isn’t it well being that we want to improve? - the metric of evaluation lars osberg - department...
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Isn’t it Well Being That We Want to Improve?
- The Metric of Evaluation
Lars Osberg- Department of Economics,
Dalhousie University
- Institute for Social and Economic Research
University of Essex
Macro Indices & Micro evaluation
Under what conditions would a series of “good” project decisions add up to an increase in aggregate well-being ?– What project information is needed for a
“good” decision ? Macro well being index Micro criteria GDP per capita Benefit/Cost > 1
So what if GDP is increasing ? If Project Benefits > Costs in current $ Income,
adoption implies GDP increase What is the connection between GDP &
Economic Well-being ?• GDP excludes leisure, environment & much more
Potential compensation not good enough Do we care about
– Accumulation for future generations ?– Distribution of Income ?– Insecurity ?
Can we all agree on “adjustments” to $ income ??
Outline of Paper Alternative Index of Economic Well Being
– Is it possible ?– Is it plausible ?– Does it make any difference ?
Index of Economic Well Being– Consumption flows– Stocks of wealth– Distribution: inequality & poverty– Economic Insecurity
Compare trends in the index and its components to GDP per capita trends
Implications for project evaluation
GDP per capita
GDP rigorously standardized across countries (SNA)
Strong Implicit assumptions when used as measure of economic well-being– aggregate share of income devoted to accumulation (including
value of unpriced environmental assets) automatically optimal– poverty, inequality & economic insecurity do not matter– changes in leisure time, length of life, household size, costs of
commuting, pollution & crime - all irrelevant poor match to popular perceptions of trends in
economic well-being• "Are you better off today than you were four years ago?"
– 1980 Ronald Reagan – 1976-80 actual increase = 8.8%
ECONOMIC WELL-BEING= a1 [ CONSUMPTION]+ a2 [TOTAL WEALTH]+ a3 [ DISTRIBUTION]+ a4 [INSECURITY]
DIFFERENT VALUES WILL IMPLY DIFFERENT WEIGHTS
Setting weight equal to Zero is a (strong) value choice
Model
Consumption flows
Stocks of wealth
Economic equality
Economic security
EconomicWell-Being
Human Well-being
Economic Well-being
Economic Well-being
Well-being and GDP
GDP
Economic Well-being
GDP
“Social regrettables”
GDP
Economic Well-being
GDP
“Social regrettables”
Average Consumption Flows $ Marketed real consumption per capita Adjustments
– value of increased longevity– reduced economies of scale in household consumption– changes in working hours – @ marginal net wage– Government services
Data Non-Availability precludes– “Regrettable Necessities”– Underground Economy
Why might such adjustments matter?– E.g.- BIG differences in hours worked 1997
• Germany 981.9 France 980.6, • USA 1428.5
Figure 1
Annual Number of Hours Worked per Person Aged 15-64 1
600
800
1000
1200
1400
1600
1800
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
year
annual hours
Canada
France
Germany
Sweden
United Kingdom
United States
1 = Average hours worked per employed person *(Employment / pop. age 15-64) Source: OECD Health Data 98 CDROM, "A Comparative Analysis of 29 Countries".
Wealth Stocks, Sustainability and Intergenerational Bequest $
Physical capital stock Research and development capital stock Value of natural resource stocks
– price + quantity change Stocks of human capital (@ cost education) Net foreign indebtedness (-) State of environment and national heritage
(degradation -) NOTE: GDP is flow of market output
Distribution Same average income if all get $500 or if ½ get
$999 & ½ get $1 – but well-being differs How to summarize “Distribution”?
– Simplicity desirable if index to be used– Poverty & Inequality differ, but both matter
Inequality– Gini coefficient
• After-tax & transfer household income• Equivalence scale =
Poverty– Sen-Shorrocks-Thon measure
• Rate (Poverty Line = ½ Median)• Average poverty gap ratio• Intensity = rate x gap
familysize
Economic Security.
[25] “Everyone has the right to a standard of living adequate for the health and well being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.”
• Universal Declaration of Human Rights – United Nations: 1948
“Economic Security” Risk income loss due to unemployment
– changes in employment rate x UI coverage x UI replacement rate
Risk of illness– Unreimbursed private medical expenses as share of
disposable income
Risk of single parent poverty– poverty rate & gap for single women with children– divorce rate of legally married couples
Risk of poverty in old age– chance x depth of elderly poverty
Australia
0.95
1.05
1.15
1.25
1.35
1.45
1.55
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
Canada
0.95
1.05
1.15
1.25
1.35
1.45
1.55
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
United Kingdom
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
United States
0.95
1.05
1.15
1.25
1.35
1.45
1.55
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
Sweden
0.85
0.95
1.05
1.15
1.25
1.35
1.45
1.55
Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)
Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)
GDP per capita Index
Caveats
Trend – NOT level – comparisons– Statistical sources differ less over time within
countries than across countries– Avoid valuation of Infra-Marginal Endowments (e.g.
security value of NHS, environment) A Cardinal Representation of an Ordinal
Magnitude– Defensible only as a Local Approximation to Trend
• if valid - only over observed range
Operationalization Matters And many more
Implications ? Much less gain in economic well-being than in
real GDP per capita 1970-99– Somewhat sensitive to weighting of change in
consumption relative to inequality & insecurity – Reducing Inequality & Insecurity was originally the
major objective of social programs – de-emphasized in recent years
• Especially USA & UK – has well being stagnated ?
Perhaps Policy Design should aim at increasing Well-Being
Useful to know project impacts on:– Accumulation– Distribution– Insecurity
The role of the natural environment
Natural Capital
GDPEWB
Physical Investment
Natural Capital
Produced Capital
GDPEWB
Human and Social Capabilities
Natural Capital
GDP
Human and Social Capabilities
Produced capital
EWB
The role of knowledge/skills
Natural Capital
GDP
Human and Social Capabilities
Human capital
Produced capital
EWB
The role of networks/social norms
Natural Capital
GDP
Human and Social Capabilities
Human capital
Produced capital
EWB
Social capital
A DIGRESSION
Human Capital
“The knowledge, skills, competencies and
attributes embodied in individuals which
facilitate the creation of personal, social
and economic well-being”
Social Capital
“Networks together with shared norms,
values and understandings which
facilitate co-operation within or among
groups”
Close ties between human and social capital
Natural Capital
GDP
Human and Social Capabilities
Human capital
Produced capital
EWB Social
capital
The role of institutions
Natural Capital
GDP
Human and Social Capabilities
Human capital
Produced capital
EWB Social
capital
Political, institutional and legal arrangements
Natural Capital
GDP
Human and Social Capabilities
Human capital
Produced capital
EWB Social
capital
Political, institutional and legal arrangements
Natural Capital
GDP
Human and Social Capabilities
Human capital
Produced capital
EWB Social
capital
Political, institutional and legal arrangements