Alternative Economic Indicators Report

Alternative Economic Indicators: Application and Potential Effects

Carlos Rymer Gregg Mol Hao Zhuang Joey Notaro Kubilay Kavak

NTRES 431: Environmental Strategies Spring, 2007

Table of Contents Introduction..................................................................................................... 3 Application of Alternative Indicators............................................................. 5 1. The Genuine Progress Indicator in Alberta, Canada............................. 6 2. The Index of Sustainable Economic Welfare........................................ 8 3. The Human Development Index.......................................................... 11 Discussion..................................................................................................... 15 Conclusion.................................................................................................... 17 References..................................................................................................... 19 Appendix....................................................................................................... 20

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Introduction Gross Domestic Product (GDP) is currently the international standard measure of a nation’s economic status. GDP represents the monetary value of all the finished goods and services produced within a country's borders in a specific time period (usually on an annual basis). It includes all private and public consumption of materials, government outlays, investments and exports that occur within a defined territory. The typical approach used to measure GDP is the expenditure method, which is defined as follows: GDP =consumption + investment + (government spending) + (exports-imports) Since the 20th century, the world has pursued increased well-being and a greater quality of life through economic growth as measured by GDP. Recently, there has been considerable debate about GDP as a measure of economic growth because its inclusion of parts of the economy is limited and inappropriate. The GDP has many serious problems, such as the flaws in calculating cross-border trading, exclusion of the black market, exclusion of unpaid social and ecosystem services, and inclusion of work that produces no net benefit or that results from repairing harm. It is becoming increasingly clear that GDP is not a very good measure of economic growth that is inclusive of all aspects of society, including natural and social capital. Simon Kuznets, designer of the GDP and the international system of National Accounts, said in his first report to the U.S. Congress in 1934 that “the welfare of a nation can scarcely be inferred from a measure of national income.” In order to ensure appropriate economic growth that maintains high economic, environmental, and social performance, the economy must be measured in terms of quantity and quality, especially in relation to environmental and social considerations. Growth should specify improvement for each of these considerations in relation to raising the quality of life, something that does not simply equate with greater access to material consumption. According to Robert F. Kennedy, well-known environmental lawyer, “the gross national product includes air pollution and advertising for cigarettes and ambulances to clear our highways of carnage. GNP includes the destruction of the

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redwoods and the death of Lake Superior. It grows with the production of napalm, and missiles and nuclear warheads... it does not allow for the health of our families, the quality of their education, or the joy of their play.” In a similar perspective, ecological economists believe that continued growth of macroeconomic systems, rather than development of quality of life, is both ecologically unsustainable and undesirable. They believe the ‘threshold hypothesis,’ the notion that when macroeconomic systems expand beyond a certain size, the additional benefits of growth are exceeded by the attendant costs.1 The current GDP calculation focuses only on national income and growth. In this sense, it was universally agreed that a proper measure of national income should be premised on the need to keep income-generating capital growing. Since natural capital depletion, as well as human capital depreciation, is not reflected in measures of national income, it is now strongly argued that the GDP overstates a nation’s real economy. Moreover, when we emphasize global growth, we should also be aware and recognize the cost which we pay and invest first for later incomes. Herman Daly pointed out: “Growth in GNP should cease when decreasing marginal benefits become equal to increasing marginal costs. But there is no statistical series that attempts to measure the cost of GNP. This is growth mania, literally not counting the costs of growth.” GNP-flow is largely a cost. Wants are satisfied by the services of the stock of wealth. The annual production flow is the cost of maintaining the stock, and though necessary, should be minimized for any given stock level. If we want the stock to grow; we must pay the added cost of a greater production flow (more depletion, more labor, and ultimately more pollution). Depletion, labor, and pollution are real costs that vary directly with the GNP-throughput.2 In this sense, GDP should take into account of increasing inequality, pollution or damage to people’s health than the environment. If crime, divorce and other elements of social breakdowns are counted as economic gains, GNP will

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Max-Neef, 1995. Herman Daly, Steady-State Economics, Chapter 5: A Catechism of Growth Fallacies

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not be able to demonstrate the real wealth of nation. As Gordon Brown said in his pre-budget statement on environmental taxation, “quality of growth matters; not just quantity.” We need to redefine progress, and replace GDP with new indicators of progress, which measure how our national policies truly deliver a better quality of life for all.3 In order to convey a complete picture of a nation’s sustainable development performance, ecological economists have developed several indicators to improve, complete, and later replace GDP. Those indicators try to correct GDP over a range of issues, such as income inequality, environmental damage, and depletion of environmental assets, to create an indicator which better measures how our economy delivers welfare for people.4 The first of these was Daly and Cobb’s Index of Sustainable Economic Welfare (ISEW) in 1989; others include the Genuine Progress Indicator or GPI (1995), the Sustainable Net Benefit Index or SNBI (1999), the Human Development Index (HDI), and a stockbased indicator called Genuine Savings (GS). The ISEW, GPI, GS and SNBI try to convince those countries to realize that when macroeconomic systems expand beyond a certain size, the additional benefits of growth are exceeded by the attendant costs, and to eventually abandon the growth objective and focus on sustainable qualitative improvement, Sustainable Development (SD).5 The paper will mainly focus on three of above mentioned indicators: GPI, HPI, and ISEW, to illustrate and analyze the contents of the measurement, as well as the applications. We also tried to evaluate the feasibility of using these economic alternative indicators in reality, the constraints and potential effects to our life.

Application of Alternative Indicators Sustainable development is a broad goal that aims to ensure growth in economic, environmental, and social performance; it assumes that these considerations can complement each 3

Friend of the Earth: http://www.foe.co.uk/campaigns/sustainable_development/progress/replace.html Friend of the Earth: replacing GDP. http://www.foe.co.uk/campaigns/sustainable_development/progress/replace.html 5 Philip A. Lawn, A theoretical foundation to support the Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), and other related indexes 4

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other. In order to measure sustainable development and base decisions on progress, alternative indicators must be used to factor in the social and environmental aspects of society.6 In this section, we explore case studies where GPI, HDI, and ISEW have been applied. We also identify barriers to official adoption and indicate potential effects of adoption. The Genuine Progress Indicator in Alberta, Canada Alberta is a Canadian province where the GDP has increased in the last 40 years by more than 400%. While this improvement in the GDP signals that quality of life has improved, which it has, it doesn’t necessarily account for social and environmental costs.7 Recognizing this shortcoming of the GDP, the Albertan government publishes each year a report that defines progress based on 76 indicators that include economic, environmental, and social goals. This report, called Measuring Up, compares progress to a set of goals determined by the Albertan government. It is made publicly available for Albertans to decide whether the government has addressed all indicators appropriately.8 Although this government report has a set of indicators that include economic, environmental, and social considerations, it does not equally satisfy the three pillars as well as the GPI does. Alberta’s GPI for the period 1960-2003 was determined by a non-governmental organization called The Pembina Institute. The GPI includes a total of 51 economic (12), environmental (17), and social (21) indicators that measure the health of the Albertan economy in terms of the three fundamental pillars. These indicators include such important considerations as greenhouse gas emissions, water and air quality, poverty, and income distribution.9 While Alberta’s assessment of progress heavily focuses on social improvement, the GPI places nearly equal weight on all three considerations. In effect, the GPI deducts negative costs that are typically added to GDP in order to reflect the real status of welfare.

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Bossel, 1999:xi. Taylor, 2006:5. 8 Alberta Finance. 2006:62. 9 Taylor, 2006:6. 7

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The assessment on Alberta’s GPI was based on an index, where 100 was the highest possible score. While GDP grew in the 1961-2003 period, GPI fell from 76 to 61.10 According to the Albertan government’s progress report, there were overall improvements in the last few years, especially in social and economic considerations.11 The graph below shows the changes in both GDP and GPI during the 43-year period:

Clearly, well-being as measured by GPI was radically different from well-being as measured by GDP. In the first two decades, GPI was higher than GDP, while the opposite was true beginning in the late 1980’s. In addition, the graph shows how GDP grew steadily while GPI decreased slightly and stabilized. While there may have been a noted increase in monetary income per capita in Alberta during this period, there may have been severe losses in natural and human capital in the form of resource degradation or loss and higher human depreciation, such as crimes, diseases, accidents, and incidences. In the case of Alberta, indicators have proven to be quite useful to the government in enhancing overall quality of life and accounting for environmental and social aspects of society.

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Pembina Institute for Appropriate Development. 2006:1. Alberta Finance. 2006:62.

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Adoption of alternative indicators by the Albertan government suggest that indicators may prompt governments to 1) enact policies that reflect social and environmental considerations, 2) spend more heavily on human and natural capital, and 3) begin valuing social and natural capital. Conceptually, this may lead to policies that reflect the real costs of social and natural capital, and may affect the market in such a way that encourages businesses to reduce negative social and environmental impacts while increasing economic output. Similarly, this could affect consumers by providing incentives that reduce consumption and increase conservation. The GPI, in particular, can thus prove to be a useful starting tool for addressing environmental and social problems at all levels of society. The Index of Sustainable Economic Welfare One of the major components of the ISEW calculation is what is called future reduction of economic welfare. This is distinct from the current defensive costs incurred by environmental damage, such as increased health costs from air pollution and the cost of cleaning up polluted water. This “future reduction” includes two things: (1) the depletion of natural resources such as fossil fuels and mineral resources and (2) the effects of long-term damage such as climate change, both of which are expected to incur future costs. Expenses from these categories are difficult to quantify and are subject to challenges on theoretical grounds; however, they are crucial—they can constitute from one-half to three-quarters of the ‘negative’ items in the ISEW. Using non-renewable resources can be costly to future welfare if we are reducing the amount available for use in the future. However, if other energy substitutes are available by the time these resources are fully depleted, then their current depletion does not incur a future cost or reduction in welfare. Therefore, the current cost of such resource use depends upon the rate at which substitutes are being developed and upon the degree to which society is prepared to deal with the loss of such resources; how to account for this is at the crux of the debate. The view of conventional economics is that natural resource depletion does not cost society as alternative methods of resource use will be fully developed by the time that some natural 8

resources are exhausted. Nordhaus and Tobin, argue that “reproducible capital is a near-perfect substitute for land and other exhaustible resources.” 12 Consequently, they did not include resource depreciation in their indicator, which focused more on social variables. Similarly, Serafy objects to depreciation of the full value of resource depletion on the ground that “capital stocks to substitute for these resources can be built up from the revenues of non-renewable resources However, most ISEW studies do exactly what Serafy objects to. The authors of the Austrian ISEW reject Serafy’s position by arguing that “…while this holds true theoretically, there have been no empirically relevant attempts to develop such technologies that would justify a different treatment of this position.”13 Cobb and Cobb claim that “the faith in the infinite substitutability of resources is founded on the experience of a peculiar period in history, during which energy was extremely cheap.”14 This point is central to the entire functioning of the ISEW; however, it requires substantial non-economic data to properly argue, and neither side sufficiently provides such evidence. Because of this debate, there are a range of methods used to account for resource depletion. The original ISEW developed by Daly and Cobb used the entire value of extracted resources and extraction costs. Cobb and Cobb later decided to use a “replacement cost,” which is the cost of using renewable energies to replace current fossil fuel use.15 The important factor in the “replacement cost” method is that it applied a growth rate of 3% a year that compounds upon itself. Finally, some studies use more conservative accounting methods such as the Serafy method or Hotelling rent. Both are calculations that attempt to determine the portion of revenues generated by the resources that must be set aside to compensate for the depletion of the resource. One explanation for Hotelling rent is that “if a mine owner invests the [annual] Hotelling rent in an interest-bearing account,

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Nordhaus and Tobin, 1972:14 Stockhammer et al., 1997:29 14 Cobb and Cobb, 1994:38 15 Jackson, McBride, 23 13

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then by the time the mine is exhausted he will have accumulated sufficient funds to purchase an equally valuable mine to maintain his mining business.”16 Similarly, the Serafy method “estimates the amount of money that would need to be set aside…to generate a permanent income stream that would be as great in the future as it is in the present.”17 The depletion of natural resources represents approximately 37% of all deduction items in the US ISEW in 1990, 31% in the UK ISEW in 1996, 21% in the Swedish ISEW in 1992, and 36% in the Dutch ISEW in 1992. Depending on the method used, these amounts can vary widely. In the Chile study, use of the “Hotelling rent” method instead of the replacement cost reduces the difference between ISEW and GDP by half, and results in net growth of ISEW during the period 1965-1995 instead of net loss.18 Similar “sensitivity analysis” done for the US and UK show that use of Hotelling rent results in significant change. In the US, this results in a very slight growth in the ISEW, and in the UK the ISEW growth rate mirrors that of GDP, but at a lower starting value.19 Since most ISEW studies used the replacement cost method, it is reasonable to assume that using different methods would result in similar adjustments. The Italy study, the only one to explicitly use the Serafy method, shows constant growth in ISEW over the course of the study.20 Clearly, this is a point that needs further study and debate and, most importantly, more data pertaining to natural resource use and alternative technology development. Cobb and Cobb admit “that there is a great deal of arbitrariness in any effort to account for depreciation of ‘natural capital.’”21 The ISEW will not be properly accepted until this is resolved; one alternative direction suggested by this debate is that ISEW would be more appropriate as a non-aggregated set of multiple indicators, as suggested by Neumayer.

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Vincent, 1997 Cobb and Cobb, 1994:69 18 Castaneda, 1999:242 19 Neumayer, 1999:86 20 Jackson, 28 21 Cobb and Cobb, 1994:72 17

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The other crucial point of contention is the accounting for “long-term environmental damage,” which ostensibly includes treatment of nuclear waste and other issues but essentially deals with climate change. It is equally significant as resource depletion. The center of the debate is whether the costs of climate change should accumulate over time rather than merely increase. The yearly costs themselves are not as contentious as the accumulation method; Neumayer writes: “I do not claim here that a marginal [yearly] social cost per tonne of carbon of $75 (US ISEW) or £228 (UK ISEW) would be unjustifiable. It is true that $75 is close to the upper end of damage cost estimates as reported in IPCC…”22 The results of accumulation are hugely significant. Neumayer (2000) shows that, depending on the methods used, the ISEW studies can be made, in many cases, to rise over time rather than decline. While they still fall way short of GDP in absolute terms, the change in the directional trend is more important in interpreting the ISEW than its numeric value. Therefore, the different methods of calculation have huge implications for the ‘threshold’ hypothesis and the entire interpretation of the ISEW time series. Human Development Index The Human Development Index (HDI) is an international registry of relative national wellbeing indicators published by the United Nations Development Programme (UNDP) annually in the Human Development Reports (HDRs). The composite index essentially measures the degree of “human development,” which the UNDP defines “in the HDR as ‘a process of enlarging people’s choices.’”23 Principally, the HDI measures this human development as a combination of three components, including the ability to live a long and healthy life, access to education, and a decent standard of living and material conditions.24 From this rather simplistic foundation, the HDI has been criticized and propositionally expanded by members of the academic community seeking to arrive at more refined indices in order to accurately capture the level of human development within countries. 22

Neumayer, 2000:34 Kelley, 1991:316. 24 Kelley, 1991:316. 23

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The HDI is an outgrowth of the international global economy context of the late 1980s that was dominated by the Bretton Woods Institutions, namely the World Bank and IMF.25 This was a response to the perceived failure of structural adjustment policies that had left Global South nations relatively impoverished despite growing GDPs in several different corners of the global market.26 Haq was instrumental in encouraging the UNDP to sponsor the HDRs in the first place and the ultimate measure of “human capabilities” came from Sen’s own previous decades of theoretical insight.27 Perhaps, the most intriguing aspect of the HDR, and by extension the HDI, is that the report has the institutional support of the UNDP but is also independently authored by a number of intellectuals that provide input into the process of calculating each country’s HDI.28 Thus, it has been a relatively strong competitor with the GDP for its prestige and integrity. In its inception, the HDI was constructed as a composite of three separate measures of health, education, and income that were derived from the life expectancy at birth, the adult literacy rate, and the GDP per capita adjusted to purchasing-power-parity, respectively.29 Each component is given minimum and maximum values and a “deprivation index” is calculated based on how far a nation’s data are from the maximum potentials.30 The only exception to this reasoning is for the income scale which assumes diminishing marginal utility as income increases beyond a certain established point and in this case a logarithmic scale is used.31 All three variables are assumed to be relatively independent of each other and so are arithmetically averaged and weighted equally to arrive at a mean deprivation score.32 This number is then subtracted from unity to determine the consequent level of human development. There have only been a few major changes in methodology, including combining the adult literacy rate with mean years of schooling, “giving 2/3 weight to the former and 1/3 weight to the 25

McNeill, 2007:5. McNeill, 2007:10. 27 McNeill, 2007:6-7. 28 McNeill, 2007:12. 29 Kelley, 1991:316. 30 Kelley, 1991:317. 31 Kelley, 1991:317. 32 Kelley, 1991:319. 26

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latter,”33 as well as using the Atkinson adjustment formula instead of a simple logarithmic transformation for accounting for diminishing returns to higher incomes34 (the Atkinson formula later being abandoned for the old methodology). Also, the minima and maxima were fixed for each indicator in 1994, whereas they had previously been decided by the lowest and highest national values respectively for the given year.35 This fixing has allowed for intertemporal comparison, another reason why the HDI calculations have received so little methodological changes in its existence. The relative lack of change has received considerable critical attention in the years since the HDI was first introduced. Sagar and Najam derive a Reformed HDI (RHDI) that replaces the arithmetic averaging of the constituent components with a product of the three because “the scheme of arithmetic averaging runs counter to the notion of their being essential, and, therefore, nonsubstitutable.”36 Hicks developed an Inequality-Adjusted HDI (IAHDI) that attempts to incorporate distributional measures of each of the three components into the overall index.37 He found a significant correlation between inequality in both education and longevity to greater human development and therefore, argues that distributional scores should be accounted for.38 Neumayer offers an alternative HDI that included sustainability in the analytical framework by questioning whether a current level of human development appears to be unsustainable, given depreciation of natural capital stocks.39 This measure attempts to redress environmental deficiencies in the HDI by questioning simply whether current income levels can be sustained over an indefinite period of time.40 Morse has extended the possibilities for addressing sustainability by positing that the HDIs be qualified with a measure of a country’s ecological footprint.41 Morse agrees with Neumayer in maintaining the basic measures of

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Sagar and Najam, 1998:251. Sagar and Najam, 1998:251. 35 Sagar and Najam, 1998:251. 36 Sagar and Najam, 1998:251. 37 Hicks, 1997:1292. 38 Hicks, 1997:1290. 39 Neumayer, 2001:105. 40 Neumayer, 2001:106-107. 41 Morse, 2003:194. 34

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the HDI and to avoid creating ever more complex indices but believes that it would be best to also evaluate at what expense of ecological deficit human development is maintained.42 For intertemporal comparisons, however, it appears that the HDR will not change its methodology in the near-future, despite so many criticisms. Morse offers a compelling example of the state of the HDI in use with a comparative case study of African trading blocks over a ten-year period. Morse illustrates how, in practice, disaggregating the HDI shows important regional trends that may not be seen otherwise, citing life expectancy declines in the Southern African Development Community (SADC) with the AIDS crisis, despite an overall increase in the aggregate HDI.43 Furthermore, much of the HDI increase can be accounted in the changes in methodology experienced for education in 1994 and not much in a change in the actual level of human development per se.44 Ultimately, Morse suggests that an aggregate index may belie some of the very foundations of human development in the first place; that is, the enlarging of people’s choices, by continuing to focus narrowly on a single index.45 He prescribes perhaps a more community-based neo-populist approach similar to the United Nations Environment Programme’s indicators of sustainable development that offers people with a host of measures to raise awareness about local issues, a method that accommodates participatory action and attention to crucial information that may be hidden in the aggregated data.46 Flexibility in measurement may be vital to encourage participation and elide the supposed consistency of the HDI’s methodology by continually improving individual, not aggregate, indices.

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Morse, 2003:193-194. Morse, 2004:14-15. 44 Morse, 2004:12. 45 Morse, 2004:15-16. 46 Morse, 2004:17. 43

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Discussion The Advantages of the Alternative Indicators The main advantage of the alternative indicators is their initial reference point. Since they begin with personal consumption expenditure, they promote less production that degrades natural resources in contrast to GDP, which is in favor of more production regardless of whether natural resource degradation occurs or not. Another advantage is that they include income distribution, which GDP neglects. Most economists criticize GDP because it does not take the overall welfare of society into consideration. Lawn points out that “if personal consumption expenditure does not change from one year to the next but the distribution of income deteriorates, the economic welfare enjoyed by society as a whole is likely to fall because the marginal benefit uses of the rich is less than the marginal benefit uses of the poor.”47 Therefore, paying attention to income distribution makes the alternative approaches more comprehensive. There are other factors that augment the scope of the alternative indicators, such as “the value of household and volunteer work, costs of mobility and pollution, and the depletion of social and natural capital.”48 In this regard, deducting the cost of noise pollution, commuting, crime, underemployment, unemployment, and lost leisure time provides a broader picture to understand the overall economic picture. Similarly, the cost of sacrificed natural capital services is also incorporated into computations. The loss of farmland, the cost of ozone depletion, air and water pollution, the loss of wetlands and old-growth forests are other popular examples. Consideration of defensive and rehabilitative expenditures also increases the scope of alternative indicators because normally “a large portion of the human-made capital produced each year

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Lawn, 2003:112. Costanza et al., 2004:154.

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does not contribute to the psychic income of a nation.”49 These expenditures are dedicated to prevent the undesirable side-effects of the economic activities. Amongst them the cost of household pollution abatement, vehicle accidents, and family breakdown can be mentioned. The Disadvantages of the Alternative Indicators The most important criticism to the alternative indicators is the valuation of different assets. There are two challenges in this respect: (i) the valuation method and monetizing of different assets, (ii) the degree of the methods inhibiting universality (comparison problem). It is a well-known reality that valuing such assets as human life and leisure is quite difficult. Despite the existence of some methods,50 they are highly open to discussion. Moreover, they produce very different results in different countries due to different wage levels, overall welfare, and other factors. For example, the value of a human life in the US may be ten to twenty times higher than the value of a human life in a developing country. This complicates the matter in terms of comparison. Same problem is prevalent for environmental assets. Although there are some techniques51 used to measure the existence value of a natural asset, they are still open to question52 and subject to change due to society’s priorities. For example, two rivers in two different countries having virtually similar characteristics can be evaluated very differently. There is not a standardized method to measure the value of the assets under the same base. Lawn emphasizes that the valuation methods used by the alternative indicators “are extremely crude and often involve the use of very heroic assumptions.”53 Even in the computation of some very technical issues, estimates may be based on very rough assumptions. Therefore, the values of some 49

Lawn, 2003:113. Hedonic price method is a good example, which measures how wage rates change with death or injuring risk and infers the value of life. 51 For example, contingent valuation (stated preference or hypothetical valuation) method, which aims to find individual’s willingness to pay for a good by posing a set of questions regarding preferences directly to the individuals, is widely used. Similarly, travel cost method is frequently applied to reveal the value of a natural environment (e.g. parks) that people visit to appreciate. 52 Kolstad, 2000:331-332, 344-350. 53 Lawn, 2003:116. 50

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items are likely to be distant approximations of their correct value. In addition, different cultures and life standards are ignored in these calculations. In order to show how these factors deeply affect the overall solutions, some examples are presented in Appendix part. The second serious criticism for the alternative indicators is that they only count the cost of lost natural capital services. “They are based on current flows rather than stocks and thus do not really address the maintenance of capacity, which some would argue is at the heart of sustainability.”54 Knowing the degree of decline in stock of natural capital is as important as valuing environmental damage. In this regard, another criticism is their inability to reveal about the future impact of current activities, which is part of a sustainable approach. The third criticism is about the assumption that all personal consumption expenditure contributes to human well-being. Lawn states, “Since this item includes the consumption of junk food, tobacco products, alcohol, and guns, it is unlikely that all consumption expenditure will boost the psychic income of a nation’s citizens.”55 Finally, there are still some important factors that are unaccounted in these indicators. The disutility of certain forms of work and the existence values of natural capital are good examples.

Conclusion Alternative indicators promise a better approach by taking into account social and environmental aspects of society. Alternative indicators that account for economic, environmental, and social considerations of society are likely to be an essential component of sustainable development. However, there are some roadblocks to enforce these indicators worldwide. In a world where businesses grow quickly and have a significant influence on government, it is difficult to fully incorporate societal aspects other than economic transactions into national accounts. Clearly, the

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Hanley et al., 1999:56. Lawn, 2003:115.

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adoption of any alternative indicator that fits the mission of sustainable development will involve long negotiations and substantial changes to what is included in any given alternative indicator. On the other hand, adoption of an alternative indicator that accounts for social and environmental costs may prove to be an effective incentive to increase spending in increasing social and environmental capital, eliminate market distortions so as to include so-called externalities, and change the basis of decision-making from classical economics to sustainable development. Consequently, this may allow businesses to make high social and environmental performance profitable, and may change the current culture of high consumption and little social and environmental concern to one of high efficiency and greater socially and environmentally sound behavior. We conclude that as nations continue to face more severe social and environmental consequences of the GDP, there will be room for a shift to an alternative indicator that reflects the goals of sustainable development.

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References Alberta Finance. (2006). “Measuring Up 2006 Report.” Alberta Government. Amy, Taylor. (2006). “Sustainability Indicator Frameworks in Alberta.” The Pembina Institute. Bossel, Hartmut. (1999). “Indicators for Sustainable Development: Theory, Methods, Applications.” International Institute for Sustainable Development. Castaneda, Beatriz. (1999). “An Index of sustainable Economic Welfare for Chile.” Ecological Economics 28: 231-244. Clarke, Matthew,and Sadar Islam. (2005). “Diminishing and Negative Welfare Returns of Economic Growth: An Index of Sustainable Welfare (ISEW) for Thailand.” Ecological Economics 54: 8193. Cobb, Clifford, John Cobb; Tim Jackson, Nat McBride. (1994). “Measuring Progess? A Review of ‘Adjusted’ Measures of Economic Welfare in Europe.” European Environment Agency. Costanza, R., J. Ericson, K. Fligger, A. Adams, C. Adams, and others. (2004). “Estimates of Genuine Progress Indicator (GPI) for Vermont Chittenden County and Burlington, from 1950 to 2000.” Ecological Economics 51 (2): 139-155. Hanley, Nick, Ian Moffatt, Robinn Faichney, and Mike Wilson. (1999). “Measuring Sustainability: A Time Series of Alternative Indicators for Scotland.” Ecological Economics 28 (1): 55-73. Hicks, D. A. (1997). “The Inequality-Adjusted Human Development Index: A Constructive Proposal.” World Development 25 (8): 1283-1298. Kelley, A. C. (1991). “The Human Development Index: ‘Handle with Care.’” Population and Development Review 17 (2): 315-324. Kolstad, Charles D. (2000). “Environmental Economics.” New York: Oxford University Press. Lawn, Philip A. (2003). “A Theoretical Foundation to Support the Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), and Other Related Indexes.” Ecological Economics 44 (1): 105-118. McNeill, D. (2007). “‘Human Development’: The Power of the Idea.” Journal of Human Development 8 (1): 5-22. Morse, S. (2003). “Greening the United Nations’ Human Development Index?” Sustainable Development 11: 183-198. Morse, S. (2004). “Putting the Pieces Back Together Again: An Illustration of the Problem of Interpreting Development Indicators Using an African Case Study.” Applied Geography 24: 122.

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Neumayer, Eric. (1999). “The ISEW: not an index of sustainable economic welfare.” Social Indicators Research 48: 77-101. Neumayer, Eric. (2000). “On the methodology of ISEW, GPI, and related measures: some constructive suggestions and some doubts on the ‘threshold’ hypothesis.” Ecological Economics 34: 347361. Neumayer, Eric. (2001). “The Human Development Index and Sustainability – A Constructive Proposal.” Ecological Economics 39: 101-114. Nordhaus, William, and James Tobin. (1972). “Is Growth Obsolete?” Economic Growth. Bureau of Economic Research. Pembina Institute for Appropriate Development. (2006). “Genuine Progress: Alberta GPI.” The Pembina Institute. Sagar, A. D. and A. Najam. (1998). “The Human Development Index: A Critical Review.” Ecological Economics. 25: 249-264. Stockhammer, Englebert, Harald, Hochreiter, Bernhard Obermayr, and Klaus Steiner. (1997). “The ISEW as an Alternative to GDP in Measuring Economic Welfare: The Results of the Austrian ISEW Calculation 1955-1992.” Ecological Economics 21: 19-34. Vincent, Jeffery R. (1997). “Resource Depletion and Economic Sustainability in Malaysia.” Environment and Development Economics 2: 19-37.

Appendix Here are some examples, which show how factors mentioned in the discussion part, affecting the overall solutions: 1) Valuation of household or volunteer work: To do this, one has to decide on a wage rate. The alternative indicators choose a base rate for household workers or volunteers performing the same tasks as paid workers. However, “this could be well below or well above the ‘real’ rate, because, for example, paid household workers may be significantly underpaid or volunteers may be significantly less skilled than paid workers doing the same jobs.”56 2) Cost of crime and cost of family breakdown: These are strongly related to cultural values and vary in different cultures. Without taking cultural factors into consideration, making a comparison may not give economically meaningful results. For example, in places where divorce is seen as a great 56

Costanza et al., 2004:149.

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shame, the possible cost of family breakdown is likely to be less. Similar arguments can be raised for the cost of crime. 3) Cost of commuting: In places where oil prices are relatively higher due to taxes levied by the government, cost of commuting will likely to be higher. Consequently, it would decrease the GPI. However, it is known that oil taxes are applied in some countries to deter drivers to drive more. So, there is a feadback problem in this case. 4) Cost of automobile accidents: These costs will highly vary between developed and developing countries since the value of human life changes with respect to income levels and the overall welfare. 5) Depletion of nonrenewable resources: Costanza and others calculated this value in a Vermont case study by using the “estimated cost of replacing one barrel of oil with a renewable resource.”57 The renewable resource here is ethanol. Nevertheless, ethanol is not available in most places of the world. Obviously, this is not a good yardstick. If one wants to use any other benchmark, it would not be a renewable source because today’s available alternative fuels (LPG, CNG, etc.) are mostly non-renewable. Briefly, the alternative indicators use a series of adjustments, which may vary in different regions very highly, by relying on imperfect measures. Questions for Discussion: 1) How can using these alternative indicators affect business? We know that there are numerous factors that especially multinational corporations take into account for an investment decision. These factors involve convertibility or exchange power of the country, soundness of legal institutions and courts, financial markets of the country, proximity to possible markets, loosened environmental standards in the country, attitude of the government towards foreign capital, cheap labor, well educated

57

Costanza et al., 2004:144.

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human capital, etc. It is still ambiguous whether or not big corporations want to use alternator indicators before making decision about a new investment since they don’t even care GDP. 2) From the developing nations’ point of view, it is also uncertain that the governments in these countries would be willing to apply new measuring methods. There are two reasons: (i) Even the computations performed for GDP are not quite reliable, and they are unlikely to want to undertake more responsibility or red tape unless there is a certain incentive. (ii) If GPI measurements increase the position of poor countries in the overall ranking, they probably will be reluctant since they get money from international organizations due to their poverty level.

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