By Hénaut Jeremy, Pardo González Juan Luis and Trausch Christophe.
On April 22, 2019, Jonas Van der Slycken, PhD student in Ecological Economics at the University of Gent, visited us to give some insight into the paper he’s working on at the moment, co-authored with his director of research Brent Bleys, assistant professor at the Faculty of Economics and Business Administration. The paper, entitled “A conceptual exploration and critical inquiry into the theoretical foundation(s) of economic welfare measures like the ISEW and GPI” is in line with their research on alternative indicators for economic welfare, such as the Index of Sustainable Economic Welfare (ISEW), that take into account the interconnectedness of the economic system and the natural environment. Brent Bleys has been compiling the ISEW for Flanders on a yearly basis as part of the Flanders Environment Report (MIRA) of the Flemish Environment Agency. The presentation of the paper was followed by a discussion and Q&A about the subject and form of the paper. The following is a summary of the paper and the ideas that came out of that discussion.
The purpose of this paper, which constitutes the first stage of his research, is inquiring into the shortcomings of Economic Welfare Measures (EWM). They are identified as stemming from an ambiguous theoretical foundation and a lack of standardization, which subsequently hinder these measures’ ability to establish themselves as sound and solid alternatives to GDP. Once this point is established, it will serve as a basis to compile welfare measures and analyse the data for the EU15 countries (15 most developed countries in European Union) in order to compare, for these 15 countries, what the determinants of welfare for ISEW and for GDP are, where they match and where they don’t. This will allow to identify which parameters contribute most to welfare and/or GDP, in order to give policymakers better knowledge on what they should focus to stimulate welfare.
GDP has been the subject of much criticism, particularly regarding its inability to accurately portray the level of welfare of society. Even though there is some correlation between welfare and GDP or GDP per capita, it fails to be a representative measure of welfare since it overlooks many dimensions, like environment or other societal issues, to just focus on economic welfare. In response, a number of alternative indicators have been proposed in the past years. However, they haven’t proved to be of real significance in terms of policy making. Two main causes have been identified so far to explain these shortcomings: an ambiguous theoretical foundation and a lack of standardization.
In their theoretical inquiry into the conception of alternative welfare measures, Van Der Slycken and Bleys demonstrate how these measures were inspired by Hicks’ and Fisher’ notion of income. Fisher’s income highlights the experiential nature of welfare, whereas Hicksian income is structured around a cost-benefit analysis. In other words, welfare measure can be seen as “capturing the benefits and costs experienced by nations’ citizens at a particular moment in time, or as reflecting the benefits and costs of present economic activities”. These different interpretations have very practical consequences in the determinants of these measures, especially regarding the temporal accounting – should we include future costs in measurements? – as well as geographical accounting – should costs caused by activities to other regions be traced? While practitioners currently rally under the use of Fisherian’s income, the authors suggest that, in order to address the shortcomings identified previously, it would be beneficial to address two issues: At first, authors should “register costs of present activities shifted abroad or the future, whether they are experienced or not” (thus taking a Hicksian approach); but also for practitioners to make it clear which welfare paradigm and subsequent choices have been made in the design of their indicator.
Discussion
While the paper made very clear what its purpose was, and in our sense achieved it, we found its development sometimes lacked clarity for the uninitiated in advanced economical concepts.
However, the theoretical concepts like Fisher’s psychic income illustrated here were found to be of much interest. We raised the idea of them opening the door to the use more experimental measures like Max-Neef’s theory of needs. It was argued that even if the theory of needs is indeed a very useful concept, Max-Neef’s needs make it difficult to trace utility, and the starting point of an index like ISEW is consumption and those are not strongly correlated notion. The ISEW is already acknowledging this distinction by not accounting for expenses. In that perspective, it is also interesting to note the issue of measuring items that are essentially free to use, and especially digital tools like the internet, Wikipedia or Facebook. Should we assume that the amount of services they provide is incorporated in the expenditure with the purchase of the device? Further down that line is the matter of the temporal accounting of the services provided by a device, which was explored in the presentation.
We also discussed the situation of other alternative welfare measures, wondering if they suffer the same lack of theoretical foundation and whether that was the reason why they’re establishing themselves. We came to the conclusion that they probably had the same shortcomings, and that some sort of unification of all these disparate indexes could be useful, compared to this well-established, standardized and dominant monolith that GDP is.
Another important concern that was raised was related to the valuation methods used to monetise ecosystem services, who haven’t yet proved to be reliable enough and are still subject of much controversy, especially because of their arbitrary and subjective methodology. Does this state of affairs hamper the standardization potential pursued? For Van Der Slycken, it is important to note that despite its standardization and “cleanliness”, GDP was also based on arbitrary decisions; and arbitrary does not mean subjective, because all these decisions can and need to be motivated. But it is indeed difficult to obtain the valuation of ecosystem services, because of the different environmental conditions between countries, and because the actual modus operandi for measures like ISEW needs to use the most locally relevant data (data is collected differently from one country to another). However, he argues that it doesn’t necessarily go against the standardization procedure because a similar rationale is followed. What matters really is the choice of the items included and what the index wants to capture. For instance, some issues, like climate change, will need to inquire into global damage costs, thus requiring less region-specific data. There is a trade between the calculation method, standardization and the precision of information. A potential way out would be to standardize through a core of welfare measurement items, and then adding onto them local items a la carte.
This raised the important issue of the purpose of indicators: Indicators will and should be different depending whether they’re to be used to compare between countries or grasp the local level of welfare. That point proved to be recurrent and underlies a lot of issues related to the very nature and purpose of alternative welfare measures.
Besides, a point was made about the relevance of considering at the same level of reliability forward-looking data, which is by definition uncertain, and backward-looking data, and Van Der Slycken, while acknowledging the tricky nature of estimating forward-looking numbers and, more generally to pinpoint exact numbers, argued that estimates are still relevant to account these costs, because ISEW is generally used to show another perspective and give relevant estimations. It is in that perspective that the position saying that we needn’t to look at absolute numbers of EWM but their evolution is made.
More generally, it’s the very relevance of alternative welfare measures that is at stake. For instance, what could be, ultimately, the policy use of alternative welfare measures? Are they relevant to replace more straightforward tool like GDP? Isn’t their composite nature an inherent obstacle to policy use?
As a conclusion to this discussion around the use of alternatives welfare measures, it appeared clearly that for J. Van Der Slycken,, the ultimate purpose of alternative welfare measures is to promote an environmental transition, and to be used as benchmarks to see whether overall economies and societies move in that direction. The exact final value of these indicators is not what matters, but rather their instrumental use. As stated before, it is more relevant to look at the evolution of indexes than their absolute value. In this context, alternative measure can give insight on what should be the priority policies for the policymakers, for instance knowing that more investment in public transport is needed, or deploying measures like minimum wage to tackle income inequality. That is how alternative measures should be used, and how they would be able to debunk GDP, by giving visibility to other societal issues and trying to determine more accurately societies’ level of welfare.
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