Social and Environmental Adjustments to Economical Measures The ISEW/GPI account method

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1 Francesca Silvestri Turin, Italy - April 2 nd, Social and Environmental Adjustments to Economical Measures The ISEW/GPI account method Francesca Silvestri University of Milano Bicocca - Department of Environmental Science francesca.silvestri@unimib.it Prepared for the International Workshop on Sustainable Development and Environmental Accounting Methodologies: Turin, Italy - April 2 nd, Social and Environmental Adjustment to Economical Measures Measures are quantitative tools that help to define goals, to link them to clear targets and to assess the progress. They provide an empirical and numerical basis to evaluate performances and to connect past and present activities. Table 1. shows a list of measures representing economical, social and environmental performances with relative measure units. Table 1. Economical, Social and Environmental measures Performances Measures Measure units Economical GDP $, Consumption $, Environmental Social Air pollution Water pollution Time use Family breakdown CO 2, PM ph, nitrate-n, pesticides, orthophosphates Houseworking hours Divorces number Among Table 1 measures, the economical ones have always had an important role in representing nation s conditions. Particularly, the GDP (Gross Domestic Product) 1 is usually intended by politicians and media as the most important indicator to refer to, but his massive use misleads sometimes to consider it as a wellbeing measure instead of an economical one. Since the well-being is defined as the state of being happy, healthy and prosperous 2, a measure representing it should refer not only to economical performances (e.g. GDP), but also to social and environmental ones. 1 GDP measures all final goods and services produced within a nation s borders in a given time period. In Italy it corresponds to PIL (Prodotto Interno Lordo). 2 Source:

2 Francesca Silvestri Turin, Italy - April 2 nd, Having the purpose to measure a nation s well-being and to compare it to economical performances, in the last years there have been many attempts to adjust the economical measures with social and environmental performances. Particularly, these attempts aims to measure social and environmental performances in monetary value (e.g. $ and ), the same measure unit used for many economical indicators, particularly for GDP and Consumption. 2. ISEW and GPI The Index of Sustainable Economic Welfare (ISEW), created in 1989 by Daly and Cobb, measures the monetary value of social and environmental performances and adds these values to the economical performances Consumption (eq. [1]). ISEW/GPI = Consumptions + Social performances + Environmental performances [1] In the case performances increase the well-being they have to be accounted positively, it the case they decrease it, negatively. The GPI, created in 1995 by the Redefining Progress group, differs from the ISEW because it assess the monetary value of a larger number of social and environmental performances (from 17 to 24). These 24 performances are listed in Table 2 and divided into economical, social and environmental ones. Table 2. Economical, Social and Environmental performances accounted by the GPI method Economical Performances Social Performances Environmental Performances + Consumption + Housework and parenting value - Cost household pollution abatement + Volunteering value - Cost water pollution + Household capital services - Cost air pollution + Highways and streets services - Cost noise pollution + Net capital investment - Cost of long-term environmental damage - Crime cost - Cost ozone depletation - Automobile accidents cost - Depletion of non-renewable resources - Commuting cost - Loss of old growth forest - Family breakdown cost - Loss of wetlands - Leisure time cost - Loss of farmlands - Underemployement cost - Income distribution - Net foreign borrowing - Consumer durables cost Starting from 1989 ISEW and GPI were assessed at national and sub-national level, as shown by Table 3.

3 Francesca Silvestri Turin, Italy - April 2 nd, Table 3. GPI assessment at different geographic level United States Daly and Cobb, 1989; Australia Hamilton, 1999 Austria Stockhammer at al., 1997 Great Britain Jackson at al., 1997 National Netherlands Rosenberg and Oegema, 1995 Sweden Jackson and Stymne, 1996 Italy Guenno and Tiezzi, 1998 Chile Castañeda, 1999 Poland Gil and Sleszynski, 2003 Thailand Clarke and Sardar, 2005 Sub-national United States, Vermont, Chittenden county and Burlington Costanza et al., 2004 Siena province, Italy Pulselli et al., 2006 China urban level Wen et al., The Social Well-being and the ISEW/GPI account method During my doctoral studies the ISEW/GPI accounting method has been used to assess the monetary value of the social performances of United States, Maryland, Baltimore County and Baltimore City, for the years 1970, 1980, 1990 and Nevertheless, the used method differs from the original ISEW/GPI one because it does not consider the environmental performances and presents some methodological changes in the calculation. The final result was an indicator named Social Well-being indicator (SWB). The Social Well-being indicator (SWB) is based on three criteria that are inspired by the ISEW/GPI method. These criteria are: a) To consider the performances that, not having a market value are not accounted in the GDP, but actually increase our well-being. These are the so called time use performances, like the time spent in cleaning the own house or doing volunteer service. b) Consumptions can increase or decrease the human well-being. Consumptions that increase it, like food, shelter and apparel expenditures, are named positive Consumptions ; Consumptions that decrease it, like expenditures to recover crime and air pollution damages are named social failures. c) The final well-being value (Eq. 2, Table 4) is obtained adding time use values and subtracting society failures value to Consumptions value. Table 4 shows with an example how to assess the SWB based on these three criteria.

4 Francesca Silvestri Turin, Italy - April 2 nd, Table 4. Formula Data Assessment of the SWB Example SWB = C + t f where C = Consumption t = time use f = society failure Maid wage = 5 Car price = 10 Consumption = 90 [2] My well-being performances Well-being data Well-being assessment Measure unit I clean my house by myself and the monetary value of this activities equals the average wage of a maid; Where I live there is crime and I have to buy a new car because mine has been stolen; C = 90 t = cleaning the own house = average maid wage = 5 f = crime cost = new car price = 10 SWB = = 85 $/capita; numbers used in the example are conjectural. Going into details, equation 2 variables are divided into more variables, which are: t = t 1 + t 2 + t 3 t 1 = housework t 2 = childcare t 3 = volunteering f = f 1 + f 2 f 1 = family breakdown f 2 = crime Values of t 1, t 2, t 3, f 1, f 2 are assessed with a standard formula, which is: t and f value = Number of performances * analogues market value [3] Table 5 shows the considered t and f analogues market values.

5 Francesca Silvestri Turin, Italy - April 2 nd, Table 5. t and f analogues market values Social performances t1 = housework t2 = childcare t3 = volunteering f1 = family breakdown f2 = crime Wage of a housecleaner Analogues market value (Replacement cost method = how much it would cost to pay someone else to do the same activities) Wage of a childcare worker (Replacement cost method = how much it would cost to pay someone else to do the same activities) Minimum wage (Opportunity cost method = best alternative job that has not been taken) Divorce legal fees and extra expenditures (food, utility, house) due to the fact that divorce turns one family into two families. Productivity losses, medical care and ambulance, mental health care, property loss and damage, police and fire service. 4. SWB as well as ISEW/GPI Limitations 4.a Data Limitations The assessment of indicators like ISEW/GPI or SWB needs data that are not easy to be collected. Moreover the smaller the geographic scale for which these indicators are assessed, the less data are available. Table 6 shows how the data for SWB calculation have been collected. Direct source means the data have been directly taken from a database or from publications; Extrapolated data means the data have been extrapolated; US data means the used data have the same value of the United States ones. Table 6. Data origin distribution United States Maryland Baltimore county Baltimore city Direct data 43% 26% 22% 22% Extrapolated data 57% 18% 22% 22% US data 0% 56% 56% 56% Table 7. Original Source of US data Source Bureau of Economic Analysis CENSUS, Occupational Employment Statistics Bureau of Labour Statistics, Volunteerism In The United States U.S. Department Of Labour Cohen, 2005, tab 3.1 Federal Bureau of Investigation, Uniform crime report CENSUS, Statistical Abstract, Vital Statistics Maryland Vital Statistics Administration Schramm, 2006, tab. 3 CENSUS, Statistical Abstract; Income, Expenditure and Wealth, tab. 631 Maryland Planning Department Type of source Researcher publication Researcher publication Official

6 Francesca Silvestri Turin, Italy - April 2 nd, Table 6 shows that only at national level it has been possible to collect a large part of the data (43%) from a direct source. These have been collected from national statistics sources like CENSUS and in some cases from researcher analysis (Table 7). Table 6 shows that for sub-national analysis only around one quarter of the data was available from direct source. The opportunity to set a limit in the number of data that can be extrapolated in this kind of analysis, is an interesting discussion point. 4b. Well-being aggregated indicators The SWB, as aggregate indicator, enables to measure with an unique number complex system, involving economical and social aspects. Nevertheless, once the system is captured in order to understand and consequently improve the well-being situation, it s necessary to go into details and to use a measure that can represent the single elements of the ystem. In conclusion, aggregate indicators are good sources to provide a brief and complete information, but detailed measures turn out to be essential to solve or improve the wellbeing. References Anielsky, M. and Rowe, J , The Genuine Progress Indicator 1998 Update. Redefining Progress, San Francisco, CA. Castaneda, B., An index of sustainable economic welfare (ISEW) for Chile. Ecological Economics, 28: Clarke. M., Sardar, M. N. I., Diminishing and negative welfare returns of economic growth: an index of sustainable economic welfare (ISEW) for Thailand. Ecological Economics, 54: Cobb, C. W., Measurement tools and the quality of life. Redefining Progress, San Francisco, CA. Cohen, A. M., The costs of crime and justice. Routledge, New York, 121 pg. Costanza, R., Erickson, J., Fligger, K., Adams, A., Adams, C., Altschuler, B., Balter, S., Fisher, B., Hike, J., Kelly, J., Kerr, T., McCauley, M., Montone, K., Rauch, M., Schmiedeskamp, K., Saxton, D., Sparacino, L., Tusinskic, W., Williams, L, Estimates of the Genuine Progress Indicator (GPI) for Vermont, Chittenden County and Burlington, from 1950 to Ecological Economics, 51: Daly, H. and Cobb, J.; For the Commod Good. Beacon Press, Boston. Gil, S., Sleszynski, J., An index of sustainable economic welfare for Poland. Sustainable Development, 11: Guenno, G., Tiezzi, S., An index of Sustainable Economic Welfare for Italy. Fondazione Eni Enrico Mattei, Milan, Working paper 5/98.

7 Francesca Silvestri Turin, Italy - April 2 nd, Hamilton, K., The genuine progress indicator: methodological developments and results from Australia. Ecological Economics, 30: Jackson, T., Laing, F., MacGillivary, A., Marks, N., Ralls, J., Stymne, S., An Index of Sustainable Economic Welfare for the UK University of Surrey, Centre for Environmental Strategy, Guildford, UK. Jackson, T., Stymne, S., Sustainable Economic Welfare in Sweden. A pilot index Stockholm Environment Institute. Neumayer, E., The ISEW Not an index of sustainable economic welfare. Social indicators research, 28: Neumayer, E., On the methodology of ISEW, GPI and related measures: some constructive suggestions and some doubt on the threshold hypothesis. Ecological Economics, 34: Nordhaus, W. D., Kokkelenberg, E. C., Nature s Numbers. Expanding the National Economic Accounts to Include the Environment. National Academy of Science, Washington, DC, 250 pp. Pulselli, M. F., Ciampalini, F., Tiezzi, E., Zappia, C., The index of sustainable economic welfare (ISEW) for a local authority: A case study in Italy. Ecological Economics, 60: Rosenberg, D., Oegema, T., A Pilot ISEW for the Netherlands Instituut vor Milieu-En systeemanalyse, Amsterdam. Schramm, D.G., Individual and Social Costs of Divorce in Utah. Journal of Family and Economic Issues, 27: Silvestri, F., PhD Dissertation: New Sustainable Development Instruments and Methodologies. Stockhammer, E., Hochreiter, H., Obermayr, B., Steiner K., The index of sustainable economic welfare (ISEW) as an alternative to GDP in measuring economic welfare. The results of the Austrian (revised) ISEW calculation Ecological Economics, 21: Talberth, J., Cobb, C., Slattery, N., The Genuine Progress Indicator A Tool for Sustainable Development. Redefining Progress, Oakland, CA. Wen, Z., Zhang, K., Du, B., Li, Y., Li, W., Case Study on the Use of Genuine Progress Indicator to Measure Urban Economic Welfare in China. Ecological Economics, 63: