Download Isn`t it Well Being That We Want to Improve? - The

Isn’t it Well Being That We Want to
Improve?
- The Metric of Evaluation
Lars Osberg
- Department of Economics,
Dalhousie University
- Institute for Social and Economic Research
University of Essex
Macro Indices & Micro evaluation

Under what conditions would a series of
“good” project decisions add up to an
increase in aggregate well-being ?
– What project information is needed for a
“good” decision ?
Macro well being index Micro criteria
 GDP per capita Benefit/Cost > 1

So what if GDP is increasing ?

If Project Benefits > Costs in current $
Income, adoption implies GDP increase
 What is the connection between GDP &
Economic Well-being ?
• GDP excludes leisure, environment & much more

Potential compensation not good enough
 Do we care about
– Accumulation for future generations ?
– Distribution of Income ?
– Insecurity ?

Can we all agree on “adjustments” to $
income ??
Outline of Paper

Alternative Index of Economic Well Being
– Is it possible ?
– Is it plausible ?
– Does it make any difference ?

Index of Economic Well Being
–
–
–
–

Consumption flows
Stocks of wealth
Distribution: inequality & poverty
Economic Insecurity
Compare trends in the index and its
components to GDP per capita trends
 Implications for project evaluation
GDP per capita

GDP rigorously standardized across
countries (SNA)
 Strong Implicit assumptions when used
as measure of economic well-being
– aggregate share of income devoted to accumulation
(including value of unpriced environmental assets)
automatically optimal
– poverty, inequality & economic insecurity do not matter
– changes in leisure time, length of life, household size,
costs of commuting, pollution & crime - all irrelevant

poor match to popular perceptions of trends in
economic well-being
• "Are you better off today than you were four years ago?"
– 1980 Ronald Reagan – 1976-80 actual increase = 8.8%

ECONOMIC WELL-BEING=
a1 [ CONSUMPTION]
+ a2 [TOTAL WEALTH]
+ a3 [ DISTRIBUTION]
+ a4 [INSECURITY]

DIFFERENT VALUES WILL IMPLY
DIFFERENT WEIGHTS

Setting weight equal to Zero is a
(strong) value choice
Model
Consumption flows
Economic
Well-Being
Economic security
Economic equality
Human Well-being
Economic Well-being
Economic
Well-being
Well-being and GDP
GDP
GDP
Economic
Well-being
“Social regrettables”
“Social
regrettables”
GDP
GDP
Economic
Well-being
Average Consumption Flows $

Marketed real consumption per capita
 Adjustments
– value of increased longevity
– reduced economies of scale in household
consumption
– changes in working hours – @ marginal net wage
– Government services

Data Non-Availability precludes
– “Regrettable Necessities”
– Underground Economy

Why might such adjustments matter?
– E.g.- BIG differences in hours worked 1997
• Germany 981.9 France
• USA
1428.5
980.6,
Figure 1
Annual Number of Hours Worked per Person Aged 15-64 1
1800
1600
annual hours
1400
Canada
France
Germany
Sweden
United Kingdom
United States
1200
1000
800
600
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
year
1
= Average hours worked per employed person *(Employment / pop. age 15-64)
Source: OECD Health Data 98 CDROM, "A Comparative Analysis of 29 Countries".
Wealth Stocks, Sustainability and
Intergenerational Bequest $



Physical capital stock
Research and development capital stock
Value of natural resource stocks
– price + quantity change




Stocks of human capital (@ cost
education)
Net foreign indebtedness (-)
State of environment and national
heritage (degradation -)
NOTE: GDP is flow of market output
Distribution

Same average income if all get $500 or if ½
get $999 & ½ get $1 – but well-being differs
 How to summarize “Distribution”?
– Simplicity desirable if index to be used
– Poverty & Inequality differ, but both matter

Inequality
– Gini coefficient
• After-tax & transfer household income
• Equivalence scale =
familysize

Poverty
– Sen-Shorrocks-Thon measure
• Rate (Poverty Line = ½ Median)
• Average poverty gap ratio
• Intensity = rate x gap
Economic Security.

[25] “Everyone has the right to a standard of
living adequate for the health and well being of
himself and of his family, including food,
clothing, housing and medical care and
necessary social services, and the right to
security in the event of unemployment,
sickness, disability, widowhood, old age or other
lack of livelihood in circumstances beyond his
control.”
• Universal Declaration of Human Rights
– United Nations: 1948
“Economic Security”

Risk income loss due to
unemployment
– changes in employment rate x UI coverage x
UI replacement rate

Risk of illness
– Unreimbursed private medical expenses as
share of disposable income

Risk of single parent poverty
– poverty rate & gap for single women with
children
– divorce rate of legally married couples

Risk of poverty in old age
– chance x depth of elderly poverty
Australia
1.55
1.45
1.35
1.25
1.15
1.05
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
99
19
98
19
97
19
96
19
95
19
94
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
80
0.95
Canada
1.55
1.45
1.35
1.25
1.15
1.05
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
99
19
98
19
97
19
96
19
95
19
94
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
80
0.95
United Kingdom
1.60
1.50
1.40
1.30
1.20
1.10
1.00
0.90
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
99
19
98
19
97
19
96
19
95
19
94
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
80
0.80
United States
1.55
1.45
1.35
1.25
1.15
1.05
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
99
19
98
19
97
19
96
19
95
19
94
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
80
0.95
Sweden
1.55
1.45
1.35
1.25
1.15
1.05
0.95
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
99
19
98
19
97
19
96
19
95
19
94
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
80
0.85
Caveats

Trend – NOT level – comparisons
– Statistical sources differ less over time within
countries than across countries
– Avoid valuation of Infra-Marginal Endowments
(e.g. security value of NHS, environment)

A Cardinal Representation of an Ordinal
Magnitude
– Defensible only as a Local Approximation to Trend
• if valid - only over observed range

Operationalization Matters
 And many more
Implications ?

Much less gain in economic well-being
than in real GDP per capita 1970-99
– Somewhat sensitive to weighting of change in
consumption relative to inequality & insecurity
– Reducing Inequality & Insecurity was originally
the major objective of social programs
– de-emphasized in recent years
• Especially USA & UK – has well being stagnated ?

Perhaps Policy Design should aim at
increasing Well-Being
 Useful to know project impacts on:
– Accumulation
– Distribution
– Insecurity
The role of the natural environment
Natural
Capital
EWB
GDP
Physical Investment
Produced
Capital
Natural
Capital
EWB
GDP
Human and Social Capabilities
Produced
capital
Natural Capital
Human and Social
Capabilities
GDP
EWB
The role of knowledge/skills
Produced
capital
Natural Capital
Human and Social
Capabilities
Human
capital
GDP
EWB
The role of networks/social norms
Produced
capital
Natural Capital
Human and Social
Capabilities
Human
capital
Social
capital
GDP
EWB
A DIGRESSION
Human Capital
“The knowledge, skills, competencies and
attributes embodied in individuals which
facilitate the creation of personal, social
and economic well-being”
Social Capital
“Networks together with shared norms,
values and understandings which
facilitate co-operation within or among
groups”
Close ties between human and social capital
Produced
capital
Natural Capital
Human and Social
Capabilities
Human
capital
Social
capital
EWB
GDP
The role of institutions
Produced
capital
Natural Capital
Human and Social
Capabilities
Human
capital
Social
capital
Political, institutional
and legal arrangements
GDP
EWB
Produced
capital
Natural Capital
Human and Social
Capabilities
Human
capital
Social
capital
Political, institutional
and legal arrangements
GDP
EWB
Produced
capital
Natural Capital
Human and Social
Capabilities
Human
capital
Social
capital
Political, institutional
and legal arrangements
GDP
EWB