New sustainability index looks beyond GDP

18 June 2012

New sustainability index looks beyond GDP

The world's fixation on economic growth ignores a rapid and largely irreversible depletion of natural resources that will seriously harm future generations, according to a UN report that presents a new indicator aimed at encouraging sustainability. The Inclusive Wealth Index (IWI) was unveiled in the Inclusive Wealth Report 2012 that looks at changes in inclusive wealth in 20 countries.

UN Photo/Paulo Filgueiras

The IWI, which looks beyond the traditional economic and development yardsticks of Gross Domestic Product (GDP) and the Human Development Index (HDI) to include a full range of assets such as manufactured, human and natural capital, shows governments the true state of their nation's wealth and the sustainability of its growth.

Manufactured capital is defined as infrastructure, goods and investments. Natural capital includes fossil fuels, minerals, forests, fisheries and agricultural land. Human capital includes education and skills.

The indicator was unveiled in the Inclusive Wealth Report 2012 (IWR), a joint initiative launched at Rio+20 by the United Nations University's International Human Dimensions Programme on Global Environmental Change (UNU-IHDP) and the United Nations Environment Programme (UNEP).

The report looked at changes in inclusive wealth in 20 countries, which together account for almost three quarters of global GDP, from 1990 to 2008.

The countries include Australia, Brazil, Canada, Chile, China, Colombia, Ecuador, France, Germany, India, Japan, Kenya, Nigeria, Norway, the Russian Federation, Saudi Arabia, South Africa, USA, United Kingdom and Venezuela.

Bringing precision to assessing wealth generation

Rio+20 is an opportunity to call time on Gross Domestic Product as a measure of prosperity in the 21st century, and as a barometer of an inclusive Green Economy transition - it is far too silent on major measures of human well-being namely many social issues and the state of a nation's natural resources, said UN Under-Secretary General and UNEP Executive Director Achim Steiner.

"IWI is among a range of potential replacements which world leaders can consider as a way of bringing great precision to assessing wealth generation in order to realize sustainable development and eradicate poverty," he added.

Wealth accounting, the concept behind the IWI, draws up a balance sheet for nations and shows countries where their wealth lies.

By taking into account a wide array of capital assets a nation has at its disposal to secure society's well-being, it presents a more comprehensive picture and informs policy makers on the importance of maintaining their nation's capital base for future generations.

"The IWR stands for a crucial first step in changing the global economic paradigm by forcing us to reassess our needs and goals as a society," said Professor Anantha Duraiappah, Report Director of the IWR and Executive Director at UNU-IHDP.

"It offers a rigorous framework for dialogue with multiple constituencies representing the environmental, social and economic fields."

The importance of keeping an eye on the full range of a country's capital assets becomes particularly evident when population growth is factored in.

Examination of natural capital crucial for policy making

While inclusive wealth has increased for most countries, the report shows that an examination of natural capital is crucial for policy makers.

Even though a reduction in natural capital can be offset by the accumulation of manufactured and human capital, which are reproducible, many natural resources such as oil and minerals cannot be replaced.

As a result, a more inclusive definition of wealth that will secure a legacy for future generations is urgently needed in the discussion of sustainable economic and social development.

UN Under-Secretary General and Rector of the United Nations University, Professor Konrad Osterwalder, said that using the IWI would safeguard the interests of many developing nations.

"The Millennium Development Goals (MDGs) have functioned as an important tool to focus international attention and action around key pressing global issues,” he said.

“As 2015 fast approaches, the deadline for meeting the MDGs, it is clear that the opportunities for many developing countries to achieve their goals may be compromised if the present rates of decline of various crucial ecosystem services continue.”

“In order to reverse this decline, we need a natural capital accounting framework that takes into consideration the value of ecosystem services in relation to the wealth of nations,” he added.

“Ideally, from now on, it will be essential that national and international agencies make use of inclusive wealth per capita as a yardstick to measure economic progress," Professor Osterwald concluded.

Key findings from the report

*While 19 out of the 20 countries experienced a decline in natural capital, six also saw a decline in their inclusive wealth, putting them on an unsustainable track, Russia, Venezuela, Saudi Arabia, Colombia, South Africa and Nigeria were the nations that failed to grow. The remaining 70 percent of countries show IWI per-capita growth, indicating sustainability;

*High population growth with respect to IWI growth created unsustainable conditions in five of the six countries mentioned above. Russia's lack of growth was due largely to a drop in manufactured capital;

*25 percent of countries which showed a positive trend when measured by GDP per capita and HDI were found to have a negative IWI per capita. The primary driver of the difference in performance was the decline in natural capital;

*With the exception of France, Germany, Japan, Norway, the United Kingdom and the United States, all countries surveyed have a higher share of natural capital than manufactured capital, highlighting its importance;

*Human capital has increased in every country and is the prime capital form that offsets the decline in natural capital in most economies;

*There are clear signs of trade-off effects between the different forms of capital;

*Technological innovation and/or oil capital gains (due to rising prices) outweigh decline in natural capital and damages from climate change, moving a number of countries - Russia, Nigeria, Saudi Arabia and Venezuela - from an unsustainable to a sustainable trajectory;

*Estimates of inclusive wealth can be improved significantly with better data on the stocks of natural, human and social capital and their values for human well-being.

Recommendations

The report makes the following specific recommendations:

*Countries witnessing diminishing returns in natural capital should invest in renewable natural capital to improve their IWI and the well-being of their citizens. Example investments include reforestation and agricultural biodiversity;

*Nations should incorporate the IWI within planning and development ministries to encourage the creation of sustainable policies;

*Countries should speed up the process of moving from an income-based accounting framework to a wealth accounting framework;

*Macroeconomic policies should be evaluated on the basis of IWI rather than GDP per capita;

*Governments and international organizations should establish research programs to value key components of natural capital, in particular ecosystems.

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