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Measuring Sustainability and
Economic Growth in Europe
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Friedrich Hinterberger
Sustainable Europe Research Institute, Vienna, Austria
Member of the Board of the Austrian Chapter of the Club of Rome
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Co-author: Paul Weaver
Groundswell Research Association, Bedford, UK
In this paper we argue that there is a need to distinguish between several
different – albeit related – societal goals that all have some relation to economic
activity. These concern the level of formal economic activity, the level
of real income and net change in national wealth, the level of wellbeing,
and the possibilities to sustain each of these three into the future. In turn,
progress toward each of these goals is constituted differently, so each goal requires
different indicators for tracking progress. In the paper we argue that
our current performance indicators confuse these different goals, that inappropriate
design and use of indicators is detrimental to the achievement of
them all, and that there is a risk of introducing further confusion in efforts
to produce integrated indicators, which may be misguided. To avoid this
risk, we suggest an approach based upon distinguishing different goals and
arranging our information systems accordingly on the principle of ‘different
indicators for different goals’. Since there is no necessary hierarchy or structure
among different goals there is a need also to ensure that no one goal
is allowed inadvertently to override the others, for example by becoming
the driver of policies that are pursued at expense of other goals that may be
of equal- or greater- importance to society. Exploring relationships among
different goals and among means for their achievement is therefore an important
area for future research, which also depends upon developing and
using goal-specific indicators.
Introduction
Information systems, such as the system of national accounting, are intended
to deliver indicators useful for tracking progress toward societal
goals. The information systems and indicators are ‘tools’ and as with all tools
their usefulness depends on whether they are ‘fit for purpose’. This means
that the starting point for the design and correct use of such tools should
be the purpose each tool is intended to serve. In this paper we argue that
there is a need to distinguish between several different – albeit related – societal
goals that all have some relation to economic activity. These concern the level of formal economic activity, the level of real income and net addition
to wealth, the level of wellbeing, and the possibilities to sustain each of
these three into the future. In turn, progress toward each of these goals is
constituted differently, so each goal requires different indicators for tracking
progress. In the paper we argue that there is an urgent need to clarify these
different goals and to arrange our information systems accordingly on the
principle of ‘different indicators for different goals’.
We argue that this is needed so that we are better able to track progress
toward different goals, to explore relationships (both antagonistic and synergistic)
between progress toward different goals, to prevent misuse of indicators
that are inaccurately specified or are commonly misinterpreted, and
to prevent lock-in and lock-out effects of indicators and of policies informed
by them. These last concerns are important. There is evidence that, once
adopted, the role of indicators can unconsciously switch from ‘progressmonitoring’
of goals set by society to those of ‘goal-setting’, ‘agenda-setting’
and ‘policy-determining’. Especially where there is a single dominant indicator,
such as GDP, political commitment to making progress as measured by it
can confine policy making to supporting only some modes of development,
while ruling-out alternatives that would support progress on goals that are
not so well monitored.
Context
Concern over this issue is contextualized by several ongoing developments
and debates. In the wider context of using an internationally-agreed
set of national accounting standards to develop internationally comparable
sets of national accounts there has been a longstanding discussion of methodological
anomalies and deficiencies in the accounting methods. Many different
deficiencies have been noted, but different ones feature in different critiques
depending on the perspective of the critique. Broadly, the perspective
of different critiques and the weaknesses they identify in accounting practices
reflect the different societal goals and concerns just identified. There is an ongoing
discussion about if and how to ‘correct’ the methods. So far, this has
resulted in the partial modification of the internationally-agreed accounting
system and, also, to the introduction of ‘shadow’ accounts, which are produced
by some international organizations and some nations. A problem
arising from this approach is that the ‘partially-corrected’ system of accounts
arguably now fails to provide information that is accurate and useful for any
of the individual purposes just listed.
In the European context the European Union has two concurrent sets
of ‘overarching’ development goals, one expressed by the Lisbon Agenda (which concerns growth of the formal economy, competitiveness and employment)
and one expressed by the EU Sustainable Development Strategy
(which concerns wellbeing and, also, the capacity to sustain wellbeing). Both
European policy documents, the Lisbon Strategy and the Sustainable Development
Strategy, are followed by politico-administrative processes to measure
progress with regard to their proclaimed goals. Policy making is also
supported by ex-ante policy assessment procedures in the form of Impact
Assessment, which, in principle, seeks to project the likely future impact of
proposed policies on sets of indicators chosen to reflect the goals and concerns
expressed in the Lisbon Agenda and the EU SDS. There is a debate currently
concerning how these two overarching development agendas might be
brought closer together and what role revision of the indicator system might
play in this. Once again, this raises the question whether it is better to seek
to develop ‘integrated’ indicators that try to include and internalize multiple
concerns (i.e., a modified GDP that is constituted to reflect concerns for
wellbeing and sustainability) or whether different indicators should be developed
to serve separate goals and purposes. It is to this debate that we
seek to contribute through this short paper.
In the context of this debate we argue that an important principle is to use
different indicators for different goals. However we want to draw attention
also to the need not to assume automatically that one goal is necessarily more
important to society than others. In the European context, the Lisbon goals
and the goals of the EU SDS have their own indicators. The framework for
Sustainable Development Indicators (SDI) developed by EUROSTAT is based
on themes and sub-themes, which are linked directly to the policy priorities
of the EU SDS. The framework and the set of SDI are designed to be flexible
to adjust to possible changes in policy priorities and objectives. The set consists
of a relatively large number of indicators in order to properly assess the
complex character of SD. The preliminary set of SDI used in the monitoring
report for 2005 consisted of 12 headline, 45 core policy and 98 analytical indicators
(EUROSTAT, 2005). This set of indicators is currently being revised
by the EUROSTAT Working Group on Sustainable Development Indicators
(WG-SDI) and the revised indicator set will be applied in the 2007 monitoring
report. Meanwhile, the set of EU Structural Indicators, designed to monitor
the implementation of the Lisbon Strategy, is also being applied and it,
too, is under constant review and improvement. In contrast to the EU SDI,
the focus of the Structural Indicators (SI) is on economic performance. Thus,
the development and use of progress indicators in this instance conforms to
the principle of using different indicators for different goals. However, available
evidence (for example from the use of these indicators in ex-ante policy assessment processes) suggests that even if there is no official ‘hierarchy’ of
different development goals and even if sustainable development is declared
to be an overarching policy goal of the EU, the practical reality is that the economic
goals of the Lisbon agenda are afforded de facto priority over the goals
of wellbeing and sustainability expressed in the EU SDS. Given the political
importance as well as the public attention of GDP, presented and widely interpreted
as being much more than just one indicator among many others,
it seems that economic growth measured by GDP has an outstanding role in
these kinds of sets.
In this paper we suggest a more fundamental view. Indicators need to
follow societal goals and be designed in a way that they measure progress
towards the achievement of these goals and, since there is no necessary hierarchy
or structure among goals, there is a need to ensure that no one goal
or indicator is allowed inadvertently to override others or to drive or ostensibly
justify policies that are pursued at the expense of opportunity to achieve
other goals. In the following, we describe 3 different (sets of) goals and the
possibilities to measure progress towards the achievement of these. The three
goals match the three concepts that form the subject matter of an up-coming
high-level international conference, which is entitled: Beyond GDP: measuring
progress, real wealth and the well being of nations (see www.beyondgdp.
eu). Our starting point is to consider these different goals in order to
establish why these are important and to set out in broad terms what kind
of information is relevant or is not relevant in monitoring performance and
progress toward them. What we seek to demonstrate through this short review
is not only that there are differences in what needs to be included or
excluded in the design of performance indicators in respect to the different
goals, but sometimes also in how the constituent elements need to be
treated. Sometimes, the same constituent quality that contributes to one goal
is one that detracts from the achievement of another. These differences mean
that appropriate treatment of such qualities is goal-specific and that different
treatments can be mutually exclusive. By implication ‘correcting’ an indicator
developed for one goal so that this improves the indicator as a measure of
performance on another goal may reduce its accuracy and utility in respect of
the goal it was originally designed to serve. It will also introduce ambiguities
into indicators, which reduce their interpretability and utility.
The level of the formal economy
One goal of society is concerned with the level of (formal) economic activity.
Importantly, this concern is insensitive to the structure of that activity. If concern is simply that there should be a high level of formal economic activity
and growth in this (for example in order to generate paid employment and
a tax base and for these to increase over time) it makes no difference to the
achievement of this goal whether the activities in question concern producing
food, producing weapons, commuting to work, treating pollution-induced
health disorders or cleaning-up after an oil spill. Inefficiency in the economy,
such as might be associated with high materials-, energy-, pollution-, waste-,
and transport- intensities, adds to the total level of formal economic activity.
So does activity associated with defending against or repairing environmental
or health damages caused by other economic activities. Also irrelevant to
this concern is how the income generated by economic activities is distributed
and what this implies for equity of access to the goods and services produced
by the formal economy. The level of formal economic activity is important
because it is a strong correlate, both for theoretical reasons and in practice,
with the level of formal employment, the size of the tax base, and other concerns,
such as competitiveness and innovativeness. It is also an element in
ensuring the sustenance of social capital through the skills and knowledge
that are developed and transferred in the course of working within the formal
economy. All of these are important political concerns and are relevant
for the electoral prospects of politicians.
Measurement of formal economic activity is achieved at present using
the System of National Accounts (SNA). The present System of National Accounts
is backed by a set of internationally agreed standards (SNA 1993),
which are designed to promote common methods and ensure the exhaustiveness
of GDP estimates. Adherence to common standards is important,
especially in contexts such as the European Union where national account
statistics are used as the basis for levying contributions and distributing subsidies.
The SNA standards define the production boundary of the accounts;
i.e. they establish what is included and what is excluded from the measurement
of GDP and its growth rate over time.
The starting point for the SNA is the sets of capital, labor and material inputs
used to produce goods and services. The production boundary takes a
relatively broad view of economic activity; for example, it makes no distinction
between legal and illegal activities so that the ‘shadow’ or ‘non-observed’
economy is intended to be included to the extent possible in GDP calculation
and efforts have been made to propose means to measure and include the
unrecorded or unobserved economy; e.g. OECD (2002). The SNA also requires
account compilers to ‘pretend’ that certain transactions have occurred;
for example that home-owners rent their homes in their capacities as owners to themselves in their capacities as occupants, so that the value-stream of
‘housing service’ is included in the production boundary. However, most ‘informal’
work and the value of domestic services, such as cooking, cleaning,
laundry, caring for children and caring for the elderly in households is not included
currently. Also not included is the value of services supplied to households
and offices by consumer durable goods, such as washing machines,
fridges, computers and hi-fi systems, which, analogously to the housing services
provided by the housing stock, are typically not exchanged in markets,
since the owner of the durable good is usually the service beneficiary.
Here, then, we already see some confusion creeping in to the accounting
system because there is a lack of clarity about what purpose the accounts are
intended to serve. The confusion concerns whether the purpose is to measure
the level of formal economic activity or to measure the value of the combined
level of formal and informal economic activities. If the purpose is to measure
the level of formal economic activities (from the perspective that this is a good
correlate of the number of paid jobs in the economy and the size of the tax
base), informal economic activities are not relevant. However, if the purpose
is to measure the level of both the formal and informal economies, in order to
provide a global measure of the value of all economic activities taking place in
a nation whether or not these involve declared, money-backed transactions,
informal activities are relevant.
Furthermore, the distinction between these separate purposes raises an issue
that is of considerable potential importance from the perspective of wellbeing
and sustainable development. This concerns what scope might exist to
include informal activities in the future employment and tax base, for example
by providing income for currently unpaid household work and for community
work and by shifting to an economy organized along the principle of
selling service contracts rather than selling goods, in which case the value of
the stream of services emanating from the use of the housing stock and the
stock of consumer durable goods would be part of the tax base. Importantly,
useful work and services that are not part of the formal economy do contribute
to another (different) goal, that of achieving a high level of wellbeing.
Real income and wealth
Another goal of society is concerned with wealth and real income. The relevant
questions concerns whether the net wealth of society has increased, remained
stable or decreased in consequence of economic activity in the course
of a particular year and what level of ‘real’ or Hicksian income has been generated.
Real income differs from gross income, since part of gross income ought to be used in principle to restore depreciated capital. In calculating
real income, capital depreciation should therefore be deducted from gross
income. Since the use of resources depletes the stock of natural capital and
since pollution has the potential to degrade health and ecosystem services,
both of these reduce real income and wealth. Defensive, preventative and
restorative expenditures in relation to actual or potential damages caused by
economic activities should therefore be deducted from gross income, since
these do not add to, but rather reduce real income and wealth. The distribution
of income is not relevant to these concerns. The question of change
in wealth can be addressed using flow measures alone, so information about
the absolute level of wealth and the structure of the capitals that constitute
it is not needed. Real income is important since it is a measure of the value
that has been added by economic activities and which is available to support
consumption and to support saving and new investment. Savings and new
investments add to capital stocks, and so increase wealth. Conversely, there
may be ‘negative net savings’ if current consumption exceeds real income.
This arises if current consumption is achieved by depleting capital.
Several multi-lateral and international organisations and NGOs such as
the UN, OECD, the World Bank and Eurostat have been in the vanguard in
collaborating on and developing approaches to measuring real income and
net additions to wealth. A Handbook on a System for Integrated Environmental
and Economic Accounts (SEEA) was developed by the UN in 1993. A
revised version of the SEEA that takes into account the latest developments
was released in 2003. New data is being developed on the material basis
of economic activities, which meet the data requirements for implementing
environmentally-adjusted accounts, and recent advances in economic methods
for valuing environmental goods and services now improves the technical
possibilities to implement many of the revisions (e.g., Markandya and
Pavan 1999, Markandya and Tamborra 2005, Tietenberg 2005).
On the one hand, some organisations, such as theWorld Bank, are already
implementing the SEEA guidelines and are producing adjusted accounts.
The World Bank has focused on the use of revised accounts to produce two
key indicators: environmentally-adjusted net savings and broader-based indicators
of real wealth based on multiple capitals. It has been able to perform
some limited international comparative analyses and to highlight unsustainable
trends as represented by negative net savings rates. Applications and
tests of the methods have also been made in the context of regional organisations
and projects. The European Union has led several efforts, compiling oil
and natural gas accounts for five member countries, and forest accounts for three countries. It supported the GREENSTAMP (Greened National Statistical
and Modelling Procedures) Project, which worked on environmental accounts
and their potential application in the EU. Eurostat has also supported
the Green Accounting Research Project (GARP), which attempts to compile
comparable monetary accounts based on the damage cost approach, including
transboundary transport, across 27 EU countries.
On the other hand, little of this progress is observable at the level of the
formal national accounts. At the level of nation-states, nations continue to use
the standard SNA. A recent institutional analysis of the use made of environmental
accounts (World Bank 2003) found that applications were confined to
relatively few countries. The construction and use of monetary environmental
macro-indicators was also found to be limited. Overall, the study concluded
that no country has truly comprehensive accounts and that there is an
underutilisation of the accounts. It reports that many countries have not exploited
the full potential to monitor characteristics of wealth and changes in
wealth over time or to assist in resource management. Even simple analysis
such as comparison of rent to the taxes on rent and the cost of resource management
is not routinely carried out in countries that compile asset accounts
for natural capital. This may also indicate a lack of institutional awareness
of the practical applications of the information that the accounts can deliver
and therefore of their true potential value.
The "well-being of nations"
Yet another goal of society is concerned with the wellbeing of citizens.
Wellbeing is a multi-faceted concept, since many different factors contribute
to it. It is also an individual concept and a ‘lifestyle’ concept. Individual
wellbeing is in part a function of access to goods and services produced in
the formal economy. It is also a function of access to public services, such as
healthcare, educational and recreational opportunities and public spaces. It is
also a function of access to goods and services that are produced informally,
for example through community work, voluntary work and household work
and the use made of household equipments, even though the goods and services
produced are not formally bought and sold. It is a function also of access
to non-economic goods and services. These include ecosystem services produced
by climatic conditions and habitats, as well as services flowing from
cultural capital and heritage resources. Another important element of individual
wellbeing involves the quality of interpersonal relationships and of
engagement with other members of society, such as involvement in community
activities and in decision making that affects oneself, one’s family and one’s community. A sense of security is an important element of wellbeing,
as also is a sense of self-development and self-esteem. As a ‘lifestyle’ concept,
wellbeing is related to uses of time and space. Especially it involves
the balance achieved between work (both formal and informal) and leisure
time. Since individual wellbeing depends on ‘access’ to many different component
elements the question of how income is distributed or how access to
various services or opportunities is arranged is relevant. Wellbeing is important
because it correlates with the quality of life of individuals and with the
possibilities each person has to fulfil his/her potentials.
Currently, there are three ways to measure well-being. One is to study the
constituents of well-being; a second is to try to measure wellbeing directly;
and a third is to value the determinants of wellbeing; i.e. the inputs which
‘produce’ well-being. The current status in respect to each approach is as
follows:
- Several accounting methods for quality of life/well-being/happiness are
now available. Since the 1970s some areas of policymaking have come to
consider a broader range of aspects beyond just that of economic wealth;
aspects like health, housing, employment, the environment, family, education,
and basic human rights. For example, the Human Development
Index (HDI) of the United Nations Development Program (UNDP) re-
flects the wider concerns of human development as a multi-faceted concept
and has been used as a simple measure of quality of life. It combines
three indexes: life expectancy at birth, per capita GNP, and adult literacy.
More sophisticated indicator systems for wellbeing have since been
developed that consist of many categories of indicators and that combine
both objective factors, such as life conditions, with more subjective factors.
These systems include the Quality-of-life Index, the Calvert-Henderson
Quality of Life Indicators, the Canadian Index of Wellbeing, and the indicator
systems of UNICEF, the German Centre for Survey Research and
Methodology and Swiss Statistics.
- More recently, much work has been done to measure quality of life, life
satisfaction, wellbeing and happiness directly (see, for example, Layard
2005, Frey/Stutzer 2005, Grimm 2006). The “Eurobarometer” as well as
the US General Social Survey ask representative samples of the population
for their life satisfaction. Their results have been shown to correspond
with those from studies using medical techniques to study patterns
of brain activity as well as with findings from economic research
that have explored subjective evaluations by people of how they experience
time spent in comfortable and uncomfortable situations. The Asian kingdom of Bhutan was the first to develop a so-called Gross Domestic
Happiness indicator. Many of these results are published in the “World
Database of Happiness (worlddatabaseofhappiness.eur.nl). Further
work is certainly needed to consolidate these concepts and measures
(Clark/McGillivray 2007).
- Determinants of wellbeing can be regarded as the different types of capital
(produced, human, natural and social), which constitute the productive
base of the economy and of wellbeing. Thus determinant-based measures
of wellbeing and measures of sustainability can be considered as attempts
to address the same issue. They provide the same information regarding
inter-temporal efficiency and intergenerational equity.
Conclusion
There are methodological difficulties in developing a single, comprehensive
‘integrated’ indicator that would be directionally reliable in respect of
all the different concerns and goals listed in this paper. These are related
on the one hand to the capacity to place monetary values on non-produced
capital stocks and non-traded production factors, goods and services, and on
the other hand to the extent to which different capital stocks and their constituents
are substitutable or not. As indicated earlier, some constituents of
progress that contribute to achieving one goal detract from the achievement
of another, a problem which cannot be resolved satisfactorily using a single,
comprehensive ‘integrated’ progress indicator. The challenge faced is therefore
one of developing separate indicators for separate goals and of using
these to explore relationships among goals and means of making progress
toward them. This depends also on ensuring a correct interpretation and use
of indicators.
Despite some deficiencies, GDP is a good measure of formal economic activity,
to which other economic variables, such as formal employment (the
number of jobs) or tax revenues are theoretically and empirically related.
Corrected GDP values would be much less useful in determining such interdependencies.
However, the intrinsic ambiguities of GDP concerning the
structure of economic activity and the qualitative aspects of growth – whether
growth is justified if all externalized costs are compensated – suggests strong
deficiency in GDP as a dominant measure of economic performance. The
goal of increasing real income and adding to net wealth reflects this qualitative
concern. This goal is best served by using different indicators of progress
that are designed to compensate for the damage costs of economic activities,
even when these are not internalised automatically in markets as these are structured currently. Equally, when we attempt to measure quality of
life or well-being, which are the central policy goals of the EU-SDS, these
should be measured independently from GDP calculation. Given that the
concepts of quality of life and wellbeing are subjective and are individuallyand
culturally- conditioned their specification will differ within and between
societies to varying degrees, albeit that some elements are likely to be common
across interpretations. The specification of indicators will need to take
such differences into account, which has implications for the possibilities of
developing standardized information systems and indicators. Nevertheless,
for reasons of orientation, transparency, accountability, and monitoring, there
is an urgent need to develop such indicators, especially as a counterweight to
the current dominance of GDP, which has a distoring influence on decisionand
policy-making.
In the context of the challenges facing Europe, it is prudent that future European
development should be founded on systemic models, strategies and
transition-relevant concepts, which allow less environmental consumption,
a fairer distribution of entitlement or access to the constituents of wellbeing,
and an economy in which citizens’ needs for quality of life and comunity values
are satisfied. For that it is necessary to realize revenues in all forms of
capital based on specific investments. Overdependence on GDP as a dominant
and widely misinterpreted indicator of progress can create systematic
biases in our information system and in the direction of policy, making both
the indicators and the policies predicated on these directionally unreliable in
relation to the goals of wellbeing and sustainable development. Because the
SNA does not include benefits of sustainable developments – such as reduced
pollution damage leading to improvements in public health or reductions in
resource use leading to higher resource productivity, environmental capital
preservation and greater intergenerational equity – these benefits from more
sustainable development are not visible to decision makers in the main indicators
of our economic information system. Likewise, improvements in economic
efficiency, such as are coming from more sustainable modes of production
and consumption that use less resources, water and energy and that emit
less pollution, are flagged up by GDP as negative developments, since they
reduce the need to spend on raw materials and energy (typically imported
from outside the EU), on environmental restoration and on healthcare (typically
funded from the public purse) in respect of pollution-induced health
problems.
Importantly, we know that there are already some trends in our socialecological
systems in the direction of sustainable development, such as toward
dematerialisation and improved energy efficiency, and a growing number of niche-examples of sustainable consumption-production systems that
represent win-win outcomes for the economy, society and the environment;
e.g. by switching from selling products to selling services or by establishing
routes to develop money-backed demand for useful work now done in
the informal sector. These pioneering examples illustrate the potential for introducing
new modes of development capable of bridging between the concerns
of the EU SDS and the Lisbon Agenda. We also know that the positive
benefits of these trends and niche-examples are not revealed by the current
measures of economic performance, which are dominated by GDP. Furthermore,
there is a real danger that further innovations in modes of economic
activity such as these may become blocked either because they show up as
having a negative impact on economic growth and employment or because
their positive contribution to growth and employment is not recorded. There
is therefore an urgent need for sets of indicators able to recognise progress toward
wellbeing and sustainability and to record this as positive as well as for
the societal goals of wellbeing and sustainbility to be appropriately weighted
in decision- and policy-making.
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