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Figure 1. Conceptual model of sustainable development.  If an activity lies in the intersection then it makes a positive contribution to the environment, to society and to the economy, all at the same time

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  • Figure 2. Plot of the proposed sustainable economic growth index for Scotland, UK, USA, Canada, Sweden, and Japan over period 2000 to 2014

Getting the Measure of Sustainable Economic Growth

James Curran

30th January, 2017

The new Index of Sustainable Economic Growth shows there is a shift to strike a healthier balance between support for the economy, and care for essential social and environmental systems. But can it ever replace GDP as a measure of progress? JAMES CURRAN explores the idea

It looks like there is a shift to strike a healthier balance between support for the economy, and care for essential social and environmental systems

"It's time to go beyond GDP" claimed Manuel Baroso, President of the European Commission in 2007, but for over 60 years GDP has remained the obsession, and some have said fetish, of most Governments and most commentators.

GDP is a measure of inflation-adjusted value that is added in an economy and, although it was first devised in the 17th century, it was only after the Second World War that it became widely and routinely used. Despite this long history, the Economist magazine recently published a pretty scathing attack on the ability of GDP to tell us all that much about anything at all.

It's becoming increasingly difficult to calculate, and indeed increasingly irrelevant in modern, service-based, economies which feed off the immense growth of the internet, social media, and new business models like Airbnb and Uber. It's a measure that also tells us nothing about inequalities, innovation or expanding consumer choice; it's a rather old-fashioned measure of production, not welfare. It has no means, for example, of including housework or caring for a relative. It does, however, capture major pollution events and their clean-up, such as Deepwater Horizon in the Gulf of Mexico, as positive additions to economic activity.  Yes - it's certainly time to go beyond GDP.

In Scotland, the Government has adopted as its main purpose the creation of "a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth". Note that the emphasis is on providing the capacity for the nation to flourish, not on economic growth for its own sake. The economy, even if it is sustainable, is an enabler for a higher purpose. However, the Nobel prize-winning economist and adviser to the Scottish Government, Joseph Stiglitz has commented that "GDP tells you nothing about sustainability".  So how do we know whether things are going well or badly, whether policies are working or not?

It's worth thinking, first, about sustainable development. There are many definitions, but the original from the UN Brundtland Report in 1987 still serves well - development that meets the needs of the present without compromising the ability of future generations to meet their own needs. So, we're immediately faced with considering what sorts of economic activity can satisfy social requirements, can result in us all living well, but within the natural limits of the planet we inhabit. Very often these ideas are summarised and visually represented by a Venn diagram (see image above) in which sustainability is delivered by those activities or developments, which lie in the central area of overlap. These developments then contribute to economic, social and environmental growth, all at the same time.

We need a better way to measure and monitor progress

The great American architect Buckminster Fuller said (more or less) "The trouble with Planet Earth is that it didn't come with an instruction manual". Perhaps as we think through what sustainable development means, how to achieve it, and what tools we need, then we're starting to write that instruction manual.

The Scottish Government's current economic strategy aims to accelerate economic recovery, following the global setback of 2008, but also aims to tackle unemployment, particularly through learning and skills development, and to promote a transition to a low-carbon economy. So captured within the strategy are those essential features of economic, social and environmental growth.

It's certainly clear that we need urgently to find a better way than GDP to measure and monitor Scotland's progress, but that's when things become just a bit more complicated. 

There are numerous ways to estimate whether we are living within the limits of the planet. Environmental foot-printing is one and it suggests that, in Scotland, each person is using three times what would be an equitable share of the planet's available resources: so-called three-planet living, whereas sustainability would ultimately require a one-planet lifestyle. 

Taking a different approach, an analysis of the nine fundamental planetary life-support systems indicates that safe limits have already been breached for the global nitrogen cycle, for loss of global biodiversity, and of course for climate change. Pope Francis recently reflected that Nature is a "sister with whom we share our life" but that she is "among the most abandoned and maltreated of our poor".

Then we also have to determine what "living well" means.  Oxfam Scotland has done great work on this, launching its so-called Humankind Index which collects data across eighteen individually-weighted sub-domains - assessing attributes like having satisfactory work to do, having good relationships with family & friends, or feeling part of a community. The Index has rather limited environmental content which mostly concerns having access to a clean and healthy environment and, more specifically, access to play areas or green space. Criticism has been levelled at this index because the factors are unavoidably ideologically defined and so they may not be universally appropriate in our pluralist and multi-cultural society.

Can all these numerous factors, across society, environment and the economy, be brought nicely together to tell us whether Scotland, or any other country, is doing well on sustainable economic growth, or not?

Again there are various methods that can be used. One, for example, is the Genuine Progress Indicator, which is loosely defined as GDP minus social and environmental costs. It is formed of 26 indicators including things like the costs of crime and of pollution, the costs of depleting natural resources, or family breakdown. It is pretty complex to compute and very demanding of input data and so it hasn't been used all that much routinely around the world.  Criticism of such a composite indicator is, again, that the contributory factors and their weightings can be too subjective and culturally biased, and also that any internal positive or negative shifts within each factor can be obscured beneath the headline figure and therefore strong, unambiguous, messages don't emerge to stimulate appropriate policy action by government.

More widely used, and indeed published annually for a large number of countries, are the World Development Indicators which include the measure known as Adjusted Net Savings. This is derived from net national savings, modified to include the addition of national investment in education and the subtraction of national depletion of various natural resources and the damage caused by carbon and particulate emissions. It's really a long-term measure of the growth, or indeed running down, of a wide basket of national economic, social and environmental assets.

Stiglitz has argued in favour of a dashboard of separate measures to capture human welfare and, indeed, the Scottish Government has been highly innovative in setting out its own National Performance Framework which sets 11 high-level purpose targets and tracks 55 indicators of progress comprising a broad range of measures such as improving mental well-being, reducing criminal re-offending, reducing drug use, reducing the pay gap, increasing renewable energy generation, reducing waste, increasing exports.  Very sensibly, there is no attempt to combine these into one headline measure.

With all of these options available to us, and many more besides, it might be reasonable to ask if we need yet another one?  Well possibly. There is no single, easily understood and readily calculable and comparable number that gives a feel for different countries' relative progress in that overlapping space on the Venn diagram of Figure 1.

How might such a number be derived?  First of all we should consider what makes a good indicator. The Bellagio Principles suggest that it must:

  • Consider the social/economic and environmental system as a whole, including its governance
  • Be able to monitor dynamical change, so that appropriate authorities can make near real-time decisions
  • Make clear where and how decisions should be made
  • Have an appropriate geographical scope
  • Have appropriate time horizons, from short to long
  • Use standardised measurement methods to allow for inter-comparability
  • Allow comparison with targets
  • Set a baseline from which to monitor progress
  • Use data widely available to the public
  • Use data that are clear, simple, and understandable, with good visualisation
  • Be reflective of public views and priorities
  • Be responsive to change and readily repeatable and replicable

 

Now think back to those three elements that make up the Scottish economic strategy:  economic growth, unemployment and the low-carbon economy. They are themselves ideally suited to creating a single, very simple measure of sustainable economic growth that is, in effect, a product of economic efficiency (GDP per head), social inefficiency (percentage unemployment) and environmental inefficiency (carbon dioxide emissions CO2 per head).  So:

Index of sustainable economic growth = GDP per head, divided by percentage unemployment and divided by carbon dioxide emissions per head

This proposed index meets all the Bellagio Principles except perhaps one - because the national carbon dioxide emissions data are usually released more than a year late. However, it's worth remembering that even GDP figures are quite often revised a year or so after first publication. If unemployment drops then the index will rise; if climate change action is successful then the index will rise; if GDP increases then, again, the index will rise. The balance between these three factors will determine the overall rate of increase or decrease in the index.

The three factors that make up the index are readily available for nearly every country so it's simple to work out the values of the index year-by-year, for various countries.  Since we are thinking about sustainable economic growth and because sustainable development itself is often referred to as a journey, it seems sensible to normalise the index values so that all countries start with a value of one in the initial year.  Figure 2 shows how several countries have been doing on their sustainability journey.

This seems like a useful and quite illuminating index because it has focus on the elements that politically are important not only in Scotland right now, but around the world; it's also constructed of three elements which are, to a degree, amenable to Government action; and most importantly it's easy to understand.

Numerically, the index also performs well as a Bellagio-compliant indicator because the three components have a similar impact on its change year-on-year.  For example, across the fifteen years 2000 to 2014, for Scotland, GDP per head changed 93%, percentage unemployment changed 74%, and CO2 emissions per head changed 69%.  The biggest change is not always driven by GDP either - for example for the USA percentage unemployment changed by 140%, whereas GDP per head only changed by 49%.

How do the three separate factors relate to economic, social and environmental performance? It's evident that GDP per head is a reasonable measure of how efficient the economy is in producing valuable output for a given national population; it reflects national productivity and is often used as short-hand for a narrow economically-defined standard of living. Indeed raising GDP is one of the Scottish Government's own eleven purpose targets.

Equally, it's well recognised that national unemployment rate is related to a very wide range of social ills including social exclusion and restriction of personal choices, skills loss, psychological damage including feelings of helplessness, anxiety and self-doubt, ill health and reduced life expectancy, loss of motivation, undermining of human relations and family life, added racial and gender inequalities, loss of social values and responsibility, and increased crime rates.  Unemployment is therefore related to either growth or decline of many aspects of national social assets.

In 2014 Scotland made the biggest advance in sustainable growth

Care about, and action on, climate change, at both the personal and the government levels, is symptomatic of wider concern about the environment. A recent survey in the USA showed a majority of Americans believed climate change was related to other environmental problems such as water shortages, wildfires, and food production. The same poll revealed general agreement that Americans exhibited a range of values which underpinned their desire to protect the environment including living up to the responsibility to protect future generations, respecting and taking care of the Earth, preventing human suffering and harm, and living up to our responsibility to protect other species. The global Environmental Performance Index compares countries around the world and it's clear that those that score well on climate change action generally score well on other environmental actions as well.

Admittedly the three factors are not totally independent of each other. For example, unemployment is a source of economic inefficiency, and lower economic performance quite often negatively impacts on care about the environment.

The end result is that Scotland and the UK appear to be doing rather well on their sustainability journey. Scotland is a small economy, with a high exposure to the global crisis in the financial sector in 2008, so the indicator plotted in Figure 2 is quite volatile compared to other bigger economies.  But, by 2014, Scotland has made the biggest advance in sustainable growth of all six nations. There have been 13 years of sustainable growth and two of decline. By contrast, the UK has done slightly less well overall and experienced four individual years of decline. On the single measure of GDP per head alone, Scotland started in fourth place and ended in fourth place, with four individual years of decline over the period. So Scotland's policy ambition seems to be having an effect in promoting sustainable economic growth, compared to the more traditional economic growth in isolation.

Could this new indicator supplant the dominance of GDP in the minds of politicians, commentators and the public? Could it appear in the newspaper headlines of the future? Well - just possibly and particularly so since both the UK and Scotland are doing relatively well by international standards. It looks like there is a shift to strike a healthier balance between support for the economy, and care for essential social and environmental systems.  That certainly matters, and matters particularly for the long term, because my own definition of sustainability is "living on the planet as if we mean to stay here".

This Author

Professor James Curran retired recently as Chief Executive of the Scottish Environment Protection Agency.  He researches, writes and talks on climate change and sustainability

 

 

 

 

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