"You cannot manage what you do notmeasure" –PavanSukhdev
Economists have found ways to quantify what we produce, consume and spend and have captured these succinctly via various economic indicators that are ordinarily used. The most common measurement of economic growth is Gross Domestic Product (GDP), which is essentially the value of all officially recognised final goods and services produced in a country within a specific time. However, in the process of maximising economic output, as measured by GDP, is it unavoidable for the natural environment to be degraded in the process? If so, are we really progressing or are these GDP figures grossly inflated? Naturally, the next step in attempting to capture the true prosperity of a nation will necessarily involve the quantification of the things we take for granted on a daily basis: a sip of clean water, the oxygen and shade that trees provide... Essentially, how do we value the intricacies of nature and how can those values be incorporated into conventional measures of prosperity? This was a primary topic of discussion at the recently concluded 'Rio+20 Earth Summit 2012', which was held on 20 - 22 June in Brazil. Advocates of 'green accounting' are pushing forward the concept of placing monetary values on the world's natural resources. Green accounting, in a broad macroeconomic sense aims to factor in environmental costs into the overall performance of a nation.
Some years ago, the Group of Eight (G-8) sanctioned a study to examine the monetary value of the environment, led by Pavan Suhkdev, a former banker and now the Founder/ CEO of GIST Advisory, an environmental consulting firm which helps governments and corporations discover, value and manage their impacts on natural and human capital. The study that started in 2007 estimated that the world economy suffers approximately US$2.5 trillion – US$4 trillion in losses every year due to environmental degradation. This represents about 7% of total world GDP and roughly 20% of US GDP alone! At the Rio+20 Conference in Brazil, the International Human Dimensions Programme on Global Environmental Change (IHDP) launched the 'Inclusive Wealth Report' for 2012 (IWR 2012). The report presents a framework that offers a long-term perspective on human well-being and sustainability, based on a comprehensive analysis of a nation's productive base and its link to economic development. The Inclusive Wealth Index (IWI) looks at a country's capital assets (manufactured, human and natural capital) and includes a long-term comparison to GDP for an initial group of 20 countries worldwide, which represent 72% of world GDP and 56% of global population. Table 1 shows the countries assessed and a summary of the key findings from the report.
The IWI revealed that of the 20 countries examined, 14 were found to have positive IWI growth rates, while six experienced negative growth. According to the report, of the 14 countries with positive results, only China returned a growth rate above 2% over the past 19 years while Chile, France, and Germany grew more than 1%. The remaining 10 had growth rates between 0.1% and 1%. This indicates that the probability of switching to an unsustainable trajectory is high, given these low growth rates. The report also showed that high population growth was one of the major reasons why countries experienced negative IWI growth. This implies that a negative population growth rate can help to counter a negative IWI, and can boost a country's IWI on a per-capita basis. Another staggering revelation from the report was that 19 out of the 20 countries assessed recorded a decline in natural capital, with Japan the only country to record growth due to an increase in forest cover. Moreover, for six countries - Colombia, Nigeria, South Africa, Russia, Saudi Arabia, and Venezuela- decreases in natural capital base contributed to their negative IWI. For most of these countries, in particular South Africa, the rapid decline of their fossil fuel asset base was a major cause for the decrease of their natural capital. One-quarter of the countries assessed, which showed a positive trend when measured by GDP per capita and the HDI, were found to have a negative IWI.
The IWI presents a much more comprehensive tool for policymakers as it gives a broader scope of a country's well-being. The index can be used to track whether a country is on a sustainable growth path, and can also indicate the shortfalls in terms of human, produced and natural capital. This type of in-depth analysis will bode well, as it will facilitate a more focused approach to policy determination as it unequivocally identifies the deficits in the different capital assets. One of the primary policy recommendations disclosed in the IWR 2012 is the need for governments to shift from an income-based national accounting framework to a wealth accounting framework so that all aspects of the country's capital will be captured concisely.
Environmental economics has become an increasingly topical issue for many countries and many have already started the process of reevaluating nature in monetary terms. The Maldives recently banned fishing gray reef sharks after working out that each was worth US$3,300 a year in tourism revenue, as opposed to US$32 paid per catch. Moreover, a Kampala wetland in Uganda was saved from agricultural development after calculating it would cost US$2 million a year to run a sewage treatment facility – the same job the swamp does for free.
Nature now has to be re-examined under a different microscope, for example, a forest cannot only be valued based on the price it will fetch on the timber exchange, but the carbon dioxide it absorbs and the water filtration system it provides should also be captured. A study conducted jointly by a team of US, Dutch and Argentine researchers some years ago placed a US$33 trillion value a year on natural resources such as water, wood, fossil fuels and 'services' such as a forest's absorption of carbon dioxide.Though admittedly there may be flaws in the calculations and methodologies used, the team's report indicated that the figure was in reality, conservative.
Several countries have already committed to a concerted drive to produce 'green' accounts. In April 2012, India announced plans for 'greening' national accounts by 2015, and Australia will soon begin taxing carbon emissions, a measure which Costa Rica has implemented for about a decade to fund forest preservation. Many issues will have to be addressed in moving towards 'green accounting', the biggest and most controversial being the determination of the value of natural resources, simply because markets do not exist for ecosystems. Nevertheless, plant, machinery and all other fixed assets depreciate with use shouldn't natural resources be treated in the same light? Growth at any cost is simply not an option and is clearly unsustainable. Proper management of all capital assets is necessary for appropriate policy decisions to encapsulate all aspects of an economy. We must ensure that our linear pursuit of economic growth does not compromise our future generations.
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