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Social Indicators Research

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01-04-2015

Beyond GDP: Conceptual Grounds of Quantification. The Case of the Index of Economic Well-Being (IEWB)

Author: Géraldine Thiry

Published in: Social Indicators Research | Issue 2/2015

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Abstract

Today, though the need for new indicators of progress is broadly recognized, no consensus has arisen on a successor to gross domestic product (GDP). Various quantification options are debated. While some intend to improve current indicators by completing or adjusting them to new constraints, others think that new indicators of progress are liable, if well-designed, to catalyse a transition toward a new societal model, less reliant on growth. Up to now, the normative stakes related to quantification options, though crucial for “what we measure affects what we do”, are scattered among the debates and do not appear clearly to actors. Our paper aims therefore to offer a systematic understanding of the normative impacts of generic quantification choices. To that end, we analyse the index of economic well-being (IEWB). For each dimension of this composite indicator, the analysis—which aims to be easily transposed to other indicators—sheds light on the variety of normative implications resulting from its conceptual and methodological apparatus. This concomitantly leads us to question in depth the relevance of some theoretical hypotheses underlying the IEWB to coherently account for economic, social and ecological issues. The paper’s conclusion suggests that alternative conceptual frameworks, such as ecological economics and the capability approach, are liable to carry more coherent indicators of progress.

next article An Analysis of the Relative Importance of Components in Measuring Community Wellbeing: Perspectives of Citizens, Public Officials, and Experts

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See Van den Bergh (2007) and (2009), Méda (2008) and Gadrey and Jany-Catrice (2012).

Such as the OECD, the World Bank and the EU.

Let us mention the influential Commission on the Measurement of Economic Performance and Social Progress ("the Stiglitz commission"), chaired by Stiglitz, Sen and Fitoussi, launched in January 2008 by the President of France, Sarkozy.

The commission CAE-CGEE (launched in 2009 by Merkel and Sarkozy) questions: "How can we broaden our perspective from its current focus on economic performance to an assessment of the quality of life more generally, in order to appreciate what really counts for human welfare?" (CAE-CGEE 2010: 5). The European Commission recognizes that: "Critically, GDP does not measure environmental sustainability or social inclusion and these limitations need to be taken into account when using it in policy analysis and debates"(European Commission, 2009: 3).

See FAIR (2011) for a good overview of the various initiatives at stake.

It is worth mentioning that the normative scope of quantification choices raises a strong democratic issue at the procedural level: who is legitimate to define what progress is? This question has been at the origin of numerous studies (see FAIR 2011). Purposely we do not focus here on this procedural level, in order to study in depth the technical aspects of the normative scope of quantification.

Linear scaling is used to standardize the range of a variable. In the case of the IEWB, an estimate is made for the high and low values for all time periods and/or for all countries analyzed (denoted Min and Max, respectively). The data is then scaled according to these values. If a variable increase corresponds to an increase in economic well-being, the variable (Value), is scaled according to the formula (Value − Min)/(Max − Min). If, in contrast, an increase in (Value) corresponds to decrease in economic well-being, the Value is scaled according to (Max − Value/Max − Min). For more details, see Salzman (2004) and Jany-Catrice and Kampelmann (2007).

Illustratively, the authors, on the CSLS website suggest various weighting schemes in their spreadsheets among which a weighting giving much weight to consumption [0.4, (CF), 0.1 (WS), 0.25 (ID) and 0.25 (ES)] and an equal weighting [0.25, (CF), 0.25 (WS), 0.25 (ID)) and 0.25 (ES)].

ISEW = personal consumption + public non-defensive expenditures − private defensive expenditures + capital formation + services from domestic labour − costs of environmental degradation − depreciation of natural capital; GPI = Personal consumption adjusted for income inequalities + Value of housework and parenting + Services of consumer durables + Services of highways and streets + Value of volunteer work + Net capital investment − Cost of household pollution abatement − Cost of noise pollution − Cost of crime − Cost of air pollution − Cost of water pollution − Cost of family breakdown − Loss of old-growth forests − Cost of underemployment − Cost of automobile accidents − Loss of farmland − Net foreign ending or borrowing − Loss of leisure time − Cost of ozone depletion − Loss of wetlands − Cost of commuting − Cost of consumer durables − Cost of long term environmental damage − Depletion of non-renewable resources. See Brian et al. (2003: 8) for a synthetic overview of the differences between ISEW and GPI.

The real value of changes in working time is indicated by the imputed value of leisure per capita with unemployment adjustment (1996$). The latter is computed as the product of the average after tax compensation per employed person per hour, the working age population as a percentage of the total population, and the average annual number of hours of unemployment per person aged 15–64 relative to the 1971 benchmark year. The average after tax compensation per employed person per hour = (1 − (General Government Current Receipts, as a Percentage of Nominal GDP/100)) * Average Compensation per Employed Person per Hour. The average annual number of hours of unemployment per Person Aged 15–64 = ((Average annual number of hours worked per person * Employment over Working Age Population Ratio, %)/100) * Average Annual Number of Hours of Unemployment per Person Aged 15–64.

In Osberg and Sharpe compute this dimension as (C + UP + G + WT) * (LE), where C is the real per capita consumption adjusted for regrettable costs. For the sake of clarity, we have decided to make this adjustment explicit in the formula.

Index of equivalent income (US 1971 = 1.00) = Square Root of Family size/Square Root of family size in US 1971 (Note: Index of Equivalent Income was calculated on the basis of one half rate of change of family size.) Source: Census Data, http://www.census.gov/population/socdemo/hh-fam/htabHH-6.txt.

The use of deflators is not neutral and would deserve some attention, in the fact that deflators and price consumption indices, on one hand, imperfectly reflect quality changes and, on the other, are generally based on average baskets of goods, not considering distributional issues related to the way changes in certain prices (basic goods for instance) affect the economic well-being of specific socioeconomic categories. But it exceeds the aim of that paper. See Stiglitz et al. (2009) and Conseil National de l'Information Statistique (2006).

Crime is accounted as "the cost of crime to victims based on their out-of-pocket expenditures or the value of stolen property" (Anieleski and Rowe 1999: 18). Costs of commuting encompasses: "the money spent to pay for the vehicle, or for bus or train fare" and "the time lost that might have been spent on other, more enjoyable or productive activities" (Ibid. 1999: 28). Costs of household pollution abatement are the expenditures made for equipments and other defensive expenditures aimed to compensate for pollution. Costs of automobile accidents account the economic losses which "cover only motor vehicle accidents on and off the road and all injuries regardless of length of disability. Economic loss includes wage loss; legal, medical, hospital, and funeral expenses; insurance administration costs; and property damage." (Ibid. 1999: 31).

For now this problem appears mostly theoretical: given problems of data availability across countries, and the resulting lack of comparability, this dimension has been retrieved from the index.

"Unpaid productive work such as domestic work and child care should be included, where appropriate, in satellite national accounts and economic statistics" (Agenda 21, Chapter 8, http://www.gdrc.org/decision/agenda21chapter8.html).

See Cassiers and Thiry (2014).

This discussion might be addressed to many other indicators, such as the ISEW and the GPI.

LIM means Low-Income Measure, whereby the poverty line is defined as a fixed proportion of the median income.

More precisely, the Gini index measures the area between the Lorenz curve (which plots on the y axis the proportion of the total income of the population that is cumulatively earned by the bottom x % of the population) and the hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. (See http://stats.oecd.org/glossary/detail.asp?ID=4842).

See OCDE 2011 for examples of multi-dimensional joint distributions.

See http://www.un.org/millenniumgoals/ for more details.

For a deeper analysis of the sustainability dimension of a different indicator (Adjusted Net Savings), see Thiry and Cassiers (2010).

This question is explored in detail in Thiry and Cassiers (2010).

α is the normalized proportion of the population aged 15–64 in the total population, β is the normalized proportion of the population at risk of illness (=100 %), γ is the normalized proportion of the population comprised of married women with children under 18, δ is the normalized proportion of the population in immediate risk of poverty in old age.

In the present case, a variation in average outcomes can uneasily compensate for a variation in inequalities; at least, the foundation of such a possibility of substitution should be explicitly questioned.

This ethical/conceptual framework is the object of the chapter 5 of Thiry (2012).

See Dervis and Klugman (2011), Stanton (2007) and Robeyns (2005).

Gaudet (2007) explore the slope of the resources price path in different market structures. He shows that as soon as imperfections are introduced (he studies monopoly and oligopolistic competition respectively), the price path is flatter than in perfect competition.

We study in detail the contribution of ecological economics in the construction of new indicators of progress in another ongoing paper.

"Le défi posé par l’articulation des inégalités écologiques et des inégalités sociales est complexe en ce que la discussion porte tant sur la définition de ce qui est " bien " et de ce qui est " mal " (…) que sur leur répartition."(p. 1).

This opens up a broad questioning on the contribution of indicators' analysis, through their specific epistemological position at the edge of theory and of empirical experience, in the criticism of weak sustainability. This question is treated in chapter 5 of Thiry (2012).

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Title: Beyond GDP: Conceptual Grounds of Quantification. The Case of the Index of Economic Well-Being (IEWB)
Author: Géraldine Thiry
Publication date: 01-04-2015
Publisher: Springer Netherlands
Published in: Social Indicators Research / Issue 2/2015
Print ISSN: 0303-8300
Electronic ISSN: 1573-0921
DOI: https://doi.org/10.1007/s11205-014-0650-6

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