The case for scrapping GDP

The case is growing to include social and environmental data in growth measures, but the prospect is remote as politicians cling to superficially higher GDP values during the financial crisis.

The case is growing to widen conventional measures of human wealth to take account of degrading natural assets, but the prospect is more remote as politicians cling to superficially higher GDP values during the financial crisis.

Business leaders, academics, lawmakers and green groups have pushed for including social and environmental data in national accounts at a sustainable development summit in Rio de Janeiro this week.

Conventional gross domestic product (GDP) is based on cash income, consumption and investment.

It excludes charges against declining fish stocks and fossil fuel reserves, carbon emissions, air pollution, excess government debt or pension fund deficits, and excludes the value of leisure and higher quality health and education.

It over-estimates human wealth. The implication is that countries are over-spending on pension payouts, polluting goods, and defence.

In the case of natural resources, conventional GDP assumes that where fish stocks and fossil fuel reserves are dwindling, technology advances will avoid any impact on future growth.

However evidence has grown that unpriced human impacts on the environment will harm future growth, especially climate change from carbon emissions, and should be accounted for.

The trouble is that accounting for such declining natural capital, as well as other charges against CO2 emissions and so on, would cut the value of GDP against which developed countries are borrowing to boost their flagging economies.

That makes it even less politically acceptable in a teetering economy, and reinforces a theme at the Rio summit where politicians have been seen slow to act.

It is well known that GDP has limits: it records production not welfare, flows of money rather than capital stocks.

To be exact, it measures the income that households earn in salaries, profits and rent (or the amount they and the government spend or save, or the amount of value people add at work – they all amount to the same thing).

One of its advantages is that the data are to hand: spending and income are already collected, with taxes.

Extra data could be easily gathered, but one problem is monetising these.

That challenge especially applies to "public goods" which are usually regarded as free, such as clean air, wildlife, wilderness and so on, as opposed to fossil fuel reserves which have an exact market value.

There's no consensus, for example, on how to place a single financial or even physical value on biodiversity – the number and population of animal and plant species.

More than 40 years ago Stanford University's Paul Ehrlich said: "We must acquire a lifestyle which has as its goal maximum freedom and happiness for the individual, not a maximum Gross National Product." This principle was quoted in the 1972 book co-authored by Yale environmental economist William Nordhaus, "Is Growth Obsolete?"

Progress since has been slow.

Approaches have included devising complements to GDP, or else a single alternative measure.

In the former camp, a UK government in 1998 coined a "quality of life barometer". It included health (measured as number of years of expected healthy life) and education (the percentage of young people reaching high school qualifications).

Where still calculated, the indicators are no longer published annually, as was originally conceived.

Britain now says that by 2020 it will include "natural wealth" within its national accounts.

In February, the UN Statistical Commission approved the System for Environmental and Economic Accounts – a high-level rule book. The World Bank-backed "Wealth Accounting and the Valuation of Ecosystem Services" aims to step in with technical guidance.

And the United Nations this week in Rio launched an inclusive wealth index (IWI), including estimates of natural and human capital, and applied it to 20 countries from 1990 to 2008.

China's IWI grew by just 45 per cent over the period and the United States by 13 per cent, compared with GDP growth of 422 per cent and 37 per cent respectively, the UN authors found.

Meanwhile some countries are acting regardless of indices.

For example, Norway's sovereign wealth fund has invested rather than spent the country's profits from oil and gas exploration, earning an income which offsets the annual depreciation of the asset.

Conventional GDP accounting wouldn't spot the difference.

This article was originally published by Reuters. Reproduced with permission.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles