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Welfare measured in Flanders

Issue 22-08-2014A growing number of authorities are considering the use of alternative welfare indicators for monitoring their policies. 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. An updated MIRA report reports on the evolution of the ISEW for Flanders and outlines the potential and the effective use of the index for policy-making in various countries and regions, including Flanders.

Sustainable economic welfare

In contrast to the conventional GDP, the Index of Sustainable Economic Welfare seeks to take into account social and environmental aspects in measuring economic welfare. As such, the ISEW provides a more accurate picture of actual economic welfare and also better reflects how welfare is perceived by the population.

The ISEW examines how an economy contributes to the well-being of the population. This is done at macro level by weighing the benefits and the costs of economic activities. The benefits are well represented in the expenditures of households. However, in contrast to the GDP, the ISEW then adjusts these benefits for such factors as the value of (unpaid) household work, the welfare losses from income inequality and the welfare-enhancing public expenditures (e.g. health care). The costs of economic activities that are taken into account in the ISEW are related to the loss of ecosystem services. These are the degradation of the environment (water, air, climate, and ozone depletion) and the depletion of natural capital.

Evolution of economic welfare in Flanders

Between 1990 and 2012, the GDP per capita in Flanders grew by 28 %. Over the same period, the ISEW per capita for Flanders increased less rapidly, namely by 16 % (see figure).

GDP per capita grew until 2008 and then declined as a result of the financial-economic crisis. A period of increase in ISEW between 1990 and 2002 was followed by a sharp decline between 2002 and 2008 (15 % in total, or 2.1 % on an annual basis). In 2009, ISEW/capita rose significantly (+11 %), whereas GDP/capita for Flanders fell (-4 %). In 2010, ISEW/capita declined again (-11 %). Over the next two years, ISEW/capita stagnated and GDP/capita continued to decline.

The sharp decline in the ISEW between 2002 and 2008 was caused by an increase in income inequality in Flanders. The increase in long-term environmental costs also contributed to the decline in ISEW per capita for Flanders, albeit to a lesser degree.

In 2009, ISEW/capita increased strongly, mainly as a result of the decrease in costs of our economic activities. The economic crisis was responsible for the decline in use of non-renewable energy sources. In 2010, an opposite trend was observed, with ISEW/capita falling sharply due to the increase in energy use.

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 policy focusing on environmental quality can positively impact the ISEW despite its short-term negative effect on household expenditures. A decline, for example, in greenhouse gas emissions and more efficient use of non-renewable natural resources will be reflected in a decrease in the costs of air pollution or climate change and a lower total replacement cost for the use of non-renewable energy sources. The lower costs can compensate for a temporary decrease in household expenditures. By weighing costs and benefits, the ISEW approaches policy analysis from a different perspective as compared to the GDP. When looking only at the GDP, such a policy will be assessed negatively due to the decrease in total consumption.

Figure: ISEW per capita versus GDP per capita (Flanders, 1990-2012) 

ISEW per capita versus GDP per capita (Flanders, 1990-2012)

Read the English summary of the Dutch report 'The Index of Sustainable Economic Welfare (ISEW) for Flanders 1990-2012'

Study commissioned by MIRA, the Environment Reporting Unit
Research report MIRA/2014/05

researchers: Brent Bleys, UGent

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