Faulty yardstick

Published July 2, 2022
The writer is director of intergovernmental affairs, United Nations Environment Programme.
The writer is director of intergovernmental affairs, United Nations Environment Programme.

GROSS Domestic Product has been used as the primary yardstick to measure economic growth, income, expenditure and output. It provides a useful overview of the performance and structure of the market economy for the formulation of fiscal and monetary policy. However, as an indicator of national development, GDP focuses only on produced capital and ignores other forms of capital such as human, natural and social capital. In the process, GDP growth is often wrongly equated with national well-being and progress. Poverty, inequality and nature loss in several countries and regions with high GDP rates highlight this fallacy. A rise in GDP does not — on its own — translate into the overall welfare of a society.

The current methodology of GDP is emblematic of a bigger malaise. It encourages the depletion of natural resources at a rate that surpasses the regenerative capacity of the earth. While profiling income, it ignores the impact of production on other determinants of human well-being like clean air or clean water. Secondly, it does not incorporate the contribution of human capital and natural capital (including minerals, water, forests and plants) to human well-being. From a larger perspective, GDP-centred development models do not value nature.

The pursuit of attaining higher GDP at the expense of natural capital remained unnoticed for as long as the demographic pressure on natural resources was manageable. Unfortunately, in the long run, it exacted a heavy toll on the planet. The roots of unsustainable patterns of consumption and production, which are undermining efforts for sustainable development, lay beneath the ‘no-limits to growth’ model attached to GDP. As a result, the world has witnessed large-scale ecosystem degradation and increased inequality. Nature’s substantial contribution to the economy remains largely invisible in GDP calculations.

Development models based on GDP do not value nature.

These shortcomings of GDP were not lost on economists and leaders. Robert Kennedy remarked in 1968: “GDP does not allow for the health of our children, the quality of their education or the joy of their play”.The European Parliament noted in 2012 that “GDP does not measure environmental sustainability or social integration”, and “stressed the need to develop additional indicators for measuring economic and social progress”. Various alternative models were showcased including the concept of ‘Gross National Happiness’.

These efforts were challenged by the lack of broad-based metrics which could measure sustainability and enable countries to monitor progress towards sustainable development comprehensively.

To fill that gap, the United Nations Environment Programme led an initiative to develop an alternate index to the GDP and the Human Development Index. The Inclusive Wealth Index will complement GDP, providing a holistic assessment of produced capital or GDP, human capital and the natural capital of countries. According to UNEP’s environmental economist, Pushpam Kumar, IWI is “capable of measuring not only traditional stocks of wealth but also those less tangible and unseen — such as educational levels, skill sets, healthcare, as well as environmental assets and the functioning of key ecosystem services that form the backbone of human well-being and ultimately set the parameters for sustainable development”.

UNEP’s Inclusive Wealth Report 2018 showed that out of the 140 countries tracked, 44 suffered a decline in inclusive wealth per capita since 1992, though GDP per capita increased in most. The report indicates that in a combined assessment of produced capital, natural capital and human capital, the growth rate of inclusive wealth is much slower than GDP growth rate. Pakistan’s report (1992-2019) provides an insight into the country’s share of natural capital and encourages policymaking through inclusive wealth estimations.

In a related development in March 2021, the UN Statistical Commission adopted the System of Environmental-Economic Accounting — Economic Accounting, a statistical framework which will enable countries to measure their natural capital and understand the immense contributions of nature to human prosperity.

The UN is moving the needle in the direction of developing a global consensus to go beyond GDP. Last month, at an international meeting in Stockholm, the UN secretary general urged the world to place “true value on the environment and go beyond Gross Domestic Product as a measure of human progress and well-being. Let us not forget that when we destroy a forest, we are creating GDP. When we overfish, we are creating GDP. GDP is not a way to measure richness in the present situation in the world”.

As a serious planetary crisis risks our survival, we must value nature and protect the ecosystem which supports life on earth. It is time to stop considering mindless environmental destruction as economic progress. It is time to go beyond GDP.

The writer is director of intergovernmental affairs, United Nations Environment Programme.

Published in Dawn, July 2nd, 2022

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