Economic

Openness and
Green GDP
John Talberth, Alok K. Bohara (2006)
GDP Failure

• GDP fails as a true measure of economic welfare

• GDP has been criticized for its failure to appropriately address the degradation and
depletion of natural capital, gross income inequalities, and economic activity that is
purely defensive in nature such as expenditures needed to clean up toxic waste
• GDP ignores a large number of economically valuable inputs and outputs that are
not bought and sold in the marketplace such as the wide range of ecosystem service
values associated with protected natural areas
Green GDP

• There have been several attempts to develop alternative national income accounting
systems that address these deficiencies. These systems measure is referred to as
green GDP.
• Major objectives→ to provide a more accurate measure of welfare and to gauge
whether or not an economy is on a sustainable time path
• Example of green GDP systems: the Index of Sustainable Economic Welfare (ISEW)
and the Genuine Progress Indicator (GPI).
Green GDP System

ISEW GPI

• Austria • USA
• Chile • Australia
• Germany
• Italy
• the Netherlands
• Scotland
• Sweden
• United Kingdom
Green GDP: 3 Basic Steps

1. Estimates of personal consumption expenditures, which include both market and

non-market goods and services.
2. Deductions are then made to account for purely defensive expenditures such as
pollution related costs or certain avoidable health care costs such as those related to
automobile accidents. Deductions for costs associated with degradation and
depletion of natural capital incurred by existing and future generations are also made
at this stage.
3. Weight the result from the second step by an index of the inequality in the
distribution of income and labor to arrive at the final green GDP measure.
Economic Openness

Pros Cons

Export expansion raises the rate of Deteriorating social and environmental

economic growth by way of its impact on conditions, such as increased income
total factor productivity (Dar and inequality or greater emissions of
Amirkhalkhali, 2003). greenhouse gases (Baten and
Fraunholz, 2004; Managi, 2004).
The Openness Debate

Pros Cons

Harrod-Domar (1957): Income inequality, deteriorating

Trade Openness → GDP environmental conditions, poor working
conditions and loss of indigenous cultures
(IFG, 2012)
Freer trade regimes (Dowrick, 1994):
Adam Smith: emphasizing Ricardian models: Borghesi and Vercelli (2003):
the role of trade in enabling comparative advantage
specialization which leads to specialization in Recent process of globalization of
increases productivity particular activities that may
international markets has been accompanied
through learning by doing be characterized by higher
or through specialization of rates of productivity growth. by a worldwide increase in environmental
research, degradation and economic inequality.
The Openness Debate
Pros
Dowrick (1994): a fairly consistent pattern of
positive correlations between trade openness
and growth.
Edwards (1997): more open countries
experienced faster productivity growth.
Karras (2003): the effect of trade openness
on economic growth is positive, permanent,
statistically significant, and economically
sizable
Cons
Alarming environmental trends associated
with greater openness by way of increased
export prices of agricultural and forest
products (Capistrano, 1994; Managi, 2004).
Downward pressure on wages for unskilled
and other types of labor subject to relatively
high international elasticities of demand
(Ozay and Tavakoli, 2003; Baten and
Fraunholz, 2004; Ghose, 2004; Marjit et al.,
2004).
How can these viewpoints be
reconciled?
Conducting growth studies using green GDP bridges this divide because
green GDP is a broader measure of welfare which explicitly addresses
factors of paramount concern to GDP critics.
Empirical models and data

1. A model of the Green GDP growth

2. A model of the GDP–green GDP gap
Green GDP Modeling Results
• Displays panel coefficient estimates for the
level model of green GDP
• Shows that openness and its square are
significant but with opposite direction of
effect
• The direction of effect for GFCFpct is as
expected and significant
• The influence of ADR is in the opposite
direction of what we anticipated but its
insignificance precludes drawing any
inferences at this stage
• The time trend coefficient is as expected
with the steady growth of green GDP over
the greatest segment of time
Green GDP Modeling Results
• Openness is negatively correlated with
green GDP growth (GGDPgrn) but the sign
on its square is reversed
• DGFCFpct and DDADR are significant and
in the direction we anticipated in our
theoretical model
GDP-green GDP gap modeling results
• Openness has a strongly positive influence of
the size of the gap
• Direction of effect is reversed for its square
• LPI nor CCO2 appear to influence the gap
while the effect of the time trend is significant
and negative
Conclusion
There remains no global consensus on alternatives to
traditional GDP measures

It is not clear that the ISEW, GPI, and its variants are
sufficiently similar to combine in a single multi-country
panel model

We estimate our models in reduced form

“NONMARKET BENEFITS OF
NATURE: WHAT SHOULD BE
COUNTED IN GREEN GDP?”
BOYD, JAMES.
ECOLOGICAL ECONOMICS (2007)
GREEN GDP

“Measures what is valuable about nature, excluding goods and services that are already
captured in GDP, such as nature’s contributions to commercial harvests and other
products.”
WHY MEASURE GREEN GDP

• To see how market consumption affects the consumption of public goods like beautiful
views, clean air, and clean water.
• To track the provision of nature’s benefits over time, either to hold governments
accountable or to compare their environmental conditions with those of another
country.
• To articulate tradeoffs, measure performance, and maximize social well-being.
(impossible to achieve when nature’s contribution to human welfare is not measured.)
MAKING GREEN ACCOUNTING MORE PRECISE –
WHAT SHOULD GREEN GDP COUNT?

• What is enjoyed or consumed - when the beneficial aspects of nature are counted,
nature’s contributions to welfare can be much better described.
PROBLEM FOR PRECISENESS LEVEL OF
GREEN ACCOUNTING
Nature offers plenty of features to count
• Ecology, environmental economics, and the growing field of
green accounting have failed to provide adequate guidance on
what in nature should be counted as defensible measure of
nature’s services
Terminology
• Ecology and economics talk about ecosystem components,
processes, functions, and services—and often in different ways
WHAT ARE ECOSYSTEM SERVICES? THE
5 PRINCIPLES GUIDE
Services are nature’s end products, not everything in nature; only have to count what matters
directly to people.

Ecosystem services are benefit-specific, flows from the first

Count things that can be practically measured and that have concrete meaning to
people

Ecosystem services should be ecological

Ecosystem services should be counted with the greatest possible spatial and temporal
resolution.
ROLE OF ECOLOGY

• Ecosystem services provide this link.

• Economics has dominion over what should be counted if one wants to measure the
benefits of nature. But ecology has dominion over the study of changes in services
over time.
• To help economists make such predictions in the ecological realm.
• To substantiates adjustments for resource depletion.
CONCLUSION: A NOTE ABOUT PRICES
• Attaching weights (virtual prices) to environmental public goods is a significant
challenge, but a more significant hurdle is deriving those weights without the benefit of
consistently defined units of account.
• Reasons why welfare-based accounting for environmental goods must begin with
defensible definitions of the units to be counted:
a. Keeping track of these units (without prices) yields useful information.
b. The missing price problem can be systematically addressed only if the units to which
virtual prices are attached are consistently defined.
c. Assigning prices to nature is controversial for philosophical and political reasons.
“ECOSYSTEM SERVICES: THE NEED
FOR STANDARDIZED
ENVIRONMETNAL ACCOUNTING
UNITS”
BOYD, JAMES.
INTRODUCTION
• Ecosystem services are the benefits of nature to households, communities,
and economies.
• Ecology and economics have failed to standardize the definition and
measurement of ecosystem services.
• The development and acceptance of welfare accounting and environmental
performance assessment are hobbled by the lack of standardized ecosystem
• Clear units of account are fundamental to two policy initiatives whose social
desirability we take as self-evident:
– The effective procurement of environmental quality by governments
– Clear national measures of well-being arising from environmental public
goods and market goods—other- wise known as a green GDP.
STANDARDIZED UNITS WILL IMPROVE
ENVIRONMENTAL PROCUREMENT AND ACCOUNTING
• Most ecosystem services are public goods, markets are not available to provide clear
units of account.
• Governments being the trustees of environmental quality. Standardized units will improve
governments' ability to consistently and defensibly measure and police environmental
quality affected by regulation, ecosystem trades, compensation, and expenditures.
• Green accounting’s accounts must concerned with:
– The ways in which services are weighted (the missing prices problem)
– The definition of services: the consistent definition of the environmental units to
which value can be attached.
• Environmental economics historically is more concerned with the valuation of
discrete actions, damages, or policies than with the comparison of benefits
across time.
• Ecological valuation often relies on marketed outputs of nature, such as
harvests, to derive a (partial) value of nature.
THE ARCHITECTURE OF WELFARE ACCOUNTS
• Clarify the meaning of ecosystem services within the context of both an
economic accounting system and ecological models.
• From the standpoint of economic accounting, a framework that is analogous
to GDP.
– Final ecosystem services are weighted by their virtual prices (or marginal
willingness to pay) and aggregated in the same way as market goods
and services in GDP. This allows for direct comparison of ecosystem-
related inputs to well-being and other inputs such as labor and capital.
THE ARCHITECTURE OF WELFARE ACCOUNTS
Two Alternative accounting strategies
Green GDP
• Green GDP aggregates all final goods
and services, including final non-market
goods and services, into a single index.
• Green GDP adds those missing
ecological elements that are directly
enjoyed to GDP.
• GDP captures all final goods and
services, where “final” refers to the point
of enjoyment
Ecosystem Services Index (ESI)
• Captures all ecosystem end-products,
those counted in green GDP plus
ecosystem components that are
combined with non-ecological inputs to
produce market goods.
• Comprehensive measure of all nature's
contributions to well-being, marketed
and non- marketed.
• ESI captures all final ecosystem
services, where “final” refers to the last
contribution of the ecosystem.
A DEFINITION OF ECOSYSTEM SERVICES
A final ecosystem service:
Final ecosystem services are components of nature, directly
enjoyed, consumed, or used to yield human well-being.

Three features of our definition:

That they are a

That final ecosystem
quantity to be That they are
services are directly
paired with a price components
enjoyed or used
(value)
ION OF ECOSYSTEM SERVICES
, consumed or used”
This signifies that final services are end-products of nature.
Our definition of services compared to
others'

•The confusion about definition of service arise outside of economic

and often called processes or functions.
•In the daily services, purification is part of service, but some thinks
purification is embodied on production function of the services but it
is not the service itself.
•The preservation and renewal of soils, the cycling of nutrients,
pollination are services.
An illustrative inventory

•Harvests
Some people don't want to use managed harvests as measure of ecosystem services.
Too many non-ecological inputs affect such harvests. So, they would use the available
population or crop as the ecosystem measure, because the ecosystem itself is
delivering the harvest opportunities.
•Amenities and fulfillment
Recreational benefits and property values, for
example, are influenced strongly by visual amenities. Any
environmentalist can describe the emotional benefits of
contact with nature, as hard as these may be to measure.
An illustrative inventory

•Damage Avoidance
Climate-related damages to natural resources are accounted for already.
Consider the effect of climate-related sea-level rise on beach recreation. If sea-
level rise damages beaches, and thus recreational benefits, that will be captured
in our beach-related ecosystem
service measures.
From units of account to green GDP

•Accounting frameworks require at least three things.

a.the definition and measurement of quantities
b.accounting requires aggregation or the adding up of the quantities.
c. weights for the individual elements in the index
•The aspiration of economic analysis is willingness-to-pay (WTP)-based
weights from nonmarket valuation studies.
•However, nonmarket valuations tend to focus on single services at
discrete locations or, at best, at a regional scale making their coverage of
WTP weights would be very spotty.
From units of account to green GDP

•In conventional accounting, arbitrage allows us to assume a single

market price.
•However, there is no arbitrage for many ecosystem services.
•Many ecological services are best thought of as differentiated goods with
important place-based quality differences.
•Methodologically, an ecological welfare index demands the continued
development and application of benefit transfer techniques using meta-
analysis of existing value estimates.
From units of account to green GDP

•Other approaches include the use of stated preference techniques

to place weights on units of account using place specific scenarios.
•The scenarios presented in stated preference surveys could rely on
standardized service units and ways of measuring place-based
quality, substitution, and complementary asset landscape factors to
what we call WTP indicators.