Measuring prosperity and quality of life At the Austrian Federal Ministry of Finance in Vienna May 2010

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1 KEYNOTE SPEECH Measuring prosperity and quality of life At the Austrian Federal Ministry of Finance in Vienna May 2010 Walter Radermacher Director General of Eurostat; Chief Statistician of the EU Ladies and Gentlemen I am very glad to be with you today to tackle the issue of measuring prosperity and quality of life. 1. Measuring the welfare of populations has been a concern of statisticians for some time, but, over recent years, it has been gaining ever more support from politicians, the media and much of public opinion. It was against this background that the European Commission, in collaboration with the European Parliament, the Club of Rome, the World Wildlife Fund (WWF) and the OECD, organised a conference entitled "Beyond GDP" in November In February 2008, the President of the French Republic, Nicolas Sarkozy, called for the creation of a commission to re-examine the issues surrounding how Gross Domestic Product is measured and how to find other information needed to arrive at more relevant indicators of social progress. This commission, known as the Stiglitz Commission after its chairman, gave a new impetus to work on measuring wellbeing. The concept of wellbeing and statistics 2. Measuring prosperity and quality of life is particularly difficult for a statistician. It is certainly possible to measure the resources invested in improving wellbeing, but is it really possible to define and measure wellbeing itself? An initial response would seem to be that wellbeing is a purely subjective matter which is not measurable directly as there is no 1

2 benchmark for it. It is hard to imagine being able to say one day that one person's wellbeing is double that of his neighbour. However, whilst wellbeing is not directly measurable, this does not necessarily imply that statisticians have nothing to say about it. Even though it is not measurable, some of its effects may be and, if so, it should be possible to measure it indirectly. It is evident that wellbeing is a complex subject and, to measure it, the idea that a single benchmark can be found needs to be abandoned. We have to accept that several benchmarks are needed. Wellbeing has several dimensions 3. Wellbeing has indeed several dimensions. There can be no question of wellbeing without good health, integration in society, a pleasant environment and a minimum level of material comfort. The Stiglitz Commission identified eight dimensions of wellbeing: i. Material living standards (income, consumption and wealth); ii. Health; iii. Education; iv. Personal activities including work v. Political voice and governance; vi. Social connections and relationships; vii. Environment (present and future conditions); viii. Insecurity, of an economic as well as a physical nature. 4. I take the view that all these areas can be followed statistically using indicators. The first step for statisticians is therefore to define them. An indicator is a particular type of statistical information: Contrary to the broad infrastructure in official statistics providing a public good for multiple purposes, indicators are tailored to answer more specific questions; they are 2

3 related to an "indicandum". Examples: From GDP in nominal values (multipurpose) to GDP growth in real values and after seasonal adjustment (more specific indicator for growth); or, even more specific, the part of research and development expenditure on GDP (indicator on efforts to boost innovation). The indicators must, of course, satisfy the statistical information quality criteria defined by the Code of Practice and the Regulation 223/2009 for European Statistics: relevance, accuracy, timeliness, punctuality, accessibility, comparability and coherence. Researchers will certainly focus on the criterion of relevance, but statisticians would point out the need to also respect the other five criteria, so cooperation between researchers and statisticians is needed. 5. Another constraint, unfortunately omnipresent, is budgetary, which has an inevitable impact on the work. For example, existing statistics may not be enough to tackle the complex issues associated with wellbeing, meaning that new surveys are necessary. However, surveys are expensive, especially when they tackle new issues, so it is especially important to draw the authorities' attention to these budgetary aspects. 6. In the absence of data, researchers will be tempted to resort to modelling. This is the first risk and the first fundamental decision to be taken: to what extent can modelling be a substitute for measuring? While the absence of modelling may restrict considerably the range of possible indicators, its introduction could jeopardise the objectiveness of the indicators and thus their legitimacy. The greatest attention will have to be paid to this question, and as little modelling as possible should be used in order to safeguard the scientific and objective nature of the results. The use of indicators 7. Let me now turn to the use of indicators. The second risk and thus the second important decision relates to composite indicators. Politicians, like 3

4 normal citizens, cannot make anything of thousands of indicators on wellbeing. They need a small number so as to really be able to understand the situation in a country. This therefore calls for composite indicators, with the ideal being a single indicator, such as GDP for the economy. 8. However, this need for composite indicators runs up against a fundamental difficulty, indeed impossibility: how to define objectively and indisputably the weightings needed to aggregate indicators relating to different magnitudes. For example, the number of beds available in hospitals is an indicator of health, and the size of the audiences for operas is an indicator of culture. Both hospitals and operas contribute to improving wellbeing, so both these indicators could be relevant, if not to wellbeing itself then at least to the factors contributing to it, but how can they be combined to create a composite indicator? 9. It may be interesting at this stage to quote an extract from the final report of the Stiglitz Commission: In the introduction (paragraph 3), the Report states that "Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance." 10. This extract focuses attention on one possible role of aggregation: the aggregation of two criteria means that the debate on the choice between promoting GDP and protecting the environment could be replaced by approaches similar to maximisation procedures. GDP is a measurement of economic activity, but such activity can damage the environment, so each society has to reconcile economic activity and environmental protection. The extract from the report suggests that the development of a composite indicator which has just to be maximised could avoid the ongoing question of the balance between economic activity and environmental protection. 4

5 However, we should be aware of the consequences of this aggregation: aggregating indicators of economic activity with environmental protection indicators amounts to considering that these two concepts are equivalent, in other words substitutable, so that it should be possible to compensate for damage to the environment by more economic activity. Now, it is evident that the idea of economic activity and environmental protection being substitutable is not universally accepted. Many people consider that debate is necessary on this matter and that only democratic decision-making has sufficient legitimacy to resolve it. 11. This leads us to an important consequence of the aggregation procedure: it has the potential to transform a problem of societal choice into a technical problem. Consequently, a composite indicator which, de facto, takes decision-making away from citizens to give it to experts may encounter considerable opposition. 12. A second risk associated with the aggregation is loss of information. This aspect is illustrated in the Stiglitz report by the analogy of a car with a single meter aggregating in a single value the speed of the vehicle and the remaining level of petrol. Such a meter would be of no use to drivers as "both pieces of information are critical and need to be displayed in distinct, clearly visible areas of the dashboard". In general, the loss of information associated with aggregation can make the composite indicator unsuitable as a decision-making aid. This happens when several independent actions are required to arrive at the same objective. For example, to arrive at his destination, the driver has to both check his speed and refuel. He therefore needs two different meters, one for each action. 13. Whatever their nature, indicators have one thing in common - they are all linked to an objective. The aim of all indicators is to help decision-makers to understand complex situations. This link between the indicator and 5

6 decision-making is both its strength and its weakness: its strength, because the decision justifies the usefulness of the indicator and thus its legitimacy, and its weakness because the objectives can vary over time, from one country to another and from one decision-maker to another. This makes the definition of common indicators for all countries more difficult. 14. Even if it is expressed as a figure and is based on measurements, an indicator only has value if it is specifically geared to a particular objective. Gross domestic product, on the other hand, even though it can be used as an indicator, is primarily a measurement of the economic activity of a country. GDP in itself is a measurement independent of any particular objective. Of course, GDP can be put to various uses, but these uses are sufficiently general and varied for it to have been adopted in every country by politicians, researchers, trade unions and even normal citizens. However, the fact that GDP is independent of any particular objective and universally applicable has a negative consequence, too, namely that it is not well adapted to the taking of specific decisions. This means that it sometimes has to be supplemented by specific indicators geared to the decisions in question. These indicators could, in particular, supplement a short-term analysis of GDP by incorporating an assessment of sustainability which complements the issue of current wellbeing or economic performance, as emphasised in the Stiglitz report. 15. The main aim of any statistical institute is to satisfy the needs of its users, so it cannot help but be interested in the creation of indicators for measuring wellbeing. However, any statistical institute is also bound to maintain its independence from political or economic decision-makers. These two obligations may sometimes be in conflict with each other, in particular when it comes to producing composite indicators. On the one hand, the statistics would not be worth the effort taken to produce them if 6

7 they were not useful for decision-making. On the other hand, composite indicators must not legitimise the activity of decision-makers by implicitly integrating the latter's objectives or preferences in the weighting coefficients. Thus statistical institutes should contribute to the creation of indicators geared to the needs of decision-makers, but they must do so whilst respecting certain technical and ethical restrictions, in particular the principles of the European Statistics Code of Practice, especially when it comes to publishing composite indicators. 16. One of these restrictions relates to the need to inform users and the public of the real nature of the indicators. There are also three other restrictions relating more specifically to composite indicators. It flows from the above that, for the realisation and publication of composite indicators, statistical institutes must find a compromise between three imperatives: a. providing users with a sufficiently low number of indicators so that they are of genuine use; b. refraining from the use of aggregates that blur a transparent democratic debate on societal choices; c. not aggregating indicators serving as the basis for independent decisionmaking. 17. By clearly establishing each party's role and the limits of their cooperation, affirming these principles could contribute to a healthy basis for the vital relations between statistical institutes producing indicators and their users. Once these principles are established, efforts to measure wellbeing in all its dimensions can be stepped up. 18. I consider that, among the eight dimensions of wellbeing identified by the Stiglitz Commission, the first, material living standards, is certainly the one best covered by statistical information, but significant progress remains to 7

8 be made. The Stiglitz report underlines the importance of monitoring data on the actual disposable income and wealth of households. Whilst there is a great deal of information on disposable income available, there is still much to be done in the recording of wealth. Moreover, it is important to take distributional aspects into account, on the basis of a breakdown by category of household. This latter point is particularly important as improving social cohesion and combating poverty are some of the objectives of the European Commission's Europe 2020 Strategy. Other research should also be encouraged: for example, in addition to the current household accounts, the introduction of a new way of presenting household accounts could indicate irreducible expenditure, thus highlighting the reality of households' economic difficulties. 19. The issue of households' unpaid activities is also very important in measuring their wealth, especially in this period of high unemployment where such activities appear to be, for many, the only way to compensate for loss of monetary income. But this is a thorny issue calling for more research, in particular regarding the value of these activities. It will also require recourse to time-use surveys, which are expensive and difficult and call for a substantial investment of resources 20. As far as the other dimensions of wellbeing are concerned, the statistics are already collected by the Member States, but certain fields are better covered than others. For example, data on work are well covered (by the labour force survey), as are data on health and education, fields which form the subject of satellite accounts in certain countries. Data on participation in political life and governance are less well covered. There remains much to be done in these various fields, but it is also important to emphasise the importance of linking up information from different sources so as to allow a holistic approach to wellbeing. 8

9 21. Eurostat has launched initiatives in line with the above considerations, based on the Commission Communication (COM (2009) 433 final of 20 August 2009) entitled "GDP and beyond, Measuring progress in a changing world". 22. In the social field, I would like to mention in particular the EU-SILC (European Union Statistics on Income and Living Conditions) project, which you know well because Austria was one of the six Member States that launched it in The project, which has since been extended to other countries, aims to provide two types of data: a. cross-sectional data allowing comparisons to be made, for a certain time period, between indicators of income, poverty, social exclusion and other living conditions; b. longitudinal data for comparing fluctuations in individual data over time. 23. As far as the environment is concerned, rather than amending the way GDP is calculated to incorporate environmental damage, Eurostat is currently developing ways of paying greater attention to environmental accounts and indicators, in accordance with the recommendations in the Commission Communication. Important modules relating to environmental accounts will thus be the subject of a forthcoming Regulation of the European Parliament and of the Council, rendering them more visible and allowing us to better measure, for each sector, atmospheric emissions, environmental taxes and the consumption of resources, in addition to expenses on environmental protection already collected jointly with the OECD. These environmental activities will help to promote better health for today's generations and a better quality of life in the future. 24. Eurostat will, of course, continue to assist these projects and support the related initiatives, in particular because they take renewed importance in the 9

10 context of the new European strategy aimed at promoting a smarter, greener and socially inclusive growth (the so-called EU 2020). 25. One important point that has become very clear during the discussions of EU 2020 is the need to specify the role of official statistics as part of political surveillance systems. As we can observe in the current debate related to the monitoring of indicators of the Stability and Growth pact, a one-to-one relationship between statistical measurement and political decisions might cause risks for the quality of statistical information. If the future EU2020 strategy includes indicators that are linked to target values and that are combined with political monitoring, then similar challenges can be expected. We, the statistical community should understand this as situation which offers many opportunities for the relevance of the statistical system. We should however find ways to limit the risks by explanation of the potential as well as the shortcomings of indicators. Intensive interactions with political users on national and European level are necessary. Since EU2020 is a very fast procedure, we have to speed up in order to be able to deliver our inputs in time. 26. Measuring the wellbeing of populations is still an enormous challenge calling for the mobilisation of considerable efforts and close collaboration between statisticians and researchers around in the world in many different disciplines. Eurostat therefore warmly welcomes the Austrian initiative, which is in line with initiatives launched by Eurostat in cooperation with INSEE in the form of sponsorship to ensure that the Stiglitz Report is followed up and implemented. We take the view that there is much to be gained from Austria contributing to the work of this sponsorship. Activities at national level are of the greatest importance, forming the basis on which European-level activities can build and feed. It goes without saying that 10

11 close collaboration is the best way to exploit these experiments, so I can assure Austria of Eurostat's support. Thank you for your attention. 11