Alternative Economic Indicators

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Information about Alternative Economic Indicators
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Published on January 23, 2009

Author: rym87

Source: slideshare.net

Alternative Economic Indicators: Application and Potential Effects Carlos Rymer Gregg Hao Zhuang Joey Kubilay Kavak

Gross Domestic Product (GDP) GDP: International standard measure of a nation’s economic status. Problems with GDP: Flaws in calculating cross-border trading Exclusion of the black market Exclusion of unpaid social and ecosystem services Inclusion of work that produces no net benefit or that results from repairing harm It is exclusive of social and natural capital

GDP: International standard measure of a nation’s economic status.

Problems with GDP:

Flaws in calculating cross-border trading

Exclusion of the black market

Exclusion of unpaid social and ecosystem services

Inclusion of work that produces no net benefit or that results from repairing harm

It is exclusive of social and natural capital

Discussion about Correcting Measure A ppropriate economic growth should represent high economic, environmental, and social performance ; T he economy must be measured in terms of quantity and quali ty Gordon Brown: “ Quality of growth matters; not just quantity ”

A ppropriate economic growth should represent high economic, environmental, and social performance ;

T he economy must be measured in terms of quantity and quali ty

Gordon Brown: “ Quality of growth matters; not just quantity ”

Alternative Economic Indicators Index of Sustainable Economic Welfare (ISEW) , Daly and Cobb’s(1989) Genuine Progress Indicator or GPI (Redefining Progress, 1995) Sustainable Net Benefit Index or SNBI (Lawn and Sanders, 1999; Lawn, 2000) Human Development Index (HDI) Stock-based indicator called Genuine Savings (GS)

Index of Sustainable Economic Welfare (ISEW) , Daly and Cobb’s(1989)

Genuine Progress Indicator or GPI (Redefining Progress, 1995)

Sustainable Net Benefit Index or SNBI (Lawn and Sanders, 1999; Lawn, 2000)

Human Development Index (HDI)

Stock-based indicator called Genuine Savings (GS)

The Genuine Progress Indicator Uses the GDP framework, but makes important environmental and social distinctions. 51 indicators that measure economic, environmental, and social performance. Assesses: Income Distribution Housework, Volunteering, and Higher Education Crime Resource Depletion Pollution Long-Term Environmental Damage Changes in Leisure Time Defensive Expenditures Lifespan of Consumer Durables and Public Infrastructure Dependence on Foreign Assets

Uses the GDP framework, but makes important environmental and social distinctions.

51 indicators that measure economic, environmental, and social performance.

Assesses:

Income Distribution

Housework, Volunteering, and Higher Education

Crime

Resource Depletion

Pollution

Long-Term Environmental Damage

Changes in Leisure Time

Defensive Expenditures

Lifespan of Consumer Durables and Public Infrastructure

Dependence on Foreign Assets

Alberta’s GPI and Alternative Indicators In the last 40 years, GDP has increased by more than 400%. Albertan Government publishes Measuring Up , a report with 76 indicators of economic, environmental, and social performance. Measuring Up compares progress against goals, and is not as inclusive as the GPI. GPI calculated by The Pembina Institute.

In the last 40 years, GDP has increased by more than 400%.

Albertan Government publishes Measuring Up , a report with 76 indicators of economic, environmental, and social performance.

Measuring Up compares progress against goals, and is not as inclusive as the GPI.

GPI calculated by The Pembina Institute.

GDP v. GPI (Scale of 0-100)

Differences in Trend GPI higher than GDP for first two decades. GDP higher than GPI in last two decades. GDP had steady growth, while GPI had a slow decline. Noted increase in per capita income, but substantial loss of natural resources and human capital.

GPI higher than GDP for first two decades.

GDP higher than GPI in last two decades.

GDP had steady growth, while GPI had a slow decline.

Noted increase in per capita income, but substantial loss of natural resources and human capital.

What Can Adoption of Indicators Do? May prompt governments to: 1) Enact policies that reflect social and environmental considerations 2) Spend more heavily on human and natural capital 3) Begin valuing social and natural capital

May prompt governments to:

1) Enact policies that reflect social and environmental considerations

2) Spend more heavily on human and natural capital

3) Begin valuing social and natural capital

Conceptual Effects of GPI Adoption GPI adoption may: Lead to policies that reflect the real costs of social and natural capital Affect the market in such a way that encourages businesses to reduce negative environmental and social impacts while increasing economic output Change consumer behavior by providing incentives that reduce consumption, increase conservation, and promote good social values

GPI adoption may:

Lead to policies that reflect the real costs of social and natural capital

Affect the market in such a way that encourages businesses to reduce negative environmental and social impacts while increasing economic output

Change consumer behavior by providing incentives that reduce consumption, increase conservation, and promote good social values

Calculating the ISEW The two largest adjustments are: Depletion of natural resources: 20%-40% Long term environmental costs: 10%-35% Combined total of: 30%-75%

The two largest adjustments are:

Depletion of natural resources: 20%-40%

Long term environmental costs: 10%-35%

Combined total of: 30%-75%

Depletion of Non-Renewables Does not measure environmental impact of extraction; Measures the cost to future welfare (the cost of not having it). Depends of substitutability of resource

Does not measure environmental impact of extraction;

Measures the cost to future welfare (the cost of not having it).

Depends of substitutability of resource

Depletion of Non-Renewables Methods of Calculation: ‘ Replacement Cost’: (cost of using renewables X growth rate) $75 per barrel of oil X (1.03^(year-1980))

Methods of Calculation:

‘ Replacement Cost’:

(cost of using renewables X growth rate)

$75 per barrel of oil X (1.03^(year-1980))

Source: Neumayer, Eric “On the methodology of ISEW, GPI, and related measures” 2000 Ecological Economics 34 347-361

Source: Neumayer, Eric “On the methodology of ISEW, GPI, and related measures” 2000 Ecological Economics 34 347-361

Depletion of Non-Renewables Methods of Calculation: ‘ User Cost Method’: Cost of replacing asset with similar income stream in the future.

Methods of Calculation:

‘ User Cost Method’:

Cost of replacing asset with similar income stream in the future.

Source: Castaneda, Beatriz “An Index of sustainable economic welfare for Chile” 1999 Ecological Economics 28 231-244

Source: Castaneda, Beatriz “An Index of sustainable economic welfare for Chile” 1999 Ecological Economics 28 231-244

Long-Term Environmental Damage Mostly considers the cost of climate change Based arbitrarily on percentage of fossil fuel usage Close to 1995 IPCC estimates Includes accumulation factor (year C= year A + year B + year C)

Mostly considers the cost of climate change

Based arbitrarily on percentage of fossil fuel usage

Close to 1995 IPCC estimates

Includes accumulation factor (year C= year A + year B + year C)

Source: Neumayer, Eric “On the methodology of ISEW, GPI, and related measures” 2000 Ecological Economics 34 347-361

Source: Neumayer, Eric “On the methodology of ISEW, GPI, and related measures” 2000 Ecological Economics 34 347-361

Threshold Hypothesis?

Human Development Index (HDI) History Bretton Woods Institutions dominate development discourse with GDP Late 1980’s “human development” paradigm reaction to structural adjustment policies “ Human development” defined as the process of enlarging people’s choices First published in Human Development Report in 1990 and annually since

Bretton Woods Institutions dominate development discourse with GDP

Late 1980’s “human development” paradigm reaction to structural adjustment policies

“ Human development” defined as the process of enlarging people’s choices

First published in Human Development Report in 1990 and annually since

How Do You Measure Your HDI? Composite of three components Health and longevity (life expectancy at birth) Education (adult literacy rate) Income (GDP per capita adjusted in PPP) “ Deprivation Index” calculated relative to highest possible values for each component All components equally weighted and averaged Subtract from unity to measure human development, instead of relative deprivation

Composite of three components

Health and longevity (life expectancy at birth)

Education (adult literacy rate)

Income (GDP per capita adjusted in PPP)

“ Deprivation Index” calculated relative to highest possible values for each component

All components equally weighted and averaged

Subtract from unity to measure human development, instead of relative deprivation

Criticisms Against HDI Equally weighted mean implies that all three components are substitutable Multiplicative index might better reflect HD HDI only considers aggregate measures and not distribution No measure of sustainability in HDI Calculate whether a given level of income can be sustained, given depreciation of natural capital Measure ecological footprint as a proxy for whether level of human development is sustainable

Equally weighted mean implies that all three components are substitutable

Multiplicative index might better reflect HD

HDI only considers aggregate measures and not distribution

No measure of sustainability in HDI

Calculate whether a given level of income can be sustained, given depreciation of natural capital

Measure ecological footprint as a proxy for whether level of human development is sustainable

African Trading Blocks Case Study Aggregate regional HDIs compared Disaggregated components also compared by region Overall improvements not reflected in individual indicators for the region Southern African Development Community (SADC) has continually decreasing life expectancy with rise in HDI Most of HDI increase in SADC accounted for in methodological changes in measuring education component Recommend disaggregating HDI to avoid missing complexity of individual indices

Aggregate regional HDIs compared

Disaggregated components also compared by region

Overall improvements not reflected in individual indicators for the region

Southern African Development Community (SADC) has continually decreasing life expectancy with rise in HDI

Most of HDI increase in SADC accounted for in methodological changes in measuring education component

Recommend disaggregating HDI to avoid missing complexity of individual indices

Advantages Initial reference point: Consumption vs. Production Income distribution A better picture for overall economic activity The value of household and volunteer work Defensive and rehabilitative expenditures (vehicle accidents, family breakdown) The costs of mobility and pollution The depletion of social and natural capital The cost of noise pollution, commuting, crime Unemployment and underemployment The cost of sacrificed natural capital services (farmlands, wetlands, forests, etc.)

Initial reference point: Consumption vs. Production

Income distribution

A better picture for overall economic activity

The value of household and volunteer work

Defensive and rehabilitative expenditures (vehicle accidents, family breakdown)

The costs of mobility and pollution

The depletion of social and natural capital

The cost of noise pollution, commuting, crime

Unemployment and underemployment

The cost of sacrificed natural capital services (farmlands, wetlands, forests, etc.)

Disadvantages Valuation of different assets The valuation method and monetizing of different assets The degree of the methods inhibiting universality (comparison problem) - Valuation of human life - Valuation of environmental assets Examples: 1) Valuation of household or volunteer work 2) Cost of crime and cost of family breakdown 3) Cost of commuting 4) Cost of automobile accidents 5) Depletion of nonrenewable resources

Valuation of different assets

The valuation method and monetizing of different assets

The degree of the methods inhibiting universality (comparison problem)

- Valuation of human life

- Valuation of environmental assets

Examples: 1) Valuation of household or volunteer work

2) Cost of crime and cost of family breakdown

3) Cost of commuting

4) Cost of automobile accidents

5) Depletion of nonrenewable resources

Disadvantages (Continued) Counting only the cost of lost natural capital services (lack of future impact) Counting harmful consumption expenditure Still unaccounted factors

Counting only the cost of lost natural capital services (lack of future impact)

Counting harmful consumption expenditure

Still unaccounted factors

Discussion Questions 1) How can using these alternative indicators affect business? What is the prospective reaction of firms? 2) Do governments want to transform existing measuring systems? What are the difficulties that developing countries may face?

1) How can using these alternative indicators affect business?

What is the prospective reaction of firms?

2) Do governments want to transform existing measuring systems?

What are the difficulties that developing countries may face?

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