Measuring Wealth to Promote Sustainable Development
What's wrong with GDP?
For over half a century, Gross Domestic Product (GDP) has been accepted as the universal measure of economic health and national progress. A growing GDP always indicates progress is being made.
One of the best warnings against this misconception was offered in 1968 by U.S. Senator Robert F. Kennedy who warned GDP measures “everything except that which makes life worthwhile.” GDP is a good measure of national income but does not reflect the quality of life and societal progress. While countries race to top world GDP growth rankings, a number of examples prove this conception of progress can be misleading.
When GDP and life do not take the same way:
|COVID-19||Vietnam’s GDP is just 1% that of the United States’, yet Viet Nam recorded only 35 deaths to COVID as of September 22nd, 2020, while the United States had more than 200,000 deaths. In per capita terms, Vietnam did about 1,700 times better than the US at containing the pandemic.|
|Black Saturday bushfires in Australia||The Black Saturday bushfires in Victoria, Australia in February 2009 resulted in 173 fatalities, 414 injuries, 450,000 hectares burnt and 3500 buildings destroyed. At the same time, Australian GDP went up by USD 4 billion (Stanley, 2020).|
|Land degradation in Ethiopia||Ethiopia’s GDP growth reached 13.5% in 2004 and has remained above 5% since. Yet, land degradation has long been a critical threat in the country. More than 85% of the land has been degraded to various degrees (Gebreselassie et al, 2016). Major causes of land degradation in Ethiopia are rapid population increase, severe soil loss, deforestation, low vegetative cover, and unbalanced crop and livestock production (Taddese, 2001). None of these factors are captured by the country’s robust GDP growth.|
|Recovery from global recession||In the first three years of the recovery from the 2008 global financial crisis, about 91% of the gains went to the top 1% economies. (Stiglitz, 2019).|
GDP does not reflect many basic components of societal progress. It does not address gender equality, health, education, social inclusion, income distribution or environmental quality. Take for example education and health. GDP sees these merely as costs to society, failing to account for the value of education and health outcomes, so important to society’s long-term well-being. GDP also fails to consider the value of services and assistance to neighbors and families – unless people are hired to carry them out. Volunteering activities are important parts of social development and, yet, GDP pays them no attention since they are reputed to be “non-economic”.
The Measuring Wealth to Promote Sustainable Development project aims to encourage governments to move “beyond GDP” as the main measure of societal progress. Wealth is, simply put, the sum total of the assets we own as a society. Wealth is important because it represents the resources we have at hand today to ensure our social and economic activities continue in the future. For this reason, measures of wealth provide an important lens to judge our prospects for future well-being.
The assets that make up wealth are the basis for producing nearly all goods and services that people and the society require to prosper: obvious things like food, electricity and health care; but also clean air, healthy forests and safe communities. The consumption of these goods and services is a large part of what creates well-being for individuals and for nations as a whole.
Wealth at a Glance
Wealth measures five fundamental types of assets a nation has:
- Produced capital consist of roads, railways, ports, houses, machinery, and the wide variety of other manufactured assets found in the economy.
- Natural capital includes market natural resources such as timber, minerals, oil, and gas. It also includes ecosystems of all kinds; for example, wetlands that help create clean drinking water and forests that act as carbon storehouses.
- Human capital is made up by the collective knowledge, skills, and capabilities of the labour force —the result of lifelong learning in both formal and informal settings.
- Financial capital covers stocks, bonds, and other forms of financial assets. Investments by governments, businesses, and households are often aimed at building up stocks of produced and financial capital.
- Social capital represents the norms and behaviours that define interactions between members of society, including how safe people feel in their communities, inclusivity, and trust in important institutions.
Each of the five elements of the comprehensive wealth portfolio is important because each is an input into the broad “societal production function” for well-being.
A key question is whether the size of a country’s comprehensive wealth portfolio is growing over time. If it is, then national development is likely sustainable and well-being should be stable or increasing. If it isn’t, development is on an unsustainable path and well-being will decline at some point. This is why measures of comprehensive wealth are increasingly understood to be crucial to assessing societal progress.
The Canadian Experience
Examining data from Statistics Canada from 1980 to 2015, the IISD reported on Canadian wealth in 2016 and again in 2018. The findings raised a number of red flags for the sustainability of Canadians' prosperity; namely:
- Unprecedented levels of Canadian household debt
- Stagnant human capital (lifetime earning potential) since 1980
- Reliance on foreign lenders for nearly three quarters of investment flows after 2012
- Concentration of business investment in just two areas: housing and oil and gas extraction infrastructure
- An 86 per cent drop in the market value of Canada’s most valuable natural asset: the oil sands
- Vulnerability of Canada’s comprehensive wealth portfolio to climate change impacts
These concerns don't emerge when examining Canada's GDP performance over the same time period, which paints a far rosier picture of the country’s success.
After the initial phase in Canada, the Measuring Wealth to Promote Sustainable Development project is expanding in Africa, Asia, and the Caribbean.
In Africa, IISD is partnering with Mekelle University in Ethiopia. Ethiopia’s interest in moving beyond GDP was transmitted through the Growth and Transformation Plan II, which focuses on “broad-based growth.” The country also started valuation of its forest as natural capital in 2017.
In Indonesia, we are partnering with the SDG Hub of Universitas Indonesia. This partnership builds on IISD’s long-standing work in Indonesia through our Global Subsidies Initiative and the development of an SDG implementation tracking platform. The country’s experience with the System of Integrated Environmental and Economic Accounting (SEEA) and land accounting in Sumatera and Kalimantan have built national capacity and interest in moving beyond GDP.
In the Caribbean, we are collaborating with the University of the West Indies in Trinidad and Tobago. This collaboration was partially motivated by the large share of investment and employment in Trinidad and Tobago linked to depletable oil and gas resources. While these resources offer benefits to the country while they last, it is critical to identify future investment opportunities to promote sustainability of well-being in the long term. Also, Trinidad and Tobago has several policy documents aligned with comprehensive Wealth, including the country’s SDG strategy “Environmental, Economic and Social Well-being for today and tomorrow.”
In addition to the top-flight universities mentioned above, project partners include national statistical agencies, ministries, and international organizations with local presence.
African Environmental Ministers Commit to Beyond GDP and Inclusive Wealth Measures
The 19th session of the African Ministerial Conference on the Environment showed increasing interest and commitment from African leaders to explore measures that go beyond GDP to gauge progress.
Working with Countries to Move Beyond GDP
Any framework that goes beyond GDP to measure societal progress must be country owned.
Founder of Midsummer Analytics to speak at FSU’s South Asian Media and Cultural Studies Conference
Robert Smith, founder of Midsummer Analytics and a senior associate with the International Institute for Sustainable Development, will speak at Florida State University on Thursday, Feb. 2, about avenues to replace gross domestic product (GDP) as the central measure of a country’s progress.
Sortir de la dictature du PIB (in French)
Et si introduire de nouvelles mesures qui prennent en compte la qualité de vie permettait de mieux relever les défis environnementaux auxquels nous faisons face ? La réflexion est entamée.
Moving Beyond GDP To Achieve The SDGs
World leaders increasingly believe it is time to move beyond gross domestic product (GDP) as the central measure of progress.
Moving Beyond GDP: A Stock-Flow Approach To Measuring Wellbeing For The G20
To achieve effective climate action, the G20 countries need to move urgently beyond GDP and use a comprehensive approach to assessing national progress.
Rethinking Wealth: The case for moving beyond GDP
For decades, GDP has been a defining indicator of the strength of countries’ economies. However, GDP only reflects the size of an economy; it does not account for factors that are central to well-being.
Is it just the heat, or does the concept of 'uneconomic growth' make a lot more sense now?
Something to ponder if you’re stuck in one of the many places so hot now that sitting in a darkened room is recommended, giving you more time alone with your thoughts: are we paying the price for a big mistake?
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