Ed Mayo
Alex MacGillvray
Duncan McLaren
One of the earliest attempts to make a more comprehensive adjustment to the national accounts was the Measure of Economic Welfare (MEW) which Nordhaus and Tobin prepared for the United States in 1972. Their results suggested that between 1950 and 1965, welfare in the US grew consistently, although at a slower rate than the growth in GDP. Nordhaus has recently presented a new MEW which reflects an increasing divergence from GDP in the later years of the study.
The most widely applied attempt to adjust conventional accounts in recent years has been the Index of Sustainable Economic Welfare (ISEW) pioneered (for the United States) by Herman Daly, John Cobb, and Clifford Cobb in an appendix to Daly and Cobb's seminal 1989 book, For the Common Good. The ISEW takes as its basis the measure of consumer expenditure which also underlies the GDP. It then makes a number of additions and subtractions to account for certain environmental and social factors including, for example, (positive) contributions from unpaid household labour, and (negative) contributions from resource depletion, income inequality and environmental damage.
The initial US ISEW was revised by the Cobbs in their 1994 book, The Green National Product, and now forms the basis for the Genuine Progress Indicator. A pilot UK ISEW for the period from 1950 to 1990 was published in 1994 by the New Economics Foundation and the Stockholm Environment Institute. ISEWs have also been constructed for Austria, Germany, the Netherlands, and Sweden, and work is in progress in several other countries.
The Index of Sustainable Economic Welfare (ISEW) provides a way of looking at how sustainable welfare is changing over time. It takes as its basis the measure of consumer expenditure which also underlies the economic measure of GDP. The ISEW then makes adjustments to account for eighteen aspects of our economic lives that GDP ignores.
The key differences between ISEW, as a measure of sustainable economic welfare, and GDP, as a measure of production, are that in the ISEW:
The results show a striking difference between the trends in GDP and ISEW. Per capita GDP is 2.5 times greater in real terms in 1996 than it was in 1950, with an average year to year growth rate of 2 per cent. In contrast, the trend in the ISEW over the same period has been up and down. The level of the ISEW in 1996 ends up a modest 31 per cent higher than it was in 1950: an average annual growth rate of only 0.6 per cent.
The difference between GDP and ISEW is particularly marked from the mid- 1970s onwards. Between 1950 and 1975, ISEW rises, albeit more slowly than GDP per capita. After a period of stagnation in the late 1970s, however, ISEW has actually fallen - by around 22 per cent since 1980. GDP on the other hand continued to rise, by over a third.
Over the last six years, per capita ISEW has declined at an average rate of 1.3 per cent a year (compared to per capita GDP growth of 1.1 per cent).
The key factors which contribute to the decline are environmental degradation (in particular depletion of non-renewable resources and long-term environmental damage) and income inequality. The decline would have been greater, had it not been for positive factors in the ISEW, such as services from household labour, over the same period.
The environmental component of ISEW is a significant one. This reflects the importance of environmental sustainability to well-being and to present and future economic performance. There are three reasons for this. The first reason is the depletion of non-renewable resources, such as North Sea Oil, which are included in the ISEW. Secondly, and similarly, climate change, carrying a diverse and uncertain range of knock-on effects, may arguably be the most significant single factor affecting the global economy over the next forty years. The third reason for including an environmental component, and one that relates more directly to personal experience, is the negative feedback a polluted environment has on human well-being. Perhaps the most important single factor for quality of life is our health.
The findings of the UK ISEW have parallels in experience overseas. In each case, sustainable economic welfare rose up to an apparent turning point, at which any relationship between per capita GDP and ISEW turned negative. One interpretation of these findings might be dubbed the 'threshold hypothesis' (Max-Neef 1995). This hypothesis holds that for every country, economic growth (as conventionally measured) brings about an improvement in the quality of life, but only up to a point (the threshold point beyond which more economic growth leads to a decline in the quality of life ). The implications of this would be considerable, implying the need to turn traditional economic thinking upside down beyond the threshold point, with a concentration on qualitative improvement rather than quantitative growth.
Since its original formulation, the ISEW methodology has come under considerable scrutiny, and a number of criticisms have been raised about particular aspects of the index. The updated UK ISEW which is presented briefly in this box has taken these criticisms into account and made some important methodological revisions to the original index. Full details of these revisions, together with an account of their effects on the index and a number of important sensitivity analyses, are to be found in a forthcoming paper from the Centre for Environmental Strategy at the University of Surrey (Jackson et al. 1997). In the following paragraphs the most important revisions are briefly described. The full range of factors contributing to the Index is shown in table 1, together with the values which these factors assume at the beginning, middle and end of the study period.
In the original index, the adjustment for income inequality was essentially ad hoc: an index of inequality was constructed from time series Gini coefficients by setting the 1950 coefficient equal to 100. Consumer expenditure was then 'weighted' by dividing the raw data by the inequality index. The updated index uses a method specifically developed for measuring the economic impact of distributional inequality. The method determines a level 'perfectly distributed' income equivalent to each unequal distribution of income (Atkinson 1983). The two incomes are equivalent in the sense that both incomes are deemed to deliver the same level of social welfare. The Atkinson income is thus ideal for use as a basis for the Index of Sustainable Economic Welfare.
The revised method allows for an input to reflect society's aversion, or otherwise, to income inequality. The factor 'epsilon' ranges from zero (reflecting absolute indifference to income inequality) to infinity (reflecting complete aversion). This revision uses a rather low figure of 0.8 suggested by studies of consumer behaviour in the United Kingdom. However, it is not entirely clear that it is appropriate to accept a judgement about social welfare inferred from existing patterns of consumption. The acceptance of (or aversion to) income inequality is an issue which legitimately should refer to social evaluation (e.g. by surveys of public attitudes) as well as to market behaviour. Such an evaluation is not yet available for the United Kingdom. Sensitivity analyses demonstrate that a slightly higher value of epsilon would considerably depress the index, particularly over the last fifteen years of the study during which income inequality has reached 'unprecedented' levels (Goodman and Webb 1994).
A number of people have criticized the original ISEW method of accounting for the long-term environmental costs associated with fossil and nuclear fuel consumption. A simple tax of 50 cents (in 1972 dollars) was levied for every barrel of oil equivalent consumed by either fossil fuels or nuclear power. As post hoc justification, the authors compared certain estimates of the future costs of climate change, showing that, in some cases, their provision was relatively conservative by comparison.
The revised UK ISEW explicitly uses cost estimates for long-term damage from global warming, relating these directly to emissions of carbon. A marginal social cost (in 1990) of around 11 Pounds per tonne of carbon emitted has been derived from estimates by Fankhauser (1994). This cost is then used as the basis for determining retrospective marginal social costs which rise over the time period according to the cumulative level of emissions from past activities. Applying these marginal social costs to the actual emissions per year has provided a stream of annual contributions to future damages. Since these future damages accumulate annually, the associated costs are accumulated through the index.
The ISEW research team at the Centre for Environmental Strategy gave detailed consideration to the view expressed by some critics that only the annual contributions to future damages should be counted each year. However, they decided against this argument for a number of reasons, principally because it is clear that, all other things being equal, paying off the damages associated with a single year (say 1990) would not reduce the present value of future welfare losses to zero. The accumulated debt of the past would still represent a very real loss to the future. The present value of that future loss is the very least that an index of sustainable economic welfare should measure.
Several other refinements of the methodology have been made. These include: re-basing the costs of ozone depletion to consumption of CRCs in the UK, instead of production, expanding the category formerly accounting for wetlands loss to include other forms of natural habitat loss, smoothing the annual effects of certain financial factors which might legitimately vary from year to year without adversely affecting long-term economic welfare, and updating a number of columns for which better data have been found.
The main effect of the revisions that have been undertaken has been to present a slightly less dramatic picture of the change in welfare in the UK than what was presented in the first pilot index. The principal reason for this has been the choice of a relatively low aversion to income inequality. Nevertheless, the picture presented by the revised index is not different in character from what was revealed by the earlier version. Sustainable economic welfare rose in the UK from about 1950 to around the mid-1970s, more or less in line with the rise in economic output. It has declined considerably over the last fifteen years of the study, in spite of increasing growth in per capita GNP.
REFERENCES
Atkinson, A. (1983) The Economics of Inequality. 2nd edition. Oxford University Press, Oxford.
Cobb C., and Cobb J. (1994) The Green National Product. University of Americas Press, Lanham, Md.
Cobb, C., Halstead, El, and Rowe, J. (1989) The Genuine Progress Indicator - summary of data and methodology. Redefining Progress, Washington, DC.
Daly, H., and Cobb, J. (1989) For the Common Good - redirecting the economy towards community, the environment and sustainable development. Beacon Press, Boston.
Goodman, A., and Webb, S. (1994) For Richer; for Poorer - the changing distribution of income in the UK 1961-1991. Institute for Fiscal Studies, London.
Jackson, T., and Marks, N. (1994) Measuring Sustainable Economic Welfare: a pilot index for the UK 1950 -1990. Stockholm Environment Institute/New Economics Foundation, London.
Jackson, T., Laing, F., MacGillivray, A., Marks, N., Ralls, J., and Stymne, S. (1997) An Index of Sustainable Economic Welfare for the UK 1950- 1996. Centre for Environmental Strategy, University of Surrey.
Max-Neef, M. (1995) Economic Growth and Quality of Life: a threshold hypothesis. Ecological economics, 15, 115-118.
Nordhaus W., and Tobin, J. (1972) Is Growth Obsolete? in Economic Growth, Fiftieth Anniversary Colloquium. National Bureau of Economic Research, Columbia University Press, New York.