Sunday, April 26, 2009

From GDP to Wealth: Measuring Economic Success

Look up “GDP” and “Measurement” on nearly any Internet search engine and you will find a wide variety of criticisms for the way economists measure economic success. GDP, or GDP per capita, is the most commonly used index for gauging the health and future strength of a country’s economy, but a number of critics are concerned with several items that are left out of this important aggregate measure. GDP calculates the total amount spent on final goods and services in a region, including its net of exports minus imports. It does not, however, include a monetary assessment of that region’s natural capital (fossil fuel reserves, forests, fisheries etc.), a calculation of the financial impact that man-made pollution is causing to the environment, or even the normal depreciation that occurs in all man-made capital stock (such as buildings, vehicles, etc).

This challenge is difficult to meet precisely because it is so difficult to count and price the goods that nature provides. One recommendation comes from Partha Dasgupta, economics professor at the University of Cambridge, who believes that much can be gained by switching from GDP per capita to wealth per capita. He defines wealth as “the value of an economy’s entire productive base, comprising man-made capital, natural capital, knowledge, skills and institutions.” With this measure, it would be possible to define a sustainable economy as one capable of passing on at least the same amount of wealth to succeeding generations.

Dasgupta states that several economists and ecologists believe we must reverse our economic growth trends in order to slow global warming and environmental degradation. However, his alternative incorporates the natural environment and other capital depreciation into a measure that still allows for economic growth. As portrayed in data obtained from the World Bank below, there are significant differences in per capita trends in wealth and GDP. The Indian Subcontinent has shown greater GDP growth than the OECD average for the 30-year period between 1970 and 2000. However, the wealth per capita measure reveals that this growth in man-made capital (final goods and services) has not made up for significant losses in natural capital. In contrast, the OECD countries show roughly similar growth rates by each measure, indicating a more sustainable method of economic growth.

As noted above, it is difficult to quantify and ultimately calculate financial costs for the natural environment, and these World Bank numbers exclude several important elements: forests, ocean fisheries, freshwater, soil, wetlands and even the atmosphere’s ability to serve as a sink for pollution. With this data included, it is possible that all regions would show negative growth rates in wealth per capita.

People from around the world should know what the best scientific models estimate to be the costs of our current economic development. Even though it is difficult to model the depreciation of natural and man-made capital, I believe it is important that we begin to calculate even imperfect measures, provided the process is done with transparency and fairness across all regions. It is time to go beyond the few isolated examples (China calculated a “Green GDP” for 2004, and discontinued it after releasing its first annual result in 2006), and institute a global effort to model the total impact that our economic development has on both the environment and on future generations.

Partha Dasgupta, “Counterpoint: A Measured Approach,” part of the larger article “Economics in a Full World” by Herman Daly, Scientific American, September 2005. Available at:

1 comment:

gully said...

I couldn't get the specific article you referenced to come up so I'm mostly speaking with reference to other things Daly has published in the past, but I'm very glad you brought this up.

The fact that we consume natural capital or damage ecosystems to yield product or services which we view as profit without any account of the "costs" or impacts of these is truly short-sited. Particularly if we start to imagine the value of these resources in the sense of if they did not exist. What would be the situation of our society if these resources were not available? What would be the "cost" or necessary processes of reproducing these services? Screwed, a lot, and impossible would be my assessment (people such as Robert Costanza, Garcia Chichilnisky, and Herman Daly have better ways of stating that).

So then what do we do? Of all the issues surrounding energy dependency and environmental impacts I believe economic reform to be of the most value and immediately applicable. Even by just starting with reforming the concept of GDP - at the least it should be separated into a cost account and a benefit account. But certainly a solution we can have comfortable confidence in can't be resolved until we have a financial assessment of the environmental impacts of these profits. Robert Costanza ("The value of the worlds ecosystems and natural capital")has done some of these analysis' and come to the expected conclusion that these impacts are very costly - as in double the year's GDP for the year of analysis, 1987.

It really almost seems foolish to believe that these are resources which are available at all until we have a much better understanding of the interplay of global systems on a much more well understood level - weather, chemical cycling, population cycling, temperature cycling. There's a lot of cycles, but in accordance with our typical behavior, we assume we know more than we do.