Beyond GDP: Measuring natural wealth
- 27 June 2012
Now the United Nations has proposed a new index for measuring countries' wealth, which includes long term environmental factors excluded by familiar metrics such as gross domestic product (GDP).
Published to coincide with last week's Rio+20 conference on sustainable development, the UN Inclusive Wealth Index (IWI) incorporates the state of natural resources, ecological conditions and the sustainability of national policies.
Limitations of GDP
Mindful Money has previously highlighted criticisms of GDP by economist Shaun Richards. Richards cited examples including the boost to British GDP over time by exploiting North Sea Oil, without any deduction for using up this finite resource.
As another example of the limitations of GDP, the Global Campaign for Climate Action described how "the cost of last year's extreme floods around the world amounted to billions for insurance companies and as a result, GDP rose and was listed as growth in national accounts".
Mindful Money has outlined some alternative yardsticks for economic growth, including the Happy Planet Index from the New Economics Foundation (NEF), which ranks countries based on their sustainable well-being, and the Better Life Index developed by the Organisation for Economic Cooperation and Development, which allows users to rank quality of life indicators.
Alternative provided by the UN's Inclusive Wealth Index
The UN's new IWI measures the wealth of nations by looking into a country's capital assets, including manufactured, human and natural capital. Manufactured capital includes machinery and buildings, while human capital examines education and health, and natural capital incorporates factors such as fossil fuels, minerals, forest resources, agricultural land and fisheries. Ecosystem services and water accounting were not included due to lack of reliable data.
As GDP does not consider reduction in natural resources or environmental degradation, the UN's index records lower annual average growth in wealth than GDP, down 1.7 percentage points.
The IWI covers the 20 countries that account for the majority of global GDP, and you can see how countries stack up according to the IWI in these charts created by the Economist.
This first report found that 19 out of 20 countries saw a decline in their natural capital from 1990 to 2008, and six countries had a decline in their overall IWI, indicating unsustainable growth, as reported on the Huffington Post.
Although most countries saw growth in their IWI, it was at a much slower rate than GDP growth. The Huffington Post cited the example of China, which saw GDP growth of 422% between 1990 and 2008, but IWI growth over the same period of only 45%, driven down by the impact on the country's natural capital.
Challenging growth as a goal
Professor Tim Jackson, author of Prosperity Without Growth, railed against the failure of Rio+20 to question the existing economic model.
Jackson has been working to show that an innovative green investment led economic system is possible, and decries the pursuit of "sustained" rather than "sustainable" economic growth.
Jackson was quoted in the Guardian yesterday as saying: "Instead of accepting the responsibility of the richest to develop a new economic model, this language has set back by a decade any attempt to question the model that led us to the brink of financial disaster, perpetuates huge consumption inequalities and is driving us towards ecological collapse."
Jackson propounds a new economic paradigm, starting from the point of "accepting that growth does not equal jobs and incomes do not mean prosperity".
He said: "Our happiness and wellbeing are not based on incomes rising. Prosperity is more social and psychological, it's about identification, affiliation, participation in society and a sense of purpose.
"If you ask what kind of economy we want at this point, particularly in the developed economies, it makes sense to expand in the services that improve our lives, like health, education, social care, recreation, culture and crafts.
"This offers satisfying work and improves the quality of peoples' lives. This has a lower footprint than industrial production and it is labour intensive and has less prospect of labour productivity growth."
Short term vs long term use of GDP
Over academic website The Conversation, GDP is acknowledged as "the best single measure of economic activity", when trying to manage medium term economic issues such as employment and inflation, according to John Quiggin, professor at the School of Economics at the University of Queensland.
Over the long term however, Quiggin urges economists and governments to take account of depreciation, or improvements to, natural capital such as forests. He also suggests that the value of leisure and non-market work should be included when considering economic welfare.
Moving from GDP to IWI
Back in 1968, GDP was criticised by Robert F. Kennedy because "it measures everything, in short, except that which makes life worthwhile".
More than 40 years later, Achim Steiner, head of the UN Environment Program, echoed these concerns when criticising GDP for completely ignoring the central themes of human welfare, and urged the IWI as an alternative.
If Governments would agree to consider IWI as part of their economic decision making, it would be a step towards truly sustainable development.
More on Mindful Money:
To receive our free daily newsletter sign up here.
- Beware Europe-based financial advisers 'passporting' into the UK but operating to much lower standards on charges and disclosure
- Metal madness - why I'm a gold sceptic
- Under 25s relying heavily on credit to cover housing costs
- Paragon Bank sweeps the best buy rates
- Buy, sell or hold? Mindful Money's weekly shares watch: Barclays, ITV & Diageo
- Government names the banks and building societies who will offer Help to Buy ISAs
- Pensions freedom fraud increase has the "makings of a national scandal"
- Investors urged to “China-proof” their investment portfolios as shares crash
- Four funds for courageous commodity contrarians
- "Chinese contradictions and Western hypocrisy"