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Measuring Green Growth: The Limits of GDP

Posted on the 05 July 2012 by Center For International Private Enterprise @CIPEglobal

Measuring Green Growth: The Limits of GDP

Many observers were disappointed at the outcome of the recent Rio+20 environmental summit, which produced no major new initiatives. But more than 86 companies and 50 countries did make an important commitment to sustainable development by endorsing a seemingly obscure and technical accounting change: including environmental assets in countries’ national accounts.

The idea of valuing environmental assets like forests and rivers in the same way as factories and computers – Natural Capital Accounting – is not as radical as it might sound. Businesses and governments already routinely place dollar values on untapped natural resources, such as oil and gas reserves. The problem is that the primary measure of national economic performance, Gross Domestic Product (GDP), counts only economic activity, not the assets or wealth from which it is derived. A dollar earned by clear-cutting a forest, which depletes natural resource wealth and contributes to global warming, is therefore counted the same as a dollar generated by growing crops, selling hydroelectric power, or writing software.

“GDP tells you nothing about sustainability,” Nobel Prize-winning economist Joseph Stiglitz said in 2008. While private companies are judged by both their income statements and their balance sheets, he notes, most countries only calculate their “income” – GDP – and know little about their national “balance sheet.”

The idea of evaluating economies by more than just GDP, long discussed in academia, now has major institutional support. The World Bank’s WAVES (Wealth Accounting and the Valuation of Ecosystem Services) initiative has brought together governments, the private sector, and civil society groups to back the natural capital approach, which is now used in some form by at least 24 countries.

Valuing natural resources appropriately is something even the most sophisticated financial experts at large multinational corporations struggle with. However, there have been important steps towards a feasible system for including natural wealth as a component of national accounts. The international community has now adopted the United Nations Statistical Commission’s System of Environmental-Economic Accounts, an internationally-recognized standard consistent with the existing System of National Accounts used to calculate GDP and other key economic figures.

There are still many other challenges: the statistics can be expensive and time-consuming to collect and compile, and not all countries use the UN system of national accounts (the U.S., France, and China being major exceptions). Also, no comparable standard for accounting by companies has yet been established, though many major firms have endorsed initiatives to include natural capital in their investment and strategy decision-making.

But the basic idea of expanding traditional notions of “capital” is not a new one. In the 1950s, economists began searching for a model to help explain the growth of the knowledge-based service economy, which had supplanted traditional manufacturing in developed countries. The result was the human capital approach, which measures the value of knowledge, skills, creativity, leadership, and social connections and how they relate to innovation and economic performance.

Investments in human capital led directly to the technology revolution which has powered worldwide growth for decades. Countries that spent heavily on education and research, like South Korea, saw incomes soar and millions lifted out of poverty.

Unfortunately, much of this economic growth came at the expense of the planet’s (largely unmeasured) natural resource wealth, which has been depleted at an alarming rate. Measuring that depletion in a systematic way, and balancing it against the economic activity created, is a crucial first step towards a more sustainable economic growth model.

Both governments and the private sector now recognize, at least in principle, that sustainable, inclusive growth is the only path forward. At Rio+20, a strong political will – backed by extensive private sector and civil society support – has emerged to start looking beyond GDP at the environmental fundamentals on which all economies are built.

Images by Fotolia, Oxan

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