Alternative Economic Indicators: Application

and Potential Effects

Carlos Rymer
Gregg Mol
Hao Zhuang
Joey Notaro
Kubilay Kavak

NTRES 431: Environmental Strategies

Spring, 2007
 Table of Contents

Introduction..................................................................................................... 3

Application of Alternative Indicators............................................................. 5

1. The Genuine Progress Indicator in Alberta, Canada............................. 6

2. The Index of Sustainable Economic Welfare........................................ 8

3. The Human Development Index.......................................................... 11

Discussion..................................................................................................... 15

Conclusion.................................................................................................... 17

References..................................................................................................... 19

Appendix....................................................................................................... 20

2
Introduction
Gross Domestic Product (GDP) is currently the international standard measure of a nation’s

economic status. GDP represents the monetary value of all the finished goods and services produced

within a country's borders in a specific time period (usually on an annual basis). It includes all private

and public consumption of materials, government outlays, investments and exports that occur within a

defined territory. The typical approach used to measure GDP is the expenditure method, which is

defined as follows: GDP =consumption + investment + (government spending) + (exports-imports)

Since the 20th century, the world has pursued increased well-being and a greater quality of life

through economic growth as measured by GDP. Recently, there has been considerable debate about

GDP as a measure of economic growth because its inclusion of parts of the economy is limited and

inappropriate. The GDP has many serious problems, such as the flaws in calculating cross-border

trading, exclusion of the black market, exclusion of unpaid social and ecosystem services, and

inclusion of work that produces no net benefit or that results from repairing harm. It is becoming

increasingly clear that GDP is not a very good measure of economic growth that is inclusive of all

aspects of society, including natural and social capital.

Simon Kuznets, designer of the GDP and the international system of National Accounts, said in

his first report to the U.S. Congress in 1934 that “the welfare of a nation can scarcely be inferred from

a measure of national income.” In order to ensure appropriate economic growth that maintains high

economic, environmental, and social performance, the economy must be measured in terms of quantity

and quality, especially in relation to environmental and social considerations. Growth should specify

improvement for each of these considerations in relation to raising the quality of life, something that

does not simply equate with greater access to material consumption. According to Robert F. Kennedy,

well-known environmental lawyer, “the gross national product includes air pollution and advertising

for cigarettes and ambulances to clear our highways of carnage. GNP includes the destruction of the

3
redwoods and the death of Lake Superior. It grows with the production of napalm, and missiles and

nuclear warheads... it does not allow for the health of our families, the quality of their education, or the

joy of their play.”

In a similar perspective, ecological economists believe that continued growth of

macroeconomic systems, rather than development of quality of life, is both ecologically unsustainable

and undesirable. They believe the ‘threshold hypothesis,’ the notion that when macroeconomic systems

expand beyond a certain size, the additional benefits of growth are exceeded by the attendant costs.1

The current GDP calculation focuses only on national income and growth. In this sense, it was

universally agreed that a proper measure of national income should be premised on the need to keep

income-generating capital growing. Since natural capital depletion, as well as human capital

depreciation, is not reflected in measures of national income, it is now strongly argued that the GDP

overstates a nation’s real economy.

Moreover, when we emphasize global growth, we should also be aware and recognize the cost

which we pay and invest first for later incomes. Herman Daly pointed out: “Growth in GNP should

cease when decreasing marginal benefits become equal to increasing marginal costs. But there is no

statistical series that attempts to measure the cost of GNP. This is growth mania, literally not counting

the costs of growth.” GNP-flow is largely a cost. Wants are satisfied by the services of the stock of

wealth. The annual production flow is the cost of maintaining the stock, and though necessary, should

be minimized for any given stock level. If we want the stock to grow; we must pay the added cost of a

greater production flow (more depletion, more labor, and ultimately more pollution). Depletion, labor,

and pollution are real costs that vary directly with the GNP-throughput.2 In this sense, GDP should

take into account of increasing inequality, pollution or damage to people’s health than the environment.

If crime, divorce and other elements of social breakdowns are counted as economic gains, GNP will

1
Max-Neef, 1995.
2
Herman Daly, Steady-State Economics, Chapter 5: A Catechism of Growth Fallacies

4
not be able to demonstrate the real wealth of nation. As Gordon Brown said in his pre-budget statement

on environmental taxation, “quality of growth matters; not just quantity.” We need to redefine

progress, and replace GDP with new indicators of progress, which measure how our national policies

truly deliver a better quality of life for all.3

In order to convey a complete picture of a nation’s sustainable development performance,

ecological economists have developed several indicators to improve, complete, and later replace GDP.

Those indicators try to correct GDP over a range of issues, such as income inequality, environmental

damage, and depletion of environmental assets, to create an indicator which better measures how our

economy delivers welfare for people.4 The first of these was Daly and Cobb’s Index of Sustainable

Economic Welfare (ISEW) in 1989; others include the Genuine Progress Indicator or GPI (1995), the

Sustainable Net Benefit Index or SNBI (1999), the Human Development Index (HDI), and a stock-

based indicator called Genuine Savings (GS). The ISEW, GPI, GS and SNBI try to convince those

countries to realize that when macroeconomic systems expand beyond a certain size, the additional

benefits of growth are exceeded by the attendant costs, and to eventually abandon the growth objective

and focus on sustainable qualitative improvement, Sustainable Development (SD).5

The paper will mainly focus on three of above mentioned indicators: GPI, HPI, and ISEW, to

illustrate and analyze the contents of the measurement, as well as the applications. We also tried to

evaluate the feasibility of using these economic alternative indicators in reality, the constraints and

potential effects to our life.

Application of Alternative Indicators

Sustainable development is a broad goal that aims to ensure growth in economic,

environmental, and social performance; it assumes that these considerations can complement each

3
Friend of the Earth: http://www.foe.co.uk/campaigns/sustainable_development/progress/replace.html
4
Friend of the Earth: replacing GDP. http://www.foe.co.uk/campaigns/sustainable_development/progress/replace.html
5
Philip A. Lawn, A theoretical foundation to support the Index of Sustainable Economic Welfare (ISEW), Genuine
Progress Indicator (GPI), and other related indexes

5
other. In order to measure sustainable development and base decisions on progress, alternative

indicators must be used to factor in the social and environmental aspects of society.6 In this section, we

explore case studies where GPI, HDI, and ISEW have been applied. We also identify barriers to

official adoption and indicate potential effects of adoption.

The Genuine Progress Indicator in Alberta, Canada

Alberta is a Canadian province where the GDP has increased in the last 40 years by more than

400%. While this improvement in the GDP signals that quality of life has improved, which it has, it

doesn’t necessarily account for social and environmental costs.7 Recognizing this shortcoming of the

GDP, the Albertan government publishes each year a report that defines progress based on 76

indicators that include economic, environmental, and social goals. This report, called Measuring Up,

compares progress to a set of goals determined by the Albertan government. It is made publicly

available for Albertans to decide whether the government has addressed all indicators appropriately.8

Although this government report has a set of indicators that include economic, environmental, and

social considerations, it does not equally satisfy the three pillars as well as the GPI does.

Alberta’s GPI for the period 1960-2003 was determined by a non-governmental organization

called The Pembina Institute. The GPI includes a total of 51 economic (12), environmental (17), and

social (21) indicators that measure the health of the Albertan economy in terms of the three

fundamental pillars. These indicators include such important considerations as greenhouse gas

emissions, water and air quality, poverty, and income distribution.9 While Alberta’s assessment of

progress heavily focuses on social improvement, the GPI places nearly equal weight on all three

considerations. In effect, the GPI deducts negative costs that are typically added to GDP in order to

reflect the real status of welfare.

6
Bossel, 1999:xi.
7
Taylor, 2006:5.
8
Alberta Finance. 2006:62.
9
Taylor, 2006:6.

6
 The assessment on Alberta’s GPI was based on an index, where 100 was the highest possible

score. While GDP grew in the 1961-2003 period, GPI fell from 76 to 61.10 According to the Albertan

government’s progress report, there were overall improvements in the last few years, especially in

social and economic considerations.11 The graph below shows the changes in both GDP and GPI

during the 43-year period:

Clearly, well-being as measured by GPI was radically different from well-being as measured by

GDP. In the first two decades, GPI was higher than GDP, while the opposite was true beginning in the

late 1980’s. In addition, the graph shows how GDP grew steadily while GPI decreased slightly and

stabilized. While there may have been a noted increase in monetary income per capita in Alberta

during this period, there may have been severe losses in natural and human capital in the form of

resource degradation or loss and higher human depreciation, such as crimes, diseases, accidents, and

incidences. In the case of Alberta, indicators have proven to be quite useful to the government in

enhancing overall quality of life and accounting for environmental and social aspects of society.

10
Pembina Institute for Appropriate Development. 2006:1.
11
Alberta Finance. 2006:62.

7
 Adoption of alternative indicators by the Albertan government suggest that indicators may

prompt governments to 1) enact policies that reflect social and environmental considerations, 2) spend

more heavily on human and natural capital, and 3) begin valuing social and natural capital.

Conceptually, this may lead to policies that reflect the real costs of social and natural capital, and may

affect the market in such a way that encourages businesses to reduce negative social and environmental

impacts while increasing economic output. Similarly, this could affect consumers by providing

incentives that reduce consumption and increase conservation. The GPI, in particular, can thus prove to

be a useful starting tool for addressing environmental and social problems at all levels of society.

The Index of Sustainable Economic Welfare

One of the major components of the ISEW calculation is what is called future reduction of

economic welfare. This is distinct from the current defensive costs incurred by environmental damage,

such as increased health costs from air pollution and the cost of cleaning up polluted water. This

“future reduction” includes two things: (1) the depletion of natural resources such as fossil fuels and

mineral resources and (2) the effects of long-term damage such as climate change, both of which are

expected to incur future costs. Expenses from these categories are difficult to quantify and are subject

to challenges on theoretical grounds; however, they are crucial—they can constitute from one-half to

three-quarters of the ‘negative’ items in the ISEW.

Using non-renewable resources can be costly to future welfare if we are reducing the

amount available for use in the future. However, if other energy substitutes are available by the

time these resources are fully depleted, then their current depletion does not incur a future cost

or reduction in welfare. Therefore, the current cost of such resource use depends upon the rate

at which substitutes are being developed and upon the degree to which society is prepared to

deal with the loss of such resources; how to account for this is at the crux of the debate. The

view of conventional economics is that natural resource depletion does not cost society as

alternative methods of resource use will be fully developed by the time that some natural
8
resources are exhausted. Nordhaus and Tobin, argue that “reproducible capital is a near-perfect

substitute for land and other exhaustible resources.” 12 Consequently, they did not include

resource depreciation in their indicator, which focused more on social variables. Similarly,

Serafy objects to depreciation of the full value of resource depletion on the ground that “capital

stocks to substitute for these resources can be built up from the revenues of non-renewable

resources

However, most ISEW studies do exactly what Serafy objects to. The authors of the Austrian

ISEW reject Serafy’s position by arguing that “…while this holds true theoretically, there have been

no empirically relevant attempts to develop such technologies that would justify a different treatment

of this position.”13 Cobb and Cobb claim that “the faith in the infinite substitutability of resources is

founded on the experience of a peculiar period in history, during which energy was extremely

cheap.”14 This point is central to the entire functioning of the ISEW; however, it requires substantial

non-economic data to properly argue, and neither side sufficiently provides such evidence.

Because of this debate, there are a range of methods used to account for resource depletion. The

original ISEW developed by Daly and Cobb used the entire value of extracted resources and extraction

costs. Cobb and Cobb later decided to use a “replacement cost,” which is the cost of using renewable

energies to replace current fossil fuel use.15 The important factor in the “replacement cost” method is

that it applied a growth rate of 3% a year that compounds upon itself.

Finally, some studies use more conservative accounting methods such as the Serafy method or

Hotelling rent. Both are calculations that attempt to determine the portion of revenues generated by the

resources that must be set aside to compensate for the depletion of the resource. One explanation for

Hotelling rent is that “if a mine owner invests the [annual] Hotelling rent in an interest-bearing account,

12
Nordhaus and Tobin, 1972:14
13
Stockhammer et al., 1997:29
14
Cobb and Cobb, 1994:38
15
Jackson, McBride, 23

9
then by the time the mine is exhausted he will have accumulated sufficient funds to purchase an

equally valuable mine to maintain his mining business.”16 Similarly, the Serafy method “estimates the

amount of money that would need to be set aside…to generate a permanent income stream that would

be as great in the future as it is in the present.”17

The depletion of natural resources represents approximately 37% of all deduction items in the

US ISEW in 1990, 31% in the UK ISEW in 1996, 21% in the Swedish ISEW in 1992, and 36% in the

Dutch ISEW in 1992. Depending on the method used, these amounts can vary widely. In the Chile

study, use of the “Hotelling rent” method instead of the replacement cost reduces the difference

between ISEW and GDP by half, and results in net growth of ISEW during the period 1965-1995

instead of net loss.18 Similar “sensitivity analysis” done for the US and UK show that use of Hotelling

rent results in significant change. In the US, this results in a very slight growth in the ISEW, and in the

UK the ISEW growth rate mirrors that of GDP, but at a lower starting value.19 Since most ISEW

studies used the replacement cost method, it is reasonable to assume that using different methods

would result in similar adjustments. The Italy study, the only one to explicitly use the Serafy method,

shows constant growth in ISEW over the course of the study.20

Clearly, this is a point that needs further study and debate and, most importantly, more data

pertaining to natural resource use and alternative technology development. Cobb and Cobb admit “that

there is a great deal of arbitrariness in any effort to account for depreciation of ‘natural capital.’”21 The

ISEW will not be properly accepted until this is resolved; one alternative direction suggested by this

debate is that ISEW would be more appropriate as a non-aggregated set of multiple indicators, as

suggested by Neumayer.

16
Vincent, 1997
17
Cobb and Cobb, 1994:69
18
Castaneda, 1999:242
19
Neumayer, 1999:86
20
Jackson, 28
21
Cobb and Cobb, 1994:72

10
 The other crucial point of contention is the accounting for “long-term environmental damage,”

which ostensibly includes treatment of nuclear waste and other issues but essentially deals with climate

change. It is equally significant as resource depletion. The center of the debate is whether the costs of

climate change should accumulate over time rather than merely increase.

The yearly costs themselves are not as contentious as the accumulation method; Neumayer

writes: “I do not claim here that a marginal [yearly] social cost per tonne of carbon of $75 (US ISEW)

or £228 (UK ISEW) would be unjustifiable. It is true that $75 is close to the upper end of damage cost

estimates as reported in IPCC…”22 The results of accumulation are hugely significant.

Neumayer (2000) shows that, depending on the methods used, the ISEW studies can be made,

in many cases, to rise over time rather than decline. While they still fall way short of GDP in absolute

terms, the change in the directional trend is more important in interpreting the ISEW than its numeric

value. Therefore, the different methods of calculation have huge implications for the ‘threshold’

hypothesis and the entire interpretation of the ISEW time series.

Human Development Index

The Human Development Index (HDI) is an international registry of relative national well-

being indicators published by the United Nations Development Programme (UNDP) annually in the

Human Development Reports (HDRs). The composite index essentially measures the degree of

“human development,” which the UNDP defines “in the HDR as ‘a process of enlarging people’s

choices.’”23 Principally, the HDI measures this human development as a combination of three

components, including the ability to live a long and healthy life, access to education, and a decent

standard of living and material conditions.24 From this rather simplistic foundation, the HDI has been

criticized and propositionally expanded by members of the academic community seeking to arrive at

more refined indices in order to accurately capture the level of human development within countries.

22
Neumayer, 2000:34
23
Kelley, 1991:316.
24
Kelley, 1991:316.

11
 The HDI is an outgrowth of the international global economy context of the late 1980s that was

dominated by the Bretton Woods Institutions, namely the World Bank and IMF.25 This was a response

to the perceived failure of structural adjustment policies that had left Global South nations relatively

impoverished despite growing GDPs in several different corners of the global market.26 Haq was

instrumental in encouraging the UNDP to sponsor the HDRs in the first place and the ultimate measure

of “human capabilities” came from Sen’s own previous decades of theoretical insight.27 Perhaps, the

most intriguing aspect of the HDR, and by extension the HDI, is that the report has the institutional

support of the UNDP but is also independently authored by a number of intellectuals that provide input

into the process of calculating each country’s HDI.28 Thus, it has been a relatively strong competitor

with the GDP for its prestige and integrity.

In its inception, the HDI was constructed as a composite of three separate measures of health,

education, and income that were derived from the life expectancy at birth, the adult literacy rate, and

the GDP per capita adjusted to purchasing-power-parity, respectively.29 Each component is given

minimum and maximum values and a “deprivation index” is calculated based on how far a nation’s

data are from the maximum potentials.30 The only exception to this reasoning is for the income scale

which assumes diminishing marginal utility as income increases beyond a certain established point and

in this case a logarithmic scale is used.31 All three variables are assumed to be relatively independent

of each other and so are arithmetically averaged and weighted equally to arrive at a mean deprivation

score.32 This number is then subtracted from unity to determine the consequent level of human

development. There have only been a few major changes in methodology, including combining the

adult literacy rate with mean years of schooling, “giving 2/3 weight to the former and 1/3 weight to the

25
McNeill, 2007:5.
26
McNeill, 2007:10.
27
McNeill, 2007:6-7.
28
McNeill, 2007:12.
29
Kelley, 1991:316.
30
Kelley, 1991:317.
31
Kelley, 1991:317.
32
Kelley, 1991:319.

12
latter,”33 as well as using the Atkinson adjustment formula instead of a simple logarithmic

transformation for accounting for diminishing returns to higher incomes34 (the Atkinson formula later

being abandoned for the old methodology). Also, the minima and maxima were fixed for each

indicator in 1994, whereas they had previously been decided by the lowest and highest national values

respectively for the given year.35 This fixing has allowed for intertemporal comparison, another reason

why the HDI calculations have received so little methodological changes in its existence.

The relative lack of change has received considerable critical attention in the years since the

HDI was first introduced. Sagar and Najam derive a Reformed HDI (RHDI) that replaces the

arithmetic averaging of the constituent components with a product of the three because “the scheme of

arithmetic averaging runs counter to the notion of their being essential, and, therefore, non-

substitutable.”36 Hicks developed an Inequality-Adjusted HDI (IAHDI) that attempts to incorporate

distributional measures of each of the three components into the overall index.37 He found a significant

correlation between inequality in both education and longevity to greater human development and

therefore, argues that distributional scores should be accounted for.38 Neumayer offers an alternative

HDI that included sustainability in the analytical framework by questioning whether a current level of

human development appears to be unsustainable, given depreciation of natural capital stocks.39 This

measure attempts to redress environmental deficiencies in the HDI by questioning simply whether

current income levels can be sustained over an indefinite period of time.40 Morse has extended the

possibilities for addressing sustainability by positing that the HDIs be qualified with a measure of a

country’s ecological footprint.41 Morse agrees with Neumayer in maintaining the basic measures of

33
Sagar and Najam, 1998:251.
34
Sagar and Najam, 1998:251.
35
Sagar and Najam, 1998:251.
36
Sagar and Najam, 1998:251.
37
Hicks, 1997:1292.
38
Hicks, 1997:1290.
39
Neumayer, 2001:105.
40
Neumayer, 2001:106-107.
41
Morse, 2003:194.

13
the HDI and to avoid creating ever more complex indices but believes that it would be best to also

evaluate at what expense of ecological deficit human development is maintained.42 For intertemporal

comparisons, however, it appears that the HDR will not change its methodology in the near-future,

despite so many criticisms.

Morse offers a compelling example of the state of the HDI in use with a comparative case study

of African trading blocks over a ten-year period. Morse illustrates how, in practice, disaggregating the

HDI shows important regional trends that may not be seen otherwise, citing life expectancy declines in

the Southern African Development Community (SADC) with the AIDS crisis, despite an overall

increase in the aggregate HDI.43 Furthermore, much of the HDI increase can be accounted in the

changes in methodology experienced for education in 1994 and not much in a change in the actual

level of human development per se.44 Ultimately, Morse suggests that an aggregate index may belie

some of the very foundations of human development in the first place; that is, the enlarging of people’s

choices, by continuing to focus narrowly on a single index.45 He prescribes perhaps a more

community-based neo-populist approach similar to the United Nations Environment Programme’s

indicators of sustainable development that offers people with a host of measures to raise awareness

about local issues, a method that accommodates participatory action and attention to crucial

information that may be hidden in the aggregated data.46 Flexibility in measurement may be vital to

encourage participation and elide the supposed consistency of the HDI’s methodology by continually

improving individual, not aggregate, indices.

42
Morse, 2003:193-194.
43
Morse, 2004:14-15.
44
Morse, 2004:12.
45
Morse, 2004:15-16.
46
Morse, 2004:17.

14
Discussion
The Advantages of the Alternative Indicators

The main advantage of the alternative indicators is their initial reference point. Since they begin

with personal consumption expenditure, they promote less production that degrades natural resources

in contrast to GDP, which is in favor of more production regardless of whether natural resource

degradation occurs or not.

Another advantage is that they include income distribution, which GDP neglects. Most

economists criticize GDP because it does not take the overall welfare of society into consideration.

Lawn points out that “if personal consumption expenditure does not change from one year to the next

but the distribution of income deteriorates, the economic welfare enjoyed by society as a whole is

likely to fall because the marginal benefit uses of the rich is less than the marginal benefit uses of the

poor.”47 Therefore, paying attention to income distribution makes the alternative approaches more

comprehensive.

There are other factors that augment the scope of the alternative indicators, such as “the value

of household and volunteer work, costs of mobility and pollution, and the depletion of social and

natural capital.”48 In this regard, deducting the cost of noise pollution, commuting, crime,

underemployment, unemployment, and lost leisure time provides a broader picture to understand the

overall economic picture. Similarly, the cost of sacrificed natural capital services is also incorporated

into computations. The loss of farmland, the cost of ozone depletion, air and water pollution, the loss

of wetlands and old-growth forests are other popular examples.

Consideration of defensive and rehabilitative expenditures also increases the scope of

alternative indicators because normally “a large portion of the human-made capital produced each year

47
Lawn, 2003:112.
48
Costanza et al., 2004:154.

15
does not contribute to the psychic income of a nation.”49 These expenditures are dedicated to prevent

the undesirable side-effects of the economic activities. Amongst them the cost of household pollution

abatement, vehicle accidents, and family breakdown can be mentioned.

The Disadvantages of the Alternative Indicators

The most important criticism to the alternative indicators is the valuation of different assets.

There are two challenges in this respect: (i) the valuation method and monetizing of different assets,

(ii) the degree of the methods inhibiting universality (comparison problem).

It is a well-known reality that valuing such assets as human life and leisure is quite difficult.

Despite the existence of some methods,50 they are highly open to discussion. Moreover, they produce

very different results in different countries due to different wage levels, overall welfare, and other

factors. For example, the value of a human life in the US may be ten to twenty times higher than the

value of a human life in a developing country. This complicates the matter in terms of comparison.

Same problem is prevalent for environmental assets. Although there are some techniques51 used

to measure the existence value of a natural asset, they are still open to question52 and subject to change

due to society’s priorities. For example, two rivers in two different countries having virtually similar

characteristics can be evaluated very differently. There is not a standardized method to measure the

value of the assets under the same base.

Lawn emphasizes that the valuation methods used by the alternative indicators “are extremely

crude and often involve the use of very heroic assumptions.”53 Even in the computation of some very

technical issues, estimates may be based on very rough assumptions. Therefore, the values of some

49
Lawn, 2003:113.
50
Hedonic price method is a good example, which measures how wage rates change with death or injuring risk and infers
the value of life.
51
For example, contingent valuation (stated preference or hypothetical valuation) method, which aims to find individual’s
willingness to pay for a good by posing a set of questions regarding preferences directly to the individuals, is widely used.
Similarly, travel cost method is frequently applied to reveal the value of a natural environment (e.g. parks) that people visit
to appreciate.
52
Kolstad, 2000:331-332, 344-350.
53
Lawn, 2003:116.

16
items are likely to be distant approximations of their correct value. In addition, different cultures and

life standards are ignored in these calculations. In order to show how these factors deeply affect the

overall solutions, some examples are presented in Appendix part.

The second serious criticism for the alternative indicators is that they only count the cost of lost

natural capital services. “They are based on current flows rather than stocks and thus do not really

address the maintenance of capacity, which some would argue is at the heart of sustainability.”54

Knowing the degree of decline in stock of natural capital is as important as valuing environmental

damage. In this regard, another criticism is their inability to reveal about the future impact of current

activities, which is part of a sustainable approach.

The third criticism is about the assumption that all personal consumption expenditure

contributes to human well-being. Lawn states, “Since this item includes the consumption of junk food,

tobacco products, alcohol, and guns, it is unlikely that all consumption expenditure will boost the

psychic income of a nation’s citizens.”55 Finally, there are still some important factors that are

unaccounted in these indicators. The disutility of certain forms of work and the existence values of

natural capital are good examples.

Conclusion

Alternative indicators promise a better approach by taking into account social and

environmental aspects of society. Alternative indicators that account for economic, environmental, and

social considerations of society are likely to be an essential component of sustainable development.

However, there are some roadblocks to enforce these indicators worldwide. In a world where

businesses grow quickly and have a significant influence on government, it is difficult to fully

incorporate societal aspects other than economic transactions into national accounts. Clearly, the

54
Hanley et al., 1999:56.
55
Lawn, 2003:115.

17
adoption of any alternative indicator that fits the mission of sustainable development will involve long

negotiations and substantial changes to what is included in any given alternative indicator.

On the other hand, adoption of an alternative indicator that accounts for social and

environmental costs may prove to be an effective incentive to increase spending in increasing social

and environmental capital, eliminate market distortions so as to include so-called externalities, and

change the basis of decision-making from classical economics to sustainable development.

Consequently, this may allow businesses to make high social and environmental performance

profitable, and may change the current culture of high consumption and little social and environmental

concern to one of high efficiency and greater socially and environmentally sound behavior. We

conclude that as nations continue to face more severe social and environmental consequences of the

GDP, there will be room for a shift to an alternative indicator that reflects the goals of sustainable

development.

18
References
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Kelley, A. C. (1991). “The Human Development Index: ‘Handle with Care.’” Population and
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Appendix

Here are some examples, which show how factors mentioned in the discussion part, affecting

the overall solutions:

1) Valuation of household or volunteer work: To do this, one has to decide on a wage rate. The

alternative indicators choose a base rate for household workers or volunteers performing the same

tasks as paid workers. However, “this could be well below or well above the ‘real’ rate, because, for

example, paid household workers may be significantly underpaid or volunteers may be significantly

less skilled than paid workers doing the same jobs.”56

2) Cost of crime and cost of family breakdown: These are strongly related to cultural values and

vary in different cultures. Without taking cultural factors into consideration, making a comparison may

not give economically meaningful results. For example, in places where divorce is seen as a great
56
Costanza et al., 2004:149.

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shame, the possible cost of family breakdown is likely to be less. Similar arguments can be raised for

the cost of crime.

3) Cost of commuting: In places where oil prices are relatively higher due to taxes levied by the

government, cost of commuting will likely to be higher. Consequently, it would decrease the GPI.

However, it is known that oil taxes are applied in some countries to deter drivers to drive more. So,

there is a feadback problem in this case.

4) Cost of automobile accidents: These costs will highly vary between developed and

developing countries since the value of human life changes with respect to income levels and the

overall welfare.

5) Depletion of nonrenewable resources: Costanza and others calculated this value in a

Vermont case study by using the “estimated cost of replacing one barrel of oil with a renewable

resource.”57 The renewable resource here is ethanol. Nevertheless, ethanol is not available in most

places of the world. Obviously, this is not a good yardstick. If one wants to use any other benchmark, it

would not be a renewable source because today’s available alternative fuels (LPG, CNG, etc.) are

mostly non-renewable. Briefly, the alternative indicators use a series of adjustments, which may vary

in different regions very highly, by relying on imperfect measures.

Questions for Discussion:

1) How can using these alternative indicators affect business? We know that there are numerous

factors that especially multinational corporations take into account for an investment decision. These

factors involve convertibility or exchange power of the country, soundness of legal institutions and

courts, financial markets of the country, proximity to possible markets, loosened environmental

standards in the country, attitude of the government towards foreign capital, cheap labor, well educated

57
Costanza et al., 2004:144.

21
human capital, etc. It is still ambiguous whether or not big corporations want to use alternator

indicators before making decision about a new investment since they don’t even care GDP.

2) From the developing nations’ point of view, it is also uncertain that the governments in these

countries would be willing to apply new measuring methods. There are two reasons: (i) Even the

computations performed for GDP are not quite reliable, and they are unlikely to want to undertake

more responsibility or red tape unless there is a certain incentive. (ii) If GPI measurements increase the

position of poor countries in the overall ranking, they probably will be reluctant since they get money

from international organizations due to their poverty level.

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