An index of sustainable economic welfare (ISEW) for Chile

Abstract

Chile has experienced a period of strong economic growth. The Gross Domestic Product (GDP) has doubled in the past 12 years, however, income inequality remains relatively the same as in the 1960s. The economic growth is primarily attributed to the exports of natural resources, which accounts for 80% of total exports. However, the GDP fails to account for the loss of natural capital and non-marketed services. The objective of this paper is to more clearly indicate the status of the Chilean economy in terms of welfare using the Index of Sustainable Economic Welfare (ISEW) designed by Daly and Cobb (1989). The ISEW provides corrections to the GDP that includes income inequalities, household labor and damage to natural capital. This index has been applied in several case studies for developed countries. In general, the results show that ISEW runs parallel with GDP until the 1970s when a decline in welfare occurs due to a loss in natural capital. This study is the first attempt to utilize the ISEW for the purpose of analyzing whether or not similar trends exist for Chile, a developing country. The ISEW for Chile grew at a much slower annual rate over the past 30 years, compared with GDP (−0.16% vs. 2.9%). The Chilean ISEW parallels the GDP until the 1980s; a decline in the ISEW then occurs, showing that Chile is not on a sustainable path and that there is a strong link between economic growth and the depletion of natural resources.