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Looking for new yardsticks

by Oliver Zwirner

In brief

Cyclone damage in Bangladesh – reparing things boosts GDP, but only raises welfare back to the level it was before the event

Cyclone damage in Bangladesh – reparing things boosts GDP, but only raises welfare back to the level it was before the event

The EU Commission is looking for a better measurement of progress than GDP alone, one that would take into account environmental and social factors. Oliver Zwirner works for the European initiative established to consider the options: “Beyond GDP”. The employee of European Commission's Environment Directorate-General explains what the initiative is about in this article.

The EU Commission has been thinking since 2007 about new yardsticks for gauging societal progress in Europe. The sub-title of a strategy paper published in August 2009 “Measuring progress in a changing world” explains what it is about. The idea is not to reform the GDP formula; it is to complement it with other, more inclusive indicators of prosperity and soci­etal progress.

The political debate flared up long ago. Nobel Prize winners are calling for new benchmarks for socioeconomic development. The OECD supports their ende­avours. Minds are applied to the matter in Germany, France, Britain, Austria and even China and India. In the latest initiative, the German Bundestag set up a commission of inquiry tasked with identifying what kind of growth counts and which indicators help define it. The crux of the matter is that governments and parliaments, town halls and business leaders need other data for crafting more rational policies.

Calculated on a basis of sound statistics, GDP is certainly still a useful measure. We still need an accurate picture of the volume of goods and services sold on the market. But we need to dump the notion that a higher GDP automatically means a “gain” for society as a whole. The business community is ahead of economists in realising this. No company selling off assets would think about simply classing the proceeds as profits. But that, in a way, is how econo­mists think. Like entrepreneurs, governments need to understand that “a bigger turnover” is not necessarily a positive national economic result.

Consider the classic example of Hurricane Katrina. This natural catastrophe claimed around 1,800 lives in the USA and caused $ 81 billion damage to property. As a result of reconstruction, however, the country's GDP was actually boosted by approximately 0.5 %. GDP is also pushed up by rainforest clearance in the Amazon Basin, but does not register the loss due to the depletion of resources. In such cases, GDP shows only “revenues" – but not the impacts on wealth and the assets that underpin it.

What is not adequately taken into account by GDP is loss of resources – especially natural resources and raw mater­ials as was illustrated in the examples above. But GDP figures also say nothing about income distribution, access to healthcare, education, leisure or quality of environment for different sections of the population. What is more, they do not include non-remunerated services such as those rendered by households or non-profit organisations.

The European Commission strategy paper is currently being discussed in the European Parliament. Because of the far-reaching importance of establishing a comprehensive benchmark for prosperity and quality of life, six committees are involved. A final plenary statement is now scheduled for March 2011. In a parallel debate, the EU lawmakers are also looking at a legal framework for integrated environmental-economic accounting to produce figures on economic and envir­onmental matters that are fully com-parable. The latter will include physical flow accounts on emissions and material consumption and monetary accounts on environmental taxes for around 60 branches of the economy.

EU member governments have also responded positively to these proposals in the European Council. It seems obvious that good information improves market efficiency, business innovation and public decision-making.

That information is vital for directing the change to a low-carbon resource efficient economy and society. One of the most important questions it answers will be: To which extent do different economic sectors depend on environmental factors? The first that spring to mind are agriculture and forestry, fisheries and tourism. But many other sectors are just as dependent on the availability of natural resources. The food and textile industries, for example, rely on clean and adequate sources of water. Which is another fact not sufficiently taken into account by GDP – and another reason for complementing it with other indicators.

Oliver Zwirner

The views expressed in this article do not necessarily reflect the official position of the European Commission.