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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