The rate of economic growth is a very poor measure of the level of well-being in a country and yet the Irish government is doing everything it can to increase it while ignoring its damaging side effects. In Germany, incomes have been increasing since 2001 but the welfare of ordinary people has been going down. The same might be happening in Ireland, especially now that so many cuts are being made. In response to an appeal on this website, two people, Ciaran Mulloy and Ruth Barrett, have volunteered to work together for the next two or three weeks digging out data for a National Welfare Index which will show the extent to which Ireland’s national well-being is being affected by government policies. The data will be processed by another Feasta member, Hans Diefenbacher, who has already prepared a similar index for Germany. The results will appear early next year.
Why Ireland needs an Index of National Welfare
Since the 1960s, GDP forecasts calculated by central banks, expert groups and institutes for economic research have been presented to the general public as if the quality of every single citizen’s life was solely dependent on the forecast figure.
As a result, the public perception of the economy has been narrowed down to one thing – its Gross Domestic Product. But while economists and statisticians have never claimed that GDP figures express the quality of life or the level of well-being in the country.they have not spoken out against the increasing use of GDP as an indirect measure of welfare.
Yet, as many people know, it is dangerous to equate GDP and welfare. GDP is nothing more than a measure of the economic value exchanged in markets. Household and voluntary labour are omitted when GDP is worked out. The way the national income is distributed is ignored, too, though these three factors are significant for the welfare of a nation. GDP is also blind about whether the incomes it measures were produced by reducing the natural wealth of a country or whether they are sustainable because they are generated within a circular-flow economy.
Most importantly, GDP does not distinguish between products that directly increase the welfare of citizens and those that generate negative external effects that have to be repaired by other economic activities. For example the need to build walls to reduce road noise or to carry out medical treatments to cure illnesses from air pollution all add to GDP as currently measured because they generate incomes for those carrying them out when really, from a national welfare perspective, they should be deductions.
The way economic measurement systems look at these external effects is therefore critical. When choosing which indicators to use to measure progress we must question whether damaging external effects are all treated positively, as they are with GDP, or whether they are subtracted to enable a much better understanding of the welfare aspects of the economy. In addition, we have to remember that a substantial part of costs that result from current economic decisions may only emerge far in the future, as they will, for example, in the case of climate change.
The new “National Welfare Index“ (NWI) which I developed recently in cooperation with Roland Zieschank of the Free University of Berlin, is designed to supplement GDP, to be a complementary source of information. In it, private consumption is weighted by a measure for income distribution. Household and voluntary labour is added and a number of social factors are considered, such as the amount of public expenditure on health and education. Allowance is also made for a number of ecological factors such as environmental damage, air pollution, climate change and the use of non-renewable resources.
When we compared the German Gross Domestic Product index with the results from our new the National Welfare Index for Germany we became quite concerned. Whereas German GDP grew more or less continuously over the past twenty years as the graph shows, the NWI reached its maximum around the turn of the century. Since then, it has been declining almost every year, largely because of a worsening income distribution and negative environmental external effects.
Calculations of this kind are far more than unworldly academic experiments because the political system will struggle to keep its legitimacy if it concentrates on indicators like GDP that do not reflect the realities of people’s lives. If GDP is growing steadily but these increases do not translate into welfare gains for the majority of the people because of the increasing inequality of income distribution, the system will lose its credibility.
A second argument for supplementing GDP is even more important. Restructuring the economy so that it would meet the requirements of sustainable development cannot be measured by GDP growth or de-growth. There will inevitably be something like “green growth”. Certain parts of the economy will need to expand, for example, to make old buildings more energy efficient or to increase the production of renewable energy production. But other parts of the economy will shrink especially if an increasing number of people explore how an “economy of enough” could positively effect their lives.
The net effect is very uncertain – green growth on the one side and the reduction of production harmful to the environment and sustainable consumption patterns on the other. A slow decrease of GDP is the most likely result. But how could a politician “sell” such a strategy if his or her success was measured by GDP growth rates? A political strategy to increase wellbeing would be completely different from a Gross Domestic Product growth strategy.
Wellbeing will increase if income distribution becomes more even. In Germany, the income situation of the poor has to be improved. Volunteer labour has to be promoted. Above all, the reduction of pollution and a cutback in the use of natural resources would directly increase the NWI.
Utopia? For the time being: maybe. But the thought that promoting GDP growth could be leading us in the wrong direction is a disquieting one and the best way of stimulating such thoughts, and thus changing direction, is to produce an alternative measure which demonstrates that it is.
A long-standing member of Feasta, Prof. Dr. Hans Diefenbacher works at FEST, the Protestant institute for interdisciplinary research in Heidelberg, and is Professor Extraordinarius of Economics at Heidelberg University. [email protected] An English-language version of his German NWI study can be downloaded from http://www.umweltbundesamt.de/uba-info-medien-e/mysql_medien.php?anfrage=Kennummer&Suchwort=3903.
Richard Douthwaite writes:
Indices of Sustainable Economic Welfare have been prepared for at least two dozen countries in the past but not for Ireland. These have generally shown that although national incomes have gone up, the rises have not been sustainable because they have been produced by the increased use of non-renewable resources or by damaging society or the environment. More details of how an ISEW is calculated can be found on the Friends of the Earth website – . See http://www.foe.co.uk/community/tools/isew/brief.html.
Hans’ and Roland’s new index improves on its ISEW forerunner by correcting the national income data to allow for changes in income distribution and for several other factors listed in the table below:
|Variable||Effect of variable on National Welfare Index||Is the variable included in the Index of Sustainable Economic Welfare?|
|1||Index of income distribution||The more equal the distribution, the greater effect on the index||No|
|2||Weighted consumer spending||Higher corrected consumer spending has a positive effect on the index||No|
|3||Value of unpaid domestic work||An increase is positive||No|
|4||Value of voluntary work||An increase is positive||Yes|
|5||Public spending on health and education||An increase is positive||No|
|6||Consumer durables – cost /benefit||Can be positive or negative depending on the cost-benefit result||No|
|7||Commuting time between home and work||An increase is negative, a decrease positive||No|
|8||Cost of traffic accidents||Negative||No|
|9||Cost of crime||Negative||Yes|
|10||Cost of alcohol-related diseases||Negative||Yes|
|11||Social cost of compensation for environmental damages||Negative||Yes|
|12||Damage due to water pollution||Negative||No|
|13||Damage due to impacts on the soil||Negative||Yes|
|14||Damage due to air pollution||Negative||No|
|15||Damage due to noise||Negative||No|
|16||Loss of wetland, including bogs||Negative||No|
|17||The loss of usable agricultural land||Negative||No|
|18||Substitution costs generated by the exploitation of non renewable resources||Negative||No|
|19||Damage due to CO2 emissions||Negative||Yes|
|20||Net change in the value of invested capital (excluding buildings)||Can be positive or negative||No|
|21||Changes in the capital account||Can be positive or negative||No|
Hans has offered to help prepare an Irish NWI. He and his staff will do most of the calculations in Heidelberg after two volunteers, Ciaran Mulloy and Ruth Barrett, have assembled the Irish data. The idea is to present the new index before next spring. Its effect on the political debate could be enormous.
Featured image: Business. Author: ilco. Source: http://www.sxc.hu/photo/1198416