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First international conference on Economic De-growth for Ecological Sustainability and Social Equity, Paris, April 18-19th 2008 methodological framework only the quantitatively most important items in the original index. It is shown that reducing the number of items in such a way allows for an easier compilation of the index, while at the same time, the outcome of the exercise is almost unaffected. There ar minor differences in absolute terms between per capita ISEW and SISEW, yet, as the trend over time offers the only valid ground to draw conclusions with regard to (changes in) the level of sustainable economic welfare, the message that the simplified ISEW study conveys is the same. A Simplified Index of Sustainable Economic Welfare for France, 1980-2006 BLEYS Brent Corresponding author: Brent Bleys, Department for Mathematics, Operational Research, Statistics and Information Systems for Management Vrije Universiteit Brussel, Pleinlaan 2, B-1050 Brussels, Belgium E-mail: [email protected] 2. A Simplified ISEW for France, 1980-2006 Abstract Data and Methodology This paper presents the results of a Simplified Index of Sustainable Economic Welfare (SISEW) case study for France. It is shown that the results do not support the ‘threshold hypothesis’ put forward by Max-Neef. The paper also looks at the policy value of the index. Building on the methodology put forward by Bleys (2007), I have calculated the Simplified Index of Sustainable Economic Welfare for France for the period 1980-2006. The SISEW is composed of 11 items, which are given in table 1. The exact methodology used to calculate the monetary estimates for each item (including data sources) will be reviewed in this section. The results of the case study will be presented in section 2.2, while section 2.3 compares them to the results of SISEW case studies in other countries. 1. Introduction In ecological economics, the Index of Sustainable Economic Welfare (ISEW) is often used to empirically support the ‘threshold hypothesis’ put forward by Max-Neef (1995). Based on the results of a set of international ISEW case studies, it is argued that the economic system has surpassed its optimal scale in most developed countries. A decrease in per capita ISEW indicates a declining level of sustainable economic welfare. From the mid 1970s onwards, such a decrease was found in most countries for which the index was calculated. SISEW The ISEW was developed by Daly and Cobb (1989) as an alternative measure of economic welfare that compares the benefits and the costs of economic activities. In doing so, it draws heavily on the different criticisms that the Gross Domestic Product (GDP) has attracted over the years when used as a measure of economic welfare. For instance, the ISEW includes household labor and welfare losses from inequalities in the income distribution and accounts for of the environmental costs of the economic process. For a detailed description of the ISEW methodology, Cobb and Cobb (1994) or Jackson et al. (1997) can be consulted. The Index of Sustainable Economic Welfare is often put forward as an alternative to GDP. Recently, the index attracted a lot of interest in several European countries, either by petitions in favour of alternative measures of wellbeing (Belgium and the Netherlands) or by support from expert workshops (Germany). Furthermore, both José Manuel Barroso, President of the European Commission, and Stavros Dimas, Commissioner for the Environment, called for the development and further improvement of indicators that adjust, complement or replace GDP at the ‘Beyond GDP’ conference organised by the European Commission in November 2007. + Private Consumption Expenditures - Welfare Losses Inequalities + Value of Household Labor + Non-defensive Public Consumption Expenditures - Costs of Commuting - Costs of Air Pollution - Depletion of Energy Resources - Costs of Climate Change - Costs of Ozone Layer Depletion +/- Net Capital Growth +/- Change in Net Investment Position from Income Non-renewable International Table 1: The 11 items in the SISEW framework (Bleys, 2007) Private consumption expenditures are taken directly from the French national accounts, accessible at the website of the National Institute for Statistics and Economic Studies1 (INSEE). Welfare losses from inequalities in the income distribution are calculated using the Atkinson index, I (with = 0.8). The necessary income distribution data (percentage of total income earned by each population decile) are taken from However, the compilation of the ISEW requires a large amount of data on a wide range of topics. Gathering these data can be a very difficult task that has undoubtedly put off researchers in the past. Bleys (2007) has come up with a Simplified ISEW (SISEW), which includes in its http://events.it-sudparis.eu/degrowthconference/ = 1 http://www.insee.fr/fr/indicateur/cnat_annu/base_2000/ cnat_annu_2000.htm 113 First international conference on Economic De-growth for Ecological Sustainability and Social Equity, Paris, April 18-19th 2008 the WIDER World Income Inequality Database 2. The actual welfare losses of income inequalities are estimated by multiplying the private consumption expenditures by a factor of (1 – I). World Resources Institute5 (WRI). The marginal social cost estimate used is taken from Fankhauser (1994) and linked to the cumulative emissions from 1900 onwards in order to reflect increasing costs associated with rising CO2 concentrations in the atmosphere. The value of household labor is estimated by applying a shadow wage rate to time use data. Estimates of the total time spent on household labor in France for 1986 and 1999 are taken from Dumontier and Pan Ké Shon (1999), while the SMIC3 hourly wage rate is used to value these amounts of time. Linear interpolation is used to link both time use studies, while the average time spent on household labor per person is kept constant in the periods before 1986 and after 1999. Ozone layer depletion is accounted for by valuing cumulative consumption of ozone depleting substances (ODS) at a fixed estimated unit cost. Average per capita ODS consumption for Europe is calculated by combining data from UNEP’s Geo Data portal with data from the Alternative Fluorocarbons Environmental Acceptability Study6 (AFEAS). These averages are then multiplied by the number of people living in France. The fixed unit cost applied to the ODS consumption is 53€/kg of CFC equivalent, the average of the estimates used in Cobb and Cobb (1994) and Jackson et al. (1997). Non-defensive public expenditures are calculated as the difference between effective private consumption and private consumption expenditures. Effective private consumption is equal to the actual final consumption of households and includes goods and services acquired by transfer from government units and non-profit organizations. To calculate the effective private consumption, the value of social transfers in kind receivable is added to the private consumption expenditures. Data on effective private consumption is available from the national accounts of France. Net capital growth is calculated by taking five-year rolling averages of the changes in the net capital stock, adjusted for fluctuations in the number of people employed. Data on both the net capital stock and the volume of the workforce are available at the INSEE website. Finally, the change in the net international investment position (NIIP) is taken into account, as according to Daly and Cobb (1989), sustainability requires long-term financial self-reliance. To smooth out large year-on-year variations, a five-year rolling average of the changes in NIIP is taken. Data on the NIIP are available from the International Financial Statistics (IFS) Yearbooks of the International Monetary Fund, or through their website 7. The costs of commuting are estimated by applying a ‘commuting ratio’ to the total private expenditures on transportation. The latter are obtained from the national accounts at INSEE, while the former is calculated by indexing the product of the proportion of the active people that work outside their residential communities and the average distance that these people commute. The necessary data are obtained from Talbot (2001), while a commuting ratio of 0.2 is taken for 1982 based on data for Belgium (Bleys, 2006). Results of the SISEW case study for France The ISEW is expressed in constant 2000 prices using the GDP deflator. Figure 1 plots GDP/capita against SISEW/capita for France for the period 1980-2006 (see annex). Several conclusions can be drawn from this figure. First, both lines show a trend over time that is quite similar. In 18 of the 26 periods, both indicators move in the same direction, while only in the second half of the 1990s, the observed path of both indicators differs markedly. Time series data on the emissions of five differente air pollutants (SO2, NOX, CO, particulate matter and nonmethane volatile organic compounds) are valued at estimated fixed marginal social costs rates derived from Jackson et al (1997) in order to track the costs of air pollution. Data on emissions are obtained from UNEP’s Geo Data Portal website4. Second, the SISEW case study for France does not support the ‘threshold hypothesis’ of Max-Neef (1995): except for a significant drop in sustainable economic welfare levels in the mid 1980s, SISEW/capita indicates improvements in economic welfare levels for France from 1988 onwards. The ‘depletion of non-renewable energy resources’ item is calculated by applying a replacement cost factor to nonrenewable energy consumption data. Non-renewable energy consumption includes oil, petroleum products, natural gas, coal and coal products and nuclear energy. Data is taken from UNEP’s Geo Data Portal. The replacement cost factor increases over time to reflect an increase in demand for energy and the associated increasing costs, as described in Cobb and Cobb (1994). Finally, SISEW/capita is lower than GDP/capita throughout the entire period studied. Based on this observation, it would, however, be wrong to conclude that GDP/capita overstates the actual level of welfare. The absolute value of SISEW/capita does not contain much useful information on the level of welfare, as this value would change items are added to the methodology of the index. For instance, if the value of leisure time would be added to the index, SISEW/capita would undoubtedly surpass GDP/capita. It is the trend over time of SISEW/capita, and its comparison to the trend over time of GDP/capita, that offer the most valuable insights. Costs of climate change are estimated by applying a marginal social cost estimate of carbon dioxide emissions to the cumulative emissions of CO2 since 1900. Carbon dioxide emissions data are available from the ‘Climate and Atmosphere’ section of the Earthtrends database at the 2 http://www.wider.unu.edu/research/Database/en_GB/database/ SMIC = Salaire Minimum Interprofessionnel de Croissance, data available at INSEE (http://www.insee.fr/fr/indicateur/smic.htm) 4 http://geodata.grid.unep.ch/ 3 http://events.it-sudparis.eu/degrowthconference/ 5 http://earthtrends.wri.org/searchable_db/index.php?theme=3 http://www.afeas.org/data.php 7 http://www.imfstatistics.org/imf/ 6 114 First international conference on Economic De-growth for Ecological Sustainability and Social Equity, Paris, April 18-19th 2008 Importance Average Positive Items Looking at the positive items, private consumption expenditures is obviously the most important one, as it accounts for more than half of the total value of all positive items. The two other major items are household labour and non-defensive public expenditures. All three items have witnessed similar changes over time. The net capital growth and changes in the net international investment position items have lower importances, yet, given the high degree of variation in their trends over time, these items have had a significant impact on the overall trend over time of SISEW/capita. Evolution Change 100 Relative 162.6 Private Consumption Expenditures 56.4 -2.24 156.0 Value of Household Labor 23.8 +1.39 172.9 Non-defensive Public Expenditures 15.4 +2.1 187.2 Net Capital Growth8 4.1 - - Change in Net International 0.3 - - The negative items show more diverse patterns. Two items have registered significant drops in their importances: the welfare losses of income inequalities have increased at a rate that was far below that of the negative items category in general, while the costs of air pollution have fallen both in relative and in absolute terms, over the period studied. The first observation can be explained by a decrease in inequalities in the income distribution in France from 1984 onwards, while the second can be linked to a decrease in emissions of air pollutants. The item linked to the depletion of non-renewable energy resources has increased dramatically, both in relative terms (+22.3%) as in absolute terms (+223.6%). This can be partly explained by the increase in non-renewable energy use, yet overall the escalation factor in the replacement cost has had the biggest impact. While non-renewable energy use increased by 50% between 1980 and 2006, the replacement cost estimate increased by 120%. The costs of climate change have also increased at a higher rate than that of the negative category in general, resulting in an increase of its relative importance. Investment Position8 Negative Items 100 183.3 Welfare Losses from Income Inequalities 20.0 -7.21 123.6 Costs of Commuting 1.0 +0.5 308.1 Costs of Air Pollution 11.5 -18.6 37.2 Depletion of Nonrenewable Energy Resources 39.4 +22.3 323.6 Costs of Climate Change 16.4 +3.4 227.0 Costs of Ozone Layer Depletion 11.6 -0.4 176.1 The SISEW for France, Belgium and the Netherlands The Simplified Index of Sustainable Economic Welfare has already been compiled for Belgium and the Netherlands (Bleys, 2007). This section will compare the results of both studies with the ones from the French case study presented above. Figure 2 compares the trend over time of SISEW/capita for the three countries (see annex). Two elements stand out from this figure. First, the SISEW/capita level is highest in France, exceeding levels in Belgium and the Netherlands by over 4,000€/capita on average. The main items responsible for this difference in absolute terms are non-defensive public expenditures, depletion of non-renewable energy resources and costs of climate change. Non-defensive public expenditures were calculated for France as the difference between effective private consumption and private consumption expenditures, whereas in Belgium and the Netherlands they were based on a categorization of public expenditures. In the latter, only half of the public expenditures on health and education were included. The replacement costs involved in natural capital depletion are lower in France than in the other countries under consideration, as the per capita level non-renewable energy consumption is lowest in France. Carbon dioxide emissions per head are also lower in France, resulting in lower estimates of the costs associated with climate change. Part of this can be explained by the fact that France generates significantly more energy from nuclear power plants than the other countries (about 45% in 2005). Table 2: Analysis of individual items within the SISEW for France Table 2 analyses the different SISEW items individually. Items are classified in two categories: positive and negative items. The first column of the table lists the different items, the second looks at their average importances within the respective classes, the third column indicates the change in these importances in absolute terms over the period studied, while the fourt column gives the relative change in the monetary estimates of the different SISEW items. 8 Both the ‘Net Capital Growth’ item and the ‘Changes in Net International Investment Position’ item have recorded positive and negative entries over the period studies. As the positive entries exceeded the negative ones, they are classified in the ‘positive items’ category, yet it should be noted that the importances listed in column 2 understate the actual importances of both items. http://events.it-sudparis.eu/degrowthconference/ 115 First international conference on Economic De-growth for Ecological Sustainability and Social Equity, Paris, April 18-19th 2008 Next, whereas the trend over time of the per capita SISEW is fairly similar for France and the Netherlands, Belgium shows a markedly different pattern, especially in the later years of the period studied. The SISEW/capita for Belgium decreased by over 30% in the period 2000-2004. According to Bleys (2008), this decline is mainly driven by a decrease in Belgium's net international investment position, which falls sustainability, but one of weak sustainability, since the ISEW framework allows for perfect substitution among different types of capital. The methodological criticism on the ISEW is more fundamental and urges a structural rethinking of the index. When Lawn (2003) worked out the theoretical framework of the ISEW, he built on the Fisherian concept of income. This concept forces one to distinguish between the actual capital stocks and the flows of services that these capital stocks deliver. The latter are important to measure the level of welfare or income currently enjoyed by a nation's citizens, while the former indicate whether this level can be sustained in the future. The ISEW should focus on the flows of services generated within a particular year, while additional natural capital accounts are needed to keep track of changes in the ecological sustainability of the level of welfare enjoyed in a country. Other supplemental accounts could look at the sustainability of the economic process in terms of the stock human-made capital and the level of national self-reliance (financial, food production, natural resources). The ISEW goes far in being consistent with the Fisherian income and capital concept, yet a few problems remain. These need to be addressed when developing an internationally agreed upon standardized methodology of the index. From its 2000 record high of €154,455 million to €90,475 million in 2004. A decline in net capital growth also adds to the decline of SISEW/capita in 2004. 3. Discussion This section will analyze the value of the Index of Sustainable Economic Welfare, and by extension, that of its simplified version. The criticism that the ISEW has attracted over the years has undermined both the value of the index as well as the validity of the ‘threshold hypothesis’ (Neumayer, 1999 and 2000). The different critiques can be grouped into two categories: methodological issues on the one hand and practical issues on the other. Methodological issues shed doubt on the value of the entire exercise, while practical issues are concerned with specific items within the methodology of the ISEW or with data quality or availability. Many advocates of the ISEW have replied to these critiques, refuting some of the issues raised. Another methodological flaw of the ISEW that is often emphasized is the high amount of subjectivity that enters its methodology. The researcher has to decide which items to incorporate into the methodology of the index and which valuation methods to employ. When the choices and assumptions made during the compilation of the index are not clearly communicated, the risk of misinterpretation of the results is high. ISEW studies should be clear and comprehensive so that this risk is minimized. On the practical level, several valuation methods within the ISEW methodology have been criticized. Concerns that minor adjustments to these valuation methods would have a significant impact on the index and the conclusions drawn from the ISEW studies, were expressed by many authors. The two components that have attracted the largest amount of criticism are non-renewable resource depletion and longterm environmental damage. Another practical issue that is often put forward are the inconsistenies in the methodology of the index across the different case studies. In most countries, the original methodology was adapted in order to overcome problems with data availability or to pay attention to country-specific issues. As a result of these inconsistencies, it is very difficult - if not impossible - to make cross-country comparisons. At the moment, the greatest value of the ISEW lies in its potential as a communication tool. The index is appreciated as an empirical translation of the criticism on traditional measure of economic welfare, such as the GDP. As such, it offers easy-to-understand insights that benefit the current debates on degrowth and the reorientation of the economic system. The current value of the ISEW for policy-making is rather limited. The methodological framework of the index needs revised in order for the index to gain a broader acceptability among policy-makers. Furthermore, a standardized methodology is needed to allow for international comparisons. Yet, the ISEW can be used as a guiding principle in the development of a new set of comprehensive accounts at the national level. These practical objections to the ISEW can be overcome. It is possible to think of a consistent ISEW methodology that is widely agreed upon. This methodology would consist of a list of items to be included in the index as well as guidelines on how these items should be valued. It should be noted here that several individual efforts to improve the valuations methods of specific items have been undertaken recently. Examples include Talberth et al. (2007), Forgie (2007) and Bleys (2008). Furthermore, both the availability and the quality of data has increased significantly over the last decade. 4. Conclusion Reducing the number of items in the methodological framework of the ISEW by omitting the items that have a low quantitative importance compared to most others, will reduce the amount of data needed in the compilation of the index. For most countries, the trend over time of the resulting Simplified ISEW (SISEW) is nearly identical to that of the original ISEW. On the methodological level, Neumayer (1999) argues that the authors of the ISEW commit the mistake of methodological inconsistency in two respects. First, the ISEW cannot at the same time function as both an indicator of current welfare and an indicator of sustainability: what affects current well-being need not affect sustainability and vice versa. Second, the index is not an indicator of strong http://events.it-sudparis.eu/degrowthconference/ In this paper, the SISEW is calculated for France for the period 1980-2006. It is found that, with the exception of a decrease in de mid 1980s, SISEW/capita rises steadily 116 First international conference on Economic De-growth for Ecological Sustainability and Social Equity, Paris, April 18-19th 2008 throughout the entire period studied. These results are not in line with the findings in most other ISEW studies and do not support the threshold hypothesis put forward by MaxNeef. Compared to the results of SISEW case studies in Belgium and the Netherlands, the observed level of sustainable economic welfare is higher in France. However, making cross-country comparisons is difficult, as different data sets were used. Fankhauser, S. (1994). The Social Cost of Greenhouse Gas Emissions: an Ex-pected Value Approach. The Energy Journal, 15(2): 157–184. Forgie, V. 2007. The Need for ‘Convention’ in Environmental Valuation. International Journal of Environment, Workplace and Employment 3(2): 72-90. Jackson, T., Marks, N., Ralls, J. and Stymne, S. (1997). Sustainable Ecomonic Welfare in the UK, 1950-1996, New Economics Foundation, London, UK. Although both the ISEW and its simplified version (SISEW) have numerous positive features, the lack of a consistent and internationally agreed upon methodology is a major setback. By highlighting the most important items in the ISEW framework, the SISEW gives an indication about which items require further research and debate to arrive at such a standardized methodology. Lawn, P. (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. Max-Neef, M. (1995). Economic Growth and Quality of Life: a Threshold Hypothesis. Ecological Economics, 15(2): 115-118. Some of the methodological criticism on the ISEW urges for a more structural rethinking of the index. Building on the current theoretical framework of the index, the ISEW should be transformed in a flow-oriented measure of current economic welfare. This would not necessarily require many adjustements to to current methodology. Additional stock accounts are needed to track the sustainability of the current level of welfare. These stock accounts should include natural capital, human-made capital and information on national self-reliance. Neumayer, E. (1999). The ISEW: Not an Index of Sustainable Economic Welfare. Social Indicators Research, 48(1): 77-101. Neumayer, E. (2000). On the Methodology of ISEW, GPI and Related Measures: Some Constructive Suggestions and Some Doubt on the 'Threshold' Hypothesis. Ecological Economics, 34(3): 347-361. The new set of macro-level accounts outlined above is essential if one wishes to properly monitor the links between the economy, the environment and the level of economic welfare. The development of such a set of accounts is, however, a difficult task. However, the guidelines on the System of Economic and Environmental Accounts (SEEA) worked out by the United Nations should be seen as a first step in the right direction. Talberth, J., Cobb, C. and Slattery, N. (2007) The Genuine Progress Indicator 2006. Redefining Progress, Oakland, CA. Talbot, J. 2001. Les déplacements domicile-travail. De plus en plus d’actifs travaillent loin de chez eux. INSEE Première N° 767 (avril 2001), Institut Nationale de la Statistique et des Etudes Economiques, Paris. Bibliography Bleys, B. (2006). The Index of Sustainable Economic Welfare for Belgium: First Attempt and Preliminary Results. MOSI Working Paper 27, Vrije Universiteit Brussel, Brussels. Bleys, B. (2007). A Simplified Index of Sustainable Economic Welfare for the Netherlands. International Journal of Environment, Workplace and Employment 3(2): 103-118. Bleys, B. (2008). The Index of Sustainable Economic Welfare: Proposed Adjustments to the Methodology. Ecological Economics 64(4): 741-751. Cobb, C. and Cobb, J. (1994). The Green National Product: A Proposed Index of Sustainable Economic Welfare. University Press of America, Lanham, MD. Daly, H. and Cobb, J. (1989). For the Common Good. Redirecting the Economy toward Community, the Environment and a Sustainable Future. Beacon Press, Boston, MA. Dumontier, F. and Pan Ké Shon, J.-L.. 1999. En 13 ans, moins de temps constraints et plus de loisirs. INSEE Première N° 695 (octobre 1999), Institut Nationale de la Statistique et des Etudes Economiques, Paris. http://events.it-sudparis.eu/degrowthconference/ 117 First international conference on Economic De-growth for Ecological Sustainability and Social Equity, Paris, April 18-19th 2008 30000.0 25000.0 2000€/capita 20000.0 15000.0 10000.0 5000.0 05 06 20 04 04 20 03 03 20 02 20 01 20 00 00 20 99 99 20 98 19 97 per capita 19 96 19 95 19 94 per capita GDP 19 93 19 92 19 91 19 90 19 89 19 88 19 87 19 86 19 85 19 84 19 83 19 82 19 81 19 19 19 80 0.0 SISEW Figure 1: GDP/capita and SISEW/capita for France, 1980-2006 20000.0 18000.0 16000.0 constant 2000€/capita 14000.0 12000.0 10000.0 8000.0 6000.0 4000.0 2000.0 SISEW France 118 SISEW Netherlands 20 20 02 20 01 20 20 19 98 19 97 19 96 95 19 94 19 93 SISEW Belgium Figure 2: SISEW/capita for various countries http://events.it-sudparis.eu/degrowthconference/ 19 92 19 19 91 19 90 19 89 19 88 19 87 19 86 19 85 19 84 19 83 82 19 81 19 19 19 80 0.0