Alternative Economic Indicators


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Alternative Economic Indicators

  1. 1. Alternative Economic Indicators: Application and Potential Effects Carlos Rymer Gregg Hao Zhuang Joey Kubilay Kavak
  2. 2. Gross Domestic Product (GDP) <ul><li>GDP: International standard measure of a nation’s economic status. </li></ul><ul><li>Problems with GDP: </li></ul><ul><ul><li>Flaws in calculating cross-border trading </li></ul></ul><ul><ul><li>Exclusion of the black market </li></ul></ul><ul><ul><li>Exclusion of unpaid social and ecosystem services </li></ul></ul><ul><ul><li>Inclusion of work that produces no net benefit or that results from repairing harm </li></ul></ul><ul><ul><li>It is exclusive of social and natural capital </li></ul></ul>
  3. 3. Discussion about Correcting Measure <ul><li>A ppropriate economic growth should represent high economic, environmental, and social performance ; </li></ul><ul><li>T he economy must be measured in terms of quantity and quali ty </li></ul><ul><li>Gordon Brown: “ Quality of growth matters; not just quantity ” </li></ul>
  4. 4. Alternative Economic Indicators <ul><li>Index of Sustainable Economic Welfare (ISEW) , Daly and Cobb’s(1989) </li></ul><ul><li>Genuine Progress Indicator or GPI (Redefining Progress, 1995) </li></ul><ul><li>Sustainable Net Benefit Index or SNBI (Lawn and Sanders, 1999; Lawn, 2000) </li></ul><ul><li>Human Development Index (HDI) </li></ul><ul><li>Stock-based indicator called Genuine Savings (GS) </li></ul>
  5. 5. The Genuine Progress Indicator <ul><li>Uses the GDP framework, but makes important environmental and social distinctions. </li></ul><ul><li>51 indicators that measure economic, environmental, and social performance. </li></ul><ul><li>Assesses: </li></ul><ul><ul><li>Income Distribution </li></ul></ul><ul><ul><li>Housework, Volunteering, and Higher Education </li></ul></ul><ul><ul><li>Crime </li></ul></ul><ul><ul><li>Resource Depletion </li></ul></ul><ul><ul><li>Pollution </li></ul></ul><ul><ul><li>Long-Term Environmental Damage </li></ul></ul><ul><ul><li>Changes in Leisure Time </li></ul></ul><ul><ul><li>Defensive Expenditures </li></ul></ul><ul><ul><li>Lifespan of Consumer Durables and Public Infrastructure </li></ul></ul><ul><ul><li>Dependence on Foreign Assets </li></ul></ul>
  6. 6. Alberta’s GPI and Alternative Indicators <ul><li>In the last 40 years, GDP has increased by more than 400%. </li></ul><ul><li>Albertan Government publishes Measuring Up , a report with 76 indicators of economic, environmental, and social performance. </li></ul><ul><li>Measuring Up compares progress against goals, and is not as inclusive as the GPI. </li></ul><ul><li>GPI calculated by The Pembina Institute. </li></ul>
  7. 7. GDP v. GPI (Scale of 0-100)
  8. 8. Differences in Trend <ul><li>GPI higher than GDP for first two decades. </li></ul><ul><li>GDP higher than GPI in last two decades. </li></ul><ul><li>GDP had steady growth, while GPI had a slow decline. </li></ul><ul><li>Noted increase in per capita income, but substantial loss of natural resources and human capital. </li></ul>
  9. 9. What Can Adoption of Indicators Do? <ul><li>May prompt governments to: </li></ul><ul><li>1) Enact policies that reflect social and environmental considerations </li></ul><ul><li>2) Spend more heavily on human and natural capital </li></ul><ul><li>3) Begin valuing social and natural capital </li></ul>
  10. 10. Conceptual Effects of GPI Adoption <ul><li>GPI adoption may: </li></ul><ul><ul><li>Lead to policies that reflect the real costs of social and natural capital </li></ul></ul><ul><ul><li>Affect the market in such a way that encourages businesses to reduce negative environmental and social impacts while increasing economic output </li></ul></ul><ul><ul><li>Change consumer behavior by providing incentives that reduce consumption, increase conservation, and promote good social values </li></ul></ul>
  11. 11. Calculating the ISEW <ul><li>The two largest adjustments are: </li></ul><ul><li>Depletion of natural resources: 20%-40% </li></ul><ul><li>Long term environmental costs: 10%-35% </li></ul><ul><ul><li>Combined total of: 30%-75% </li></ul></ul>
  12. 12. Depletion of Non-Renewables <ul><li>Does not measure environmental impact of extraction; </li></ul><ul><li>Measures the cost to future welfare (the cost of not having it). </li></ul><ul><li>Depends of substitutability of resource </li></ul>
  13. 13. Depletion of Non-Renewables <ul><li>Methods of Calculation: </li></ul><ul><li>‘ Replacement Cost’: </li></ul><ul><li> (cost of using renewables X growth rate) </li></ul><ul><li>$75 per barrel of oil X (1.03^(year-1980)) </li></ul>
  14. 14. <ul><li>Source: Neumayer, Eric “On the methodology of ISEW, GPI, and related measures” 2000 Ecological Economics 34 347-361 </li></ul>
  15. 15. Depletion of Non-Renewables <ul><li>Methods of Calculation: </li></ul><ul><li>‘ User Cost Method’: </li></ul><ul><li>Cost of replacing asset with similar income stream in the future. </li></ul>
  16. 16. <ul><li>Source: Castaneda, Beatriz “An Index of sustainable economic welfare for Chile” 1999 Ecological Economics 28 231-244 </li></ul>
  17. 17. Long-Term Environmental Damage <ul><li>Mostly considers the cost of climate change </li></ul><ul><li>Based arbitrarily on percentage of fossil fuel usage </li></ul><ul><li>Close to 1995 IPCC estimates </li></ul><ul><li>Includes accumulation factor (year C= year A + year B + year C) </li></ul>
  18. 18. <ul><li>Source: Neumayer, Eric “On the methodology of ISEW, GPI, and related measures” 2000 Ecological Economics 34 347-361 </li></ul>
  19. 19. Threshold Hypothesis?
  20. 20. Human Development Index (HDI) History <ul><li>Bretton Woods Institutions dominate development discourse with GDP </li></ul><ul><li>Late 1980’s “human development” paradigm reaction to structural adjustment policies </li></ul><ul><li>“ Human development” defined as the process of enlarging people’s choices </li></ul><ul><li>First published in Human Development Report in 1990 and annually since </li></ul>
  21. 21. How Do You Measure Your HDI? <ul><li>Composite of three components </li></ul><ul><ul><li>Health and longevity (life expectancy at birth) </li></ul></ul><ul><ul><li>Education (adult literacy rate) </li></ul></ul><ul><ul><li>Income (GDP per capita adjusted in PPP) </li></ul></ul><ul><li>“ Deprivation Index” calculated relative to highest possible values for each component </li></ul><ul><li>All components equally weighted and averaged </li></ul><ul><li>Subtract from unity to measure human development, instead of relative deprivation </li></ul>
  22. 22. Criticisms Against HDI <ul><li>Equally weighted mean implies that all three components are substitutable </li></ul><ul><ul><li>Multiplicative index might better reflect HD </li></ul></ul><ul><li>HDI only considers aggregate measures and not distribution </li></ul><ul><li>No measure of sustainability in HDI </li></ul><ul><ul><li>Calculate whether a given level of income can be sustained, given depreciation of natural capital </li></ul></ul><ul><ul><li>Measure ecological footprint as a proxy for whether level of human development is sustainable </li></ul></ul>
  23. 23. African Trading Blocks Case Study <ul><li>Aggregate regional HDIs compared </li></ul><ul><li>Disaggregated components also compared by region </li></ul><ul><li>Overall improvements not reflected in individual indicators for the region </li></ul><ul><ul><li>Southern African Development Community (SADC) has continually decreasing life expectancy with rise in HDI </li></ul></ul><ul><ul><li>Most of HDI increase in SADC accounted for in methodological changes in measuring education component </li></ul></ul><ul><ul><li>Recommend disaggregating HDI to avoid missing complexity of individual indices </li></ul></ul>
  24. 24. Advantages <ul><li>Initial reference point: Consumption vs. Production </li></ul><ul><li>Income distribution </li></ul><ul><li>A better picture for overall economic activity </li></ul><ul><ul><li>The value of household and volunteer work </li></ul></ul><ul><ul><li>Defensive and rehabilitative expenditures (vehicle accidents, family breakdown) </li></ul></ul><ul><ul><li>The costs of mobility and pollution </li></ul></ul><ul><ul><li>The depletion of social and natural capital </li></ul></ul><ul><ul><li>The cost of noise pollution, commuting, crime </li></ul></ul><ul><ul><li>Unemployment and underemployment </li></ul></ul><ul><ul><li>The cost of sacrificed natural capital services (farmlands, wetlands, forests, etc.) </li></ul></ul>
  25. 25. Disadvantages <ul><li>Valuation of different assets </li></ul><ul><li>The valuation method and monetizing of different assets </li></ul><ul><li>The degree of the methods inhibiting universality (comparison problem) </li></ul><ul><li>- Valuation of human life </li></ul><ul><li>- Valuation of environmental assets </li></ul><ul><li>Examples: 1) Valuation of household or volunteer work </li></ul><ul><li>2) Cost of crime and cost of family breakdown </li></ul><ul><li>3) Cost of commuting </li></ul><ul><li>4) Cost of automobile accidents </li></ul><ul><li>5) Depletion of nonrenewable resources </li></ul>
  26. 26. Disadvantages (Continued) <ul><li>Counting only the cost of lost natural capital services (lack of future impact) </li></ul><ul><li>Counting harmful consumption expenditure </li></ul><ul><li>Still unaccounted factors </li></ul>
  27. 27. Discussion Questions <ul><li>1) How can using these alternative indicators affect business? </li></ul><ul><li>What is the prospective reaction of firms? </li></ul><ul><li>2) Do governments want to transform existing measuring systems? </li></ul><ul><li>What are the difficulties that developing countries may face? </li></ul>