National account measures and sustainability objectives: present approaches and future prospects

Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment

National Account Measures andSustainability Objectives: PresentApproaches and Future Prospects

Matthew Clarke1* and Sardar M. N. Islam2

1School of Social Science and Planning, RMIT University, Victoria, Australia2Centre for Strategic Economic Studies, Victoria University, Victoria, Australia

ABSTRACTA dominant objective within the public policies of all SE Asian countries has been theachievement of economic growth. The issue of sustainability has serious implicationsfor this policy objective. Pursuit of economic growth is concerned solely with thepresent, whilst sustainability is concerned with ensuring the current generation meetsits present needs without threatening future generations’ ability to do likewise.National accounts, such as gross domestic product, can measure healthy economies,but they can not measure sustainability. This paper, however, sets out a conceptualapproach that describes the misalignment of national accounting measures with sus-tainability objectives and provides empirical evidence of how this misalignment canbe partially overcome. An empirical approach is developed whereby certain adjust-ments to national accounts, based on normative social choice theory, are introducedto indicate how a partial measure of sustainability can be determined using nationalaccounting aggregates as a base. Copyright © 2005 John Wiley & Sons, Ltd and ERPEnvironment.

Received 15 October 2003; revised 10 May 2004; accepted 1 June 2004

Keywords: national accounts; sustainability, normative social choice theory

Introduction

ADOMINANT OBJECTIVE WITHIN THE PUBLIC POLICIES OF ALL SE ASIAN COUNTRIES HAS BEEN THE

achievement of economic growth. The issue of sustainability has serious implications for thispolicy objective. Pursuit of economic growth is concerned solely with the present, whilst sus-tainability is concerned with ensuring the current generation meets its present needs without

threatening future generations’ ability to do likewise. National accounts, such as gross domestic product,can measure healthy economies, but they cannot measure sustainability. This paper, however, sets out

* Correspondence to: Matthew Clarke, School of Social Science and Planning, RMIT University, GPO Box 2476V, Melbourne 3001, Victoria,Australia. E-mail: [email protected]

Sustainable DevelopmentSust. Dev. 14, 219–233 (2006)Published online 20 October 2005 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/sd.264

220 M. Clarke and S. M. N. Islam

a conceptual approach that describes the misalignment of national accounting measures with sustain-ability objectives and provides empirical evidence of how this misalignment can be partially overcome.

Sustainability has been defined in many ways and a universal understanding does not yet exist.However, the most widely accepted objective of sustainability is the ability of the present generation tomeet its own needs without compromising the ability of future generations to achieve their needs(WCED, 1987). Whilst vague and non-operational, this definition of sustainability highlights the needfor sustainability indicators to be focussed on the future rather than just measuring present economicactivities.

National accounts, most popularly represented by gross domestic product (GDP) and gross nationalproduct (GNP), only focus, however, on present economic activities. The system of national accountswas developed primarily to assist policy makers predict and smooth market cycles. National accountsaggregate certain economic activities that come into contact with Pigou’s (1962) money-rod. GDP andGNP are the most cited statistics within these accounts. However, since the inception of this system ofnational accounts, they have assumed a greater importance then originally envisaged by their develop-ers (Kuznets, 1941). GDP and GNP have become the main indicators not only of economic success butoften social and political success also (see World Bank, 2001).

More recently, increased interest has focussed on how national accounts can be made ‘green’ throughthe calculations of the costs and benefits of economic growth in terms of sustainability and the envi-ronment more specifically. Satellite accounts with standard calculation methods have been officiallyadopted to take into account the economic value of the environment (UN, 2000). A number of newindices have also been developed and applied to various economies to measure sustainable economicwelfare. This paper, however, sets out a conceptual approach that describes the misalignment of nationalaccounting measures with sustainability objectives and provides empirical evidence of how this mis-alignment can be partially overcome. An empirical approach is developed whereby certain adjustmentsto national accounts, based on normative social choice theory, are introduced to indicate how a partialmeasure of sustainability can be determined using national accounting aggregates as a base.

This paper is structured as follows: the following section provides a brief history of the developmentof the system of national accounts. The next section reviews sustainability issues before the fourthsection discusses approaches to measuring sustainability within the national account framework, includ-ing the construction of ‘official’ green accounts. A review of adjusted national accounts is given in thefifth section before the sixth section introduces a new approach based on normative social choice theory.The seventh section concludes this paper.

A System of National Accounts

The concept of estimating a nation’s total product predates the development of the current system of national accounts. It was first explored in Petty’s Political Arithmetik, Smith’s Wealth of Nations andMarshall’s Principles of Economics. Estimating national production became increasingly important in theearly half of the last century due to the Keynesian macro-management of the economy dating from theGreat Depression. In order to manage the business cycles, accurate data on economic activities werenecessary. The development of these accounts were given further impetus during World War Two, whenan understanding of the economic capacity of the Axis powers to continue the war effort was sought bythe United Kingdom and the United States.

The international community quickly recognised the benefits of measuring nations’ economic activ-ities. Under the auspices of the United Nations, the methodologies for calculating a country’s nationalproduction were formulated into a system of national accounts and were first released in 1953. This

Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment Sust. Dev. 14, 219–233 (2006)DOI: 10.1002/sd

National Account Measures and Sustainability Objectives 221

common set of rules was then modified in 1968, 1993 and again in 2000 (UN, 1953, 1968, 1993, 2000).There is now almost universal adherence to these standards to measure official economic activity. Thelatest revisions will expand the consideration of environmental valuation and accounting and are due for official release in 2004 (though they can be reviewed currently on the internet –http://unstats.un.org/unsd/environment/seea2003.htm).

The development of this system of national accounts has been heralded as the ‘achievement of thecentury’ for its role in winning World War II, stabilizing economies and promoting prosperity (Moullon,2000). For politicians, the historic Olympian feat (higher, faster, and stronger) of these nationalaccounts, popularly represented by GDP/GNP, provides a positive message to share with their con-stituents of ever increasing prosperity. Comparisons between countries can be easily and quickly made.

A number of different statistics are calculated within this system of national accounts. The most widelyused is GDP. GDP is the total value of final goods and services at market prices produced in an economyduring a specific period. It excludes income earned by domestic residents from overseas investmentsbut does include income earned in the domestic economy by non-residents. GDP does not deduct thevalue of expenditure on capital goods for replacement purposes. The difference between GDP and GNPis that GNP includes income earned by nationals overseas (GDP does not) but it does not include theincome earned domestically by non-nationals (GDP does). As with GDP, no allowance is made for thedepreciation or consumption of capital used in production. In addition, per capita versions of each ofthese measures are also estimated by dividing each by the population. Per capita versions are mostlywidely used in intertemporal and interspatial comparisons of welfare.

As previously mentioned, the primary purpose of these accounts was to assist public policy makerssmooth business cycles. However, almost from its inception, these accounts have also been used as ameasure of social welfare. High GDP/GNP is considered a measurement of high social welfare. Simi-larly, a high level of growth in GDP/GNP, economic growth, is considered a measure of the increase insocial welfare. It is now popularly assumed that economic growth is the measure of change in socialwelfare (World Bank, 2003).

There are legitimate reasons for GDP/GNP to be used as a measure of social welfare (Hicks, 1940;Pigou, 1962). These aggregate statistics measure what is produced within the economy and thereforeare a measure of economic activity. These aggregates include activities such as food production, textilesand manufacturing and diseconomies such as defense spending, the justice system and certain healthexpenditures. Pigou (1962) noted that welfare has two main components: economic and non-economic.Quite clearly, these aggregate statistics accurately measure economic activity, but the question remains:is this the same as measuring social welfare? If social welfare is delineated into two parts, economic and non-economic, there is an ‘unverified probability’ that economic welfare is a barometer of the ‘index of total welfare’ (Pigou, 1962, p. 12). ‘The economic welfare of the country is intimately associ-ated with the size of the national dividend, and changes in economic welfare with changes in the sizeof the dividend’ (Pigou, 1962, p. 50). If aggregated economic activity increases therefore, so to does socialwelfare.

Therefore, while it may be possible for national accounts to became proxy indicators of social welfare,these measures have more recently also been seen as indicators of sustainability.

The Issue of Sustainability

If the number of international conferences, books and journal articles are any indication, sustainabilitymust be one of the key issues not only within contemporary development economics at the moment but



also the social and physical sciences more generally. Sustainability is a wide-ranging concept that hasbeen defined in various ways (Pezzey, 1992). The Brundtland Commission developed the most widelyaccepted and least controversial definition. Sustainable development is ‘development that meets theneeds of the present without compromising the ability of future generations to meet their own needs’(WCED, 1987, p. 1).

Sustainability has implications for all facets of society and yet it is in real danger of becoming a hollowcatch cry. A significant reason for this is the lack of accepted and operational sustainability indicatorsacross a broad spectrum of economic, environmental and social realms (see Petersen, 1997, for anattempt to overcome this). Definitions of sustainability must consider intergenerational equity, resilienceor carry capacity of the system, environmental maintenance and consumption or welfare maintenance(Clarke and Islam, 2004). It is within this definitional vacuum that national accounts have begun to beused as an indicator of sustainability.

An important consideration is that ‘sustainability is a property of the path the economy is on and notof the state of the system at any given time’ (Atkinson et al., 1997, p. 62). If national accounts are beingused as measures of sustainability, simple measures of points in time cannot measure sustainability;they can however point to the achievement of sustainability objectives. All the theoretical and empiricalapproaches to measuring sustainability, using national accounts as a basis, that are reviewed in thispaper must be viewed as a function of the path upon which the economy is on. Sustainability cannotbe measured in static terms.

Mainstream View

Whilst sustainability is a relatively recent concept, its beginnings can be traced back to how wealth wasconceptualized in the early part of the last century. Wealth was classified into two categories, capital andincome. Capital is a ‘stock of instruments existing at an instant in time’, whereas income is ‘a streamof services flowing from this stock’ (Fisher, 1906). These categories were later used to imply that aperson’s maximum consumption could not be greater than the level of income that does not reducetheir capital (Hicks, 1946). Such a concept of maximizing income flows without reducing asset stocksis key in many concepts of sustainable development (Solow, 1986; Maler, 1990 – also see Islam et al.,2003, for further discussion on this history).

Limitations of the capital theoretic approach include imperfect substitutability between factors of pro-duction, including non-substitutability of environmental services below some critical level necessary forecosystem functioning, and imperfect signaling of the values of services by market prices.

The above capital theoretic definition of sustainability based on neo-classical theory is the dominantconcept of sustainability within the mainstream economic literature, especially in neo-classical eco-nomics. As many empirical applications of sustainability are based on non neo-classical approaches, abroader concept of sustainability incorporating an integrated economic-ecological-social system is impor-tant. This approach to sustainability is surveyed below.

Concepts of sustainability can usually be classified into two distinct categories: weak or strong sus-tainability. These classifications are dependent on the consideration of substitutability between naturaland constructed resources. Weak sustainability considers that natural and constructed resources are per-fectly substitutable, whereas strong sustainability considers natural resources only substitutable withother natural resources. This distinction is important as the comparison between opening and closinglevels of resource stocks are central to measuring sustainability (see Lawn, 2000, 2001, for a review ofthis discussion). The significance of this difference is the view that natural capital provides numerousfunctions that contribute both directly and indirectly to social welfare and any loss of natural capital willhave potentially irreversible effects on this welfare.



Broader Systems-Based Concepts of Sustainability

Recently, the concept of sustainability has been extended to incorporate a systems-based analysis ofsociety. This has involved defining sustainability in terms of ecological and socio-cultural domains (seeMunasinghe, 1993; Constanza and Daly, 1992; Constanza and Patten, 1995).

Ecological sustainability is dependent on the following conditions: (1) the rate of decline of non-renewable resources (depending on the incorporation of issues of capital substitution and reinvestment),(2) the excess rate of harvest of renewable resources, (3) the assimilative capacity of nature to absorbwaste, and (4) pollution reducing technology and capital. Ecological sustainability is concerned withmaintaining an ecological system that can support viable communities. Bound by the two thermody-namic laws, the environment cannot grow and so it must be able to absorb waste emptied into it. Cur-rently, the capacity of the ecological system to resist the constant stress human existence places on it isthreatened. Ecological sustainability requires an understanding of and operation within the carryingcapacity of the ecological sub-system. Excess harvesting, pollution and other environmental pressurescan threaten the existence of a functioning ecological sub-system.

Socio-cultural sustainability is less tangible than economic or environmental sustainability. Socio-cultural sustainability is concerned with maintaining social and human relationship in the face ofexternal pressures. Reducing the vulnerability and maintaining the health (i.e. resilience, vigor and organization) of social and cultural systems and their ability to withstand shocks is also important.

Different Approaches to Measuring Sustainability through National Accounts

Having briefly discussed the history and construction of national accounts and the objectives of sus-tainability, it is appropriate to review how national accounts are misaligned with sustainability objec-tives and whether it is possible to realign them.

Theoretical Approaches

As discussed, national accounts (generally GDP per capita or GNP per capita) are popularly used to rep-resent social welfare. A better national account to measuring issues of sustainability is Net NationalProduct (NNP). NNP is the same as GNP except that it is calculated after allowances have been madefor the depreciation or consumption of capital used in the production process. By taking into accountthe use of capital and depreciation, some of the costs of economic growth, previously not taken intoaccount, are removed from the final figure. If high levels of GNP are achieved through high levels ofdepreciation or consumption of capital, NNP will capture this. Thus, greater insights into achieving sus-tainability objectives can be made.

Theoretically, NNP can measure sustainability within optimal growth models (Islam, 2001) as NNPis considered the current value of the Hamiltonian function (Weitzman, 1976). If utility (u) is a func-tion of consumption (c) and sustainability represented by depletable stock (s), the aim is to maximizethe optimal level of utility:

(1)

where H is the Hamiltonian, t is time, U is utility (or sustainable well-being), c is consumption, k iscapital and l is the Lagrangian multiplier.

The Taylor approximate of this Hamiltonian function along the optimal growth path provides the following NNP as the sum of the consumption and investment levels (Islam, 2001):

H t U c t t c t k t( ) = ( ) - ( )( ) ( ) - ( )[ ]l



(2)

where c* represents consumption sustained forever.In an optimal growth model with consumption and sustainability constraints, the current value of the

Hamiltonian, which is constant along the dynamic time path, is interpreted as the measure of NNP andsustainable social welfare (Islam, 2001). As the optimal growth problem is autonomous, the Hamilton-ian value (and hence NNP) is stationary. Therefore, the Hamiltonian provides a measure of NNP thatcan be sustained forever.

However, this approach is currently limited (Aronsson et al., 1997; Islam and Craven, 2002). The twomajor criticisms of the use of the Hamiltonian as a measure of sustainability are that it does not incor-porate the interests of future generations adequately or explicitly, and further, and perhaps more impor-tantly, that this approach has not yet been empirically implemented.

As this Hamiltonian approach is severely constrained, both theoretically and empirically, it does noteffectively overcome the misalignment between national accounts and sustainability objectives.

Empirical Approaches

There are three main areas of concern that must be rectified before it is possible to construct greennational accounts to measure sustainability objectives: (1) valuation of ecological services; (2) valuationof environmental stocks and (3) transboundary pollution.

Valuing ecological services can be undertaken in a various ways. The ‘politically determined willing-ness to pay’ is based on the assumption that democratically elected governments perfectly reflect voters’willingness to pay for environmental improvements. A second approach is to use defensive expenditurein maintaining or reclaiming environmental conditions to value ecological services (Heal and Kristrom,2001).

Natural assets are increasing treated like man-made assets within national accounts. A large numberof methods have been used for valuing natural stocks, including (1) market prices, (2) present values,(3) net rents, (4) Ricardian rents, (5) contingent values, (6) hedonic pricing, (7) replacement costmethods, (8) opportunity costs and (9) the El Serafy method.

Unlike other environmental concerns, pollution is generally transboundary. Put simply, pollution doesnot recognize national borders. When measuring pollution effects, transboundary problems are onlyremoved when considering the whole world. However, if country or regional studies are being consid-ered, the net rate of pollution must be calculated.

As discussed previously, the system of national accounts was introduced to provide a consistent frame-work of principles, concepts and classifications to compile and present country-wide economic data. Asthis framework is now almost universally accepted and used, inter- and intra-country comparisons arenow possible for a range of purposes. A similar system of natural resource accounting exercises thatconsider environmental consequences of economic activities is now being developed in the samemanner as the SNA (Harris and Fraser, 2002).

A consistent methodology concerning the valuation of ecological services, environmental stocks andtransboundary pollution has been developed under the auspices of the United Nations. The UN Systemof Environmental and Economic Accounting (SEEA) was first published in 1993. Further work has beenundertaken since a revised version is due for release in 2004. The SEEA seeks to link the environmentand economic within the SNA. Therefore the SEEA is a satellite system built upon the principles ofnatural resource accounting.

H t U c t c tt t k t t k( ) = = ( ) ( ) ( )( ) = ( ) ( ) ( )[ ]+ +NNP * *l l



The SEEA integrates use/value added tables, balance sheets for environmental and economic assetsand tables for intermediate, final consumption and capital accumulation. In summary, the basic SEEAmatrix structure is as follows:

Opening stocks Use/value added Supply tables Revaluation Closing stocks——————� —————� —————� —————�

The system expands on the standard national accounts, by separating out expenditures related to envi-ronmental issues, and providing detailed accounts of how environmental assets interact with theeconomy. This entails using a wider definition of the assets, and accounting for the economy’s impactson natural assets in terms of the environmental costs of production and consumption activities.

Having established these environmental satellite accounts, green standard national accounts will bepossible to calculate as the information required to consider issues of sustainability that did not existwithin standard national accounts is fully captured within these satellite accounts.

(3)

where gGDP is green gross domestic productC is consumptionI is investmentX is exportsM is importsES is environmental servicesED is environmental damageDE is defensive expendituresIR is invested resource rents.

Environmental services (ES) are primarily waste disposal services provided free of cost by the environ-ment. This adjustment is the monetary value estimated for the pollution absorptive capacity of the envi-ronment. Environmental damage (ED) is total costs of environmental degradation caused throughproduction. Defensive expenditures (DE) are expenditures on environmental protection undertaken byhouseholds. Invested resource rents (IR) measures the truce income from a non-renewable naturalresource that is obtained from investing a portion of the rents from using this resource.

Green GDP measures are more closely aligned with sustainability objectives. However, the limitationof this SEEA approach is that GDP is still the core component with various adjustments made to betterconsider sustainability objectives. It must be remembered though that whilst these green nationalaccounts incorporate the impact of economic activities on the environment, sustainability is reliant upona functioning and robust socio-economic environment system, and therefore these new measures arenot themselves measures of sustainability. Sustainability is in effect a property of the socio-economicenvironment system, not an economic outcome at a particular point in time.

Adapting National Accounts

An alternative approach is to adapt GDP/GNP by considering specific effects that achieving economicgrowth has on a functioning social, economic and environmental system. The first set of ‘adjusted-GDP’

GGDP = ES ED DE IRC I X M+ + -( ) + - - -



indictors was concerned with more closely aligning the national accounts with welfare objectives. Reflect-ing the rise in environmental concerns in the early 1970s (see Meadows et al., 1972), increased interestfocussed on how national accounts could be adjusted to better reflect welfare. Various adjustments cov-ering leisure, non-marketed goods, environmental concerns, urbanization and government expenditurewere made (see Sametz, 1968; Nordhaus and Tobin, 1973, as examples).

The majority of ‘adjusted-GDP’ measures seek to measure welfare by calculating the net benefit ofeconomic growth (Clarke and Islam, 2004). Barkley and Seckler (1972) provide the basic framework forthese approaches:

(4)

where NSW = net social welfareGDP = gross domestic productCL = capital equipment destroyedB = non-economic benefitsGC = costsAL = loss of natural resources.

Despite this work, national accounts, especially GDP, continued to be considered a suitable measure ofwelfare. The second generation of ‘adjusted-GDP’ measures moved from solely seeking to align nationalaccounts with welfare to also seeking to align national accounts with sustainability objectives.

The major empirical approach in using national accounts to measure sustainability has also beenthrough making various adjustments to these measures. Whilst GDP might shed some limited light onthe well-being of a nation because of the unverified probability (Pigou, 1962) that economic welfaremirrors total welfare, such an unverified probability does not exist between current economic activitiesand long term sustainability.

The first serious attempt to align national accounts with sustainability objectives that received noticein mainstream economic literature was undertaken by Daly and Cobb (1990). Daly and Cobb based theirwork on the study of the Measure of Economic Welfare of Nordhaus and Tobin (1973) to adjust GDPto better measure welfare. Nordhaus and Tobin concluded that their adjusted measure tracked move-ments in unadjusted GDP, therefore re-enforcing Pigou’s (1962) conclusion that national accounts wasan adequate indicator of welfare. However, Daly and Cobb argued that the adjusted GDP measure ofNordhaus and Tobin did not always track unadjusted GDP and in fact, at times, the adjusted GDP fellwhilst unadjusted GDP rose. From this, Daly and Cobb concluded that not only was unadjusted GDP afaulty measure of welfare but also it was misaligned with sustainability objectives. Daly and Cobb setout to develop a measure based on national accounts that was more closely aligned with both welfareand sustainability objectives. As will be discussed later, the shared emphasis on these two separate con-cepts (welfare and sustainability) has in itself limited the ability to argue that these new measures fullymeasure sustainability.

Index of Sustainable Economic Welfare

Daly and Cobb developed the index for sustainable economic welfare (ISEW). It is based on the calcu-lations of the monetary values of the costs of pollution, traffic, the loss of wetlands and the depletion ofnon-renewable resources, etc. Whilst the valuation of environmental goods has improved over the lastdecade, its results are still controversial (Brekke, 1997). The ISEW includes the following.

NSW = GDP GL GC ALf B-( ) + -( ) -



Benefits• Personal consumption of material goods – weighted for distributional inequality;• household labour;• expenditure on consumer durables;• net capital growth;• net international position• government services such as streets and highways and• public expenditure on streets and highways.

Costs• Private expenditure on consumer durables;• private expenditures on education and health;• costs of commuting;• costs of urbanization;• cost of auto accidents;• water pollution;• air pollution;• loss of wetlands;• loss of farmland;• depletion of non-renewable resources and• long-term environmental damage.

By undertaking these adjustments, Daly and Cobb argued that they could transform the nationalaccounts into a measure more aligned with sustainability objectives, as the new measure explicitly takesinto account many issues and concerns that impact on sustainability. These include the adjustments forvarious pollutants, loss of wetlands, loss of farmlands and long-term environmental degradation.

During the early 1990s a number of these adjusted-GDP studies focussing on realigning nationalaccounts with welfare and sustainability objectives were undertaken (Jackson and Marks, 1994 – UnitedKingdom; Diefenbacher, 1994 – Germany; Rosenberg and Oegema, 1995 – Netherlands; Stockhammeret al., 1997 – Austria; Lawn and Sanders, 1997 – Australia). The results for all of these studies are allsimilar; the adjusted-GDP figure rose in line with unadjusted GDP until the late 1970s or early 1980s,after which it fell in contrast to the continually rising unadjusted GDP figure. The conclusions drawnby these authors are that the current national accounts do not reflect sustainability objectives and in factobscure the reality that sustainability is not being achieved despite positive increases in economicgrowth.

A perceived flaw of this approach is that it ‘cannot at the same time function both as an indicator ofcurrent welfare and an indicator of sustainability’ (Neumayer, 1999, p. 91 – original italics). It is notpossible that one figure can simultaneously define current welfare and future non-declining welfare overtime (sustainability). The ISEW is limited through the inclusion of activities that impact either on currentwelfare (health expenditure) and those dealing with future sustainability (long-term environmentaldamage). According to Neumayer (1999), this confusing mix results in the invalidity of the ISEW havingany importance. Current welfare and sustainability are related but distinct entities. Therefore, two indi-cators are needed, not one. A second perceived weakness of this approach is that ISEW fails to main-tain its ‘strong sustainability’ roots by allowing the inclusion of some calculations of perfectsubstitutability between natural capital and other forms of capital (‘weak sustainability’). Therefore, bymixing these two concepts of sustainability and not remaining faithful to either, the ISEW suffers from



methodological inconsistencies. Lawn (2003) provides a counter-argument to these criticisms by high-lighting the Fisherian approach to income utilized in this approach.

(Re)aligning SNA and Sustainability Objectives using Normative Social Choice Theory

It is possible to improve this adjustment approach by utilizing normative social choice theory. Norma-tive social choice theory has traditionally been concerned with social or collective decisions on issuessuch as social welfare. Thus, the main focus within normative social choice theory has been the processof aggregating individual choices to form a social choice resulting in optimal social welfare outcomes.

Normative social choice theory can also highlight changes within society and how these changesimpact on sustainability (Clarke and Islam, 2004). This approach can be applied to estimate sustain-ability by using expert opinion (or analysis), scientific information, government formulated public policyabout sustainability indicators and specific interviews of individuals on social welfare outcomes includ-ing willingness to pay, hedonic prices and contingent valuation methods. The methodology for eachtechnique is well established (Islam, 2001). Using one, or a combination, of the above, it is possible todetermine the social choice perspectives on various sustainability issues. Expert opinion will form thebasis of the social choices expressed in the adjustments made within this paper.

Therefore, in order to overcome the limitations discussed in the previous sections, a new approachbased on normative social choice theory has been developed to partially realign national accounts andsustainability objectives (Islam and Clarke, 2002). This approach argues that GDP can be used as anindicator of social welfare and sustainability if the GDP estimates are undertaken within a cost–benefitanalysis framework based on normative social choice perspectives.

Such a normative-social-choice-adjusted GDP figure is a more accurate measure of social welfare andsustainability than unadjusted GDP. Sustainability is concerned with ensuring that the current genera-tion meets its present needs without threatening future generations’ needs. This is dependent upon ahealthy and functioning social economic and environmental (SEE) system. Economic development candamage the SEE system though, through economic activities resulting in resource degradation, over-harvesting and pollution. Therefore, achieving economic development and sustainability simultaneouslymay not be possible. This approach considers the tensions between economic development and sus-tainability by undertaking a number of SEE-based adjustments to GDP based on social choice perspec-tives in order to measure sustainability – termed the social, economic and environmentally adjustedGDP (SEE AGDP). Thailand is used as a case study for a 25 year period (1975–1999). These adjustmentsinclude the environmental and social costs caused by economic development such as noise pollution,water pollution, the depletion of non-renewable resources, and deforestation. The results show a sig-nificant difference in terms of GDP per capita and the SEE-adjusted GDP per capita figure. Thisapproach concludes that, with increasing environmental and social costs of economic development, pur-suing such extreme high growth objectives without due environmental and social considerations canthreaten present social welfare and future sustainability.

Within this example, eight SEE adjustments are be made to Thailand’s GDP over a period of 25 years,1975–1999 (t). These adjustments reflect the impact of the costs and benefits of economic growth onmaintaining a healthy, robust and functioning SEE system to ensure sustainability. These SEE adjust-ments (based on previous work, see Sametz, 1968; Nordhaus and Tobin, 1973; Daly and Cobb, 1990)are income inequality (I), commuting (C), urbanization (U ), noise pollution (N ), air pollution (A), waterpollution (W ), long-term environmental damage (L) and deforestation (D). Through these adjustmentsand the application of cost–benefit analysis to aggregated national accounts, which are all based nor-



mative social choice perspectives, all social states can be ranked and explicit value judgements can beincluded in recommending which sustainability policies should be initiated. A summary of these esti-mates can be found in the appendix and the full calculation of these adjustments can be found in thebook by Clarke and Islam (2004).

(5)

A positive rate of growth of the SEE AGDP index is the indicator of sustainable growth.As ‘sustainability is a property of the path the economy is on and not of the state of the system at any

given time’ (Atkinson et al., 1997, p. 62), the trend of the SEE AGDP provides a partial measure of sus-tainability. Sustainability cannot be measured in static terms and the results of the SEE GDP developedin this paper suggest that the SEE for Thailand has been damaged in recent years and is falling (seeFigure 1).

Thailand has experienced three distinct periods of economic growth over the last 25 years. The firstperiod, 1975–1987, was a period of reasonable and steady growth. The second period, 1988–1997, was

SEE AGDP GDPt t t t t t t t t tf I C U N A W L D= - [ ]( ), , , , , , ,


0

500000

1000000

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2500000

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3500000

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1975

1976

1977

1978

1979

1980

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Years

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988

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GDP for Thailand, 1975 - 1999 (1988 prices - millions of baht)SEE AGDP for Thailand, 1975 - 1999 (1988 prices, millions of baht)

Figure 1. Comparison of GDP and SEE AGDP for Thailand (1975–1999)Source: Islam and Clarke, 2002.


a period of accelerated growth, which finished dramatically in 1997 due to the financial crisis of thistime. The final period was the fallout of this crisis and shows GDP falling before showing signs of recov-ery in 1999.

The path of the SEE AGDP is different. The overall trend is much flatter, resulting in a divergencebetween the two indices. This difference is an indirect indictor of the unsustainable growth experiencedin Thailand. As time proceeds, the SEE AGDP measure becomes more distant from the unadjustedmeasure, indicating that the associated SEE system costs of economic growth are increasing through-out the period. This divergence therefore indicates that sustainability is becoming less likely as the costsof economic growth begin to impact on the health and functioning ability of the SEE system. This ismore evident in the final year, in which positive economic growth is recorded in 1999, but the SEEAGDP continues to fall. This fall indicates impoverishing growth or unsustainable growth.

Impoverishing growth or unsustainable growth is a type of economic growth when the economy hasgrown in quantitative terms but the economy’s reproductive capacity has declined because of socio-economic and environmental degradation and damage (Islam and Jolley, 1996). Future work will needto continue this time series to see whether this movement is simply a fluctuation or the beginning of anew trend. If it is the beginning of a new trend, future sustainability is under threat from the presentdamages being caused to the SEE system by economic growth.

When these SEE adjustments are made to GDP, the social, economic and environmental costs of eco-nomic growth are evident. As mentioned previously, this new SEE AGDP measure is a partial and indi-rect measure of sustainability since it does indicate that the SEE may not be as robust and healthy asexpected when simply considering unadjusted GDP as an indicator of sustainability.

Conclusion

National accounts were not designed to measure sustainability when they were first developed. The maintask of these accounts was to assist policy makers predict and smooth the business cycles. They werenot designed to measure sustainability or even be aligned with sustainability objectives. (It would be fairto suggest sustainability, as a concept that we currently discuss, did not exist during the nationalaccounts’ development.) These objectives are to allow present generations to satisfy their needs (in allaspects of society – not just the economic) without compromising the ability of future generations tosatisfy their own needs.

Theoretically, a national account statistic, NNP, can measure sustainability within optimal growththeory because of its Hamiltonian value. However, such use is both theoretically and empirically limitedto such an extent that its use can be discounted.

However, other empirically based efforts have been made to better align national accounts with sus-tainability objectives. These efforts grew from attempts to adjust GDP to be a better measure of welfare.Primarily, it is considered that if certain adjustments are made to national accounts, it is possible for anew measure to be derived which measures both welfare and sustainability objectives. Whilst still in itsrelative infancy, increasing work has been undertaken within a number of countries to implement sucha re-alignment. The results thus far suggest that not only are sustainability objectives under threat, butnational accounts obscure this fact.

National accounts are misaligned with sustainability objectives as they were conceived before sus-tainability was an issue. The value of trying to realign them lies not in ‘correcting’ a ‘faulty’ analyticaltool, but by using popularly understood and widely used economic statistics to highlight a new andimportant concept. It may be that the best outcome for those seeking to overcome the misalignment of



national accounts with sustainability objectives by undertaking ‘green’ adjustments is a partial realign-ment, but it is probable that their main concern is to raise awareness that the misalignment exists, thatGDP does not indicate sustainability and that increased attention on sustainability objectives is urgentlyrequired.

Acknowledgements

This is a substantially revised version of ‘Can standard national account aggregates and sustainability objectives be (re)aligned– theoretical and empirical approaches’, presented at the seventh PRSA Conference, Bali, 2002. The authors are grateful forthe comments made by an anonymous referee from Sustainable Development.

Appendix. SEE Adjustments for Costs caused by Economic Growth in Thailand, 1975–1999(1988 Prices, Millions of Baht)

Year GDP GDP adjusted Commuting Urbanisation Air Water Deforestation Long-term SEE AGDPfor Inequality Environmental

Damage

1975 621 555 415 261 3 066 18 084 4 117 4 067 62 013 4 960 306 5221976 680 778 451 935 3 466 20 164 4 509 4 454 58 844 5 965 340 9161977 750 054 494 736 3 829 22 255 4 913 4 956 113 162 6 932 323 6861978 824 706 540 471 3 939 24 634 5 516 5 362 113 162 13 575 357 7891979 867 797 565 022 3 787 25 712 5 759 5 503 33 949 16 893 456 0641980 913 768 591 071 3 560 27 382 6 046 6 143 33 949 20 087 475 6281981 967 374 621 635 4 704 29 172 6 069 6 854 33 949 23 175 498 3631982 1020 084 642 775 5 441 31 258 6 302 7 151 33 949 26 170 512 1031983 1075 922 664 532 6 171 30 869 6 774 7 583 30 327 28 255 533 0361984 1138 329 688 872 7 192 32 420 7 382 8 336 30 327 30 344 550 1041985 1191 089 705 935 9 141 33 843 7 930 8 033 29 875 32 428 560 8621986 1256 538 729 043 9 710 35 177 8 030 8 364 11 316 34 498 596 8181987 1377 026 805 423 10 012 37 963 9 299 8 833 11 316 35 653 664 8061988 1559 804 919 660 10 164 41 374 10 508 10 213 11 316 37 762 767 1271989 1750 228 995 442 9 133 48 611 12 146 11 533 11 316 38 981 828 7181990 1946 119 1066 278 10 218 53 538 14 244 12 145 25 348 41 914 869 9501991 2111 740 1132 104 9 947 62 459 16 144 13 528 25 348 44 848 917 5961992 2282 995 1196 974 10 647 70 775 17 521 14 443 24 896 47 047 965 9851993 2494 748 1327 580 11 497 70 927 19 479 15 060 25 348 49 194 1086 1811994 2669 573 1441 569 12 107 70 560 21 880 16 733 24 896 51 269 1190 7321995 2884 495 1578 828 12 406 81 507 24 307 18 422 25 348 53 460 1305 6881996 3095 336 1716 983 13 289 90 561 27 105 19 493 24 896 56 206 1423 5271997 3502 012 1946 944 17 099 93 200 29 257 20 033 25 348 58 210 1642 7571998 2787 395 1553 137 22 264 87 740 31 657 18 296 24 896 60 469 1252 0671999 2823 416 1480 317 22 495 98 231 34 056 18 533 4 526 62 727 1183 281

Source: See Clarke and Islam, 2004, for full calculation.



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Biography

Dr Matthew Clarke completed his PhD in 2002. He currently works at RMIT as a Lecturer in the Inter-national Development Program. Prior to this he worked for five years as a Senior Program Officer atWorld Vision Australia where he was responsible for designing, managing and evaluating Australiangovernment funded aid projects in south-east Asia. His research includes sustainability, climate change,the knowledge economy, welfare and development economics. He can be contacted at the School ofSocial Science and Planning, RMIT University, GPO Box 2476V, Melbourne, Victoria 3001, Australia.E-mail: [email protected]

Professor Sardar Islam is Professor of Welfare and Environmental Economics at the Centre for Strate-gic Economic Studies, Victoria University. He has published widely in a range of economic disciplinesincluding welfare, development, financial, environment and climate change economics. He can be contacted at the Centre for Strategic Economic Studies, Victoria University, PO Box 14428, Melbourne,Victoria 8001, Australia.


National account measures and sustainability objectives: present approaches and future prospects

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