The Index of Sustainable Economic Welfare (ISEW) as a tool in the sustainabledevelopment Poland case Swiatkowska, Marta

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1 University of Groningen The Index of Sustainable Economic Welfare (ISEW) as a tool in the sustainabledevelopment Poland case Swiatkowska, Marta Published in: Default journal IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below. Document Version Publisher's PDF, also known as Version of record Publication date: 2008 Link to publication in University of Groningen/UMCG research database Citation for published version (APA): Swiatkowska, M. (2008). The Index of Sustainable Economic Welfare (ISEW) as a tool in the sustainabledevelopment Poland case. Default journal. Copyright Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons). Take-down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. Downloaded from the University of Groningen/UMCG research database (Pure): For technical reasons the number of authors shown on this cover page is limited to 10 maximum. Download date:

2 PREFACE The research thesis has been developed at the Center for Energy and Environmental Studies (IVEM) at Groningen University. The first supervisor is Prof.dr. Henri C. Moll and the second supervisor is Dr. Sanderine Nonhebel. I would like to thank my supervisor Henk Moll for steering my work and for motivating me. The topic of the research differs a little from my previous works. Therefore the gained knowledge and experiences are precious for me and again show the great interdisciplinary character of the sustainable development.

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4 TABLE OF CONTENTS 1. INTRODUCTION THE ISEW IN GENERAL POLAND CASE ISEW methodology ISEW measure for years ISEW measure for years The alternative ISEW scenarios for years Application of the methods Results of the alternative scenarios The usefulness of the ISEW in practice THE ISEW MEASURES ON THE INTERNATIONAL AREA ISEW methodology Results of the analysis The usefulness of the ISEW in practice CONCLUSION AND DISCUSSION LITERATURE...43

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6 SUMMARY The research is based on the index of sustainable economic welfare (ISEW) as a tool in the sustainable development. The new index was developed to answer the growing number of critiques over the GDP indicator which measures only the economic activity of a country. In contrary to the GDP, the ISEW includes both the social and environmental issues which undoubtedly affect the human welfare. The base of the index is the personal consumption that is private expenditures which consumers are willing to pay for the services and goods through which welfare may be provided. The categories which contribute to the economic welfare are added, whereas certain welfare relevant losses are subtracted. The first ISEW measures have already shown that the economic growth is not always followed by the similar progress in the human well-being. Two case studies are presented: the first addresses Poland, and the second one addresses an international context. The country part considers the ISEW methodology and the possible modifications within it in order to better understand how the index works itself. Next, the changes in the ISEW calculation for Poland were made to find out what modifications, proposed in other nation studies, can be implemented and how they affect the final ISEW results. It turns out that the countryspecific issues can play an important role in the ISEW measures. Because of some arbitrary assumptions and differences in the applied calculation methods, there is a call for the standardised index framework. However in some cases the uniform methodology does not work and it may not reflect the country conditions. Analysing the relations between ISEW and GDP in the international context the comparison between several countries is made, taking into consideration both the modifications in the ISEW methodology and the indicators trends. One can notice the tendency: a higher GDP, a slower ISEW growth or even ISEW decline (Poland is the one exception). It means that economic growth does not necessarily lead to an improved well-being and partially it can confirm the threshold hypothesis. The statement that the best way of improving quality of life is the raising nation s GDP seems less and less reasonable. The role of the ISEW in practice is concerned separately for Poland case and more generally in the international context. It comes out that the relationships between science and policy are weak. Policy implications based on the ISEW analysis are rare within the literature, especially for the developing countries. Another questionable issue is the aggregated characteristic of the ISEW. On the one hand it is hardly possible to provide sufficient information about the sustainable economic welfare basing on the singular number. On the other hand that kind of indicator is a great and needed tool in the communication with society and policy-makers. Further critical analysis of the ISEW methodology is a very important step towards a better measure for the sustainable economic welfare. The ISEW seems to be an additional indicator but it can not be, at least in the near future, a substitute of the GDP.

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8 1. INTRODUCTION Many countries pursue a high economic growth often aside from a sustainable welfare. Economic profits are considered in contrast with a human well-being what it is not a reasonable approach with regard to the sustainability. The commonly known Gross Domestic Product (GDP) index does not give complete information about the broadly considered sustainable economic welfare (Cobb and Cobb, 1994). In other words, the GDP index, neglecting social and environmental aspects, does not meet the requirements of the sustainable development approach. Bleys (2005) says that GDP ignores everything that happens outside the realm of monetized exchange. Moreover, regardless of the importance to human well-being, it treats everything that happens in the market as a profit for a nation. That index describes the monetary flows, within a country, related to the production and consumption. Nevertheless, measuring flows does not give insights in the requirements to sustain these flows. Therefore the GDP seems to be an indicator of wealth, but not welfare. The increasing criticism against the GDP index created the need for a new economic indicator which includes social and environmental aspects as well. The Index of Sustainable Economic Welfare (ISEW) is an example of such an approach. It was first developed for the United States by Daly and Cobb in 1989 (Cobb and Cobb, 1994). Further, the basic methodology of the ISEW has subsequently been applied to other countries. The first ISEW measures developed for the high income countries already show that in the majority of cases GDP values are higher than ISEW values. Furthermore, that economic growth is not always followed by the similar progress in the human wellbeing. The ISEW was developed as a monetary indicator of welfare and sustainability, which takes into account the welfare effects of macro-economic activity, social inequality and environmental damages. It includes the social and environmental costs of production and takes account of defensive expenditures, which are necessary to defend from the unwanted side-effects of production (Bleys, 2005). The base of the index is the personal consumption that is private expenditures which consumers are willing to pay for the services and goods through which welfare may be provided. The categories which contribute to the economic welfare are added, whereas the certain welfare relevant losses are subtracted (Cobb and Cobb, 1994). The ISEW index seems to be a good alternative for the GDP, but there are dilemmas concerning the usefulness of the ISEW in practice and its role in the sustainable development analysis. Because of the specific factors like non-monetary values, arbitrary assumptions and differences in the applied calculation methods, the ISEW is also being strongly criticized (the contributions in Cobb and Cobb, 1994; Neumayer, 1999, 2000). Furthermore, a questionable issue is still whether the aggregated indicator (given in a singular number) can provide valid information about the sustainability. Due to the fact that ISEW is not a very common index and it is only computed for several countries, there is still a necessity to better understand how the ISEW works itself and what role it plays as a tool. It is significant issue both for developing countries which are in the beginning of process towards a sustainable development and high developed nations where economic growth is not followed by the sustainable increase in human well-being. The research aim is to explain the ISEW role in the sustainable development. The analysis has been developed on two levels. The former applies to the Poland case and the latter concerns the wider investigation in the international context. These exploration levels are connected and complete each other in order to provide the answer to the main research question: what role does the ISEW play in the sustainable development analysis? The research has been based on the presented system analysis (Fig.I). 7

9 Fig.I The system analysis for the research Polish case is an interesting example of the country with political transformation after It was the first country in Central and Eastern Europe which re-established democracy and market economy. The consideration of Poland case allows investigating the development of the index trend against a background of such significant political changes and exploring how the political transformation affected the ISEW trend. On the country level, the analysis aims to investigate and understand how the ISEW as a tool works itself. The research questions apply to the ISEW methodology and the sensitivity of the index to different modifications used in the calculations. For that purpose, the careful analysis of the ISEW measures for Poland and other countries have been done. Because of a lack of data, author s preferences or country-specific issues different methods for evaluating the ISEW categories exist. That is why the possible modifications in quantifying the most criticised categories are investigated in the research. Adapting different calculation methods, the alternative scenarios of the final ISEW results for Poland have been made. To explore the ISEW role in the wider context, the international area is taken into consideration. The nation ISEW studies, published in English, have been analysed in regard to the ISEW results for a country and the methodology applied by the authors. The crucial aim is the analysis of the relationships between the nations ISEW and commonly known GDP index. Beside the theoretical ISEW framework, the usability of the index in practice has been investigated as well. In that part the scientific and social approach and relations between those fields are considered. The practical use of the ISEW is analysed separately for Poland case and more generally in the international area. 8

10 2. THE ISEW IN GENERAL The index of sustainable economic welfare (ISEW) was first developed for the United States by Daly and Cobb in Five years later, Cobb and Cobb (1994) revised the ISEW methodology, giving the foundation for the further international researches. Because of the data availability and country-specific issues, the adaptations made to the original methodology were unavoidable. Nevertheless the idea and basic framework of the ISEW remains the same as in the original. With slightly changed methodology, the ISEW is in some cases, particularly in the recent years, relabelled as a Genuine Progress Indicator (GPI). Redefining Progress organisation, connected with Clifford Cobb, decided in 1995 that the terminology of ISEW was not very accessible in to society and published an index called the Genuine Progress Indicator which was still based substantially on the ISEW methodology (Jackson and McBride, 2005). That idea of the rebranding was to be more accessible to a lay audience. Australia and USA are the examples of the GPI studies. The GPI includes additional factors such as crime, divorce, cost of family breakdown, changes in leisure time, psychological costs of unemployment or loss of old-growth forests as well (Hamilton, 1999; Cobb and Venetoulis, 2004). However, the GPI is strongly based on the ISEW methodology and that is why this rebranded index is considered as an ISEW-kind indicator. In the following sections, in all analyzed cases, the name of Index of Sustainable economic welfare (ISEW) is used. The ISEW was developed as a monetary indicator of welfare and sustainability, which takes into account the welfare effects of macro-economic activity, social inequality and environmental damages. The theoretical framework of the index includes the non-market flows such as household labour and environmental degradation (Bleys, 2005). The ISEW incorporates a correction for the depreciation of natural and human-made capital and takes into account the reduction of welfare associated with the unequal distribution of incomes. It includes the social and environmental costs of production and takes account of defensive expenditures, which are necessary to defend from the unwanted side-effects of production (Cobb and Cobb, 1994). The ISEW was supposed to comprise economic, social and environmental aspects of the sustainable welfare. The economic components of the ISEW are consumption and capital growth. The environmental factors are represented by the costs associated with the present pollutions and long-term environmental damage. Direct social component of the index is a distribution of income (Prochowicz and Sleszynski, 2006). The next two sections consider the framework of the ISEW methodology and the aggregate characteristic of the index respectively. ISEW methodology The index methodology consists of the several categories divided into two groups: positive and negative. The base of the index is personal consumption that is private expenditures which consumers are willing to pay for the services and goods through which welfare may be provided. The categories which contribute to economic welfare are added, whereas certain welfare relevant losses are subtracted (Cobb and Cobb, 1994). The basic categories which are taken into account in the ISEW calculations are presented in table 1. The structure of data presentation is the same as the authors of the index proposed. 9

11 Table 1. The main categories of the ISEW index (Cobb and Cobb, 1994) Column Category Added (+)/ Subtracted (-) A Year B Personal consumption (+) C Services of household labour (+) D Services of consumer durables (+) E Services of streets and highways (+) F Public expenditures on health and education (+) G Consumer durables expenditures (-) H Defensive private expenditures on health and education (-) I Cost of commuting (-) J Personal expenditures on pollution control (-) K Cost of automobile accidents (-) L Cost of water pollution (-) M Cost of air pollution (-) N Cost of noise pollution (-) O Loss of wetland (-) P Loss of farmland (-) Q Depletion of non-renewable resources (-) R Cost of long-term environmental damage (-) S Cost of ozone layer depletion (-) T Net capital growth (+/-) U Change in net international position (+/-) V Distributional inequality (+/-) The total value of the ISEW can be presented by the equation (Jackson and McBride, 2005): ISEW = personal consumption income inequality + non-defensive public expenditures + value of household labour + economic adjustments defensive private expenditures costs of environmental degradation depreciation of natural capital Personal consumption is adjusted to account for inequalities in the income distribution in the economy. According to Cobb and Cobb (1994), an additional and equal amount of money adds more to the welfare of a poor family that it does to a rich family. That is why those inequalities affect the magnitude of economic welfare. The authors of the ISEW used the Gini index to adjust personal consumption to income inequality. Among the positive categories are public expenditures which are included in the index only to the extent that they are regarded as non-defensive. The category public expenditures on health and education is based on the assumptions that 50 % of expenditures contribute to welfare and the second half is just a defensive expenditure. Authors assumed that some portion of expenditures on health make people feel better and contribute directly to their well-being. In the case of education, Cobb and Cobb (1994) assumed that one half of the reason for attending high-education institutions is purely for the sake of learning rather than increasing a lifetime earning potential. The non-monetarised contribution to welfare from services of household labour is taken into account as well. This category 10

12 means the services such as cleaning or cooking which contribute to economic welfare even though they are not sold in the market. Next categories added to the ISEW base are services from consumer durables and services from streets and highways. In the subtracted categories group, the following items are adjusted: private expenditures on health and education, costs of commuting, personal expenditures on pollution control, costs of car accidents and the group of the environmental issues. Defensive private expenditure on health and education are subtracted because they are partly included already in the personal consumption. Because commuting is a logical consequence of a society that concentrates its production locations, the direct costs of commuting are taken into account, including: cost of user-operated transport, cost of depreciation of private cars, the price of purchased local transportation and portion of passenger miles on local public transportation used for commuting. Next category is costs of car accidents, what represents real costs of industrialization and higher traffic densities. The message of this item is that the cause for the accidents is not to be found in individual failure but in the traffic system as a whole. Rising costs of car accidents primarily reflect the inefficiency of the system of individual traffic (Cobb and Cobb, 1994). The costs of the environmental degradation include firstly the defensive costs of environmental and social nature, secondly the future costs related to a greenhouse effect and a resource depletion. The ISEW keeps the track of environmental damage in two ways. First the items reflecting the direct effects of water pollution, air pollution and noise pollution. A second group considers the long-term environmental damage from climate change and ozone depletion. Direct effects are based on the estimates of emission trends and damage costs, whereas the long-term damages are assumed to be cumulative and related to energy and CFCs consumption (Bleys, 2005). The calculations of the environmental degradation categories are based, in many cases, on the arbitrary estimations. One of the examples is depletion of non-renewable resources. The methodology proposed by authors of the ISEW is based on the non-renewable energy production. It assumes that the cost of replacement for renewable resources was $75 per barrel in 1988 with estimated 3% annual growth of that cost. The basic data for calculation is the total amount of non-renewable energy produced each year. Next much criticized category, due to the arbitrary estimations, is long-term environmental damage, valued by total energy consumption. In that case originally the cumulative rent coefficient of USD 0.5 per one barrel of consumed oil, in 1972 prices, was used in the calculations (Cobb and Cobb, 1994). Two last categories of the index can be added or subtracted from the personal consumption. Change in net international position reveals whether a country can self sustain its growth or not (Guenno and Tiezzi, 1998). The base for calculation is data on a balance of international trade and payments. When the balance between trade and payments is positive, that means a positive claim to the future consumption of imported goods and then the values are added to the ISEW. The negative values are subtracted from the personal consumption because other countries claim a credit in terms of goods and services. The authors of the index made also some adjustments to account for changes in the sustainability of the capital. It includes a net capital growth adjustment to account for changes in the stock of human-made capital. In contrast to GNP, the capital adjustment in the ISEW takes account of capital depreciation as well as formation and it includes only that capital growth which is a net of basic capital requirement to maintain changes in the workforce. The ISEW includes also the net transactions in overseas assets and liabilities in order to provide an indication of the sustainability of the economy in the international terms (Jackson and McBride, 2005). Many critiques of the ISEW are connected with the lack of theoretical foundation. There is a need for a standardized set of items and valuation techniques to allow for a more meaningful welfare comparison of the different nations (Prochowicz and Sleszynski, 2007). The weakest elements are: the arbitrarily assessed and accumulated costs of long-term environmental damage, the arbitrarily defined scope and interpretation of defensive expenditures, the simplified assumption that a more equal society is more to secure a non-declining future welfare. Some elements like net profits from education or technical advances are not considered at all. Different assumptions in the calculations provide different final results and may give a not valid picture of a society s welfare and a sustainability achievement (Neumayer, 1998). Additionally the positive and negative effects of different factors can cancel each other and important problems may be hidden in a composite indicator. 11

13 ISEW aggregate indicator Synthetic information is particularly needed to communicate with a society and media. This kind of information can be provided by the aggregated indicators like ISEW. On the one hand a singular number can be more readable. On the other hand it contributes to a possible simplification and a not valid interpretation of the country conditions. Nevertheless, synthetic indicators can be very useful in the monitoring of the general trends in an economy and in a decision-making process, because they provide information about the direction of whole economy development. According to Prochowicz and Sleszynski (2007) due to improving data base and methodology of the aggregated indicators, they can play more and more important role in the analysis of relations between traditional and key macroeconomic categories, like for instance: production and investment magnitude, unemployment, environmental losses and well-being. The idea of the ISEW has stimulated the interest mainly in Europe. Thus the international comparison of the welfare levels across time can be in some degree possible. According to Guenno and Tiezzi (1998) the ISEW gives an indication of its difference with GDP over time and it is the attempt at building up an aggregate monetary index directly comparable with standard national accounts which includes important issues usually neglected due to the extreme complexity of their treatment at the aggregate level. Graham et al. (2006) refer to the argument that aggregated indicator like ISEW is not scientifically valid or technically robust mainly due to the subjectivity of choice and the calculation methods of the included components. On the other hand the appeal of a composite indicator is that it provides a comprehension and is likely to be more digestible than a large series of individual indicators. It is important particularly to inform and involve a wider audience in the matter of the sustainability which requires changes in the individual behaviours. Although the construction of the ISEW is not perfect and there are still some arbitrary assumptions within the methodology, what will be presented in the next sections, this kind of synthetic indicators can be very helpful in the regular observations of the country trends. The ISEW can play important role in the sustainable development analysis due to its aggregate characteristic. Because of that it can be more legible, especially for a society, to observe the general conditions of the country looking at three different but linked factors: economic, social and environmental. 12

14 3. POLAND CASE This chapter considers Poland as a case study, paying attention to the methodology of the ISEW measures and its role in practice. Firstly, the Polish measures of the ISEW developed by Gil and Sleszynski (2003), and Prochowicz and Sleszynski (2007) are carefully investigated in order to better understand the methodology of the index and to know how it works itself. Next section (3.2) presents the alternative changes in the ISEW calculation which were made to find out what modifications proposed in the other nations studies can be implemented and how they affect the final ISEW values. After considering the results in relation to the Polish specific issues, the optimal scenario was chosen and presented. The last subchapter is about the usefulness and the role of the ISEW in practice ISEW methodology The analyzed period of time covers the years from 1980 to During that time one should distinguish, within one country, two completely different periods. The first one belongs to the era of the communist system and the second one has been the introduction of the market economy as a starting point. Because of the clear differences between those periods, they are concerned separately. Ten years before transformation, from 1980 to 1990, have been investigated basing on the Polish calculation of Gil and Sleszynski (2003). The ISEW calculations considering the time after 1990 were developed by Prochowicz and Sleszynski (2006, 2007). In the research, the consideration of the years is based on the last version because of the up-to-date data and the revised methodology. The Polish calculations of the ISEW are mainly based on the revised methodology proposed by the first authors of the ISEW. Nevertheless, some critics and modifications to the computation methods developed by other scientists were taken into account as well. In the methodology no new components were introduced and two categories were not taken into account: personal expenditures on pollution control and loss of wetland (Gil and Sleszynski, 2003; Prochowicz and Sleszynski, 2007). The former category has a very slight influence on the index and the latter is not relevant to the Polish conditions. The most important modification, in the Polish studies, comparing to the original ISEW is that a distribution of income inequality (originally Gini index) was not applied exclusively to the consumption expenditures but to the entire value of the index ISEW measure for years Taking into account the variety of the ISEW values, the considered 10 years can be divided in four periods. The ISEW growth occurs in the first year of the decade and later in years , whereas the ISEW decline is noticed in 1982 and further after 1985 till 1990 (Fig. 1). Fig.1. The ISEW per capita for Poland in years with the division for fluctuation periods (based on Gil and Sleszynski, 2003) 13

15 The personal consumption is the basic component of the ISEW. The values form other four positive categories are added to this base, while the values of 12 negative categories are subtracted from it. Among the positive categories which affect the ISEW growth, the most responsible are: household labour and public expenditures on health and education (Fig. 4). Within the negative components the most significant for the ISEW decline, presented in Fig. 5, are: change in net capital, expenditures on consumer durables, costs of commuting, long-term environmental damage with cumulative effect and cost of air pollution (Gil and Sleszynski, 2003). Fig. 2 presents the ISEW categories divided in two main groups: positive and negative, specifying the contribution of the personal consumption. The difference between positive categories, including personal consumption, and negative components provides the ISEW result positive without personal consumption negative positive with personal consumption million PLN (1992 prices) Year Fig.2. Positive and negative ISEW categories for Poland in years (based on Gil and Sleszynski, 2003) One can notice that the difference between the value of the personal consumption and the total subtracted value is not big. Moreover, the total subtracted value in each year is higher than the personal consumption (Fig. 2 and 3) Personal consumption negative categories million PLN (1992 prices) Year Fig.3. Personal consumption and the negative ISEW categories for Poland in years (based on Gil and Sleszynski, 2003) 14

16 After the ISEW growth in the first year of the 1980s, the significant decline in the index value occurs in 1982 (Fig. 1). In that time the decrease in the personal consumption seems to be the most responsible factor for the ISEW decline (Gil and Sleszynski, 2003). Although three negative categories which are the most responsible for the ISEW decline show the fall in their values, the personal consumption decrease is still much more considerable. That is, the difference between the total subtracted value and the personal consumption is higher in 1982 than it was before. The result is the ISEW decline in 1982 (Fig.3, 4 and 5) B-personal consumption C-household labour F-public expenditures on health and education million PLN (1992 prices) Year Fig.4. Categories most considerable for the ISEW growth for Poland in years (based on Gil and Sleszynski, 2003) The next period, from 1982 to 1985, is characterized by the index increase (Fig. 1). In that time the personal consumption and the total subtracted value are growing over time as well. However the increase of the subtracted values is again lower than the personal consumption growth and the difference between these values decreases to gain the lowest value in 1985 (Fig. 3). Additionally one of the most significant negative category change in net capital decreases. Looking at the other positive categories, due to a slight variety and low values their contribution does not play an important role (Gil and Sleszynski, 2003). 15

17 25000 S-change in net capital G-expenditures on consumer durables I-costs of commuting Q-long-term environmental damage L-costs of air pollution million PLN (1992 prices) Fig.5. Categories most considerable for the ISEW decline for Poland in years (based on Gil and Sleszynski, 2003) Year After 1985 the situation is changed again and the ISEW decreases to the critical point in 1990 (Fig. 1). During those five years the personal consumption increases until 1988 and after that it starts decreasing. Simultaneously, the negative values increase more and the difference between the personal consumption value and the total subtracted value increases and gains the critical point in 1990 (Fig. 3). Additionally, the second most significant category for the ISEW growth household labour decreases in that time as well, intensifying the index decline effect. Among the negative categories, with the most considerable contribution to the ISEW decline in that time are: change in net capital, expenditures on consumer durables, costs of commuting and long-term environmental damage increase (Gil and Sleszynski, 2003). After 1988, due to the big decrease in the personal consumption, the ISEW falls down in Analyzing other positive values, there is no important change in their values they decrease till 1989 and in 1990 they slightly increase. The negative values decrease in 1990 except the long-term environmental damage category which had a lowering effect on the index value in the whole period because of the cumulative effect (Fig. 4 and 5). The highest dynamic in the negative categories values occurs after In that time there is no tendency in their changes, except mentioned the growing long-term environmental damage category. ISEW and GDP The comparison of the ISEW and GDP trends shows a clear divergence (Gil and Sleszynski, 2003). In years when a growth of GDP can be observed, the ISEW usually decreases. Whereas the ISEW grows, like in 1981, then the GDP declines (Fig. 6). 16

18 Fig.6. The ISEW and GDP per capita (PLN, 1992 prices) for Poland in years with the division for the fluctuation periods (based on Gil and Sleszynski, 2003) Only in the two indexes run in parallel. It seems that these years were the only ones in the 1980s when an increase of welfare was accompanied by a dynamic growth of the economy. The GDP increase in is not accompanied by the ISEW growth. On the contrary, in that time one can observe the decline in the ISEW value. There are two moments when the simultaneous declines in the ISEW and GDP trends occur. The first moment is the economic crisis in 1982 and the second one is in 1990 due to the regime shift. In the analysis of the GDP and the ISEW trends, more explanations can be provided by the inflation. There were two moments in the 1980s where the inflation was very high: in 1982 and in years The latter was a typical hyperinflation, what undoubtedly had a negative impact on the Polish economy. That is why, in that years, both the GDP and the ISEW considerably decreased. Poland s hyperinflation in 1989 was just the 14 th occurrence in the world history (Sachs, 1993). Analyzing the ISEW, the decade was divided in four periods, whereas the consideration of the GDP changes allows distinguishing three periods (Fig. 6). In the years the GDP decreases, after that it grows until 1989 and further it falls again. During seven years in the 1980s the GDP increases, whereas in the same time the ISEW first increases and further decreases. Comparing the dynamics of the ISEW and GDP trends one can notice clear differences in the sensitivity of both indexes (Fig. 7). Namely, the GDP curve illustrating the changes over time is smoother, so the changes in that index are lower. There are two moments where the changes in the GDP are more significant. They are in years 1981 and 1984, and later in 1989 because of the regime shift. The ISEW curve is sharper and the value of the ISEW is changed by 80 %, during the 1980s. The reason for that can be the variety of the ISEW components taken from economic, environmental and social fields, what contributes to the index sensitivity increase. 17

19 120 ISEW GDP % Fig.7. The dynamics of the ISEW and GDP trends, per capita, for Poland in years (based on Gil and Sleszynski, 2003) Year Taking into consideration the presented ISEW and GDP trends, one can ask about which of the index gives a right description of the situation in Poland in the 1980s. On the one hand looking at more popular GDP index, one can have a first impression that generally the country situation was better and better. On the other hand the ISEW results are more variable with a downward tendency, providing a completely different view of the Polish situation. The given results are different because both trends describe different issues economic growth versus welfare and sustainability. After the crisis in 1982 (Sachs, 1993), the economy was growing but in a not effective and sustainable way. Therefore the GDP and ISEW do not run in parallel. The communist system seems be the basic reason for that. Income inequality The next important issue is the analysis of the ISEW unweighted and the ISEW weighted by a welfare inequality index (Fig.8). To weight the ISEW, the changes in the Gini index in relation to 1992 as a reference year were applied (Gil and Sleszynski, 2003). The values of the ISEW calculated after applying the changes are higher than the values of the ISEW unweighted. The dynamics of these two ISEW trends are exactly the same, with the exception of two last years of the analyzed period. It can prove that, at least in the official statistics, Polish society as a typical communist society was quite egalitarian considering the distribution of income and wealth. A job was ensured for everyone, because unemployment in that system was not tolerated. According to Sachs (1993) there was the ethos of social equality of Poland s government policy during the communist period. Social services like medicine and education were provided free of charge to the population. However, the income inequality was higher than in the official statistics, as politically connected people had a privileged access of commodities that were unavailable in the consumer market. Also health care for them was better than for the average population. Some unemployment existed, even though it was officially forbidden (Commander and Coricelli, 1992). Nevertheless, the system seemed to promote a greater degree of income equality, social service coverage and a low unemployment than in most market economies (Sachs, 1993). 18

20 ISEW ISEW unweighted PLN (1992 prices) Fig.8. The ISEW weighted and unweighted per capita for Poland in years (based on Gil and Sleszynski, 2003) Year Political background Analyzing the ISEW trend for Poland in the years , it is important to understand the political background of that time. The communist system, occurred for few decades in Poland until regime shift in 1989, influenced all fields of the society life. That characterized by the centrally planned economy where decisions were mainly based on a consideration of quantity. Unemployment was not tolerated and a monetary policy was basically passive. The low productive efficiency of enterprises and the regional structures of production generated shortages and imbalances in goods markets and hence chronic sellers markets. The goal of the communist authority was generally to depress investment, avoid a real opening of the economy to international and domestic competition, maintain broadly stable real wages and raise subsidies to enterprises through the budget. Consequently, the deteriorating enterprise sector and associated growth in subsidies had to be covered by an inflationary way of financing. The political weakness was dramatically highlighted in The increase in real wages was accompanied by growing shortages, queues and black markets. Continuous depreciation of the exchange rate, liberalization of food prices, major shocks to administered prices generated a wage-price spiral that resulted in the hyperinflation (Commander and Coricelli, 1992; Sachs, 1993). The political situation strongly affected the environmental approach. Poland was highly industrialized and mainly the heavy industry was the most important sector of its economy. Any decisions and activities were focused on the economic growth without any attention to the sustainability. In other words, the environmental aspects were completely neglected by the authorities, what can be confirmed by the interpretation of the environmental categories of the ISEW, which have a very negative influence on the index value in the considered period. However, the changes in the policy approach started to occur in the end of the 1980s. Looking at one of the most important and profitable company KGHM Polska Miedź S.A. (copper and coal basin) in Poland one can notice the changes in the environmental policy and consequently in the company s image. KGHM is the 6thlargest producer of copper and the 2nd-largest producer of silver in the world. In 1970s and beginning of 1980s the company was considered as the one of the biggest polluter in Poland. Because of the improvements in technology and policy, the considerable emissions reduction can be noticed starting from the mid-1980s. The example of that can be the copper smelter in Legnica, one of the departments of KGHM, where the copper (Cu) emissions in 1970 was 4000 ton/years, in ton/year and in 2005 it was reduced to 23 ton/year (Nierzewska and Piatkowski, 2005; Kaszubkiewicz et al., 2005). Those values show how significant the reductions have been over time. Nevertheless some 19

21 environmental damages caused during the last decades, especially in the 1970s and in the beginning of the 1980s were very harmful and often irreversible ISEW measure for years After the regime shift in 1989, the situation in the political, economic and social fields of the life has started to change. The communist system turned towards the market economy where the sustainable development is concerned as a base for further decisions and actions. In the whole analyzed period the ISEW for Poland is generally growing (Prochowicz and Sleszyski, 2007). There are two moments when the ISEW decreases: in 1993 and In the other years the index increases with the highest growth in years and later in years (Fig.9) PLN (2004 prices) Year Fig.9. The ISEW per capita for Poland in years (Prochowicz and Sleszynski, 2007) The ISEW trend is reflected by the graph with the division into positive and negative categories. The values of positive categories are growing whereas the subtracted values change up and down (Fig. 10 and 11). Positive categories without personal consumption million PLN (2004 prices) Negative categories Positive categories with personal consumption Year Fig.10 The ISEW categories for Poland in years (based on Prochowicz and Sleszynski, 2007) 20

22 The highest ISEW increase, first time in , is mainly caused by the decline in the subtracted values and second time in due to the increase in the personal consumption. The clear ISEW decline in 2004 can be explored by the growth in the values of negative categories. The difference between the personal consumption and total subtracted values is consistently growing during the analyzed period (Fig.11) Personal consumption Negative categories million PLN (2004 prices) Year Fig.11 Personal consumption and negative categories of the ISEW for Poland in years (based on Prochowicz and Sleszynski, 2007) The personal consumption curve is very similar to the ISEW trend (Prochowicz and Sleszyski, 2007). It is growing quite smoothly during the whole considered period without any important fluctuations. Only in one can observe the bigger increase than in the other years. The consequently growing personal consumption can be considered not only by taking into account the general trends in a market economy but in some degree by specific changes in the economy and society after After many years of consumer limitations finally the Polish society has got access to a free market and one of the consequences one can notice in the growing personal consumption. Positive categories Among the positive values which are the most considerable for the ISEW growth are: household labour and public expenditures on health and education. Both of them, likewise as personal consumption, are growing over time. Particularly, the growth of the household labour in periods and in 2000 is analogous to the personal consumption and the ISEW trend (Fig.12). Prochowicz and Sleszynski (2007) used the estimates based on time spent on domestic labour. In 2004 the services from household labour increased by 303% comparing to the

23 Personal consumption Household labor Public health and education expenditures million PLN (2004 prices) Fig.12 The categories most considerable for the ISEW growth for Poland in years (based on Prochowicz and Sleszynski, 2007) Year The category public health and education expenditures is based on the original assumptions that 50 % of the expenditures contribute to welfare and the second half is a defensive expenditure (Prochowicz and Sleszyski, 2007). Among the categories added to the basic personal consumption, the increase of this category was the lowest, namely 72 %. The other positive categories of the ISEW are services from consumer durables and services from streets and highways. Because of their low values they are less significant for the ISEW growth and therefore they are not included in the Fig.12. In Poland case, the services from streets and highways are represented by the value of investments in streets and highways (Prochowicz and Sleszyski, 2007). The values of both categories increased after fourteen years by 130 % and 124 % respectively. Negative categories The negative categories which are subtracted from the personal consumption and have important influence for the ISEW decline are presented in Fig.13. Costs of commuting and long-term environmental damage have the highest values growing during the whole analyzed period (Prochowicz and Sleszyski, 2007). The Increasing costs of commuting are connected with a developing urbanisation and mobility. Polish measures developed by Prochowicz and Sleszyski (2007) are based on time lost in commuting. The number of cars is still growing. In 1990 in Poland were 9 millions of cars whereas in 2004 this number exceeded 16 millions (CSO Statistical Yearbook, 2005). Before 1989 and in the first years after transformation the society was strongly connected with the place of living. People usually had guaranteed jobs in the city where they were living. Nowadays, after the political changes, people are more able to move and start living in other city, simply where better possibilities of a job occur. Another aspect is a better access to a free market so consequently people can buy cars what they want and what they can afford. In the case of long-term environmental damage the Polish study followed the suggestion of the first authors. The costs are consequently increasing because emissions of CO 2 are cumulated starting from 1990 (Prochowicz and Sleszyski, 2007). 22

24 Cost of commuting Consumer durables expenditures Depletion of non-renewable resources Net capital growth Long-term environmental damage Ozone layer depletion Cost of air pollution Change in net international position million PLN (2004 prices) Year Fig.13 The categories most considerable for the ISEW negative terms for Poland in years (based on Prochowicz and Sleszynski, 2007) Costs of air pollution, ozone layer depletion, depletion of non-renewable resources and consumer durables expenditures remain on the similar level without any big fluctuations (Fig.13). The costs of air pollution were estimated based on the marginal costs calculated per unit of pollution in the 1990s. That is why the values are the approximate estimations (Prochowicz and Sleszyski, 2007). After fourteen years, those costs decreased. The ozone layer depletion costs are based on the assumed, in previous international studies, rent (originally USD 15, in 1972 prices) per 1 kg of emitted freons. These costs were growing over time but the observed increase is slight. The methodology of the next category depletion of non-renewable resources was adopted after Austrian study. Stockhammer (1997) stated that a monetary value of non-renewable resources depletion equals the annual net value added of the mining sector of the industry. The calculations of consumer durables expenditures are the estimations. Because of data availability only on total expenditures, 8.5 % share of durables expenditures has been assumed by Prochowicz and Sleszyski (2007). Generally the values of these expenditures were growing, except the single decrease in The total increase during the entire period is 65 %. One can notice that two categories: net capital growth and change in net international position are positive in some years and negative in others (Fig.13). It means that these categories are responsible for both the ISEW growth and decline. According to Prochowicz and Sleszynski (2007) those fluctuations are the result of the structural changes, so called shock therapy, in the Polish economic system. Additionally the net capital growth category was questionable in the beginning of 1990s because then multiple revaluations of the domestic capital caused a limited comparability of the old and new statistics. Authors of Polish ISEW study assumed that capital to contribute to the welfare must grow more than the labour itself. The values of net capital growth were subtracted from the ISEW only in years The positive values occurred after 1998 but again decreased below 0 in The positive values in net capital stock can be seen as a source of the additional future consumption and then it is added to the personal consumption base. The positive values in net change in international position occurred only in years After that time, they were negative and significantly decreased the ISEW value. 23