Beyond GDP The Need for New Measures of Progress Part 2

Figure 5: Percent Very/Quite Happy vs. GDP Figure 5: Percent Very/Quite Happy vs. GDP 100% Puert Indonesia Ireland Canada Iceland Netherlands El Salvador 90% Singapore Mexico Egypt Philippines Percent Very/Quite Happy China France Austria Denmark U.S.A. Japan Portugal Italy Israel Germany Slovenia Lithuania India Finland Sweden Malta Argentina Chile Poland 70% Spain Rep.Korea Czech Rep. Algeria 80% Belgium Saudi Arabia Greece Hungary Belarus Slovakia Peru Iraq Estonia Iran 60% Albania Latvia Zimbabwe Rep.Moldova Russian Fed. 50% Romania Bulgaria 40% $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Real GDP per capita in 2004 US Dollars Sources: World Values Surveys; GDP per capita from United Nations Statistics Division—National Accounts. Nominal-Real GDP adjustments made with Consumer Price Index annual averages from US Bureau of Labor Statistics. Figure 6: GNP Versus Well-Being Source: R. Ingelhart, 1997 Gross National happiness Gross National Happiness (GNH) is frequently mentioned as an alternative measure of progress. It was originally suggested by the King of Bhutan in the early 1980s as a more appropriate measure for his small kingdom than GDP. It was not an actual index, but a principle for guiding Bhutanese development in a fashion consistent with the country’s culture and spiritual values rather than by focusing on increasing economic activity. Since 2004, the Bhutan government has sponsored four international conferences on GNH. Bhutan has established a Gross National Happiness Commission but a specific methodology for measuring GNH has not yet been defined (Ura and Galay 2004). coMPoSiTe iNDexeS iNcluDiNG GDP All of the alternatives to GDP (and GDP itself ) are composite indexes that combine several different measures into a single number. Here we list some indexes that combine GDP or GDP variants with some of the non-GDP environmental or social indexes already described or with other measures of well-being. human Development index Since 1990, the United Nations Development Program has used the Human Development Index (HDI) in its annual Human Development Report. The purpose of the report is to show how well the management of economic growth and human development is actually improving human well-being in the nations of the world. The inaugural report defines human development as the “process of enlarging people’s choices...to live a long and healthy life, to be educated, have access to resources needed for a decent standard of living,...[to have] political freedom, guaranteed human rights and personal self-respect.” However, the authors acknowledge the difficulty of quantifying the last three components, and the index focuses on “longevity, knowledge and decent living standards” as proxies for people’s ability to live long and prosperous lives (UN Development Program 1990). • Longevity  is measured using life expectancy at birth. This also serves as a proxy for other aspects of well-being such as adequate nutrition and good health. • Knowledge  is measured using literacy rate and school enrollment, which are intended to reflect the level of knowledge of the adult population as well as the investment in the youth. • Access  to a decent standard of living is measured using GDP adjusted to reflect purchasing power parity and the threshold effect using a logarithm of real GDP per capita. Initially reported for 14 countries, the UN’s 2007 report presented HDI results for 177 countries (UN Development Program 2007). Living Planet Report Along with several partner agencies, in 1998, the World Wide Fund for Nature (WWF, formerly the World Wildlife Fund) published the first Living Planet Report. The report has two components: the state of the world’s natural environment and the burden placed on the natural environment by humanity. The Living Planet Index (LPI) is a measure of the world’s forests, freshwater and marine ecosystems, specifically on the “extent and severity of biodiversity loss” (Hails 2006). The LPI tracks biodiversity trends by tracking the populations of 1,313 species of fish, amphibians, reptiles, birds, and mammals. In the initial reports, the Global Consumption Pressure—a measure of six subcomponents of human-related consumption of grain, marine fish, wood, cement, carbon dioxide emissions, and water withdrawals—was the measure of the human burden on the environment (Loh, Randers et al. 1998). Since 2002, the Ecological Footprint has been used as the measure of human consumption and waste generation. The 2006 Living Planet Report (LPR) showed that human use of the earth’s biocapacity is exceeding the regenerative capacity by 25 percent.3 Figure 7 compares selected countries’ biocapacities with their ecological footprints on a per capita basis using 3. Using a different method for factoring carbon emissions and the needs of other species, Redefining Progress estimated the degree of overshoot to be 40% (Venetoulis, J. and John Talberth. 2007. Refining the Ecological Footprint. Environment, Development, and Sustainability 10: 441–469). the LPR estimates. Some countries like Brazil and Canada have a positive reserve because of their vast land areas, relatively small populations, and per capita use below the regeneration rate. However, most countries in the world are operating at a loss in terms of biocapacity. Figure 7: Living Planet Index Ecological Reserve/Deficit for Selected Countries 15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 -1.0 -3.0 -5.0 happy Planet index The purpose of the Happy Planet Index (HPI), developed and published by the New Economics Foundation (NEF), is to measure a country’s ecological efficiency in delivering human well-being. The index is a composite of thr ee measures: life expectancy at birth, life satisfaction, and ecological footprint. The 2006 report by NEF shows the results for 178 countries using a color coding scheme that depicts graphically not only how a country rates on the HPI scale but also how the three components affected the rating. Countries can also have similar life satisfaction measures but different overall results. For example, although people in the US and New Zealand report similar levels of life satisfaction, New Zealand’s overall HPI is 13 points higher than the US’ because the average New Zealander has a slightly higher life expec- tancy and uses only half the resources of the average US citizen as measured by their respective Ecological Footprints (Marks, Abdallah et al. 2006). An interesting result of comparing the HPI and HDI methodologies is that two countries can have very similar results for the HDI but have very different results of HPI. For example, Honduras’s HPI is 30 points higher than Moldova even though the two countries have similar HDI ratings, ecological footprint and life expectancy. The reason is that the Life Satisfaction in Honduras is more than double that of people in Moldova. Indicator Suites All of the indicators mentioned so far, including GDP, are based on the aggregation of a large number of variables into a composite index. Many new measures of progress do not attempt this final aggregation step, but simply report many indicators separately. These systems leave the final aggregation step, which answers the question: “what does this all mean?,” to the user. There are a very large number of these indicator suites in use at a variety of scales from municipal to national. For example, the UN Division for Sustainable Development lists on its website a large set of indicators, along with guidelines and methodologies (UN DESA 2009). Here we mention only a few of the more relevant examples. National Income Satellite Accounts One problem with developing Green GDP methodologies is that the Systems of National Accounts (SNA) on which GDP is based use exclusively monetary transactions to establish values for items. As a result, natural resources and ecosystem services, which are not traded in markets, are left out. Rather than estimating “shadow” values for these items and including them directly in the SNA, another method that has been used is the creation of supplemental or “satellite” accounts, some of which are reported in physical units. In 2003, the Handbook of National Accounting: Integrated Environmental and Economic Accounting was published jointly by the United Nations, International Monetary Fund (IMF), the Organization of Economic Cooperation and Development (OECD), the Statistical Office of the European Communities (Eurostat) and the World Bank, as guidance for this process. They list four categories of satellite accounts to augment the SNA: • Flow accounts that provide information at the industry level  about the use of energy and materials as inputs and the generation of pollutants and solid waste; • Expenditure  accounts that show the amount of money spent by industry, government, and households to protect the environment or manage natural resources;  • Natural resource asset accounts that measure quantities of natural resources such as land, fish, forest, water, and minerals; and • Accounts  of the non-market flow and environmentally adjusted aggregates to show how non-market items are valued and adjusted for natural resource depletion and degradation. The Handbook of National Accounting satellite accounts do not include social and human capital components. But other efforts to produce satellite accounts are looking at components such as health, education, volunteer activity, and household production. In general, producing satellite accounts is a way to put additional information “on the table,” but avoids the difficult task of fully integrating such information into the existing SNA. calvert-henderson Quality of life indicators The Calvert-Henderson Quality of Life Indicators were developed as a collaborative effort between the socially responsible investment firm, Calvert Group, economist and futurist Hazel Henderson, and a multi-disciplinary group of practitioners and scholars from government agencies, for-profit firms, and nonprofit organizations. The indicators, the result of an extensive six-year study, cover 12 issue areas: education, economy, energy, environment, health, human rights, income, infrastructure, national security, public safety, recreation, and shelter. The indicators were developed as a suite rather than as a composite, leaving overall interpretation to the user. They were published in a report in 2000 and have been maintained online since then at www.calvert-henderson.com (Henderson, Lickerman et al. 2000). Millennium Development Goals and Indicators In 2000, leaders of 189 countries signed the United Nations Millennium Declaration, which established eight international goals for improving the global human condition. The goals included eradicating extreme hunger and poverty, achieving universal primary education, promoting gender equality and empowering women, reducing child mortality, improving maternal health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability, and developing a global partnership for development. Forty-eight indicators were defined to measure progress towards these goals (UN DESA 2007). Barriers to Measuring Real Progress Although problems with GDP as a measure of economic progress have been known since its inception and numerous alternative measures have been proposed, there are still significant barriers to developing, implementing, and using better measures of progress. These can be generally categorized as data/methodology issues and social/institutional issues. The data/methodology barriers are common to all indicators, including GDP, and can be dealt with technically. The social/institutional barriers may ultimately be more difficult to overcome. Data and Methodology Barriers to Better Measures of Progress Indicators are intended to provide information about a system—its current condition, how that condition has changed or will change over time, and the condition of and changes in the forces affecting the system. By choosing particular indicators, one is also defining what is important—one is defining goals. To be useful, an indicator needs to be reliable and the underlying data needs to be available in a timely fashion and at an appropriate scale and scope. In addition, an indicator needs to appropriately inform decisions or measure progress toward desired goals. Critics of alternative or complementary measures argue that data and methodology issues are barriers to the use of these in place of GDP (Parris and Kates 2003; Fox 2008). Data Barriers The data-related barriers to better measures of progress involve the reliability and availability of the underlying data. Availability relates to the timeliness and the scale and scope of the data collected. It should be noted this is a partial list of data barriers. For example, data confidentially can also sorely limit the use of available data. Data Reliability Indicator reliability is whether a change in an indicator is an accurate signal of change in the system it is supposed to measure. To the extent that they are based on GDP and SNA data, alternative measures meet the same standard of accuracy. Where alternative measures are based on environmental or social data, the data may be less accurate. However, given a similar level of investment of resources, the environmental and social data could probably match GDP data accuracy. But there will always be variation in data quality both within and between indicators, and instead of drawing an arbitrary line of acceptable data quality to include, we could do a better job of assessing and communicating data quality for all indicators and their components. For example, systems for “grading” data quality have been proposed for this purpose (Costanza, Funtowicz et al. 1992). Data Timeliness Timeliness relates to the frequency with which the underlying data is available. GDP is currently reported annually for all countries of the world. In the US and many other developed nations, GDP is reported quarterly. As with data accuracy, where the alternative measures are based on GDP data, the timeliness is the same. Where the alternative measures are based on other sources—such as periodic non-market valuation surveys—the infrastructure does not currently exist to gather and report the data as frequently. However, several of the alternative measures have garnered sufficient support from governments, nonprofits, and foundations to begin creating the infrastructure to gather and report the data on a regular basis. The HDI, GPI, EF, and LPI all fall into this category. Data Scope and Scale Data scope is the breadth of the items that are measured. The scope of GDP data has evolved over its 70 year existence and is standardized in its methodology. Data scale is the level of detail of the data collected and reported. Although at the smallest scale, some data is collected at the level of an individual person or business, it is reported at larger scales for privacy reasons. The scale at which GDP data is reported depends on a nation’s informational infrastructure. GDP data is reported at the national level for all countries of the world. In the US and other developed nations, GDP is regularly reported at the national, state, and metropolitan regional scales, although the reliability and timeliness of the data decreases with the scale. As with data reliability and timeliness, where the alternative measures use GDP data, their scale and scope are the same as GDP. Since these methodologies were developed, the ISEW and GPI have been calculated for numerous countries including the UK, the US, Netherlands, Australia, Chile, and Canada. It has also been calculated for subnational regions including Alberta, Atlantic Canada, counties in the San Francisco Bay area, and Chittenden County, Vermont. However, for the environmental and social data, there is a lack of institutional infrastructure in all nations of the world. There is clearly a need for better data on multiple aspects of social and environmental conditions including human and ecosystem health, education, and community well-being. Over its 70 year history, the evolution of the SNA has resulted in the development of the necessary informational infrastructure and intellectual knowhow to collect, manage, analyze, and report GDP. This ensures that GDP is an accurate and timely measure of changes in marketed economic activity in developed nations. GDP efforts in nations with less developed governmental and financial accounting institutions continue to improve with assistance from international standardization institutions. Because efforts to collect and manage data for alternative measures have been under way for only 20 to 30 years with extremely limited funding, the informational infrastructure and expertise for this data is much less extensive. The lack of data and infrastructure is a significant barrier to implementing better measures of progress. Methodology Barriers The methodology-related barriers involve standardization issues and the values implied by what is actually measured. Methodology Standardization Methodology standardization refers to the decisions underlying the construction of an indicator—which items are chosen, how items are measured, and how different items are combined. Originally developed by the US and UK Treasuries, standardization of GDP methodologies is now overseen by the UN’s Department for Economic and Social Information and Policy Analysis Statistical Division. Green GDP is also being standardized by this agency. A number of the other alternative measures are also being refined by collaborative efforts of governments, nonprofits, and foundations. These include the GPI, EF, and LPI. As with Green GDP, these efforts have only been under way for a comparatively short period of time and much work remains to be done to reach consensus on the standards. Values Embedded in Methodologies Indicators reflect societal choices, values, and goals. We measure what we think is important and our choice of indicators implicitly defines our goals. As society changes, what is most important also changes and indicators should change to reflect that. GDP includes primarily those items that have readily quantifiable monetary value. This is seen b y some as being a very ‘objective’ measurement, but it really reflects the relative social importance of rebuilding material infrastructure after WW II. Some alternative measures are based on measures of ecosystem health and measures of the stocks and flows of natural resources. Many of these measures are considered ‘objective’ although the accuracy or precision of the underlying data or lack of standardization of the methodology is often called into question. Other alternative measures are based on surveys of individuals’ perceptions of well-being. This is generally considered to be very ‘subjective’ data. A frequent criticism of alternative measures is the subjective nature of the decisions used to create the methodologies (England 1998; Neumayer 1999; Neumayer 2000; Lawn 2003; Lawn 2005). However, as Simon Kuznets observed while designing GDP, “for those not intimately acquainted with [systems of national accounts] it is difficult to realize the degree to which estimates of national income have been and must be affected by explicit or implicit value judgments” (Kuznets, Epstein et al. 1941, 5). Social and Institutional Barriers to Better Measures of Progress The social and institutional barriers to better measures of progress are primarily based on resistance to change. These barriers include the dominance of the “growth is good” paradigm, lack of leadership, and the power of those with a vested interest in maintaining the status quo. Dominance of “Growth Is Good” Paradigm The belief that growing GDP will solve all economic problems is itself the biggest barrier to better measures of progress. Across the world, the growth of economic activity is heralded as a universal remedy. Most reports in the general press equate GDP growth with improvements in human The social and institutional barriers to well-being. Business leaders, better measures of progress are prieconomists, media, and governmarily based on resistance to change. ments claim that there is no These barriers include the dominance better way to measure economic of the “growth is good” paradigm, lack progress than GDP; there is no of leadership, and the power of those better way to eradicate poverty with a vested interest in maintaining than growing GDP; and there is the status quo. no way to maintain current levels of employment without growing GDP. As a result, the general public believes that GDP is the correct measure and that growth is good. In addition, many top-level leaders are fixated on the pursuit of throughput-increasing technological advancements and openly reject goals that are inconsistent with growth (Lawn 2001). In short, the main force supporting the continued use of GDP is the GDP-based growth paradigm itself. Lack of political leadership Political leadership on the issue is also lacking, in part because of the lack of public interest and attention, but also because of the perceived danger to political power—if the new indicators show that past and current policies create problems, this will reflect badly on the people in charge of making those policies. One of the most publicized examples of this is China’s recent attempt to develop a Green GDP. In 2004, the Chinese government announced that it would develop a methodology for measuring economic growth that factored in the environmental consequences of that growth. Released in 2006, the initial report estimated that 20 percent of China’s GDP growth was counterbalanced by depletion of natural resources and degrading the environment (Liu 2006; Jun 2007). China’s Green GDP project was canceled in 2007 because of political concerns, in part due to how the results reflected on the performance of specific regions (PBS 2007; Talberth 2008). Vested interest in maintaining the status quo There are also organizations and institutions with a vested interested in maintaining the status quo—this includes industries and businesses whose financial success is predicated on continually increasing economic activity as well as those institutions that are charged with collecting, managing, and reporting on the current indicators. Finally, those institutions and organizations that are working on better measures of progress waste time and resources arguing over the minutia of methodology and data rather than presenting a united front on the pressing need for better measures. Moving Forward: Adopting Better Measures of Global Progress Agree to move forward The first step is to agree on new global goals: goals that recognize that our economic system is a tool for improving well-being and not something to grow mindlessly for its own sake. The capacity for international consensus on global goals has been demonstrated with processes such as the United Nations Millennium Summit (results include the Millennium Development Goals) and the Intergovernmental Panel on Climate Change (IPCC) (results include numerous Assessment Reports). An essential element of this step is to agree that GDP does not measure progress towards these new goals and to create an open and transparent process for a global dialogue on working towards the new goals and determining how progress will be measured. The process must engage all relevant stakeholders and define each participant’s contribution towards the goals, and how that contribution will be evaluated so that policies, programs, and plans can be adjusted as needed to ensure progress. In addition, we also have to understand, acknowledge, and truly grasp that these national measures are not for bragging rights, for determining the best, happiest, healthiest country or the worst, sorriest, poorest country. Rather they are for defining common goals and measuring each country’s contribution towards those goals. Facilitate the paradigm shift by redefining the problem Donella Meadows wrote that “the shared idea in the minds of society, the great big unstated assumptions—unstated because unnecessary to state; everyone already knows them—constitutes that society’s paradigm, or the deepest set of beliefs about how the world works” (Meadows 1999, 17). Adopting new measures of global progress requires a significant change in the global consciousness as to what actually constitutes progress. The attention of the general public is focused on the issues of climate change, rising oil prices, growing inequality, economic uncertainty, financial collapse, and global social unrest. Once we agree that GDP is not the right measure, we need to talk about how the new and improved measures will help move us in the right direction. This also requires changing the focus of the discussion from “growth” to “progress” and from economic production to sustainable human well-being. Work to change the paradigm at all scales and in all sectors Two frequently stated axioms are “what gets measured, gets managed” and “what gets measured, gets done.” However these axioms generally are applied at a small scale, where the person monitoring the measurement has control over actions that affect the measurement. At the scale of national and global well-being, the measurements, actions, and results are not the responsibility of or under the control of any single individual, organization, or even nation. Consequently there is a disconnect between actions and outcomes. Westward expansion worked in the US as a paradigm until we reached the Pacific Ocean. Expansion continued to be a useful metaphor as long as the world was seen as an “empty world;” however, we are now entering an era where a “full world” metaphor is the more accurate description of reality. We need new ways to talk about progress and new ways to measure progress. We need to change the paradigm and the measures that are used at all levels of society—from international down to individual. Stop arguing about the details and strive for consensus on the big picture The switch to better measures of progress is hampered by continuing argument by indicator experts on what is the best or correct measure of economic and social progress. The aim is not an academic exercise to find the perfect indicator but an ongoing global dialogue to agree on workable solutions. All indicators are proxies and limited in scope. By themselves none can really measure all significant aspects of economic, social, and We need new ways to talk about progenvironmental well-being. Howress and new ways to measure progever, there is a need for consensus ress. We need to change the paradigm on better indicators to set policy, and the measures that are used at all inform decisions, and measure levels of society—from international progress. Efforts to develop better down to individual. measures have been under way for more than a quarter century. All of the proposed measures have issues related to data availability, reliability, and accuracy as well as concerns about the objectivity or subjectivity of the underlying methodology. However, arguments about measurement issues only serve to obscure the fact that GDP has the same problems and is no longer a useful tool for evaluating policy decisions. We desperately need to build consensus on new measures. Use the appropriate indicators for the appropriate task The purpose of national indicators is to act as a dashboard or a compass— providing a signal or sign as to whether national-level policies and programs are moving us in the right direction. Given the complexity of the problems confronting humanity, a single indicator will most likely not be sufficient; a comprehensive set of integrated indicators may be most effective at providing a signal as to whether national level policies and programs are moving us in the right direction. Conclusions At the time it was conceived, GDP was a useful signpost on the path to a better world: a path where increased economic activity provided jobs, income, and basic amenities to reduce worldwide social conflict and prevent a third world war. That economic activity has created a world very different from the one faced by the world leaders who convened at Bretton Woods in 1944. We are now living in a world overflowing with people and manmade capital, where the emphasis on growing GDP and economic activity is leading the world back toward the brink of collapse. As Herman Daly said recently: “Economists have focused too much on the economy’s circulatory system and have neglected to study its digestive tract. Throughput growth means pushing more of the same food through an ever larger digestive tract; development means eating better food and digesting it more thoroughly” (Daly 2008). The world financial system is in crisis, partly as a result of overemphasis on material growth at all costs and a neglect of real and balanced development. Now, the world is in need of new goals and new ways to measure progress towards those goals. There is a need for a global dialogue and consensus on these issues. The time is right to embark on a new round of consensus-building processes that will re-envision what was institutionalized over the last 65 years. The need is clear for: (1) new goals with a broader view of interconnectedness among long-term, sustainable economic, social, and ecological well-being; (2) better ways to measure progress towards these goals; and (3) an invigorated campaign for the realization of this evolved economic system with new institutions. We envision a series of coordinated meetings not dissimilar in scope from the IPCC or the Millennium Ecosystem Assessment, and with similarly appropriate leadership. This series of meetings would function somewhat like the original Bretton Woods meetings in that it would set the goals, institutions, and measures for progress at multiple scales, from communities to states, countries and the whole world. There would be major differences from the original Bretton Woods meetings, however. The new meetings would have additional clarity of purpose: to create solutions to today’s global challenges, with care to bring onboard all the new thinking about what progress is and how to measure it and with much broader stakeholder participation than the original Bretton Woods. The goal of such a series of meetings would be broad consensus, with broad participation, high-level input, and transparent incorporation of the issues put forth in this paper. The OECD’s Measuring the Progress of Societies initiative is already headed in this direction. There were global fora in Palermo in 2004 and Istanbul in 2007 and another is scheduled in South Korea in late 2009. As part of this process, a knowledge base has been created that: (1) describes initiatives around the world on measures of progress and demonstrates the growing interest in these new measures; (2) assists those interested in the development, use, and communication of indicators of progress; and (3) creates a community of experts who can share their experiences and together define best practices (OECD 2009). In November 2007, the European Commission, European Parliament, Club of Rome, OECD, and WWF hosted a conference on Beyond GDP with the objectives of clarifying which indexes are most appropriate to measure progress, and how these can best be integrated into the decision-making process. In closing the conference, Stavros Dimas, the European Commissioner for Environment, noted that “the main achievement of this conference has been to clearly demonstrate the political consensus on the need to go beyond GDP” (Environment Commission 2007). In October 2008, the European Economic and Social Committee voted overwhelmingly to recommend that the EU begin to measure and report on progress that is not exclusively based on economic growth but is also determined by social and environmental factors. The recommendation further calls for these better measures to be taken into account in policy making that will lead “to better and more balanced political choices and contribute to a more sustainable and socially inclusive economy” (EESC 2008). These initiatives need to continue, grow, and multiply, ultimately building a broad global consensus on new goals for society and new measures of progress toward those goals. The current financial crisis has laid bare some of the inherent flaws in the current system. It has also provided an opening to make significant changes in that system to help create a better, more sustainable, and desirable future. We need to seize that opportunity.