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STU 03-09 : Special topic : Measuring development progress beyond GDP [Short Term Update 03-09]

After the escalation of the financial crisis in September 2008, the industrialised countries were pulled into a deep recession. The main uncertainty that currently surrounds economic forecasts concerns the robustness of the international economic recovery. In fact, monetary and fiscal policies have been able to stabilise the world economy more rapidly than expected, but it remains difficult to predict whether the economic recovery is able to withstand the fading out of the impact of the economic stimulus measures.

According to our September forecast, Belgian GDP growth should become slightly positive in the second half of 2009. In the course of 2010, economic growth should also be supported by domestic demand. Quarterly GDP growth should pick up further in the course of 2011 and reach 0.6%. This will result in annual GDP growth rates amounting to 0.4% in 2010 and 1.9% in 2011, after a drop of 3.1% this year.

Whereas total net job creation still amounted to 71 200 persons on average last year, 34 600 jobs should be lost this year. In 2010, job losses should add up to 58 900 on average. In 2011, a net job creation of 17 600 persons on average is expected. Given the evolution of the labour force, the number of unemployed (broad administrative definition) should increase by 53 900 persons this year, by 98 400 next year and a further 23 300 persons in 2011. As a result, the harmonized Eurostat  unemployment rate (which is based on labour force surveys) is expected to reach 9.6 % in 2011, compared to 7% in 2008.

According to our inflation update of October, headline inflation (as measured by yoy growth of the national index of consumer prices) has become negative since May and should remain so until November 2009. The yoy decrease of the index results from the price evolution of a limited number of products and is temporary. Underlying inflation should cool down further as a reaction to weak economic activity and the gradual pass through of lower energy prices into the prices of other goods and services, but should remain clearly positive. This year, inflation should be zero on average, mainly due to the negative impact of energy prices. As oil prices should increase gradually, their negative impact on inflation should disappear, resulting in a rise in inflation to 1.3% in 2010, despite the decrease in underlying inflation (from 2% in 2009 to slightly above 1% in the second half of 2010).

STU 3-09 was finalised on 6 October 2009

Special topic : Measuring development progress beyond GDP

This special topic article describes three kinds of synthetic indicators complementing GDP: the Human Development Index, the Ecological Footprint with Biocapacity and, third, indicators based on Environmental Satellite Accounts. It shows that these indicators, among others, provide useful additional information on the human and environmental resource bases of development.

Since the seventies and the publication of the Club of Rome report, The Limits to Growth, debates on the measure development progress have been ongoing. They were recently revived with the international initiative, Beyond GDP, launched by the European Commission and European Parliament, WWF, the Club of Rome and the OECD, and with the Communication, GDP and Beyond - Measuring progress in a changing world. These debates are reflected in a 2008 Eurobarometer showing a large consensus on the need to improve the variety of indicators. More than two thirds of citizens (77% in Belgium and 67% in the EU) support the idea that national progress should be evaluated based equally on social, environmental and economic indicators" rather than "mostly on money-based economic indicators.

In this context, new indicators have emerged since the eighties for measuring social progress and environmental challenges, as well as their interlinkages with economic performance. Those selected as examples in this article are “beyond GDP”, i.e. they reflect a variety of important data that are not included in GDP. The complexity of this debate is illustrated here by going into these synthetic indicators in five areas: coverage, added-value and limitations, figures for Belgium, institutions that developed them and their accounting systems and finally their potential for guiding policy decision.

The Human Development Index

The Human development index (HDI) is an indicator of human capital that combines four indicators covering three key dimensions of human development: Health (life expectancy at birth), Knowledge (adult literacy rate and gross enrolment ratio in education), and Standard of living (GDP per capita as a proxy, as logarithm of GDP per capita at purchasing power parity to US$. The HDI “was created to re-emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth”. An important use of HDI is to compare the health and education performances of countries with similar standard of living. However, some key aspects of human development are not covered, such as political participation or knowledge acquired through channels other than formal education. Belgium has a high human development index: its HDI rose from 0.869 in 1980 to 0.948 in 2006. In 2006, the world average HDI was 0.747 and the 26 countries with low human development had an average HDI of 0.444.

The HDI was developed by the United Nations Development Programme (UNDP) and is published yearly in the UNDP's Human Development Report. The UNDP also developed other similar indicators, for example the human poverty index and the gender-related development index. HDI is computed using a simple methodology. The values obtained for each of the three key dimensions are normalised between 0 and 1 and so for the HDI, as the simple average of these three dimensions. Countries fall into one of three categories, “high”, “medium” or “low” human development, depending on their level of HDI: above 0.8, between 0.5 and 0.8 or below 0.5 respectively.

The Ecological Footprint and Biocapacity indicators

The Ecological Footprint (EF) and Biocapacity (BC) indicators provide information on environmental flows and stocks. The EF provides information, at the level of a country or a large territory, on pressures exerted by consumption and production activities on the environment, while BC provides information on the state of the environment. One of the strengths of the EF and BC is that several environmental issues are expressed in a single common unit, the global hectare (gha). The EF and BC do not, however, encompass all environmental issues. They exclude, for example, air, water and soil pollution, water use and non-renewable resources depletion. In 2003, the EF of Belgium was 6.1 gha per inhabitant (compared to the high-income countries’ EF, 6.4), while the Belgian BC was 1.6 gha per inhabitant (compared to the worldwide available BC, 1.8). Belgium was thus in large ecological deficit in 2003 (more recent data not all available).

The EF and BC are developed by the non-governmental organisation, Global Footprint Network (GFN), using their own accounting system, which is completely different from the national accounts system. It has been launched only recently, and the methodology and data collection processes are still under development. The EF measures, in land and water area (in gha), the renewable resources and fossil energy embedded in the goods and services used by a population, as well as the land occupied by infrastructure. The BC measures, in gha too, the capacity of the land and water area (on the territory where this population lives) to produce the renewable resources taken into account in the EF. It depends, among other factors, on the technologies and production patterns used in each region. The comparison between the EF and the BC indicates whether a population shows an ecological surplus or deficit on its own territory.

Indicators based on Environmental Satellite Accounts

Environmental Satellite Accounts (ESA) provide detailed information on various environmental flows and stocks, such as eco-taxes, raw material flows, polluting emissions and natural resources. Besides, in parallel to the ESA, Social and other Satellite Accounts are also being developed. As they use the same classification system as national accounts, the ESA allow the establishment of an explicit link between economic activity and environmental data, such as the emission of acidifying gases per sector. ESA show, for this example, that, between 1990 and 2002, total acidifying emissions decreased by 28% in Belgium, with a fall of 29% in the industry sector and of 19% in the households sector.

ESA are compiled by statistical authorities. The ESA methodology has progressively been developed and harmonised at the European level by Eurostat recommendations. A number of pilot satellite accounts have been produced in Belgium by the Federal Planning Bureau. Such studies only account for overall impacts on the environment. They do not differentiate, for example, between two goods produced with different methods such as fruits produced by either organic or intensive agriculture.

GDP and beyond

Like GDP, all global indicators reviewed here are developed according to international standards, to be used world-wide; they thus provide means for comparison between many countries of the world. Each of these synthetic indicators has advantages but also limitations, which call for caution in their use, especially when making these comparisons. Moreover there is scope for development and data improvement for all of them in order to increase their level of disaggregation and their coverage, so that they could measure a larger number of human or environmental capital assets.

The HDI would not exist without GDP but it is a better measure of social progress. The pair EF and BC certainly bring a vision of the size of the environmental challenge that GDP did not even try to measure, but these indicators cannot be interconnected. Conversely, ESA can reflect the coupling or decoupling between GDP growth and environmental degradation. It should, however, be kept in mind that none of them reflects a complete knowledge of human, natural and economic systems. The sheer complexity of these systems does not allow a comprehensive measurement of these capital assets.

Guiding sustainable development policy decisions

A key question about these emerging tools is whether or not they have the potential to guide strategic sustainable development policy decisions. As HDI design is mostly targeted on developing countries, it can be used by donor countries to support ODA policies or by recipient countries to formulate development objectives. From an overarching sustainable development perspective (including its social pillar), the value of 0.8 could be adopted as a minimum development goal. ESA could also provide indicators for designing decoupling objectives and monitoring sustainable consumption and production policies. By linking them with other information, such as consumer surveys, it is possible to evaluate households' consumption pressures on the environment or even differentiate those pressures by categories of households. This could contribute to developing synergies between policies, for example those to eradicate poverty and those to protect the environment.

How the EF and the BC could guide policy decisions is unclear because reducing the ecological deficit evaluated by these indicators cannot be connected clearly to key policy target, such as greenhouse gas emissions reduction rates. To reduce this deficit, public authorities could even be inclined to increase environmental pressures that are not taken into account in the EF and BC. For example, turning woodlands into monoculture forests would increase the capacity to produce renewable resources and hence the BC, but would damage biological diversity. However, owing to the apparent simplicity of the concepts, the pair EF and BC has been largely used until now as an awareness-raising tool.

Conclusion

None of these indicators is perfect but all can contribute to measuring and debating social and environmental goals beyond economic growth, to achieve sustainable change in society. To overcome limitations in terms of coverage, they can be included in a table of indicators, such as that proposed in the 5th Federal Report on Sustainable Development (see page 19), it argues that both synthetic indicators and a structured table of detailed indicators can be combined to measure progress in a changing world.

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