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1301.0 - Year Book Australia, 2003  
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Beyond GDP: Towards wider measures of wellbeing

Introduction

For many years growth in the volume estimates of real gross domestic product (GDP) and real GDP per capita have been used as benchmarks in the determination of changes in individuals' and countries' standards of living and wellbeing. Changes in real GDP are generally accompanied by broadly similar rates of change in consumption and income, and therefore making the link between changes in GDP and changes in the standard of living is appropriate. However, national accountants who compile GDP have long recognised that GDP is an imperfect measure of changes in economic wellbeing due, in part, to particular decisions that have been taken to define its scope, the fact that it is a gross measure and not a net measure (i.e. depreciation is not deducted), but mostly because it is simply a measure of production. For example, for reasons of practicality, the scope of GDP excludes the production of services produced and consumed within the household, and by definition GDP does not reflect the income flows between a country and the rest of the world. For these reasons, real net national disposable income (RNNDI) and RNNDI per capita are considered better measures of economic welfare. RNNDI goes part of the way to addressing some of the shortcomings of real GDP as a measure of economic welfare by deducting depreciation of produced assets and taking account of flows of income and current transfers between a country and the rest of the world.

At the same time, it is also being recognised that the measurement of welfare must encompass more than only economic concerns. This broadening of the measurement agenda has moved in concert with the increasing focus in public and corporate policy on the need to consider the environmental, social and economic aspects of life together. Responding to the measurement issues posed by the integration of economic, social and environmental aspects represents a significant challenge. This article provides a guide to the relevant issues and an introduction to work being undertaken both within Australia and overseas.


Measurement frameworks

The integration of three diverse areas of statistics requires a statistical framework of some kind. Frameworks are required:

    • to place indicators in context and to organise available information
    • to assess trade-offs and reinforcements between different dimensions of sustainable development
    • to help set priorities across different policy areas
    • to develop summary or aggregated indicators.

The development of appropriate frameworks is difficult, but much work has been done and is continuing:
    • the statistical framework for economic statistics is well developed and it is this framework that is used to derive GDP (System of National Accounts 1993 (SNA93))
    • the statistical links between the economy and the environment are being increasingly well defined (System of Integrated Environmental and Economic Accounting (SEEA) (United Nations 2002))
    • frameworks on the social side are less well established particularly with regard to linkages between society and the environment; recent contributions include the development of social accounting matrices and the measurement of human and social capital (SNA93)
    • the genuine savings framework extends the traditional economic statistics boundaries to allow for environmental factors and human capital (see http://www.worldbank.org)
    • the wealth accounting focus developed by the World Bank looks specifically at the composition and changes in countries' wealth as the determinant of sustainability (see http://www.worldbank.org)
    • some frameworks focus purely on physical relationships between resources, one example being the total material flows framework developed by the World Resources Institute (see http://www.wri.org).

Further development and discussion of measurement frameworks is essential to progress in this area.


Aggregate indicators

In the same way that GDP is a single measure of economic growth, many people have desired and developed single measures of sustainable development and welfare. These single indicators require the aggregation of a variety of economic, social and environmental variables in much the same way that GDP requires the aggregation of specific economic variables.

A number of aggregate indicators have been developed that focus on environmental variables. For example:
    • Ecological Footprints developed by the World Wildlife Fund, the United Nations Environmental Program and others (see http://www.unep.org)
    • the Environmental Sustainability Index developed by the World Economic Forum (see http://www.weforum.org)
    • the Total Material Requirement developed by the World Resources Institute (see http://www.wri.org).

An aggregate indicator with a more social focus is the Human Development Index developed by the United Nations Development Program (see
http://www.undp.org). This measure combines indicators of health, education and income.

Finally, there are some aggregate indicators that combine information on a much broader range of variables which are either aggregated in monetary terms or weighted together to form a composite index. Important examples include:
    • Genuine Progress Indicators (GPI) and Indicators of Sustainable Economic Welfare originally developed by Nordhaus and Tobin (1972) in the early 1970s (see the Australia Institute's web site http://www.gpionline.net which gives a GPI for Australia)
    • the Index of Economic Wellbeing developed by Osberg and Sharpe (1998)
    • Genuine Savings developed by Pearce and Atkinson (1993) (see http://www.worldbank.org).

Although aggregate indicators provide a simplicity of message, there remain concerns over their conceptual and statistical validity and they are seldom measured officially. The lack of widely accepted frameworks, the difficulties in valuing environmental and social factors and hence allowing direct aggregation, and the subjectivity of selecting and weighting variables to include in composite indices are real and significant concerns. Despite these limitations, so long as the underlying logic of the indicator's construction can be understood, there will be instances where aggregate indicators can assist in drawing attention to, summarising and understanding cross-cutting changes.


Indicator sets

In order to present an integrated message on developments in economic, social and environmental areas of life, many groups and agencies, including the ABS, have turned to the use of indicator sets to bring together relevant information. Commonly, a compact set of high level (headline) indicators is selected to reflect changes in relevant economic, social and environmental concerns. Although there are significant difficulties in limiting the range of available indicators to a manageable number, many initiatives also present a broader range of indicators that provide detail below the headline level. Importantly, there is usually less scope to question the statistical validity of each of the indicators, which in turn gives an important element of confidence in the indicator set as a whole. As well, often there is no specific interpretive framework underlying the indicators and explaining how they are linked, and so users must form their own opinion about relative significance of change in an area such as health, say, against change in GDP or biodiversity.

There are now many examples of indicator sets. The most topical in Australia is the indicator set presented in
Measuring Australia's Progress, 2002 (1370.0) released in April 2002. Table 29.3 lists the headline dimensions and associated headline indicators from this release.

29.3 HEADLINE INDICATORS - 2002

Headline dimensionHeadline indicator

HealthLife expectancy at birth
Education and trainingPeople aged 25-64 years with a vocational or higher education qualification
WorkUnemployment rate
BiodiversityNumber of extinct, endangered and vulnerable birds and mammals
Land clearanceAnnual area of land cleared
Land degradationAssets at risk in areas affected by salinity or in areas with a high potential to develop salinity
Inland watersProportion of water management areas where use exceeds 70% of sustainable yield
Air qualityDays in which health standards for fine particle concentrations are exceeded in selected capital cities
Greenhouse gasesNet greenhouse gas emissions
National wealthReal national net worth per capita
National incomeReal net national disposable income per capita
Economic disadvantage and inequalityReal equivalised average weekly disposable income of households in the second & third deciles of the income distribution
HousingNo headline indicator (although two indicators consider housing affordability and overcrowding)
CrimeUnlawful entry with intent and assault (victimisation rates)
Social attachmentNo headline indicator (various indicators cover aspects, including people living alone, marriage and divorce, attendance at cultural venues and suicide rates)

Source: ABS 2002.



Other examples of indicator sets that may be of interest include:
Conclusion

As society seeks to answer the broad economic, social and environmental questions that confront it, the provision of information to help answer these questions is essential. Importantly, the information needs to be presented in a coordinated way that assists rather than hinders possible interpretation. This article has presented a number of ways in which measurement has moved beyond the use of GDP as the indicator for all occasions. Although much work remains to be done there is a range of promising measurement approaches that can be developed.

References

ABS (Australian Bureau of Statistics) 2002, Measuring Australia's Progress, 2002, cat. no.1370.0, ABS, Canberra.

Nordhaus W & Tobin J 1972, 'Is Growth Obsolete?', in
Economic Growth, 50th anniversary colloquium, Columbia University Press for the National Bureau of Economic Research , New York.

Osberg L & Sharpe A 1998,
An Index of Economic Well-being for Canada, Paper prepared for the 25th General Conference of The International Association for Research in Income and Wealth, Cambridge, England, 23-29 August, 1998.

Pearce DW & Atkinson G 1993, 'Capital theory and the measurement of sustainable development: an indicator of weak sustainability',
Ecological Economics, 8, 103-8.

SNA93 (United Nations, International Monetary fund, Organisation for Economic Co-operation and Development, World Bank and Commission of the European Communities) 1993,
System of National Accounts 1993, Brussels/Luxembourg, New York, Paris, Washington DC.

United Nations 2002,
System of Integrated Environmental and Economic Accounting, (Draft SEEA 2002),. Draft report of the London Group on Environmental Accounting.

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