Macroeconomic Measurement - Enviromental And Social Dimensions Part 2

Figure 21.5 Selected countries as ranked in the Human Development Index Human Development Index (Scale 1 – 100) 90 – 95 — Norway, Australia, Germany, Denmark, Netherlands, Canada, United States, New Zealand, Sweden, United Kingdom, Japan 85 – 89.9 — Israel, France, Finland, Austria, Italy, Spain, Greece, Qatar, Poland 80 – 84.9 — Chile, Saudi Arabia, Portugal, Hungary, Argentina, Russia 75 – 79.9 — Bulgaria, Malaysia, Cuba, Turkey, Mexico, Brazil 70 – 74.9 — Ukraine, Peru, Thailand, China, Colombia 65 – 69.9 — Egypt, Vietnam, Philippines, El Salvador, South Africa 60 – 64.9 — Iraq, Guatemala, India, Bhutan 55 – 59.9 — Ghana, Kenya, Pakistan 50 – 54.9 — Nigeria, Zimbabwe 45 – 49.9 — Rwanda, Haiti, Afghanistan 40 – 44.9 — Ethiopia, South Sudan 35 – 39.9 — Niger, Central African Republic The relative simplicity of the HDI has made it much easier to apply in countries with less money to spend on data collection; hence, it has been especially valuable for developing countries. It has been an annual feature of every UN Human Development Report since 1990. In a number of countries, the HDI is now an official government statistic; its annual publication inaugurates serious political discussion and renewed efforts, nationally and regionally, to improve lives and is followed by many development agencies interested in tracking progress. The HDI is one of the most referenced quality-of-life indices and it continues to be modified, with new versions that adjust for inequality and gender equity. 2.6 OTHER NATIONAL ACCOUNTING ALTERNATIVES Aside from the measures just described, many other proposals have been made either to supplement GDP, adjust it, or replace it. To give a sense of this landscape, we briefly describe a sample of them. Except for the first one, they are all indicators that have been developed for use in specific locales. • • The Happy Planet Index (HPI) has been proposed by the New Economics Foundation of London, UK. Like the HDI, the HPI is designed to compare the success of different countries, to see how efficiently (in environmental terms) each country is able to promote the well-being of its inhabitants. The HPI is obtained by taking the product of life expectancy, life satisfaction, and inequality of outcomes, and dividing it by ecological footprint—a measure of ecological impact (see Box 21.2). The Measure of America presents an HDI modified for application in the United States. For example, although the standard HDI measures access to knowledge • • • • using the average number of years that students spend in school, Measure of America uses average achievement scores at various grade levels. The results, calculated down to the level of congressional districts, are available at www.measureofamerica.org. Indicators of Well-Being in Canada are listed on the website of the Canadian Department of Human Resources and Skills Development. Data collected by Statistics Canada are used to develop indicators of well-being in the domains of work, education, financial security, family life, housing, social participation, leisure, health, security, and environment. Other national examples include Italy, which has a Regional Quality of Development Index, a composite index of 45 variables pertaining to environment, economy, rights, gender equality, education, culture, working conditions, health, and political participation. France has the Fleurbaey/Gaulier Indicator, which is similar to GPI but tries to include even more monetary values of nonmonetary factors (job security, healthy life expectancy, environmental sustainability), using subjective valuations of these factors to create adjusted “equivalent incomes.” They are aggregated and then reduced by the degree of inequality in the equivalent incomes. The Gross National Happiness (GNH) concept was proposed in Bhutan in 1972 as a guiding principle for economic development that takes a holistic approach to improving the quality of people’s lives. Although the concept of GNH has been used for decades, the attempt to quantify it is recent.19 In 2010 it was formally defined along nine different dimensions of welfare (psychological well-being, standard of living, good governance, health, education, community vitality, cultural diversity and resilience, time use, and ecological diversity and resilience), including 33 distinct indicators. In 2015 the Centre for Bhutan Studies conducted an extensive survey of over 7,000 Bhutanese households to assess the country’s GNH.20 The results indicate that 43.4 percent of Bhutanese households have sufficiency in at least six domains and are thus considered either “deeply” or “extensively” happy. This is an improvement over an earlier survey in 2010, when 40.9 percent were similarly happy. BOX 21.2 THE HAPPY PLANET INDEX The Happy Planet Index asserts that the goal of society is to create long and happy lives for its members. To do this, natural resources must be used and wastes generated. The HPI is made up of four variables that reflect these concepts: 1. Average life expectancy: This measures whether a society’s members lead long lives. The statistic for average life expectancy is obtainable for almost all countries. 2. Average subjective well-being: This measures whether a society’s members lead happy lives. The data are obtained from the Gallup World Poll survey, which asks people how satisfied they are with their lives overall, on a scale of 1 to 10. 3. Inequality of outcomes: This measures inequality based on the data on distribution of life expectancy and subjective well-being within each country. 4. Ecological footprint: This measures a society’s overall ecological impact. It is defined as the amount of land required to provide a society with the resources that it consumes and assimilate the waste that it generates. While it has been subject to methodological critiques, by converting all ecological impacts into a single value, it provides an overall assessment of sustainability. In order to obtain the HPI, a country’s well-being, life expectancy, and inequality of outcomes are multiplied to get a single measure of “happy life years” of a society. Then the HPI is calculated as: HPI = Happy life years/Ecological footprint In 2016, the HPI was calculated for 140 countries. The countries with the highest HPI scores were those that had rather happy and long-living citizens, moderate levels of inequality in outcomes, and relatively modest ecological footprints. Examples of countries with high HPI include Costa Rica, Vietnam, Thailand, and Jamaica. One interesting aspect of the HPI is that a country’s HPI ranking tends to be unrelated to its GDP. Most wealthy nations including the United States, Japan, Canada, Australia and developed countries in Europe all score highly on “Happy Life Years”, but their HPI rank is lower than that of some of the less developed countries in Latin America and the Asia Pacific region because of their larger ecological footprint. Luxembourg, for example, ranks 8th by GNI per capita and 20th in the HDI measure, but ranks 139th by HPI measure. The United States ranks 108th, just above Bulgaria, Afghanistan and Rwanda, mainly because of its relatively large ecological footprint. The low HPI rank for most sub-Saharan countries, in contrast, is due to the low life expectancy, low subjective well-being and high inequality despite the relatively low ecological footprint of this region. The interpretation and policy implications of the HPI are unclear. For example, India and Haiti have a higher HPI score than Sweden or Australia. Does this imply that India and Haiti are more desirable to live in, or more ecologically sustainable, than Sweden or Australia? Probably not. Another issue is to what extent a country’s policies can affect happiness levels, which may be more a result of inherent social and cultural factors rather than policy choices. Despite its limitations, the HPI has received attention as an alternative or supplement to GDP, especially in Europe. So while the HPI is unlikely to become a widespread alternative to GDP, it does provide information that is not currently captured in any other national accounting metric. Sources: Jeffrey et al., 2016; Goossens et al., 2007. One lesson from all these alternatives is that there is not necessarily a positive correlation between the total value of final purchases in an economy (which GDP is designed to measure) and other measures of well-being in the present or of economic possibility (even as measured by GDP) in the future. In many instances, GDP is rising while other measures stay flat or fall. The next two sections focus on the issues surrounding two particular elements that have been seriously underrepresented in GDP. Section 3 discusses issues of accounting for household production. Section 4 takes up environmental accounting, including subsections on the methodological problems of how to assign values to things that are not sold through markets. Discussion Questions 1. Does the Genuine Progress Indicator include anything that you think should be left out or fail to account for something that you think should be included? Think hard about what you really think human well-being is about. 2. Give examples of each of the following: • • • Efforts to supplement GDP Efforts to adjust GDP Efforts to replace GDP Are there some alternatives discussed above that would fit into more than one of these categories? Are there some that are difficult to fit into any of them? Would you suggest any other ways of categorizing efforts that are being made to improve how we measure the success of an economy in achieving well-being for present and future people? 3. MEASURING HOUSEHOLD PRODUCTION The preceding section described efforts around the world to improve the statistics that are used to assess a country’s economic performance. Part of this movement includes interest in gathering data on household production. Many countries, including the United States, Australia, Canada, India, Japan, Mexico, Thailand, and the UK, have conducted or are conducting national time-use surveys to aid their understanding of productive activities that do not receive monetary compensation. The United Nations Statistical Commission and Eurostat (the statistical office of the European Union) are encouraging countries to develop satellite accounts that provide the necessary information to adjust measures of GDP so that they take into account both household production and interactions between the economy and the environment, while not changing the official definition of GDP. 3.1 MEASURING HOUSEHOLD LABOR Efforts to calculate household labor actually predate standard GDP accounts. In 1921 a group of economists at the National Bureau of Economic Research calculated that the value of household services would be about 25 to 30 percent of marketed production. Decades later, in 1988, economist Robert Eisner reviewed six major proposed redesigns of the National Income and Product Accounts (NIPA), all of which included substantial estimated values for household production.21 Despite numerous demonstrations of its practicality dating back almost 100 years, household production has never been included in the U.S. GDP accounts. There are strong arguments to suggest that current GDP figures are less accurate for having neglected household production. Most obviously, GDP is understated—a substantial area of valuable productive activity has been overlooked (see Box 21.3). This was stressed by Simon Kuznets, the architect of national income accounting, when he presented his original set of estimates to Congress in 1937. With his typical candor, he noted what was missing, pointing in particular to “services of housewives and other members of the family.” Even the most conservative estimates of the total value of household production arrive at numbers equal to about 25–30 percent of standard GDP in the United States, and less conservative estimates put the value as equal to or greater than the value of marketed production. An analysis of 27 mostly high-income countries shows that the value of unpaid labor equates to an average of more than 25 percent of GDP.22 The UK Office of National Statistics estimated that the value of unpaid labor in 2014 was equivalent to 56 percent of GDP, with the largest components of the value of unpaid work being child care and transportation.23 Neglecting household production not only leads to an understatement of the level of GDP, but might also give a wrong impression about growth trends. One of the major economic shifts during the twentieth century was the movement of a large proportion of women from unpaid employment as full-time homemakers to paid employment outside the home. In 1870, 40 percent of all U.S. workers were women working as fulltime homemakers; by 2000, the proportion had dropped to 16 percent. Trends in many European countries were similar, but timing often differed. This increase in work outside the home, as well as the increase in purchases of substitutes for home production, such as paid child care and prepared foods, was counted as an increase in GDP. The value of lost household production, however, was not subtracted. This failure to account for reductions in some home-produced goods and services means that GDP growth during the period was overstated. For example, an article in the May 2012 Survey of Current Business found that if “home production”—the value of the time spent cooking, cleaning, watching the kids, and so forth—were counted, it would raise the level of nominal GDP nearly 26 percent for 2010. Back in 1965, when fewer women were in the formal labor force and more were working in the nonmarket sector, GDP would have been raised by 39 percent. Because the inclusion of “home production” would add more to the level of GDP in 1965 than in 2010, factoring in the value of these nonmarket activities was found to reduce the average annual growth rate of GDP over this period.24 BOX 21.3 WHAT ARE STAY-AT-HOME MOMS REALLY WORTH? What is the fair market value of all the work a typical stay-at-home mom does in a year? To answer this question we can multiply the hours spent at different tasks by the typical wage paid to workers who perform those tasks. For example, according to 2012 research by insure.com, the typical mom spends 14 hours per week cooking. The U.S. Bureau of Labor Statistics estimates the average wage for cooks at about $9 per hour. This implies that the annual value of a mom’s cooking labor is over $6,000. Applying the same approach to other household tasks, including child care, cleaning, shopping, yard work, and driving, the annual value of a full-time stay-at-home mom is over $60,000. Similar research by salary.com comes up with an even larger market value—about $113,000 annually! While the number of stay-at-home dads in the United States has increased in recent decades, up to 2 million in 2012 compared to 1.1 million in 1989, they are far outnumbered by the 10.4 million stay-at-home moms in 2012.25 But the number of stay-at-home moms has been declining in recent decades as more women have entered the workforce. While this brings additional income to households, the income is partially offset by additional expenses. In many states, the cost of full-time child care exceeds the typical annual cost of college tuition. For example, Child Care Aware of America reports that the average cost of childcare in Massachusetts is $17,082 per year.26 While the additional household income and market expenditures are counted as increases to GDP, the median salary in the United States for a woman working fulltime is only about $39,052.27 So based on the values presented above, it isn’t clear whether total social welfare increases or decreases as a result of more women entering the workforce. Sources: Briody, 2012; Livingston, 2014; BLS, 2017; and ChildCare Aware of America. Recognizing the value of unpaid work is important if we are to make a comprehensive assessment of well-being, especially as more unpaid labor is typically undertaken by women. To quote from a report published by the OECD: Unpaid work contributes not only to current household consumption (e.g., cooking) but also to future well-being (e.g., parental investments in raising children) and to community well-being (e.g., voluntary work). In all countries, women do more of such work than men, although to some degree balanced— by an amount varying across countries—by the fact that they do less paid work.28 Data on unpaid labor from the United Kingdom indicate that men do an average of 16 hours per week of unpaid labor, while women do an average of 26 hours.29 The gender imbalance is even more significant in developing countries of the global South, where household production makes up a much higher proportion of total production than it does in the developed countries of the global North. Hence, GDP is even more inadequate as an indicator of national production in developing countries. Globally, the United Nations estimates that women do nearly 2.5 times the amount of unpaid care and domestic work than men.30 We see in Figure 21.6 that when we add paid and unpaid labor, women almost always do more total work than men (Uganda is the only exception in the figure). The overall gender imbalance is greatest in India, where women do 35 percent more total work than men, and in the United States where women do 18 percent more total work than men. Why does this matter? One important reason is that the omission of most household production from the national accounts may contribute to a subtle bias in the perceptions of policymakers who base their economic decisions on them. The U.S. Social Security retirement system, for example, makes payments to people based only on their market wages and years in paid work. Some advocates suggest that people should also get credit for time spent raising children—for example, a year of Social Security credit for time taken off with each child, in recognition of the contribution that such unpaid work makes to social and economic life. Having home production counted in GDP might help make policymakers more aware of its productive contributions.31 Interestingly, critiques of GDP for its failure to count household labor arise out of both conservative principles, which emphasize family values, and progressive ones, which seek to recognize the value of labor that has been historically and disproportionately performed by women. Figure 21.6: Paid and Unpaid Work by Gender, Selected Countries 3.2 TIME-USE SURVEYS A first step in determining a value for household production is to find out how much time people spend in unpaid productive activities. In the past, estimates of time use in the United States came from small and sporadic surveys. However, in 2003, following the lead of many other industrialized countries, the U.S. Bureau of Labor Statistics (BLS) began to collect data for the first national ongoing survey of time use. The American Time Use Study (ATUS), conducted by the BLS, asks people age 16 or over in a nationally representative sample to report in detail how they used their time on one particular day.32 The results of the survey for 2016 indicate that, on average on any given day, 85.4 percent of women and 68.8 percent of men spend some time engaging in household activities, including housework, food preparation and cleanup, lawn and garden care, or household management (such as paying bills). When averaged over all responses (including those who had not spent any time on household activities), women spent an average of 2.24 hours per day on these activities, while men spent 1.38 hours. On an average day, 21 percent of men reported doing housework, such as cleaning or doing laundry, compared with 50 percent of women. 3.3 METHODS OF VALUING HOUSEHOLD PRODUCTION After time use has been measured in terms of hours spent on various activities, standard national accounting procedures require that these hours be assigned a monetary value using market or quasi-market prices. Economists have developed two main methods of assigning a monetary value to household time use: the replacementcost method and the opportunity-cost method. In the replacement-cost method, hours spent on household labor are valued at what it would cost to pay someone else to do the same job. In the most popular approach—and the one used to generate the most conservative estimates— economists use the wages paid in a general category such as “domestic worker” or “housekeeper” to impute a wage. A variant of this method, which usually results in higher estimates, is to value each type of task separately: child-care time is valued according to the wage of a professional child-care worker, housecleaning by the wages of professional housecleaners, plumbing repair by the wages of a plumber, and so forth. replacement-cost method (for estimating the value of household production): valuing hours at the amount it would be necessary to pay someone to do the work The opportunity-cost method starts from a different view, based on microeconomic “marginal” thinking. Presumably, if someone reduces his or her hours at paid work in order to engage in household production, he or she is assumed to value the time spent in household production (at the margin) at least at the wage rate that he or she could have been earned by doing paid work for another hour. That is, if you choose to give up $30 that you could have earned working an extra hour in order to spend an hour with your child, you must presumably think that the value of spending that hour with your child is at least $30. This leads to using the wage rate that the household producer would have earned in the market to value the time spent doing household work. In this case, estimates of the value of nonmarket production can be quite a bit higher than using the replacement-cost method, since some hours would be valued at the wage rates earned by doctors, lawyers, and other more highly paid workers. opportunity-cost method (for estimating the value of household production): valuing hours at the amount that the unpaid worker could have earned at a paid job Neither approach to imputing a wage rate is perfect. However, it would be hard to argue that perfection has been achieved in any of the other measurements and imputations involved in creating the national accounts, and many argue that imputing any value for household labor time, even using minimal replacement costs, is more accurate than imputing a value of zero. Similar arguments have been made concerning unpaid volunteer work in communities and nonprofit organizations—the time that people spend coaching children’s sports teams, visiting nursing homes, serving on church and school committees, and so on. In the American Time Use Survey, 14.3 percent of the people surveyed reported participating in organizational, civic, and religious activities on their surveyed day, a figure that includes organized volunteer activities. If volunteer work as well as household work were both counted in national accounts, the proportion of production attributed to the core sphere of the economy would rise considerably. Discussion Questions 1. Do you think that national governments should incorporate a monetary estimate of the value of household production in national accounting statistics? How do you think the inclusion of household production would affect the measurement of economic activity in developed versus developing countries? 2. Think back on at least one household activity in which you have engaged in the past couple of days that in principle could be replaced by market or third-person services. How would that activity be valued by the replacement-cost method? By the opportunity-cost method? What sorts of manufactured capital goods were important, along with your labor, in the activity? 4. ACCOUNTING FOR THE ENVIRONMENT The natural environment underpins all economic activities. Recall Figure 2.5, which indicated that the natural environment provides resources and environmental services as inflows to economic activity and that economic activity also releases waste products into the environment. Environmental economists describe economic functions of the natural world under three headings:33 1. Resource functions: The natural environment provides natural resources that are inputs into human production processes. They include mineral ores, crude petroleum, fish, soil, and forests. Some of these resources, such as fish and forests, are renewable while others, such as minerals and petroleum, are not. 2. Environmental service functions: The natural environment provides the basic habitat of clean air, drinkable water, and suitable climate that directly support all forms of life on the planet. Water filtration provided by wetlands and erosion control provided by tree-covered hillsides are other examples of services provided by ecosystems. People receive the services of the natural environment directly when they enjoy pleasant scenery or outdoor recreation. 3. Sink functions: The natural environment also serves as a “sink” that absorbs (up to a point) the pollution and waste generated by economic activity. Car exhaust dissipates into the atmosphere, for example, while used packaging goes into landfill, and fluid industrial waste ends up in rivers and oceans. Some waste breaks down relatively quickly into harmless substances. Others are toxic or accumulate over time, eventually compromising the quality of the environment. Although for centuries these environmental functions were treated as though they were provided “free” and in unlimited amounts, more recently the problems of depletion of resources, degradation of environmental services, and overuse of environmental sink functions have become increasingly apparent. Consider the example of a country that depends heavily on natural resources. If its forests are cut down, its soil fertility depleted, and its water supplies polluted, surely the country has become poorer. But national income accounting will merely record the market value of the timber, agricultural produce, and industrial output as positive contributions to GDP. In the United States, soil and water depletion has not yet raised the cost of landbased food but is likely to do so in the future without significant changes in farming practices. The market price of fish has increased with depletion of many species. The United States shares with all other countries a reliance on weather patterns that support existing lives and lifestyles; as human activities have increased the level of greenhouse gases and emissions that lead to serious disruptions in climate, more severe storms, and rising sea levels, more and more money must be spent in what we have described as “defensive expenditures.” Omitting such important environmental considerations from our measures of success could seriously undermine our goals for sustainability. We therefore need to account for the environmental costs of economic activity. 4.1 METHODS OF VALUING THE ENVIRONMENT System Of Environmental-Economic Accounting In 1993 the United Nations put forth a comprehensive framework, called the System of Environmental-Economic Accounting (SEEA), to add statistics on environmental accounting to the existing methods of national accounting, using supplementary tables. This framework was revised most recently in 2014.34 The 2014 SEEA lists three basic approaches to environmental accounting: 1. Measuring the physical flows of materials and energy. This approach measures the physical flows of natural capital from the environment to the economy as inputs to production, such as extracting metal, drilling for oil and cutting trees. It also looks at flows from the economy to the environment, such as disposal of solid waste and emission of air and water pollutants. Flows into, or out of, different sectors of the economy are quantified into tables. A table for water pollution, for example, would include quantities of chemical waste, insecticides, fertilizers and industrial discharges into the water from various sectors of the economy. 2. Measuring the stocks of environmental assets. The SEEA lists seven categories of environmental assets: mineral and energy resources, land, soil, timber, water, aquatic resources, and other biological resources. These assets are either measured in physical units such as tons of soil, or acres of wetlands, or in monetary units by multiplying a physical quantity of an environmental asset by its per-unit market price or through some nonmarket valuation process discussed in Section 4.2 below. 3. Measuring economic activity related to the environment. This approach lists monetary transactions related to the environment, such as the amount of spending on environmental protection and resource management, and environmental taxes and subsidies. The measure also includes production of environmental goods and services, “environmentally friendly” products and technologies, and pollution-control equipment. These approaches are not necessarily mutually exclusive—we could theoretically implement all of them simultaneously. While many countries have adopted one or more of these accounts to some extent, no country has fully implemented the SEEA recommendations. Also, there is no universally accepted approach to environmental accounting. Green GDP The most basic approach to “green” accounting is to start with traditional measures and make adjustments that reflect environmental concerns. In current national income accounting, it is commonly recognized that some of each year’s economic production is offset by the depreciation of manufactured, or fixed, capital such as buildings and machinery.35 In other words, while economic activity provides society with the benefits of new goods and services, each year the value of previously produced assets declines, and this loss of benefits should be accounted for. Thus, national accounting methods produce estimates of net domestic product (NDP), which starts with GDP and then deducts the annual depreciation value of existing fixed capital. For example, in 2016 the GDP of the United States was $18.6 trillion. But the depreciation of fixed capital that year totaled $2.9 trillion.36 Thus, the NDP of the United States in 2016 was $15.7 trillion. Extending this logic, we can see that each year the value of natural capital may also depreciate as a result of resource extraction or environmental degradation. In some cases, the value of natural capital could also increase if environmental quality improves; that, after all, is the point of restorative development. The net annual change in the value of natural capital in a country can simply be added or subtracted from NDP to obtain what has been called an environmentally adjusted measure of national product, or Green GDP. Thus: Green GDP = GDP – Dm – Dn. where Dm is the depreciation of manufactured capital and Dn is the depreciation of natural capital. Green GDP: GDP less depreciation of both manufactured and natural capital This measure requires estimating natural capital depreciation in monetary terms, rather than physical units such as biomass volume or habitat area. The methods discussed in Chapter 20 can theoretically be used to estimate such values, but to estimate all types of natural capital depreciation in monetary terms is a daunting task that would require many assumptions. Thus, the estimates of Green GDP that have been produced generally focus on only a few categories of natural capital depreciation. Attempts to estimate Green GDP date back to the 1980s. A pioneering 1989 analysis estimated the value of depreciation in Indonesia for three categories of natural capital: oil, forests, and soil.37 The analysis found that accounting for natural capital depreciation could reduce GDP by 25 percent or more. A 2001 analysis in Sweden looked at a broader set of natural resource categories, including soil erosion, recreation values, metal ores, and water quality.38 The results found that accounting for these factors would reduce GDP in Sweden by about 1–2 percent for 1993 and 1997, with some sectors being particularly affected, such as agriculture, forestry, and fisheries. Another study estimated the value of changes in forest resources in India in 2003.39 Based on timber and firewood market prices, the results indicated that while the overall physical stock of timber decreased, the value of timber resources actually increased due to higher prices. This illustrates the potential distortionary effect of looking at natural capital in monetary, rather than physical, terms. If we measure the value of natural capital at market prices, we can lose important information regarding the actual physical stock of those resources. A significant effort to estimate Green GDP occurred in China in the early 2000s. The initial findings by China’s State Environmental Protection Agency (SEPA) in 2006 indicated that environmental costs equaled about 3 percent of China’s gross domestic product (GDP). The report was widely criticized because it failed to include numerous categories of environmental damage, such as groundwater contamination. Shortly afterward, a separate report concluded that environmental damage was closer to 10 percent of China’s GDP—a value similar to what many observers were expecting. And in a 2007 report jointly produced by the World Bank and SEPA, the health and non-health costs of air and water pollution alone were estimated at 5.8 percent of China’s GDP.40 Green GDP efforts in China were subsequently cancelled in response to opposition from provincial officials who wanted to promote high growth rates and viewed Green GDP as a threat to their efforts. But in 2015 China announced it was restarting its efforts with the implementation of “Green GDP 2.0,” with pilot projects in certain regions. Adjusted Net Savings The World Bank has developed an indicator of Adjusted Net Saving that seeks to measure what a society is truly saving for its future, starting with net savings (gross savings minus manufactured capital depreciation) and making adjustments for education, pollution, and the depreciation of natural capital.41 Expenditures on education are added to national savings to reflect investment in human capital. Adjustment for pollution damages accounts for the negative impacts of carbon dioxide emissions on the country’s future and local air pollution damages from particulate matter that affect the productivity of workers. Accounting for depreciation of natural capital involves deducting the depletion of nonrenewable fossil fuels (oil, coal and natural gas), extraction of nonrenewable minerals and adding the net change in forest area. Table 21.2 Adjusted Net Saving (ANS) Rates, Selected Countries, Percent of Gross National Income, 2015 Net national saving Education expenditure 17.77 9.48 -0.16 -1.10 0 -0.35 24.5 Brazil 6.18 5.54 -0.71 -0.53 -0.10 -0.18 9.36 China 25.29 1.79 -0.43 -0.26 0 -0.41 22.87 Congo, Dem. Rep. 4.78 2.06 -0.16 -3.63 -16.54 -2.48 -16.36 Germany 9.80 4.67 -0.03 0 -0.08 13.71 Ghana -1.69 5.84 -1.33 -4.01 -8.79 -1.12 -12.38 India 21.08 3.08 -0.43 -0.12 -0.36 -1.18 18.65 Kuwait 21.57 3.19 -9.48 0 0 -0.09 12.73 Mexico 10.72 5.04 -1.21 -0.36 -0.08 -0.13 12.62 Philippines 28.04 1.84 -0.05 -0.68 -0.19 -0.44 27.60 Russian Federation 14.76 3.90 -4.88 -0.52 -0.38 8.96 3.42 5.05 -0.05 -0.05 -0.11 7.41 Country Botswana United States Energy depletion Mineral depletion Net forest depletion Pollution damage 0 0 0 ANS Source: World Bank, World Development Indicators database Note: The final value of ANS is slightly different from the sum total of its components due to adjustments made by World Bank to account for particulate emissions damages.. The World Bank has calculated ANS rates for most countries of the world. For most countries, the environmental adjustments are relatively minor. The deduction for energy depletion is particularly high in Kuwait, and also significant in Russia, Ghana, and Mexico. High rates of both mineral and forest depletion lead to a negative ANS for the Democratic Republic of the Congo and Ghana. The pollution adjustment tends to be a smaller share of national income, but is still high in such countries as India, Ghana, and the Democratic Republic of Congo. 4.2 MONETARY VALUATION OF ENVIRONMENTAL FACTORS If assigning a monetary value to manufactured assets that are used for only a few years is difficult, think about how much more difficult it is to determine a dollar measure for natural assets! Consider, for example, the value of uranium reserves still in the ground. Perhaps uranium will become more valuable a hundred years in the future because countries turn increasingly to nuclear power. Or the price of uranium may fall in the future as countries, concerned about safety and the disposal of nuclear wastes, explore other energy sources instead. The discovery of previously unknown mineral deposits, changes in policies, shifts in consumer demand, and new technologies are among the factors that make predicting the future over the long term very difficult and thus make it very hard to determine the value of many assets. Other assets are difficult to value because, although we have a sense that overall ecological balance is important to human as well as other life on the planet, some forms of natural capital have no apparent market value. Biologists tell us, for example, that in recent decades there has been a worldwide decline in populations of amphibians (frogs, toads, and salamanders), along with a large increase in deformities in these animals. Clearly, degradation of the natural environment is occurring. But since the market value of most frog species is zero, there are wide disagreements about how—or even whether—a monetary value can be put on these losses. As an example, suppose that a hillside is stripped of its forest covering, and the wood is sold as pulp for papermaking. The lack of vegetation now means that run-off from rain increases, and “Streamside,” a town at the bottom of the hill, suffers flooding and has to repair many buildings. In the national accounts as currently constructed, the logging activity contributes to GDP in this year (in the form of valuable wood products) and the activity of repairing buildings is counted as an economic activity that also adds to GDP in this year. Or consider an alternative scenario, in which the town realizes that flooding is likely and fills sandbags to line its riverbank. It thereby avoids costly repairs. But, again, both the logging and the sandbag making are counted as adding to GDP. What is wrong with this, of course, is that the initial environmental services of the forest in terms of water retention were not counted as part of GDP. If they had been, we would have noticed that the efforts of the town did not reflect new production so much as a shift in production from the “nature sector” to the human sector. Had we included the “nature sector” from the beginning, our national accounts would have shown a decrease in the production of that sector (decreased water retention) offsetting the increase in production of the human sector (that is, repairing buildings or constructing sandbag barriers). But how should we go about evaluating the environmental services received from the trees on the hillside? Normally, economists would try to value the production of water retention services of an existing forest by looking at some places in which this value has been translated into dollar terms. Let’s imagine that near Streamside there is another town, “Sandybank,” which has an identical situation, with identical logging, but it has avoided damage by spending $100,000 on sandbagging. Our goal is to figure out the dollar value of a year’s worth of water retention services provided by the forest near Streamside. Suppose that the cost of repairs in Streamside, after the flooding, was $5 million. If you estimate the value of the water retention services of the hillside forest using the damage-cost approach, you would say that the services are worth $5 million. damage-cost approach: assigning a monetary value to an environmental service that is equal to the actual damage done when the service is withdrawn However, we could also use the experience of Sandybank as the basis for our value estimate. Using the equally plausible maintenance-cost approach, we could say that the value of the forest’s services is $100,000. (This is similar to the “replacement-cost” approach discussed earlier in the chapter.) As often happens, the two approaches do not agree—in this case the value of the forest’s services could be estimated at either $5 million or $100,000. maintenance-cost approach: assigning a monetary value to an environmental service that is equal to what it would cost to maintain the same standard of services using an alternative method Economists and environmental scientists face a similar choice in many other areas; for example, whether to measure the value of unpolluted air in terms of effects of pollution on human health (damage) or in terms of the cost of pollution-control devices (maintenance). So far, some national and international agencies have adopted one convention and some the other in their experimental environmental accounts. If the withdrawal of environmental services makes people suffer or die, then we enter the even more controversial area of trying to assign dollar values to human suffering and human lives. And many environmental effects cross national lines. What is the monetary value of a global “public good” such as a stable climate? On whose account should we tally the loss of deep-sea fisheries located in international waters? One approach to the problem of valuation is simply to use satellite accounts, as described above, which can be recorded in physical terms, without monetary valuation. So, for example, we might note that the forest cover in a country has declined by 10 percent without attempting to value all the ecological functions of forests. Many governments have already committed in principle to creating such accounts for their own country, and some, such as Norway, maintain extensive satellite accounts for many resource and environmental categories. Discussion Questions 1. In Burgess County, current irrigation methods are leading to rising salt levels in agricultural fields. As a result, the number of bushels of corn that can be harvested per acre is declining. If you are a county agricultural economist, what two approaches might you consider using to estimate the value of the lost fertility of the soil during the current year? What sorts of economic and technological information would you need to come up with your estimates? 2. Some people have argued that the monetary valuation of environmental costs and benefits is important because “any number is better than no number”—without valuation, these factors are omitted from GDP accounts. Others say that it is impossible to express environmental factors adequately in dollar terms. What are some valid points on each side of this debate? How do you think this debate should be resolved? 5. CONCLUSION: MEASURING ECONOMIC WELL-BEING No one—and especially not their creators—would argue that alternative macroeconomic indicators have been perfected. Nor has any single approach emerged as the “best” way to adjust, replace, or supplement GDP. As we have seen, any macroeconomic indicator involves numerous assumptions. One of the strengths of some of the new measures is that they allow users to see how the results change under different assumptions. For example, the BLI allows users to adjust the weights on each of the 11 well-being dimensions according to their personal preferences. Some have suggested that the best approach is to use multiple indicators, along the lines of the “dashboard” analogy mentioned earlier. One thing is clear—reliance on a single traditional GDP measure omits or distorts many crucial variables. Thus, all the alternative approaches discussed in this chapter have some value in providing broader perspectives on the measurement of well-being. Discussion Questions 1. Of the various alternative indicators presented in this chapter, which one would you advocate as the best approach for measuring economic well-being? What do you think are the strengths and weaknesses of this indicator? 2. Suppose that your national government officially adopted your preferred indicator from the previous question. How do you think this would change specific policy debates in your country? What new policies do you think could be enacted? REVIEW QUESTIONS 1. 2. 3. 4. 5. What are the two major contexts for economic activity? What are some of the main critiques of GDP as a measure of well-being? What are satellite accounts? What is subjective well-being (SWB), and how is it commonly measured? Based on the scientific research, what is the relationship between the average level of SWB in a country and its GDP per capita? 6. Do average levels of SWB increase as a country develops economically? 7. What is the Genuine Progress Indicator (GPI), and how is it measured? 8. What is the relationship between GDP per capita and GPI per capita in the United States over the past several decades? 9. What is the Better Life Index, and what components are used to construct it? 10. What is the Human Development Index? 11. What are some examples of household production? 12. What is the difference between the replacement-cost method and the opportunitycost method for valuing household production? 13. What are the three main functions of natural systems? 14. What is Green GDP? How is it calculated? 15. What is adjusted net savings? How is it calculated? 16. What are the potential problems with estimating environmental impacts in monetary terms? 17. What is the damage-cost approach to estimating the value of environmental services? 18. What is the maintenance-cost approach to estimating the value of environmental services? EXERCISES 1. Describe in a short paragraph why measures of output do not always measure well-being. Include some specific examples beyond those given in the text. 2. Indicate whether each of the following actions or impacts would increase GDP. a. An individual purchases bottled water to avoid a contaminated municipal water supply. b. An individual obtains her drinking water from a water fountain at her workplace to avoid a contaminated municipal water supply. c. A homeowner pays a lawn-care company for landscaping services. d. A neighbor agrees to help a homeowner with landscaping work in exchange for assistance with plumbing work. e. A paper company employs workers to plant trees. f. An environmental organization provides volunteers to plant trees. 3. In calculating the Genuine Progress Indicator, a. Which factors are subtracted because they represent negative effects on wellbeing? b. Which factors are not included in GPI, even though they are included in GDP, because they are defensive expenditures or because of differences in accounting methods? 4. Go to the OECD’s website for the Better Life Index (www.oecdbetterlifeindex.org). Note that you can adjust the weights applied to each of the 11 well-being dimensions using a sliding scale. Adjust the weights based on your personal opinions. To which factors do you assign the most weight? To which factors do you assign the least weight? Briefly summarize the rationale for your weights. Also, which countries rank the highest according to your weighted BLI? 5. The UNDP Human Development Report is available at its Website (www.undp.org). Consult this report, and choose a country that is not included in Figure 21.5. Write a paragraph describing this country’s performance on the HDI as well as on three other indicators reported in the tables (such as inequality, HIV rates, or malnourishment). 6. Suppose that you buy a bread-making machine, flour, and other foodstuffs, take them home, and bake bread with a group of young children who are in your care (unpaid). How would these activities be accounted for in current GDP accounting? How might they be accounted for in an expanded account that includes household production? 7. Estimate how much time you spend each week doing two unpaid household production tasks (e.g., cleaning, cooking, or repairs). Then, locate data on the typical wages paid to workers who perform these tasks on the Bureau of Labor Statistics website (www.bls.gov/bls/blswage.htm). Based on these data, what is the monetary value of your weekly household production for these tasks? 8. Which of the following describe a resource function of the natural environment? An environmental service function? A sink function? a. A landfill b. A copper mine c. Carbon dioxide (a byproduct of combustion) entering the atmosphere d. Wild blueberries growing in a meadow e. A suitable temperature for growing corn f. A view of the Grand Canyon 9. In 2011, the Deepwater Horizon oil spill in the Gulf of Mexico caused heavy damage to the fishing and tourism industries of Louisiana and other coastal states. In addition, there were long-term ecological impacts on fish and wildlife. Describe how this might be accounted for in the 2011 national accounts of the United States, if they were environmentally adjusted: a. In terms of depreciation of assets b. In terms of flows of produced goods and services. (Describe in detail how two approaches to assigning dollar values might be applied.) 10. Consumption of oil, gas, and coal currently fuels the U.S. economy but also has other effects. How might the following be accounted for in the U.S. national accounts, if they were environmentally adjusted? a. Depletion of domestic oil, natural gas, and coal reserves b. Release of greenhouse gases into the atmosphere c. Smoggy air that hides scenery and makes outdoor activity unpleasant 11. Match each concept in Column A with a definition or example in Column B. Column A a. Depreciation of natural capital b. Satellite accounts c. An indicator of well-being including 11 dimensions d. An example of nonmarket production e. Opportunity-cost method f. Subjective well-being g. h. i. j. k. Column B 1. Valuing time at the wage that someone gives up 2. Comparison with GDP supports the diminishing marginal utility of income 3. Costs of cleaning up a toxic waste site 4. The value of fish killed by toxic waste 5. Government production 6. The effect on copper reserves of copper mining Maintenance costs 7. Better Life Index Defensive expenditures 8. The service performed by a garbage dump A way of measuring well-being (not 9. Cleanup costs following an oil spill production) using dollar amounts Damage costs 10. Monetary or physical measures that can be related to GDP Sink function 11. Genuine Progress Indicator