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Economic and Sustainable Welfare
Measurement: a New Approach to the ISEW
Pedro Beça* and Rui Santos
Ecological Economics and Environmental Management Centre,
Department of Environmental Sciences and Engineering,
Faculty of Sciences and Technology, New University of Lisbon,
Quinta da Torre, 2829-516 Caparica, Portugal
* Corresponding author. E-mail address: [email protected]
Abstract
Sustainability evaluation is a contemporary theme of major scientific and policy relevance,
requiring the consideration of multiple dimensions and diverse perspectives. The economic
approach to sustainability assessment has frequently relied on the proposal of alternatives, or
adjustments, to GDP, widely used as an indicator of macroeconomic performance.
Several authors have proposed alternative indicators, which intend to measure sustainability and
economic welfare in a way that avoids the limitations of GDP. The Index of Sustainable Economic
Welfare (ISEW) was initially proposed by Daly and Cobb (1989) with the objective of
encompassing several aspects of sustainable welfare. Several authors in recent years have
discussed this indicator and have proposed contributions to improve it. However, there are still
some doubts about its aptitude to represent a sound alternative to GDP.
This paper presents a modified ISEW, which is intended to avoid some of the methodological
shortcomings. The changes proposed allow for a direct comparison of the modified ISEW with the
GDP, which is an advantage over previous studies. An application is developed for the US case,
taking advantage of a wider availability of data and the possibility of comparing the results with
previous works.
This work discusses the influence of alternative methodological options for the calculation of the
indicator’s components on the results, as well as their comparison with GDP. Moreover, the
modified ISEW provides a clearer picture of the success or failure of environmental and social
policies, by avoiding the tampering effect resulting from the cumulative accounting of values. The
adoption of different scenarios in the indicator’s calculation allows for the substantiation, in
greater detail than previous studies, of the difference between the behavior of the ISEW and the
GDP. The results obtained reinforce the inadequacy of the GDP as a welfare indicator and the
need to adopt alternative indicators.
Key words: Sustainability evaluation, Index of Sustainable Economic Welfare (ISEW), Gross
Domestic Product (GDP)
1. Introduction
The attempts to appraise macroeconomic behavior and development have been a concern since
classical economics was established as a discipline. Adam Smith (1776) has stressed the role that
some resources (labor, capital and land) can have in the process of economic growth and wealth
creation. Economics has evolved considerably over the intervening time, however, development
has been predominantly associated with economic growth and GDP is still considered as a major
P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
macroeconomic indicator (Daly and Cobb, 1989; Ayres, 1996; England, 1998). Many researchers
and decision-makers recognize the relevance of improving the way economic and sustainable
welfare is evaluated, as well as the need to integrate the ecological and social dimensions in
sustainable development assessments (World Bank, 1997; Costanza et al. 2002; United Nations,
2003; Ayres, 2004).
To incorporate these concerns some researchers are concentrating their efforts in improving the
System of National Accounts - examples are the Net Domestic Product and the environmentally
adjusted Net Domestic Product (United Nations, 2003). Other efforts are oriented towards the
development of indicators that measure social and economic well-being – examples are the Index
of Sustainable Economic Welfare (ISEW) (Daly and Cobb, 1989 and Cobb and Cobb, 1994), the
Human Development Index (UNDSD, 2001) and the Environmental Sustainability Index (Esty,
Levy et al., 2005).
According to several authors, although GDP remains a very widely used measure of
macroeconomic performance, it is recognized that it has several limitations in the assessment of
sustainable welfare (Eisner, 1988; Ayres, 1996; Lawn, 2003; England, 1998). For instance, Eisner
(1988) emphasizes the exclusion of transactions performed outside the formal market, and Lawn
(2003) points out the environmental and social externalities associated with markets’ failures.
Moreover, some authors stress that GDP includes expenses needed to maintain the wellbeing
level, like those resulting from the environmental and social conditions generated by market’s
economy itself, and does not account for the way income is distributed across society (Daly and
Cobb, 1989; Hamilton, 1999; Costanza et al., 2004).
The evaluation of costs and benefits that are not reflected in the markets outcomes is, however, a
complex and arguable task (Nordhaus and Kokkelenberg, 1999). First, it requires a compromise
between a conceptually ideal measurement and what can be estimated with available information.
Second, the assessments of which activities contribute to welfare, as well as the value to assign
to each activity, are subjective and complex issues for which there are no unique and harmonious
solutions.
Several authors have proposed indicators that measure social and economic well-being, by
estimating and incorporating the economic values for negative and positive externalities
associated with the market economy, and adjusting income by the level of distribution across
society. Examples of such indicators are the Measure of Economic Welfare (MEW) (Nordhaus and
Tobin, 1972), the Index of Sustainable Economic Welfare (ISEW) (Daly and Cobb, 1989 and Cobb
and Cobb, 1994) and the Genuine Progress Indicator (Anielski and Rowe, 1999).
A frequent conclusion of studies performed on welfare indicators, is that there is an increasing
differentiation over time between GDP and proposed alternative indicators (Daly and Cobb, 1989;
Cobb and Cobb, 1994; Stockhammer et al. 1997; Jackson et al, 1997; Anielski and Rowe, 1999;
Lawn and Sanders, 1999; Clarke and Islam, 2005). This result is especially evident, for most
countries, from the 1980s onward, where the alternative indicators exhibit a different growth path
compared to the GDP and, in some cases, even decreasing values. One possible reason for these
results is presented by Max-Neef (1995). He suggests the existence of a threshold, a point
beyond which economic growth (measured in a conventional way) generates a decrease in quality
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of life or welfare, instead of the increase suggested by GDP growth. This perspective challenges
the notion of GDP as an adequate indicator to measure sustainable development.
Sustainable development can be considered as a development path that assures, at least, the
maintenance of wellbeing over time, as Hamilton (2000) has emphasized. In a weak perspective,
sustainability is defined as the maximization of welfare across time in a dynamically efficient
economy (Pezzey and Toman, 2002; Stavins et al., 2003). In this view, sustainability can be
achieved if the total stock of capital is maintained, while manmade capital can replace natural
capital, as Hartwick (1977) states. However, Howarth and Norgaard (1990) provide evidence that
an efficient allocation of resources (manmade and natural) between generations is insufficient to
assure sustainability, and Asheim et al. (2003) have demonstrated that a generation may comply
with Hartwick’s investment rule and yet consume more than a sustainable level. This supports the
need for a different perspective on sustainability.
The advocates of strong sustainability state that the possibilities of substitution between natural
and manufactured capital are limited (e.g. Common and Perrings, 1992; Daly, 1996). Critical
natural capital, as defined by Ekins et al. (2003), is the type of capital that cannot be replaced
and thus whose preservation is essential to assure sustainability. Moreover, natural capital has
characteristics
associated
with
multi-functionality,
irreversibility,
intrinsic
differences
and
uncertainty, which make it unique (Van der Perk et al., 2000).
On the other hand, the concerns with new welfare economics models of sustainability extend
beyond the substitutability of natural capital and the use of efficient prices, as Gowdy (2005)
emphasizes. The assessment of welfare and sustainability requires a different approach to the one
adopted in GDP; as Nordhaus (1995) asserts, a measure of sustainability based on the Fisher’s
(1906) income concept, which distinguishes the flow of services from the stock of capital that
generates it, is more appropriate than that of Hicks (1939) in which the GDP is supported.
The use of GDP to support the definition of policy strategies, to make international comparisons of
welfare or to evaluate changes in it, is constrained by the mentioned issues (Ayres, 1996;
England, 1998; Gowdy, 2005). The misleading signals, resulting from GDP use, can be particularly
significant in circumstances where there is a high level of uncertainty over the effects of economic
activity on ecosystems’ services, the intensity of environmental damages generated or the degree
of resources’ scarcity (Ayres, 1996; Howarth and Farber, 2002; Farber et al., 2002; Ekins et al.,
2003). In those situations, there are also uncertainties about the real value of externalities, their
effects in the future economy’s production capacity, and how distant a country is from a
sustainable development path.
In conclusion, the dominant paradigm, which states that the increase in national income leads to
welfare improvement, has important and recognized limitations. The misevaluation of the
contribution of environmental and social components (including both positive and negative
externalities) may contribute to a biased perception of decision makers, who support their
assessments in the dominant paradigm.
assumption
may
be
misguided
and
Therefore the decisions and policies supported in this
possibly
contribute
to
the
increase
of
intra
and
intergenerational inequities (Anand and Sen, 2000; Costanza et al., 2002; O’Connel, 2004; Islam
et al., 2003; Dean, 2007).
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This work intends to contribute to the study of alternative indicators to GDP, which include the
measurement of environmental and social externalities. It includes a theoretical contribution
through the analysis of methodologies employed to determine the economic value of welfare
components, as well as a detailed analysis of empirical results obtained with an application to the
US case.
2. The Proposed Approach
Among the different alternatives to GDP as an economic welfare indicator is the ISEW (Index of
Sustainable Economic Welfare). The indicator was developed by Daly and Cobb (1989) and Cobb
and Cobb (1994), from the indicators MEW (Measure of Economic Welfare) by Nordhaus and
Tobin (1972) and EAW (Economic Aspects of Welfare) by Zolotas (1981).
The ISEW incorporates several aspects of sustainability. Taking as a starting point personal
consumption expenses, they are adjusted for inequality in income distribution, as well as other
positive and negative contributions to welfare and sustainability (Daly and Cobb, 1989; Jackson et
al., 1997; Stockhammer et al., 1997; Costanza et al., 2004; Lawn, 2005).
This work addresses some of the ISEW’s shortcomings as an alternative measure of welfare, as
mentioned by several authors (Eisner, 1994; Gottfried, 1994; Mishan, 1994, Diefenbacher, 1994;
Jackson et al., 1997; Stockhammer et al., 1997; Hamilton, 1999; Neumayer, 1999, 2000; Lawn,
2005). The most relevant shortcomings addressed and corresponding changes proposed are:
•
The way to determine the value of externalities – it is proposed that externalities are
accounted as flows instead of stocks;
•
The deficient substantiation of some economic values of externalities – the economic
values used in the proposed approach are all based in published works;
•
The absence of an analysis that evaluates the influence of different methodologies in the
outcome of the ISEW - this paper intends to overcome this shortcoming by assessing the
effect of different methodologies on the results.
A new version for the ISEW calculation is proposed (named modified ISEW), which can be
adopted for sustainable welfare assessment. Several methodological changes for the estimation of
the indicators components are proposed, leading to a considerably different behavior of the
indicator.
One of the contributions of this work to the development of the ISEW is the analysis of existing
methodologies for the economic valuation of the components that compose welfare, choosing for
each component the methodology that seems to gather more consensus in the literature and in
view of the indicators’ objectives. Despite this orientation for the selection of methods that can
lead to more consistent estimations for externalities' values, it is recognized that every option
taken in this sense is just an estimation of intricate phenomena that intend to relate the
interaction between society and the environment.
In the application to the US case, diverse scenarios are also built using different options for the
calculation of the components, leading to ranges of values instead of single values, which are
substantially different and more extensive results than those of previous works. The results
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obtained for the modified ISEW, and their comparison with GDP, reinforces the conclusion that the
latter remains distant from a reasonable measure of welfare or sustainability.
3. The Modified ISEW
The proposed model for the modified ISEW’s calculation is based on the indicator developed by
Daly and Cobb (1989), with some changes that are briefly described in table 1 for each
component and in more detail for the most significant changes. Some of these changes are based
on published works (e.g. Cobb and Cobb, 1994; Eisner, 1994; Anielski and Rowe, 1999; Hamilton,
1999; Neumayer, 1999, 2000) while others are proposed by the authors.
Table 1 – Summary of component methodology and calculation
The main difference between the proposed modified ISEW and the majority of other previous
ISEW versions is the fact that in the modified ISEW all the components are calculated in the form
of flows instead of stocks. This is in line with comments from Neumayer (1999, 2000), who
supports that accumulating the value of environmental damage leads to a multiple and
inappropriate accounting of the harmful effects. Hamilton (1999) also calculated these costs in the
form of flows for the Australian GPI calculation.
For any environmental component where occurs damage or loss of ecological goods and services,
the associated environmental changes can be reversible and/or irreversible. For the irreversible
changes it is legitimate to consider that the economic value translating negative externalities, be
account for in the form of a stock value, whereas to the reversible ones in the form of flows. The
environmental damage significance is dependent of several factors, including: the level in which
the ecosystem functions are affected; the resilience of ecosystems (Scheffer et al., 2001); the
existence of critical thresholds (Farber et al., 2002), and whether the natural capital concerned is
critical (Ekins et al, 2003). Therefore, in order to determine the corresponding economic value
associated with the environmental change, it is necessary to characterize the influence that every
cause has in the environment and then the levels of change that correspond either to a
cumulative effect or a flow count. The marginal economic value itself may be variable depending
on factors like, for instance, the state of the ecosystem, the characteristics of the ecological
functions affected, or the size of the environmental change (England, 1998; Howarth and Farber,
2002). Moreover, as Farber et al. (2002) emphasize, there may be thresholds levels at which
ecosystem structures and functions are substantially altered, who do not necessarily have linearly
corresponding economic values.
The approach adopted in this work is to account only for the flow component of environmental
externalities. First, this option is due to the stated complexity in estimating the value of the
cumulative phenomena of environmental changes. Second, since one of the objectives of this
work is to compare the trend of a welfare indicator to that of the GDP (a flow measure), then the
comparison of two flow indicators is more explanatory than by mixing stocks and flows in the
ISEW and then compare it to the GDP, as proposed in other works (e.g. Daly and Cobb, 1989;
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Cobb and Cobb; Jackson et al., 1997; Stockhammer et al., 1997; Anielski and Rowe, 1999;
Costanza et al., 2004).
In summary, the most significant changes introduced by the modified ISEW, when compared to
the ISEW proposed by Daly and Cobb (1989), are the following:
•
Twelve components are estimated by means of a different methodology, and in five cases
the changes are substantial (e.g. services of durable and public goods, some
environmental externalities);
•
The data and unitary economic values are all from published and more recent works;
•
The environmental externalities are accounted as flows instead of stocks (e.g. costs of
carbon emissions, wetland and soil losses).
4. Case study
A study of the Modified ISEW is developed for the US case, taking advantage of a wider
availability of data and the possibility of comparing the results with previous works, allowing the
consequent evaluation of the influence of methodological changes in the outcome. The analysis
was performed using data for the period between 1950 and 2005.
For a few of the components considered for the modified ISEW, namely the loss of leisure time,
the loss of forest, and the value of the ozone layer, the data available in the literature associated
with the environmental losses and social damages, including the economic values estimated in
several studies, shows a significant uncertainty in the figures produced (e.g. Cobb and Cobb,
1994; Mishan, 1994; Costanza et al., 1997; Anielski and Rowe, 1999). For this reason, it is
avoided the inclusion of ambiguous values for these components in the first indicator’s calculation.
The potential effects of these components in the modified ISEW are only discussed in the
sensitivity analysis section.
The computed values for the modified ISEW are presented in Figures 1 to 3 and Table 2. All the
monetary values are in US dollars at constant 2005 prices. Figure 1, complemented by some
illustrative values in Table 2, illustrates the trend of the modified ISEW compared to that of the
GDP in per capita values. It is clear that, for the period 1950-2005, the growth of the GDP is
substantially higher to that of the modified ISEW and, also, that the behavior of the two is
significantly different. For instance, there are periods where the GDP evidences a significant
growth that is not replicated by the modified ISEW, and also at times the increase of the modified
ISEW is not matched by the GDP.
In fact, the modified ISEW per capita shows its most significant growth (about 53%) in the period
1973-1983, which seems to reflect the implementation of effective environmental regulations and
social protection schemes, while in the same period the GDP evidences a slow overall growth
(about 13%) and even brief periods of decline. Likewise, in the period from 1985 to 2000 the GDP
shows an increase of around 37%, while the modified ISEW demonstrates a much smaller growth
of 9% with brief episodes of decrease in the period.
Figure 1 - Modified ISEW and GDP from 1950 to 2005 in per capita values.
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Table 2 – Values for Modified ISEW and GDP in selected years ($US
2005)
In Figure 2, the trend of modified ISEW is compared to that of other ISEW versions as proposed
by four different works: Daly and Cobb (1989), Cobb and Cobb (1994), Anielsky and Rowe
(1999), Costanza et al. (2004). All values were converted to 2005 prices. The main difference is
that the modified ISEW is the only one that does not evidence a decline after reaching a
maximum point. This is a consequence of a different approach adopted by the previous authors,
since they consider the cumulative accounting of some environmental externalities, especially the
emission of CO2. This option affects the results significantly, leading to a multiple counting of the
same effect and the inevitable diminishing of the ISEW’s values beyond a threshold point, as
Neumayer (2000) suggests.
There are strong limitations in the knowledge of the aggregating impacts of CO2 emissions (Tol,
2005), to which are also associated value judgments. We emphasize the need to develop
additional research in this area, namely to allow a clear separation between cumulative and noncumulative effects and to turn available more accurate models to estimate the values of
environmental externalities. With the current state of the art we decided to adopt a noncumulative conservative approach, which is easier to apply and avoids a strong potential bias
resulting from the aggregation of impacts associated with CO2 emissions.
Figure 2 - Modified ISEW compared with ISEW as proposed by other
authors.
In Figure 3, the trend of the three aggregate components of the modified ISEW (social,
environmental, economic) is compared with that of private consumption expenses. Notice that
these are absolute values; therefore, although the values of environmental and social components
are similar, the first is negative while the latter is positive. This figure evidences that private
consumption expenses is the most significant component on the indicator’s values, and that it is
the only that shows a growth trend in the entire period of the study.
In contrast, the per capita combined values of environmental and social components, demonstrate
changes that are much less significant and do not exhibit any noteworthy global tendencies. For
the environmental components, the most relevant behavior is the decrease taking place between
1970 and 1983, which seems to reflect the positive effect of environmental regulations. The
algebraic value of economic components is negative, mainly due to the growth of private
expenses in durable goods which are deducted in the computation of this value, as their
contribution to welfare is determined the way Eisner (1994) suggests.
Figure 3 – Trend of modified ISEW aggregate components and private
consumption expenses (absolute per capita values).
In summary, the results of the modified ISEW applied to the case study evidence the following:
•
The modified ISEW and GDP have distinct behaviors;
•
The trend of the modified ISEW is different from the ISEW proposed by other works (Daly
and Cobb, 1989; Cobb and Cobb, 1994; Anielsky and Rowe, 1999; Costanza et al., 2004);
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P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
•
The private consumption expenses are the most significant component influencing the
indicator’s behavior.
The consistency of these results will be further investigated in the following sensitivity analysis.
5. Sensitivity Analysis
The objective of the sensitivity analysis performed is to evaluate the influence of the use of
different approaches to estimate externalities in the outcome of the modified ISEW. For this
purpose, for the most significant components of the indicator are considered environmental and
social externalities figures estimated by other authors. Finally, the results of the combination of
different assumptions are compared to GDP.
In the selection of the most significant components analyzed in the sensitivity analysis are
considered those that exhibit a value representing at least 10% of the modified ISEW. From the
analysis are excluded the components that have direct market values; i.e. private expenses in
durable goods and the cost of unintentional accidents. The considered components are estimated
using the following methodologies:
•
For the adjustment of private consumption expenditures, using the Theil index and, the
Atkinson index for three values of social preference (0,25; 0,50 and 0,75);
•
For household labor, using a combined opportunity and substitution cost methods, with
percentages of substitution cost of 25, 50, 75 and 100%;
•
For the cost of non-renewable resource loss, the analysis is done by comparison of the
economic value resulting from the application of several values for the energy
substitution cost, from four possible scenarios of energy price (values of energy
equivalent to oil barrels in $US 2005): the price for oil, which in 2007 exhibited an
average value of $59.18 per barrel; the EIA (2007) oil price future projections of $63.58
in 2030; current price for energy production from renewable sources taken from IEA and
OECD (2004) (average of $118,78 for wind and $137,05 for biomass); and future price
for energy production from renewable sources considering the average value of $63,96
(IEA and OECD, 2004);
•
For the public expense in education and health, using combinations of 25, 75 and 100%
of the health public expense, maintaining the education value at 100%;
•
For the service of durable goods, using the methodology of Costanza et al. (2004);
•
For the costs of commuting, through the estimate obtained by Khisty and Kaftanski
(1986) for the travel time social costs of urban traffic congestion in the USA;
•
For the costs of air pollution, with the methodology used by Costanza et al. (2004) based
on the work of Freeman (1982).
For the externalities estimated by other works, the values used in the sensitivity analysis are
taken from the work of Anieslky and Rowe (1999) and updated by those from Venetoulis and
Cobb (2004). The objective at this stage is not to challenge or analyze the methodologies used by
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the authors, but to evaluate the influence these values can have on the outcome of the ISEW,
assuming that they are accurate. However, there is one methodological change, to maintain
consistency with the methodology used in this work, which is to considerer only flows for the
valuation of environmental damages, like described in section 3.
The values of negative externalities estimated by Anieslky and Rowe (1999) considered in this
sensitivity analysis are:
•
For environmental externalities: the cost of ozone depletion and the loss of forest cover,
and
•
For the social externalities: the loss of leisure time, the cost of underemployment, the
cost of family breakdown and the cost of crime.
The different values obtained for externalities are combined in four different scenarios which are
possible outcomes of the modified ISEW. These scenarios are created with the rationale of having
a best case scenario, which yields the highest plausible welfare values, a worst case scenario that
is the opposite, plus two intermediate scenarios of possible results for the indicator:
a.
Scenario 1 (best case scenario) – the combination of the highest values of positive
externalities and the lowest values of negative ones, excluding the negative
externalities estimated by Anieslky and Rowe (1999);
b. Scenario 2 – scenario 1 plus the negative externalities estimated by Anieslky and
Rowe (1999);
c.
Scenario 3 - the modified ISEW as calculated in section 4 with the subtraction of the
negative externalities estimated by Anieslky and Rowe (1999);
d. Scenario 4 (worst case scenario) – the combination of the lowest values of positive
externalities and highest values of negative ones, including the negative externalities
estimated by Anieslky and Rowe (1999).
Figure 4 – Trend of modified ISEW compared to the designed scenarios in
per capita values.
From the analysis of figure 4, it can be seen that the different values for externalities used in each
scenario lead to substantially dissimilar values between these scenarios and the initially computed
modified ISEW. In particular, the estimation of values for household labor and loss of nonrenewable resources can induce a significant change in the outcome of the modified ISEW for the
entire period of the study. The shared trend of all the scenarios and the modified ISEW can be
condensed in the following facts:
•
the most relevant period of growth is between 1975 and 1985 approximately;
•
From 1990 to 1998 there is a slight decrease in the values of the indicator;
•
From 1998 on there is a moderate increase.
These mutual tendencies are observed in the modified ISEW and the considered scenarios,
therefore they are apparently independent of the selected methodology. The GDP exhibits a
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behavior that is significantly distinct from these welfare measures, in which there are periods of
significant growth of the GDP that are dissimilar, and in some cases even opposed, from the ISEW
and the considered scenarios. These results can help in justifying that the welfare trends
estimated by an indicator such as the ISEW are probably more close to reality than the ones
being taken by the dominant paradigm through the GDP.
The distinct trend of the GDP compared to that of a welfare indicator is also evidenced in figure 5,
which shows that the ratio between the two is generically decreasing. This decrease is even more
expressive for the more optimistic scenarios, in which the negative externalities are lower and the
positive ones higher. This way, it seems clear that the welfare per unit of GDP is generically
decreasing in the period of the study. Moreover, this decrease is higher for the measures of
welfare that adopt a more optimistic valuation of externalities. These results suggest that an
increase in economic production can lead in some circumstances to a decrease in welfare.
Figure 5 – Ratio between scenarios and GDP.
6. Discussion
The issues associated with the design and development of a welfare indicator, such as the ISEW,
are multifaceted and at times subjective. The difficulties range from the need to delineate
assumptions which are linked to ideological principles, to the availability of studies to estimate the
economic values for externalities that portray intricate phenomena of the interaction between
society and the environment.
In particular, the ISEW has associated shortcomings of both a conceptual and methodological
nature, such as the following:
a.
The definition of the indicator’s components;
b.
The share of the private consumption expenses contributing to welfare;
c.
The estimation of values for externalities.
a. The definition of the indicator’s components: as mentioned by Neumayer (1999), there is some
discussion associated with the components used to evaluate welfare. It is possible to argue
against or in favor of the inclusion of components, and the assumptions linked to them can be
cause for debate. Such an example is the concept of defense expense, used to determine the
level of contribution of components such as health and education. According to the definition by
Daly and Cobb (1989 p.78), “defense” means protection against the undesirable effects of
production and not the usual environmental conditions. However, this concept if somewhat
ambiguous since it is not very clear the frontier between undesirable effects to welfare externalities –, a neutral contribution to welfare and what can be considered an investment in
welfare. For example, Daly and Cobb (1989) consider the assumption that only 50% of the
education expenses contribute to welfare, without any scientific support, which is not followed in
this work (considered entirely).
b. The share of the private consumption expenses contributing to welfare: the decision of the
share of an expense that can be considered an investment in welfare is influenced by strong
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personal biases, namely of an ethical nature. Private consumption expenses are considered by
most authors in their totality, however, these expenses contain components that can be
considered simultaneously as beneficial and prejudicial to welfare (for instance alcohol and
tobacco). Lawn (2005) suggests that some harmful components can be excluded, such as part of
the food expenses in developed countries assuming that part of it is excessive. However, this type
of exclusion has implicit a value judgment. In this work private consumption is considered
entirely, assuming that the consumption decisions are taken in result of an expressed need or
willingness, assumed voluntarily by consumers, and are therefore a contribute to welfare.
c. The estimation of values for externalities: reaching an economic value for externalities has both
conceptual and methodological limitations. On the conceptual side, for example, matching the
economic and ecological concepts of values is a delicate task; the intrinsic values of natural
system features and processes may be distinct from their equivalent economic values (Farber et
al., 2002). Moreover, as Daly (1992) emphasizes, the economic theory is limited in the evaluation
of the adequate scale of ecosystems services, by generally making two assumptions: 1. that
environmental resources are infinite related to the scale of the economic subsystem, and 2.
neglecting to consider that the decision to allocate some natural resources limits the capacity of
the environment to provide alternative goods and services.
From the methodological perspective, as externalities are not measured by markets, their value
has to be estimated through methodologies, like those supported in surrogate or hypothetical
markets, which can introduce some uncertainty. Another controversial aspect of the ISEW is the
already mentioned accounting method of environmental damage in the form of stocks, leading to
a substantially dissimilar behavior of this indicator and undermining the comprehension and
acceptance of the results.
7. Conclusions
Sustainability evaluation is a challenging theme, which is addressed in this paper with the
objective to discuss methodological aspects associated with the development of alternative
indicators to GDP, and to propose a modified ISEW that intends to avoid some of the
shortcomings identified in the literature. The main conclusions of the work performed can be
summarized by the following:
a.
The assessment of welfare and sustainability are complex issues, as they entail multiple
dimensions and the evaluation of diverse aspects of interaction between society and the
environment;
b.
The proposed modified ISEW considers a different methodology to estimate twelve
components of the indicator, assume different data sources to the economic values
adopted in the estimation process and accounts for environmental externalities as flows
instead of stocks. Furthermore, it allows for a direct comparison with GDP, which is an
advantage over previous studies, and provides a clearer picture of the success or failure
of environmental and social policies, by avoiding the tampering effect resulting from the
cumulative accounting of values;
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c.
Although the methodology for the modified ISEW has been developed with the objective
of attenuating some of the indicators’ shortcomings, there are still several assumptions
that are influenced by intricate ethical values, limiting the conclusions that can be drawn;
d.
The application developed for the US case, took advantage of a wider availability of data
and the possibility of comparing the results with previous works. The different
methodological options explored in the sensitivity analysis scenarios allow to reinforce the
consistency of the main result: the trend of the GDP compared to the ISEW reveals
significant differences, to the point of invalidating an undoubting relation between the
economic performance results (measured in a conventional way) and welfare;
The discussion surrounding welfare measurement is far from being over. The development of
indicators such as the ISEW still has a long way to go, and it is a necessary course in order to
stimulate the analysis and discussion about the ethical values associated to the assessment of
sustainability and welfare. In the academic and policy arena this exercise will be determinant
in the way externalities will be valued and the ability of society to measure its levels of
sustainability and welfare;
The contribution presented in this paper call the attention for several aspects that require
future research, such as: (1) the development of sound methodologies for the estimation of
externalities, that leads to an enhanced comprehension and acceptance of the ISEW and
related approaches; (2) the need to standardize the way the indicator is calculated, to allow
for the comparison between countries as well as local and regional scales; (3) the need to use
of the ISEW in combination with other indicators oriented towards environmental and social
objectives, namely to evaluate the distance of an economy to a sustainable path; and (4) the
analysis of the ISEW’s trend in view of the economy’s specialization patterns; for instance
evaluating if activities with a more intensive use of natural resources, by comparison to others
based in services and knowledge, can lead to a dissimilar behavior of the indicator.
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P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
9. Figures
Modified ISEW and GDP
45.000
40.000
35.000
30.000
$US (2005)
GDP
25.000
20.000
15.000
ISEW
10.000
5.000
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Years
Figure 1 - Modified ISEW and GDP from 1950 to 2005 in per capita values.
ISEW Comparison
25.000,00
Modified ISEW
20.000,00
Cobb & Cobb (1994)
Daly & Cobb (1989)
US$ (2005)
15.000,00
10.000,00
Anielky & Rowe (1999)
Costanza et al (2004)
5.000,00
0,00
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Years
Figure 2 - Modified ISEW compared with ISEW as proposed by other
authors.
16
P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
Trend of agregated components
30.000
25.000
Private consumption expenses
15.000
Social Components
10.000
Environmental Components
5.000
Economic Components
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Years
Figure 3 – Trend of modified ISEW aggregate components and private
consumption expenses (absolute per capita values).
Scenarios comparison
50.000
45.000
scenario 1
40.000
scenario 2
35.000
30.000
$US (2005)
$US (2005)
20.000
25.000
Modified ISEW
GDP
20.000
15.000
10.000
scenario 3
scenario 4
5.000
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Years
Figure 4 – Trend of modified ISEW compared to the designed scenarios in
per capita values.
17
P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
Relation between welfare
indicators and GDP
2,000
1,800
Scenario 1 / GDP
1,600
Scenario 2 / GDP
1,400
Ratio
1,200
1,000
Modified ISEW / GDP
0,800
0,600
0,400
Scenario 3 / GDP
0,200
Scenario 4 / GDP
0,000
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Years
Figure 5 – Ratio between scenarios and GDP.
10. Tables
Table 1 – Summary of component methodology and calculation
Component
Contrib
ution
Summary of methodology
Calculation
Personal
consumption
expenditures
Positive
Monetary value of personal consumption
expenditures.
Personal consumption
expenditures x price
index year 2005 / price
index year i
Income
distribution
Variable
Gini coefficient where all groups have the same
weight, after DeNavas-Walt et al. (2005).
Gini index year i x 100
/ Gini index year 1968
Adjusted
personal
consumption
Positive
Index 100 for to the year 1968, where the highest
value for income distribution equality occurs.
Personal consumption
expenditures x
distribution index / 100
Value of
household
labor
Positive
Substitution cost method following Eisner (1985),
considering a unitary value at current market rate
of 9.00 $US (average from Landefeld et al. 2005).
Hours per year of labor
x population aged over
16 x household labor
value
Services of
durable goods
Positive
The service is estimated from the annual
depreciation of durable goods and income based
on the real interest rate, following Eisner (1994).
Durable goods stock x
(depreciation + real
interest rate) / 100
Services of
public goods
Positive
Like the previous component. All the state owned
goods are considered, except defense, health and
education equipments.
Public goods stock x
(depreciation + real
interest rate) / 100
18
P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
Public health
and education
expenses
Positive
Accounted 50% of health and 100% of education
expenses.
Public health expenses
x 0.5 + public
education expenses
Personal
health
expenses
Negative
Deducted 50% of personal health expenses.
Personal health
expenses x 0.5 +
Durable
goods
expenses
Negative
Deducted durable goods personal expenses.
Durable goods personal
expenses
Negative
Direct cost is given by: C=0.21A+0.3B, where C is
the direct cost, A is the expense in private
transportation and B is the public transportation
expense (Daly and Cobb, 1989). Indirect cost is
estimated by the loss of productivity from the lost
time.
Negative
Direct and indirect costs from unintentional
accidents. For the period before 1994 total cost is
estimated from the relation between road
accidents and total (0.4).
Between 1950 and
1994 = road accident
cost/0.4. After 1994 =
unintentional accident
cost
Negative
Estimation based on the contingent valuation
method for the improvement of water quality,
from Bingham et al. (2000) and Mitchell & Carson
(1986) for surface water and McClelland et al.
(1992) for underground water.
Willingness to pay x
available income
variation x annual
population
Cost of air
pollution
Negative
Estimation of non monetary costs for mortality and
morbidity caused by pollutant emission based on
Delucchi (2004). Economic value established by
equivalence of Delucchi’s values and pollutant
emission data from EPA (2005) and population
change.
Economic value per
pollutant unit x annual
pollutant emission x
population
Cost of sound
pollution
Negative
Estimated from WHO (1972) according to
population change. Economic values adjusted by
healthcare price index.
Economic value per
capita x population
Cost of
wetland loss
Negative
Economic value estimated for the loss of
environmental services provided by wetlands
based on Barbier et al. (1996) and Costanza et al.
(1989) (6,800 $US 2005, per hectare, per year).
Economic value per
area unit x annual lost
area
Negative
Economic value estimated for the loss of
environmental service provided by soil based on
Pimentel et al. (1995) (8.2 $US 2005 per ton).
Volume soil data from USDA-NRCS (2006) for the
period after 1982, for the previous period
estimated from population change.
Economic value per
unit value x annual
volume lost
Negative
Estimation based on the substitution cost method
for the energy from fossil fuels (including nuclear),
with the value of 134.10 $US(2005) in oil barrel
energy equivalent. Economic value from Anielsi e
Rowe (1999) and updated according to the energy
price index.
Fossil fuels
consumption energy
equivalent in oil barrel
x substitution cost
Negative
Estimation based on marginal cost of
environmental damage caused by CO2 emission.
Economic value derived from Tol (2005) of $51
(2003) for a social discount rate of 3%.
Carbon emitted by
fossil fuel consumption
x marginal cost value
of environmental
damage
Cost of
commuting
Cost of
unintentional
accidents
Cost of Water
pollution
Cost of soil
loss
Cost of nonrenewable
resources
Cost of
Carbon
Emission
Direct cost =
0.21A+0.3B
Indirect cost =
commuting time x GDP
per time unit
19
P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
Net Capital
Investment
Net Variation
of
International
Position
Variable
5 year roll average for the net stock variation of
fixed capital and the variation of working
population.
Net stock variation of
fixed capital – labor
capital(Net stock of
fixed capital x variation
of civilian labor force
Variable
5 year roll average for the net difference between
foreign lending and borrowing.
Net difference between
foreign lending and
borrowing
Table 2 – Values for Modified ISEW and GDP in selected years ($US
2005)
Years
Modified
ISEW
9
(x10 )
GDP
9
(x10 )
Population
Modified
ISEW per
capita
GDP per
capita
1950
1.219,08
1.992,55
152.271.000
8.005,97
13.085,53
1955
1.463,15
2.481,16
166.471.000
8.789,19
13.841,48
1960
1.718,89
2.804,82
180.671.000
9.513,90
14.111,64
1965
2.017,73
3.577,57
194.303.000
10.384,46
14.500,91
1970
2.157,12
4.228,57
205.052.000
10.519,86
14.151,81
1975
2.739,20
4.833,29
215.973.000
12.683,08
14.904,49
1980
3.353,93
5.786,86
227.726.000
14.727,91
14.938,39
1985
4.403,75
6.787,12
238.466.000
18.466,99
14.986,05
1990
4.791,17
7.974,05
250.132.000
19.154,56
14.602,65
1995
4.989,08
9.004,61
266.557.000
18.716,75
15.391,28
2000
5.703,43
11.006,13
282.402.000
20.196,14
15.524,48
2005
6.704,82
12.487,10
293.907.000
22.812,74
15.624,09
20
P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
Table 3a – Values of the modified ISEW and its components ($US 2005 *109)
Economic Components
Year
Adjusted
private
consumptio
n
1950
Social components
Private
expense in
durable
goods
Net
variation of
capital
Internation
al net
variation
Economic
Component
s total
Household
labor
Service of
Durable
goods
Services of
governmen
t goods
Public
expense in
health and
education
Private
expense in
health
1.218,65
-69,49
45,71
7,26
-16,52
1.360,45
26,88
42,87
82,12
-75,42
1955
1.502,79
-84,42
27,96
6,44
-50,01
1.511,35
51,96
42,29
114,59
-92,43
1960
1.729,54
-85,90
29,15
5,97
-50,77
1.666,36
68,34
47,46
157,86
-116,40
1965
2.201,42
-124,82
22,98
11,67
-90,17
1.807,69
87,69
75,79
218,61
-156,93
1970
2.693,45
-152,81
11,36
-1,82
-143,28
1.826,38
124,02
93,61
315,54
-167,47
1975
3.144,60
-194,62
29,93
5,54
-159,14
1.884,21
157,65
57,55
360,59
-200,45
1980
3.651,20
-231,89
63,32
8,05
-160,52
2.089,29
194,98
105,48
399,41
-242,13
1985
4.280,08
-339,18
121,46
-2,23
-219,95
2.192,87
287,48
268,77
478,68
-285,91
1990
4.946,01
-408,88
89,91
-56,92
-375,89
2.228,07
363,88
280,99
663,32
-347,16
1995
5.417,05
-498,22
106,66
-29,48
-421,05
2.262,42
414,14
216,01
849,54
-353,95
2000
6.572,38
-778,32
88,41
-277,64
-967,55
2.363,51
610,13
275,11
985,37
-419,71
2005
7.574,85
-1.033,07
324,55
-193,03
-901,56
2.435,75
787,15
130,86
1.185,23
-522,55
Table 3b – Values of the modified ISEW and its components ($US 2005 *109)
Social components
Environmental components
Costs of
commutin
g
Costs of
accidents
Social
componen
ts total
Costs of
water
pollution
Costs of
air
pollution
Costs of
noise
pollution
Costs of
wetlands
loss
Costs of
soil loss
Nonrenewable
resources
loss
Environm
ental
costs of
carbon
emission
Environme
ntal
component
s total
1950
-98,50
-76,84
1.261,55
-60,22
-406,12
-22,39
-7,76
-16,47
-698,80
-32,84
-1.244,61
1955
-122,74
-86,24
1.418,79
-65,84
-427,05
-24,48
-7,76
-18,01
-826,45
-38,84
-1.408,42
1960
-138,73
-95,64
1.589,26
-71,45
-449,06
-26,57
-7,76
-19,54
-931,00
-43,75
-1.549,13
1965
-175,94
-145,57
1.711,34
-76,84
-499,88
-28,57
-7,76
-21,02
-1.118,27
-52,51
-1.804,86
Year
21
P. Beça, R. Santos / Economic and Sustainable Welfare Measurement: a New Approach to the ISEW
1970
-209,45
-195,50
1.787,13
-81,09
-564,44
-30,15
-7,76
-22,18
-1.408,60
-65,95
-2.180,18
1975
-238,53
-233,43
1.787,61
-85,41
-331,95
-31,76
-7,76
-23,36
-1.485,76
-67,85
-2.033,86
1980
-284,25
-271,36
1.991,43
-90,06
-295,82
-33,49
-4,94
-24,63
-1.606,58
-72,66
-2.128,17
1985
-340,97
-301,35
2.299,57
-94,31
-179,16
-35,07
-2,03
-23,66
-1.552,97
-68,75
-1.955,95
1990
-407,53
-331,34
2.450,23
-98,92
-260,94
-36,78
-2,03
-19,68
-1.735,61
-75,23
-2.229,19
1995
-494,80
-528,44
2.364,92
-105,42
-249,70
-39,20
-2,03
-26,91
-1.868,13
-80,45
-2.371,84
2000
-643,33
-570,29
2.600,79
-111,69
-194,32
-41,53
-0,98
-14,76
-2.050,71
-88,21
-2.502,19
2005
-722,33
-709,68
2.584,44
-117,36
-208,83
-43,59
-0,98
-14,33
-2.078,57
-89,24
-2.552,91
22