Return to search

Why do we have SDGs?

And how can we marry them to traditional, flawed economic accounting, asks PGGM's former Chief Economist Peter Kraneveld

This article is Free, but to access more of our content, you can sign up for a no strings attached 28-day free trial here.


If you live in a nice, comfortable house, that doesn’t contribute any more to economic growth than if you live on the street. The comfort of the house is irrelevant, according to economic statistics. If you catch COVID-19, that has no effect on economic statistics, unless you can’t work anymore. Your plight counts for nothing. If your car breaks down, that’s positive for economic growth when it gets repaired or replaced, but your discomfort and sudden need for expensive liquidity has no effect on the statistics.

These are just a few examples that illustrate a known and acknowledged problem of economic growth statistics. They measure only financial transactions. In general terms, economic growth does not measure well-being, but only wealth generation, value added.

Wealth can be a crude proxy for well-being. It would be a good excuse to measure wealth if nothing better is available. However, in the age of computers and the internet, data is so widely available that journalists regularly use them for their “How about that?” filler items. Did you know that 76% of French children say they have difficulties going to sleep? How about that?

There have been many attempts to come up with a better index than GDP. They were stranded on inertia and conservatism. Money is such a handy benchmark and aren’t we all motivated by it? Maybe not. If money were everything, why are there soup kitchens? They count for nothing in GDP statistics. 

The OECD has proven that better data are available. Its innovative “better life index” is based on hard data and it does a good job at measuring the quality of life. You can see the results of an equal weighting of the factors used or you can apply your own weighting. This is even more important. For a school leaver, jobs, housing and income would usually be very important and health would not be a worry, while for a typical OECD retiree, health and safety would have priority and jobs would mean nothing. In its series of publications How’s life? The OECD tracks developments in well-being.

The message has not come through. In the area of ESG alone, the US Labour Department is promoting rule changes to ERISA to measure ESG investments by monetary returns only. This is a folly, because ESG is more about well-being than about financial returns. Studies that earnestly try to compare ESG and non-ESG returns are accepted without comment when they don’t factor in well-being. A better life has a return of zero. The more sophisticated pension funds try to get around this by casting the forgotten return as negative risk: what horrors would happen if we weren’t nice to people once in a while?

The OECD is also the home of the Development Assistance Committee, which sets and develops rules for what is counted as development aid. Here also, only financial transactions count, not the effect of the aid. It doesn’t matter if a significant part of the aid ends up in the donor country, because it can only be spent there or because the goods must be transported by ships of the donor country. It doesn’t matter whether the aid is famine relief or military “assistance”. Only money, or rather, credit counts.

You get what you measure. If you don’t measure well-being, at best you get it as a by-product. At worst, well-being is sacrificed to financial turnover. A global agreement to pay attention to well-being would help. Wait, that already exists. That’s why we have the SDGs. They are all about well-being.

The question now shifts to how we can marry the SDGs to traditional, flawed economic accounting. Here is a proposal. Many developing countries already have a national development bank and in addition, the UN system operates regional development banks. The development aspect links to well-being, the bank aspect to traditional economic accounting. Developing country governments could calculate in terms of well-being, donors will continue to calculate in transactions. Let the development banks be the interface between the two, making sure that the projects financed either by OECD governments or financed privately with the SDG label have a positive effect on well-being.

If the double accounting results in a financial deficit, it would be up to the recipient country’s government to pay the difference, since they profit from the well-being. If it results in a surplus, it would count as a benefit for the intermediary bank – often financed directly or indirectly by governments. If the project does not pass the well-being test, it could still go ahead, but it would not be eligible for the SDG label. 

Should there be SDGs for developed countries as well? Perhaps, but if there were, they ought to look different from the SDGs we know today. Rich country worries about clean water exist, but they are local, exceptional and considered scandalous. The wealthy worry more about traffic congestion. That’s complicated, but it doesn’t make the concept of well-being impossible to apply. As the OECD shows, diversity is the beauty of well-being.

 

Peter Kraneveld, former Chief Economist at PGGM, is a pension expert at PRIME bv.