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Another look at welfare for a more effective policy

Issue 07-06-2013A revision of the gross domestic product as welfare indicator is necessary to measure sustainable progress. A better index for this is the Index of Sustainable Economic Welfare (ISEW) which attaches greater importance to natural and human capital.

foto ISEW 1990-2011In recent years, a growing number of (regional) authorities have been considering the use of alternative welfare indicators for monitoring their policies. An updated MIRA report describes the effective use of the Index of Sustainable Economic Welfare or related indicators in various countries. In addition, the report contains updated figures of the Index of Sustainable Economic Welfare for Flanders.

Measuring social progress

The Index of Sustainable Economic Welfare (ISEW) was developed in response to the criticism against the use of gross domestic product (GDP) as welfare indicator. The ISEW provides a more accurate picture of actual economic welfare and also better reflects how welfare is perceived by the population.

By explicitly balancing benefits and costs, the ISEW represents the contribution of the economy in a country or region to the well-being of its population. The benefits of economic activities are well represented in the expenditures of households, but are afterwards corrected for the value of domestic labour, welfare losses from income inequality, and defensive expenditures undertaken to maintain a certain level of welfare. The costs are mainly related to the decline of the environment and the depletion of natural capital.

Insights for a more effective policy

The economic, social and environmental indicators which form part of the ISEW provide a broad basis of information for policy-makers. The ISEW can give them information on the broader effects of the applied policy and help to create a more effective policy that increases general prosperity in a sustainable manner.

A number of countries are already effectively using the ISEW and Genuine Progress Indicator (GPI), based on the theoretical framework of the ISEW. Today, the GPI is already being used as alternative to the GDP in a number of states in the US. Germany is currently working on the National Welfare Index, another variant on the ISEW. In Flanders, the ISEW was included as a headline indicator in the Pact 2020 for monitoring the goal of developing Flanders by 2020 into a competitive and polyvalent knowledge-based economy that creates welfare in a sustainable manner.

Evolution of economic welfare in Flanders

Between 1990 and 2011 the gap between GDP Flanders per capita and ISEW per capita for Flanders increased. Whereas GDP/capita rose steadily (+29 %) over the period studied, ISEW/capita showed a different trend.

ISEW/capita fell by about 7 % during the same period. The ISEW rose from 1990 to 2000, but fell sharply afterwards. Between 2000 and 2005, ISEW/capita declined by almost 60 % or approximately 15 % on an annual basis. It recovered again between 2005 and 2011.

The sharp decline of the ISEW between 2000 and 2005 had two main causes. First, the deterioration of Belgium’s net international investment position, which was passed on to Flanders. Second, income inequality in Flanders increased. The increase in environmental costs, particularly of climate change and the use of non-renewable energy sources, also contributed to the decline in the ISEW for Flanders, albeit to a lesser degree.

Between 2006 and 2011, the improvement of Belgium's net international investment position formed the basis for the recovery of the ISEW for Flanders. What is also remarkable is the delayed increase in costs for natural capital depletion. The use of non-renewable energy sources within the Flemish economy has been decreasing since 2005.

Impact of the decline of the environment on the index

The costs of economic activities that are taken into account in the ISEW are related to the loss of ecosystem services. The ISEW for Flanders is corrected for:

  • degradation of the environment, more specifically water and air pollution, climate change, and depletion of the ozone layer,
  • depletion of natural capital.

In the ISEW, an improvement of the environment is reflected in a decrease in costs.

Figure: ISEW per capita versus GDP per capita (Flanders, 1990-2011)

Figure ISEW per capita versus GDP per capita (Flanders, 1990-2011)

Read the English summary of the Dutch report ‘The Index of Sustainable Economic Welfare (ISEW) for Flanders 1990-2011’

Study commissioned by MIRA, the Environment Reporting Unit
Research report MIRA/2013/04

researchers: Brent Bleys, Hogeschool Gent

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