it was doing. Far more relevant is the balance sheet, which shows assets and liabilities. That is also true for a country". (Stiglitz et al. 2009)
I.e. you wouldn't say a firm with massive revenue and massive debt was doing as well as a firm with massive revenue and small debts
Therefore, we shouldn't measure how well a country is doing without knowing about its 'debts' i.e. losses within natural, human or social capital
Alternatives to GDP that Account for Wealth/ Wealth Accounting (i.e. accounting for the Future)
Examples
Namibia versus Botswana (Lange, 2007):
- Botswana:
Steadily increasing GDP
Diamond mining accounts for 1/3 of GDP
Active re-investment of mineral revenues
Reinvested into things like education etc.
When we then look at per capita WEALTH, Botswana's rises even faster
Namibia:
Stagnent GDP
Mining/ fishing account for >1/5 of GDP
Little reinvestment or control over marine fisheries
Per Capita Wealth shows Namibia is actually decreasing
This declining wealth of the country suggests it's unlikely that we'll see future GDP growth
Inclusive Wealth index
Inclusive Wealth Index was
published in 2012 and 2014 by UNEP
and UNU-IHDP:
Allows us to see how long we can maintain our current consumption and well being
Calculates the value of different forms of capital (capital approach to sustainability):
Produced capital
Stock of machines & buildings
Human capital
Stock of education across population
Natural capital
Forests
Fisheries
Fossil fuels
Mineral resources
Agricultural land
Barbier (2015)
Human capital dominates in all countries, especially in high (and upper middle) income countries
In upper middle income countries natural capital and produced capital are comparable in size
As wealth decreases, reliance on natural capital tends to increase, whilst reliance on produced capital decreases
NB: the estimates of natural capital are the
traditional measures of natural capital – doesn’t include ecosystem function importance etc.
therefore, in reality, we’d expect natural capital to be a larger proportion for all countries
Wealth and Sustainability
Weak Sustainability: Genuine Savings
Weak sustainability entails ensuring the total stock levels remain the same, but doesn't care whether the categories of wealth have relative alterations
Therefore, we can see a sustainable country as one that has a total change in wealth not less than zero
To measure, we use
Adjusted Net Savings or Genuine Savings
Measures how much a country is saving minus how much its assets are depreciating
(savings) - (asset depreciation)
This then gives the difference in wealth between two time periods
Example: Sub-Saharan Africa, 2008 (Hamilton and Naikel, 2014):
Start with just Gross Savings (around 16% of GNI), then factor in depreciation of assets (decline to around 7.5%), then factor in the benefit of the expenditure that's gone to education (10%), then account for natural resource (plummets to -6%) then finally, account for pollution damages --> end on a genuine savings rate of -7%
Whilst remembering this is only a 1 year snapshot, it shows that the people here are living beyond their means, i.e. unsustainably
Mostly thanks to resource depletion, their wealth is decreasing
Calculation
:
GNS
(which is a residual variable, i.e. what's left of GDP after private and public consumption) -
Depreciation of produced capital
= net savings
Net savings
+
investment into human capital
(i.e. spending on education) -
Natural Capital
(depletion of non-renewables, net deforestation, damages from CO2 and particulate matter) =
Genuine Savings (aka ANS)
Strong Sustainability: The Ecological Footprint
Background
Formulated by Wackernagel and Rees (1994)
Wider adoption of EF idea through:
Global Footprint Network
WWF publishes indicator on Living Planet Report
UNDP (2011) Human Development Report
Essentially asking how many planets are necessary to sustain a population, given its technology and lifestyle
The world average shows that we need an extra 0.4 of a planet to sustain current patterns - massively underestimates the future though - if people in developing countries are going to live like people in the US, we're going to need 4 extra planets
The Carbon Component of EF
Idea: We have a global carbon budget if we're to meet climate targets - allows us to see who's using more than their fair share
Measure the amount of fossil fuel energy use in a year per person (in e.g. UK)
Calculate the CO2 emissions caused by this use
Estimate land area required to plant trees to sequester (“soak up”) this CO2
WWF (2014) produced a graph which showed if we average out usable land, we have approximately 1.7ha per person - this is complicated by factors such as what usable land is, how much land must be left to other animals as habitats
Critique
Genuine Savings:
It's a one sided indicator in that whilst a negative GS definitely suggests unsustainable behaviour, a positive one doesn't necessarily suggest sustainable behaviour
If you find a positive GS like Botswana, we might think this is a good thing, but we can’t make a prediction that the economy is sustainable – it’s based on Weak Sustainability – what about if the
value of the resources change
or if you’re
running out of the resource you rely on
It also has empirical challenges in terms of getting the data needed to make the calculations and also to attaching monetary values to non-traditional commodities
Ecological Footprint:
Does it offer useful policy information or is it more just a way to codify the sense that things are going wrong
Misses out things such as water pollution, air pollution, biodiversity loss, yet includes things like carbon stored in forests - why is this the case? Subjectivity issues
Does it point towards a policy decision of anti-globalisation and self-sufficiency?
What this critique shows is that it's perhaps best not to rely on any one indicator, and instead use an amalgamation of multiple - taking their best points
The Sustainability Gap index
How to go Beyond GDP
Single Indicators or Dashboards
The analogy used to explain the dashboard is that it's not useful to mash all an aeroplane's dials and monitors into a single figure - but the criticism is that it's potentially too complicated - E.g. the UK Sustainable Development Indicators has 12 different targets with more sub targets and indicators
Example of Single Indicators
The Canadian Index of Wellbeing
8 different domains of wellbeing incorporated
E.g. community vitality, education, environment, healthy populations, leisure and culture
Acts as a companion measure to GDP - can see in Canada, from 1994 to 2008, GDP increased by 31% but CIW only by 11%
Examining wellbeing from a multidimensional perspective, the CIW recognises that policy decisions and programmes can affect the experiences, perceptions, and opportunities beyond the specific area for which they were intended
For instance, efforts to enhance the physical health of a population can decrease the necessity for health care treatment, which, in turn, frees up additional resources to fund education - something that sounds obvious but is often ignored in places like the UK (Public Health Agency of Canada, 2012)
Example of Dashboards
The indices underpinning the SDGs are probably the best example of where a dashboard approach is being used
Background to the ongoing debate:
Has been an on-going debate about what the best way to move past GDP is since the end of the 1980s
Bhutan introduced their Gross National Happiness as an alternative
Note the elected president in
2013
has moved away from the use of GNH arguing that it is potentially detracting from provision of basic services
Although he still highlights his aims are to remove obstacles to happiness
OECD research: Istanbul Declaration (
2007
): ‘We affirm our commitment to measuring and fostering the progress of societies’
World Bank: (Changing) Wealth of Nations work
United Nations: System of Environmental-Economic Accounting
Called UNSEEA; The SEEA does not propose any single headline indicator. Rather it is a multi-purpose system that generates a wide range of statistics and indicators with many different potential analytical applications
2008
: Commission on the measurement of economic performance and social progress (Stiglitz Commission) -
2012
: Rio +20 – commitment to measuring sustainable development -
2015
: SDGs – will require (lots and lots of) new indicators
Class
Individual and Welfare (flows/returns):
Individual wellbeing (happiness, fulfilment)
Income, subjective wellbeing and capabilities (i.e. 'objective lists')
Individual and Sustainability (stocks/assets):
Individual assets (physical, human and social capital)
Changes in assets
Society and Welfare (flows/returns):
Societal welfare/progress
GDP, Genuine Progress Indicator, HDI
Society and Sustainability (stocks/assets):
Aggregate assets (physical, human and social capital)
Genuine savings and Ecological Footprinting
Structure:
There are measures that determine how individuals are doing and how society is doing
Within this, there are measures of welfare (i.e. the flows and returns, i.e. how much a society or individual has NOW), and there are measures of sustainability (i.e. how much, in terms of stocks and assets, an individual or a society is going to have in the future)
Pros of Composite Indicators
(i.e. a single number built up from lots of numbers e.g. HDI)
Easy to understand (single number)
Can plot over time to show trends
Can compare across countries and across time
It has political economy: easier to communicate to press and public
Allows for multi-dimensional rankings as it's based on more than one index
Cons
Weighting of different elements is arbitrary - who decides what gets the most weighting?
In some cases, the multidimensional perspective is lost (e.g. GDP)
Monetisation/basing progress and wellbeing on monetary values is problematic as some things are not commodified e.g. the environment
Measurers of flow tell us little about sustainability - except a few like Genuine Savings which tell us about stock levels
Pros of Dashboard Approaches
No aggregation needed and no need to decide on weights (although policy making will still have to do this - potentially just more time-consuming?)
Avoids some of the issues of monetisation of measures
Captures a multidimensional approach to wellbeing
Can capture strong sustainability e.g. Ecological Footprinting
Cons
What do you include/exclude?
Harder to compare all the measures across time and space
Harder to communicate results to a wider audience
Does the overall message get lost? Can't see the forest for the trees
Stiglitz Recommendations:
One indicator, such as genuine savings, capturing “economic” sustainability, aggregating together those forms of capital that are commonly monetised
A set of well-chosen physical indicators that are, currently, difficult to monetize and thus instead measured in physical terms
Have a coherent and well-sized dashboard, and monetise only variables for which we have reliable estimates - e.g. sometimes, it's best to use hectares of land needed for the functioning of an ecosystem, for example