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Using happiness data in policy making

September 18, 2014
by Guest author

BLIToday’s post is by Angus Deaton, Dwight D. Eisenhower Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs and the Economics Department at Princeton University.

The happiness revolution is in full swing. Country statistical offices are beginning to collect data on wellbeing, the OECD has prepared a manual on how best to do it, and politicians are promising to focus, not just on economic growth and better material living standards, but on the much wider range of things that are important to people. This broadening of policy is much to be welcomed, as is the wider understanding of the inadequacies of GDP as an exclusive national target. And even if the data on wellbeing have their problems and their critics, a flawed but broader measure, such as wellbeing, can lead to better policy than a flawed but narrow one, such as income.

What are some of the things that we can do with wellbeing measures that cannot be done with standard, income based, policymaking? The concept of utility has been visible everywhere in economic texts and in economic thinking, but invisible in our databases. For goods and services that are bought and sold in markets, the invisibility of utility is not a problem because we can use prices as a guide to how much things matter to people. But that leaves uncovered the vast range of public goods and services—schools, hospitals, parks, airports, even the legal and political systems—that do not have prices. Conventional policy analysis sometimes works with “shadow” prices, the prices that would exist if these things were bought and sold. But these are hard to get right, and the numbers are often controversial. But if we can make utility visible, and measure it, then we can directly calculate how wellbeing responds to a park, or to a faster train line, and we can replace guesswork with measurement. Indeed, the “happiness” literature has estimated thousands of “happiness regressions” that show how self-reported wellbeing is affected by a wide range of circumstances, such as how income stacks up against time spent with friends, what value people place on lower pollution, or on living in a green and pleasant place.

There are many areas where people should make choices for themselves, and governments should either not interfere or should tread very lightly. Providing information is one example of light treading. If happiness regressions tell us that people are more satisfied with their lives when they choose to be clergymen, and not bar owners, or when they live in the mountains rather than in the plains, there is a role for making those facts known, perhaps endorsed by governments who might vet the quality of the research. This is what David Halpern calls “de-shrouding,” telling people how their choices might affect their wellbeing, as judged by the wellbeing of others who have already made those choices. Deshrouding would have no effect if people were fully informed, but people are often not very good at anticipating the long-term consequences of their choices. Happiness research has the potential to allow people to do better.

Even so, the results of happiness regressions must be interpreted with care. That a circumstance is correlated with life satisfaction does not automatically mean that it would be a good policy to promote more of it. Take the example of parents and children, where much of the literature finds that people who live with children are less satisfied with their lives than those who do not. Some of this is likely real, and there is good evidence that children bring a wide range of emotional experiences, including anger, stress, and worry, but also happiness and joy. Yet children do not come to people at random (blind storks?), but (usually) come to people who want them, just as those who are not parents are (usually) those who do not want children. Those who do and do not have children are different in many ways, including their tastes, not least their tastes for being parents. Comparing the wellbeing of parents and non-parents is therefore not a useful guide to young couples who are trying to decide whether or not to have children.

Consider also spatial differences in wellbeing. For example, we may discover that those who live near an airport have lower life satisfaction than those who do not. On a naïve view, people who bought houses under the flight path had no idea how much the noise would affect their lives. On a more sophisticated view, people understood that the noise was bad, but chose to live there because house prices were low, so that the noise actually provided them with an opportunity to live in a larger and more convenient house. In such a case, their low wellbeing reflects, not the noise, but that their incomes are too low to permit them to have a nice house that is also quiet. A policy of limiting noise or restricting landing hours may make such people worse off, because house prices rise, and a choice is no longer available to them. Of course, we can over-rationalize behavior, and people often do make mistakes, so that, in most cases, we have to deal with some mixture of the naïve and sophisticated.

An important question—still unanswered—is whether self-reported wellbeing is all that matters, which would simplify policymaking—or whether it is simply one thing that matters, so that people will trade it off for other good things. To illustrate the why this matters, consider that, in the U.S., once we make adjustment for educational and income differences, African Americans report substantially higher life evaluation than Whites. But African Americans suffer many deprivations beyond income and education; they are more likely to be in jail, to be banned from voting, to live in areas with low-quality schools and hospitals, to be unemployed, and to die young. Does their higher life evaluation mean that these other deprivations can be safely ignored? If not, and we refocus policy entirely towards wellbeing, we are making a mistake, just as when policy focused entirely on income.

Useful links

OECD Better Life Index

 

There’s no bailout option for the climate

September 17, 2014
by Guest author

better growth better climate reportToday’s post is from OECD Secretary-General Angel Gurría

Saving the Earth’s climate is sometimes compared to saving the world’s financial system following the crisis in 2007. But it’s not. The taxpayer saved the financial system by bailing it out a cost of trillions of dollars over a very short period, but there is no bailout option for the climate. If we let things go on as they are until disaster threatens, we’ll have no way of preventing disaster, however much we spend.

The consequences of inaction are stark. Our recent projections show that impacts of unabated climate change could dampen global GDP in 2060 by some 1.5% on average, and by almost 6% in South and Southeast Asia. ..

We have to act now. The newly-published report on the “The New Climate Economy” from the Global Commission on the Economy and Climate , argues that the next 15 years will be crucial for the world’s climate system. Beyond this, the cost of inaction on climate change will become very high and may be too great for economies to absorb .

We have to transform the global energy economy radically. Reducing emissions here and there won’t do. We have to achieve zero net emissions from the combustion of fossil fuels in the second half of this century. That’s not going to be easy. Two-thirds of electricity is generated by fossil fuels and the world’s transport system runs almost entirely on fossil fuels. Moreover fossil fuels are still relatively abundant and the exploitation of shale gas and other unconventional sources is reducing the sense of urgency that scarcity or a lack of energy security bring.

Governments and the private sector alike also see financial advantages to continued reliance on oil and gas. Investments in carbon-intensive technologies remain more profitable and attractive than those in low-carbon technologies, in many cases. Income from oil and gas taxes accounts for a considerable share of total government revenue in many countries.

To put it bluntly, there is often quite a gap between what governments are saying about climate change and what they are actually doing to combat it. If governments have inconsistent and incoherent policies, you cannot expect business to invest in the greener technologies needed to bring about lasting change.

Consumers, producers and investors react to the signals governments send them. Domestic and international policy settings influence the choice between non-fossil energy investments and fossil fuels in terms of whether the expected return justifies the risk. One policy that would send a clear, strong signal would be to put a price on carbon through a carbon tax or an emissions trading system (ETS), as more than 40 countries have already done.

We could also stop paying to make things worse. By that I mean we need to reform fossil fuel subsidies. The OECD calculated that support to fossil fuel consumption and production in our Member Countries is around $55-90 billion per year. The IEA estimates subsidies to fossil fuel consumers in developing and emerging economies at $544 billion. (The argument that these subsidies help fight poverty is unconvincing since their poor targeting makes them an inefficient way of achieving this.)

These actions will help send a clear, long-term signal that the price of emissions will rise, and governments must be frank about the distributional impacts of the transition to a zero emissions economy. But that cost can also be seen as an investment. As I said to ministers here in Paris in May for the session of the OECD Ministerial Council Meeting on promoting environmentally sustainable “greener” growth: “with the right policy mix and bold decisions, we can turn environmental sustainability into a source of growth, employment and economic resilience. Green can go hand in hand with growth.”

The Global Commission on the Economy and Climate agrees with this way of looking at things: “We have a unique opportunity now to achieve better growth and a better climate together […] the right policies, stimulating better investment in cities, land-use and energy systems could drive the transition to a more productive, more innovative low-carbon economy.”

So if we agree on what needs to be done, why it needs to be done, and how it can be done, let’s do it.

Useful links

On Oct 16, 2013, the OECD Secretary-General addressed a high-level delegation in London on achieving zero emissions. The lecture, co-organised with the London School of Economics and the Climate Markets & Investors Association (CMIA), centred on the ambitious policies needed to meet the long-term objective of achieving zero net emissions from fossil fuels in the second half of this century. Mr Gurría specifically discussed how consistent carbon price signals can help reduce fossil fuel dependence, encourage renewables and energy efficiency, foster the deployment of carbon capture and storage technologies and influence the flow of future investments in the energy sector. (Read the full speech)

OECD work on climate change
OECD Green Growth and Sustainable Development Forum To be held on 13-14 November 2014, this 3rd Forum will focus on addressing the social implications of green growth. It will examine its impact on employment, skills and income and will inform policymakers on how best to respond to changing demands, with a focus on the equity considerations of energy sector reforms.

March for the climate! UN Secretary-general Ban Ki Moon is one of thousands of people worldwide who’ll be marching on Sunday 21 September in New York to show their support for action to save the climate. You can find local events in your country by clicking on the NY link, or on this one.

 

 

Home made but global: ANDI will measure the future Australians want

September 11, 2014
by Guest author

BLIToday’s post is from Mike Salvaris, Director, Australian National Development Index (ANDI) Ltd

The Australian National Development Index (ANDI) could fairly be described as ambitious. It’s a five year national project to engage half a million citizens and a large team of university researchers in developing a new set of national progress measures. ANDI has evolved organically over time, and its present form reflects both its local origins and Australia’s participation in the larger global movement to develop societal progress measures “beyond GDP”.

How ANDI developed

Australian work in this field goes back at least 20 years. In 1993, a group of researchers and community groups successfully petitioned the Australian Parliament to set up an enquiry into new measures of national well-being. A Senate report in 1996 approved the idea and recommended that the Australian Bureau of Statistics (ABS) work with researchers, policy makers and community groups on this task. Two years later, Australia saw its first national conference on measuring progress which drew together several hundred researchers, policy makers and citizens from many different fields of social progress. In 2002 the ABS became the world’s first National Statistics Organisation to develop a new statistical model for measuring national progress; rather than simply putting existing data together in a new combination, it was based firmly on the idea that to measure a society’s progress, you must first be able to describe and define clearly what social progress looks like. (Sadly this pioneering project was discontinued this year due to agency budget cuts.)

Fast forward to 2008: a newly elected Labor government decides to convene the nation’s first ‘National Ideas Summit’, seeking new projects and new thinking for Australia’s next decade. The idea of an Australian National Development Index based on extensive community engagement and research was highly rated. Two years later, ANDI became a national, not-for-profit, citizen-owned company with a Board of Directors that included a number of eminent Australians.

Mike Salvaris explains the Australian National Development Index (ANDI) in The Zone.

In the last decade, the quest for better measures of progress and well-being has truly become a “new global movement”, as the OECD described it, noting some seventy current projects around the world. And while the OECD has played a crucial leadership role in the process through the Better Life Initiative, the movement itself has built up from the convergence of many different streams over perhaps forty years. Environmentalism, the women’s movement, the local community well-being movement, the UN Development Program and the example of world leading projects like the UN Human Development Index, Bhutan’s Gross National Happiness Index and the Canadian Index of Wellbeing and the OECD’s own earlier work on social indicators in the 1980s – all of these have played a part in the journey.

Australia has been both a contributor and a major beneficiary in this worldwide movement, so vigorously championed by the OECD. Australian researchers, policy makers and community leaders have been part of most of the key OECD forums and meetings, but also kept in touch with colleagues and projects all over the world: not just those in our part of it (Thailand, Japan, Bhutan, New Zealand etc), but in Europe, Canada, USA and Latin America.

In trying to design the best national model we can for Australia, we are very conscious of learning from global ‘best practice’. Today, with so many ideas and so many different projects in this field, there is much to choose from. But perhaps we should start with the common values and the shared experience that underlies most of these various endeavours.

What have we learned?

Two years ago at the Delhi World Forum, I tried to identify what I thought were the key conclusions and agreements that have emerged from this decade of intensive global work and thought about redefining society’s progress, and I’ve listed them below. These are now largely embodied in research articles and reports (like the Stiglitz-Sen-Fitoussi commission’s) but also in broader formal declarations like the Istanbul Declaration of 2009 and the Delhi OECD World Forum Communiqué in 2012.

  • GDP may be a good measure of economic output but it is a poor measure of the quality and wellbeing of society as whole, and using it this way can distort policy outcomes in practice.
  • A new model of societal progress is needed, not just new measures. True progress is an increase in equitable and sustainable wellbeing, not just in economic production.
  • Measures of true societal progress must integrate the economic, social, cultural, environmental and governance dimensions of progress; and they must consider the subjective wellbeing of people and the qualities of the society, such as justice and sustainability, not just the material outcomes.
  • The task of developing new progress measures is one that must engage citizens, scientists and policymakers. The process can be an important new tool to strengthen democracy, reverse the growing alienation of citizens, and create new shared visions of national progress.
  • It is now time to apply these new measures and processes in practice, to planning, policy-making and government, in the media and the community.

ANDI’s innovations

ANDI has taken all these lessons very seriously. And while we want to build the best features of all these models into our Australian index (allowing for own special priorities and culture) we have chosen to give special emphasis to two features that will make us a little different from our colleagues (I would never say “competitors” in the present context, although it is a term Australians naturally favour).

The first difference will be in the scale and range of ANDI’s community programme (and thus, hopefully, in its contribution to the larger democratic process). ANDI will aim to engage 500 000 Australians from all walks of life and all corners of the nation in a conversation addressing the central question: “What kind of Australia do we want?”. The programme will be carried out over 2 years, through a wide array of platforms and programmes: surveys, focus groups, town hall and kitchen table meetings, social media and blogs, school curricula, film and video. It will be funded from philanthropic, corporate and community sources, and will fully utilise the extensive networks of ANDI’s 60 partner organisations and their two million members.

A second difference is in the index itself: ANDI will produce each year an index of overall national well-being, but also twelve separate indexes and status reports in each key component domain of progress. These domain indexes will be released in different months, in order to maximise publicity, discussion and policy relevance, and aggregated into the national well-being index. The aggregate index will be weighted according to the relative priorities accorded to each of the 12 component domains. This is similar to the weighting process that is possible with the OECD’s Better life Index but in ANDI’s case, the weighting will be based on a national survey rather than the preferences of self selected individuals. Collectively these features will make for a more sophisticated policy-diagnostic tool, with the capacity to identify the key driver of change in progress and wellbeing, not just at the level of broad domains, but within each domain.

Useful links:

OECD Better Life Index

How’s life? 2013 – Measuring well-being

Australian National Development Index (ANDI)

Commission on the Measurement of Economic Performance and Social Progress

In my view: The OECD must take charge of promoting long-term investment in developing country infrastructure

September 10, 2014

LogoReDefine3Today’s post from Sony Kapoor, Managing Director, Re-Define International Think Tank, is one in a series of ‘In my view’ pieces written by prominent authors on issues covered in the Development Co-operation Report 2014: Mobilising resources for sustainable development.

The world of investment faces two major problems.

Problem one is the scarcity – in large swathes of the developing world – of capital in general, and of money for infrastructure investments in particular. Poor infrastructure holds back development, reduces growth potential and imposes additional costs, in particular for the poor who lack access to energy, water, sanitation and transport.

Problem two is the sclerotic, even negative rate of return on listed bonds and equities in many OECD economies. The concentration of the portfolios of many long-term investors in such listed securities also exposes them to high levels of systemic – often hidden – risk.

Most long-term investors would readily buy up chunks of portfolios of infrastructure assets in non-OECD countries to benefit from the significantly higher rate of return over the long term, and to diversify their investments. At the same time, developing economies, where neither governments nor private domestic markets have the capacity and depth to fill the long-term funding gap, are hungry for such capital.

So what’s stopping these investments?

Financial risks in developing countries are well known and often assumed to be much higher than in OECD economies. Also, investing in infrastructure means that investors will find it hard to pull their money out on short notice, and therefore such investments pose liquidity risks.

Despite these easy answers, however, there are three significant caveats:

First, the events of the past few years have demonstrated that on average, political risk and policy uncertainty in developing countries as a whole have fallen, especially in the emerging economies.

Second, OECD economies are also exposed to serious risk factors, such as high levels of indebtedness and demographic decline. As the financial crisis demonstrated, they are also likely to face other “hidden” systemic risks not captured by commonly used risk models and measures.

Third, the kind of risks that dominate in developing countries, such as liquidity risks, may not be real risks for long-term investors (e.g. insurers or sovereign wealth funds). Given that the present portfolios of these investors are dominated by OECD-country investments, any new investments in the developing world may look more attractive and may actually offer a reduction of risk at the portfolio level.

So I ask again: Why aren’t long-term investors investing in developing country infrastructure in a big way?

The biggest constraint is the absence of well-diversified portfolios of infrastructure projects and the fact that no single investor has the financial or operational capacity to develop these. Direct infrastructure investment, particularly in developing countries, is a resource-intensive process.

The G20, together with the OECD and other multilateral institutions such as the World Bank, can facilitate the development of a diversified project pipeline on the one hand, together with mechanisms to ease the participation of long-term investors on the other. This work will involve challenges of co-ordination, more than commitments of scarce public funds.

In my view, the OECD – which uniquely houses financial, development, infrastructure and environmental expertise under one roof – must take charge.

Useful links

OECD work on institutional investors and long-term investment

OECD work on financial markets

The haves and have-nots of education

September 9, 2014
by Brian Keeley

Education at a glanceIf you cling to the ideal of higher education as a force for building fairer societies, these are not encouraging times. Over the past few months, there’s been a wave of criticism suggesting that, rather than driving social mobility, higher education is tending to reinforce social divisions.

Strikingly, some of this criticism has come from people in the heart of higher education. Take William Deresiewicz, who taught for 10 years at the prestigious Yale University. He describes the American higher education as a system that is “exacerbating inequality, retarding social mobility, perpetuating privilege, and creating an elite that is isolated from the society that it’s supposed to lead”. He’s not alone: Suzanne Mettler, who teaches at Cornell, another top U.S. university, argues that “college-going, once associated with opportunity, now engenders something that increasingly resembles a caste system”.

It wasn’t supposed to be like this. Over the course of the 20th century, higher education went from being an elite to a mass phenomenon. As we’ve noted before, it’s estimated that in 1900 there were only around half a million students in higher education worldwide. By 2010, the number had risen to an estimated 177 million.

In the developed countries of today, the expansion of tertiary education, especially after World War II was accompanied by the emergence of a strong middle class – two trends that were not unconnected. A university education was associated with opportunity and social mobility. When the British political leader Neil Kinnock referred to himself in the 1980s as “the first Kinnock in a thousand generations” to go university, he was speaking not just for his own family but for millions of others.

But, today, it seems clear that the benefits of higher education are no longer making their way down through society in quite the same way. The latest evidence comes from the OECD’s Education at a Glance 2014, which looks at the relationship between the education levels of young people and their parents. In basic terms, if you have at least one graduate parent you’re very likely yourself to go to university. But if your parents didn’t go to university, and especially if they didn’t finish secondary school, the odds are much lower.

This relationship between the education levels of parents and their children is key to determining social mobility. Unfortunately, in OECD societies, the relationship seems to be getting stronger, not weaker. The OECD’s adult skills survey found that about 43% of people aged between 45 and 55 had higher levels of education than their parents. Among those aged between 25 and 34, the proportion was just 32%. (Of course, these are averages, and the situation can vary greatly between countries.)

The concern is that this relationship will become even harder to break in the future. That’s because having a college education increasingly determines your earning ability. On average, more than 80% of graduates have a job compared with less than 60% of people who haven’t completed secondary education. And even though too many young graduates are unemployed today, they still have better job prospects than young people with lower levels of education. The income gap between graduates and non-graduates is growing, too.

So, a vicious circle develops. Families where parents are graduates have higher incomes, and relatively more to invest in the education and development of their, who, in turn, are likely themselves to go on to be graduates. By contrast, families where parents don’t have a tertiary qualification are slipping further behind, bringing up children who are less likely to make it to higher education. The result, say some, is that a “bachelor’s degree is the closest thing to a class boundary that exists today.”

But is higher education to blame? In reality, it can only do so much. If pre-school, primary and secondary schools have failed to meet the needs of children from poorer families, it’s unrealistic to ask higher education to leap in and save the day once a young person hits 18.

The real work to make access to tertiary education more equitable has to begin much earlier. To start, education systems need to ensure that students from poorer families have the qualifications they need to go to university. As the OECD’s PISA programme has shown, some countries do a much better job than others of minimising the impact of social background on how well students do in school.

School systems also need to do a better job of raising students’ expectations, regardless of their family background. And they need to ensure that young people with the potential to be the first in their family to go to college have the information they need to make the right education choices.

Useful links

Education at a Glance 2014 (OECD, 2014)

Find out more about Education at a Glance 2014 at the OECD educationtoday blog and follow the launch on Twitter.

PISA 2012 Results: Excellence through Equity – Giving Every Student the Chance to Succeed (OECD, 2014)

OECD Education GPS – data on education policies and practices, opportunities and outcomes.

 

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