It makes little sense to talk about growth if it’s not sustainable. That’s why the United Nations called for a new index at the Rio+20 Summit that seeks to change the way prosperity is measured. RIO DE JANEIRO – The cost of last year’s extreme floods around the world amounted to billions for insurance companies and as a result, gross domestic product (GDP) rose and was listed as growth in national accounts. This creative accounting method might sound dubious, but that’s how it’s done. When growth and economic activity is measured, it’s still the GDP method, which accounts only for monetary value.
The UN, however, is now calling for a different measurement. According to the UN, the current economic thinking leads to irreversible destruction of natural resources that will leave future generations worse off. To rectify this, the UN has introduced a new form of measurement – Inclusive Wealth Index(IWI).
The Inclusive Wealth Index highlights nuances in different countries' evolving wealth by incorporating the changes in the produced capital (machinery, buildings, etc.), human capital (education, health, etc.) and natural capital (natural resources, land, etc.).
"It is time to phase out the GDP as a proxy for growth in the 21st century,” said Achim Steiner, head of the UN Environment Program at the launch in Rio, and he urged government leaders to adopt the new method. “GDP completely ignores the central themes of human welfare as social issues and the importance of natural resources."
Inclusive Wealth Index was presented alongside a new report that evaluates 20 different countries' development from 1990 to 2008, measured against the new index. And it presents some interesting results. Norway's GDP, for example, has increased by 51 percent during the period, but due to its consumption of natural capital -- primarily oil and gas -- its growth has risen by only 13 percent when measured by Inclusive Wealth Index. Conversely, Germany's GDP increased by 30 percent, but because of its massive investment in human capital, its Inclusive Wealth Index increased by 38 percent. Japan was the only country in the report whose natural capital didn’t decline, due to an increase in forest area.
Peter Andersen, Professor of Economics at Copenhagen University and special expert with the Danish Environmental Economic Council, believes the idea is fundamentally right and emphasized that this kind of thinking is required for future generations to have at least the same standard of living as now.
"If you are using natural resources, then other capital such as human capital has to increase accordingly,” Andersen said. “Thus, there can be a trade-off between knowledge and natural resources. This is what is referred to in economic terms as ‘genuine savings.’ Genuine savings is the sum of the increase in produced capital, human capital and natural capital. And to avoid a decline in genuine savings when natural capital is reduced, the other forms of capital need to increase. This is controversial for some, but it makes sense in my opinion."
Additionally, Andersen said that if oil resources are reduced, but our research and knowledge creates other energy sources such as wind, solar, etc., then the consumption of oil has added overall value by fueling such research endeavours.
According to Andersen, there isn’t anything theoretically or methodologically new in the Inclusive Wealth Index. "The genuine savings principle is common knowledge amongst environmental and resource economists, and has also been used several times in the Danish Economic Council," Andersen said. He predicted that if the thinking behind the index is integrated into economic policy, it would result in a long-term focus on the development in living standards, and less on cyclical fluctuations.
Kim Füchsel, managing partner at the auditing and consultancy firm PwC that advises the largest companies in Denmark, believes that resource efficiency is already a competitive factor.
"We are born with a children's savings, with few natural resources, which we carelessly use up,” Füchsel said. “As long as the full costs of manufactured products is not included in the price (for example, environmental costs), we will continue to see the waste of resources and pollution. However, if companies want to survive in the long run, they need to be sustainable." He also noted that the bill must be paid at some point in the future, thus affecting our long-term growth.
The UN said it will publish the new index every two years.
Additionally, Andersen said that if oil resources are reduced, but our research and knowledge creates other energy sources such as wind, solar, etc., then the consumption of oil has added overall value by fueling such research endeavours.
According to Andersen, there isn’t anything theoretically or methodologically new in the Inclusive Wealth Index. "The genuine savings principle is common knowledge amongst environmental and resource economists, and has also been used several times in the Danish Economic Council," Andersen said. He predicted that if the thinking behind the index is integrated into economic policy, it would result in a long-term focus on the development in living standards, and less on cyclical fluctuations.
Kim Füchsel, managing partner at the auditing and consultancy firm PwC that advises the largest companies in Denmark, believes that resource efficiency is already a competitive factor.
"We are born with a children's savings, with few natural resources, which we carelessly use up,” Füchsel said. “As long as the full costs of manufactured products is not included in the price (for example, environmental costs), we will continue to see the waste of resources and pollution. However, if companies want to survive in the long run, they need to be sustainable." He also noted that the bill must be paid at some point in the future, thus affecting our long-term growth.
The UN said it will publish the new index every two years.
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