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President Tarja Halonen’s Keynote

ESAC (European Statistical Advisory Committee) Workshop ”Measuring and Comparing the Quality of Life within Europe”

24 January 2013

GDP and well-being

Distinguished participants,

With ideas of sustainable development it has been necessary to try to balance between the wellbeing of people and the nature. In the High Level Panel for Sustainable Development we faced the same issue of seeking a balance. We considered the description made by Bruntland’s Comission good enough. Economic growth is needed and welcome, but it should be socially just and respect the planetary boundaries. The members of the panel did not think that economic growth as such always increases the wellbeing of people, but they were ready to accept that growth might be needed.

However, GDP only monitors economic progress from a production perspective. And it does not always do even that in the proper way. For instance, GDP does not cover domestic work or work in “gray areas” well enough, though these can be very important especially in developing countries or nowadays even in certain European countries. GDP does not pay enough attention to the distribution of income or the deterioration of capital. Thinking about sustainable development in a broader sense, GDP is weak in noticing the negative environmental hazards caused by production, the degradation of nature or the depletion of natural resources. The obvious lack or scarcity of oil, gas or certain minerals in the future has caused a discussion about pricing. The right pricing is essential in trying to achieve sustainable development.

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GDP is a useful indicator for measuring the economic performance of countries even if it has certain drawbacks. Describing the welfare of people should have a better linkage to people. Welfare is not only about comparing how the fruits of production are distributed, but also about how inclusive the process is. Income is needed to sustain private and public spending in the non-material components of well-being, such as education and health. However, there is an increasing recognition that focusing on GDP alone is not enough to achieve better lives for all.

Today the critical question is “Does economic growth actually benefit people?” Several studies show that the assumed direct linkage between growth and welfare, or the quality of life, has broken. One of the examples is jobless growth, uncovered by ILO.

Efforts have been made to measure well-being. Since the 1990s, complementary welfare indicators have been designed to account for the actual welfare of people. The United Nations constructed the “Human Development Index” (HDI) and the OECD its “Better Life Index”.

On the OECD Better Life Index, the relationship between a country’s s GDP per capita and its performance is positive. In other words, the countries with a higher GDP per capita are also those where well-being is higher on average. However this relationship becomes weaker as a country’s income grows, suggesting that once income reaches a certain level, increased income is less likely to generate well-being.

The other interesting feature is that some countries do better at delivering well-being as measured by the OECD’s Better Life Index than they do if measured only on the basis of economic production per capita. This is the case for all the Nordic European countries, but also for New Zealand.

On the other hand, there are countries that do better in GDP per capita than on average well- being, for instance the United States and Switzerland.

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New interesting examples could be mentioned, like happiness in Costa Rica compared to the USA or Bhutan’s Index of Happiness.

So why do economic performance and well-being not go strictly hand in hand? The answer is not only economics but politics. One explanation is that the countries that do better in terms of well-being have made the choice of working less to achieve a better balance in life. This translates into lower income. But it also means increased leisure time that can be shared with family and friends, or used for volunteering and engaging with the community.

Another reason is that these countries have better environmental quality, partly because of lower economic production and thus pollution.

The Nordic countries are also welfare societies, which brings security to most people.

Well-being results from the complex interaction of multiple factors and depends on the relative importance that each person or society attaches to them.

The welfare of individuals and environment are more and more important issues especially in industrial countries. Social and environmental issues have risen next to economic growth as proposed by Sustainable Development concepts.

In 2007, the European Commission, the European Parliament, the Club of Rome, OECD and WWF hosted the high-level conference “Beyond GDP”. The objectives were to clarify which indexes are most appropriate for measuring progress, and how these can best be integrated into the decision-making process and taken up in public debate. The EU’s Beyond GDP initiative is about developing indicators that are as clear and appealing as GDP, but more inclusive of environmental and social aspects of progress. Also many EU countries, the UK, and Flanders in are advancing in developing and using broader indicators.

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The UN High-Level Panel on Global Sustainability, which I co-chaired, gave its report “Resilient People, Resilient Planet” to the UN Secretary General last spring for the Rio + 20 Conference. I have mentioned ideas from the report during my speech .The report contained a unanimous list of recommendations for a sustainable future. (It can be found at www.un.org/gsp/report.)

In June 2012 at Rio + 20 it was recognized that the world needs broader measures of progress to complement GDP. The Conference requested the UN Statistical Commission, in consultation with relevant UN System entities and other relevant organizations, to launch a program of work in this area, building on existing initiatives. As a time limit for a new accounting system, the year 2014 was proposed. To do this globally is very demanding. I warmly welcome your efforts to do this (at least in the beginning) in Europe.

In the world, there is a lack of basic information on human beings. The most important ones are birth registers and immigration information, and statistics on child mortality and education. Indicators on women are lacking, and the work done by women is often outside statistics. When I was co-chairing the World Commission on the Social Dimension of for ILO in 2002-2004, we dealt with the lack of statistics in the creation of jobs and in employment in the process of globalization.

Finland as an example

Let me now to take some examples form my own country, which might be useful for your work.

Finland has made decisive work in studying the Index of Sustainable Economic Index (ISEW), the Genuine Progress Indicator (GPI) and the Sustainable Society Index (SSI). These indicators are based on conventional private consumption expenditures that are corrected by positive and negative social and environmental factors.

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The results of these indicator applications show that after 1990 the welfare of the average Finn has either stabilized or even slightly decreased. We have also taken more ”debt” than ever from nature in the form of over-use of natural resources. Furthermore, the value of non-market services that increase welfare has grown significantly (domestic work, value of leisure time), indicating that the significance of economic growth to welfare has diminished.

These changes in quality of life and the consequent concerns, observed in Finland, are also common to the majority of EU member countries. We share the same economic, social and environmental challenges and the structural changes in our economy and society. The economic crisis within the EU, as well as accelerated climate change, stress the urgency of developing new statistical tools.

Unfortunately within the EU the picture is somewhat scattered, disconnected and uncoordinated. It seems that our common statistical system is lagging behind in responding to these real-life challenges. The critical world situation calls for us to take rapid and consolidated actions, and not to let old disagreements, prejudices and beliefs delay us in developing new and better indicators.

In summary, the EU should accelerate and take a more decisive role in the development work of new indicators. Thus Eurostat should start immediately and open-mindedly to study and test new indicators such as the Index of Sustainable Economic Welfare (ISEW) and the Genuine Progress Indicator (GPI). The lessons gained would certainly help overcome many intellectual barriers and result in changes in attitudes.

These broader measures of progress of quality of life and the information they contain, are urgently needed to better shape common policy decisions in the EU as well as in the EU member countries. We cannot effective tackle future problems and challenges with outdated tools, such as GDP. Instead we need new measures that help us to outline new policies and make wise decisions on our future challenges.

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The need for new indicators to measure quality of life

A few years back there was much discussion about replacing GDP with just one indicator or index, but it is perhaps wiser to describe a versatile issue with several measures; different users and situations need different indicators – without forgetting the need to develop also the GDP.

The measurement of subjective well-being is challenging but politically important. People become estranged from statistics when they feel that they do not reflect their personal situations. Often statistics contain time lags of a few years (especially in social statistics) and if things change dramatically, the statistics may give a completely different, or wrong, picture.

Furthermore, the use of national averages can lead to a situation where the average does not apply to any real people. For example, if the national average for unemployment is 9 %, but it is 5 % in the capital region and over 15% in the other regions, then who can relate to the 9 %? Subjective indicators that are collected by surveys can also be produced at a faster pace.

Are we ready to ensure enough resources for the collection of the statistics? We should also consider innovative ways of collecting data, for example modern mobile technology and crowd-sourcing. Existing situations (hospital waiting rooms, shopping centers or schools) can be used to collect information on life satisfaction, similarly to customer satisfaction surveys.

Indicator developers

It is very good that people with various backgrounds are involved in developing indicators: policy makers as leaders for change in the measuring of well-being, and statisticians as experts to ensure indicators of a high quality and with existing data.

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It is important to make sure that the cooperation with the intended users of the indicators is strong. The developers should understand and be aware of the situations that indicators are used in and the format they should be provided in. It is important to tell the source of information and the main principal how the research has been made. It is important to tell what we know and what we do not now and why. These questions come automatically in the political discussion concerning, for instance, the pricing of social services or education.

Indicators must be updated timely and provided in a user-friendly format, a good example is the Finnish “findicator.fi” service.

Communication of results

Besides publishing indicators, somebody must also draw conclusions and policy recommendations to the policy makers and the citizens. Too often indicators are just given to users and the interpretation is left to them.

Not all users like numbers and graphs and hence we should at some places go beyond indicators and be bold enough to say what they really mean. Perhaps we need facilitators between statisticians and the intended users?

Production chains

Many consumer products in retail markets form very complex production chains, which may spread around the globe and contain numerous sub-contractors. This makes it difficult to evaluate the product or production chain with sustainability criteria, due to lack of relevant information in all parts of the production chain.

There is growing demand for sustainably produced products and services; for example in Finland the demand already exceeds the supply, especially in food and clothing products as well as in housing and commuting services, which support sustainable living aspirations in daily life. It is difficult to make comparisons among products and services leading to Page 8 of 8 consciously sustainable selections, because there are various product labeling schemes with very different criteria for environmental, social and economic sustainability.

We need new systems to enhance full transparency throughout the whole product chain, from raw-material extraction to industrial processing and delivery to the retail markets.

Full transparency and openness create a basis for consumer-producer dialogues and enable fully conscious decisions. Instead of discussing the best technologies available, or practices and criteria set ”from above”, we should make efforts to provide complete information of complex product and service systems. The focus should be on identified challenges to improve sustainability. The internationally certified “Life Cycle Assessment” methodology, with its derivates (such as the EU Eco-labeling schemes), provide excellent tools for sustainable product and service chain evaluations, and their ”hot spot” identification, based on environmental and socio-economic criteria.

The Sustainability Center presents an idea initiating that an international Internet platform should be created to provide methods and tools enabling transparent product-chain formation, along with publishing transparent product chains with their producers and their marketing organizations.

Ladies and gentlemen,

May I encourage you in your work. Better measurements are needed, though I personally think that happiness is very difficult to provide by the society, but it would be enough to recognize what are the main causes of unhappiness.