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Does the Inclusive Wealth framework have the firepower to replace the doddering, myopic GDP?

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Not every country or citizen has benefited from overall higher levels of economic welfare. The gap between the lowest and highest income countries remains large, with many countries in Africa, Latin America and Asia still below the global average. In addition, many countries experience significant domestic income inequalities between rich and poor. In new and rising economic powers such as China and India, millions have been lifted out of poverty, but often at a high environmental cost. “The economic growth of recent decades has been accomplished mainly through drawing down natural resources, without allowing stocks to regenerate, and through allowing widespread ecosystem degradation and loss” (UNEP 2011).

The Inclusive Wealth Report 2012 has been launched at the Rio+20 Conference in Brazil. The report presents a framework that offers a long-term perspective on human well-being and sustainability, “based on a comprehensive analysis of nations´ productive base and their link to economic development”.

Developed by the International Human Dimensions Programme on Global Environmental Change (IHDP), the IWR 2012 was developed on the notion that current economic production indicators such as gross domestic product (GDP) and the Human Development Index (HDI) are insufficient, as they fail to reflect the state of natural resources or ecological conditions, and focus exclusively on the short term, without indicating whether national policies are sustainable.

The IWR 2012 features an index that measures the wealth of nations by looking into a country’s capital assets, including manufactured, human and natural capital, and its corresponding values: the Inclusive Wealth Index (IWI). Results show changes in inclusive wealth from 1990 to 2008, and include a long-term comparison to GDP for an initial group of 20 countries worldwide, which represent 72% of the world GDP and 56% of the global population.

Key findings:

* 70 percent of countries assessed in the 2012 Inclusive Wealth Report present a positive Inclusive Wealth Index (IWI) per capita growth, indicating sustainability.
* High population growth with respect to IWI growth rates caused 25 percent of countries assessed to become unsustainable.
* While 19 out of the 20 countries experienced a decline in natural capital, six of them also saw a decline in their inclusive wealth, thus following an unsustainable track.
* Human capital has increased in every country, being the prime capital form that offsets the decline in natural capital in most economies.
* There are clear signs of trade-off effects among different forms of capital (manufactured, human, and natural capital) as witnessed by increases and declines of capital stocks for 20 countries over 19 years.
* Technological innovation and/or oil capital gains outweigh declines in natural capital and damages from climate change, moving a number of countries from an unsustainable to a sustainable trajectory.
* 25 percent of assessed countries, which showed a positive trend when measured by GDP per capita and the HDI, were found to have a negative IWI.
* The primary driver of the difference in performance was the decline in natural capital.
* 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.

What is the inclusive wealth framework? It is based on social welfare theory “to consider the multiple issues that sustainable development attempts to address”. First, according to IWR 2012, the inclusive wealth framework “moves away from the arbitrary notion of needs” (about time too, not that the rank-and-file economists are going to be listening) and “redefines the objective of sustainable development as a discounted flow of utility” – this is not good, and does not in any way appeal to readers and practitioners who do not see organic development as automatically linked to some form of economic measurement – which, in this case, is consumption. Does this mean consumption (or not) is the central idea that underlies inclusive wealth? Let’s see. “The framework is flexible enough to allow consumption to include not just material goods, but also elements such as leisure, spiritual aspirations, social relations, and environmental security, among others”. Interesting and curious – spiritual aspiration as a consumption good? Family and clan or tribe ties as consumption?

How useful is the IWR 2012 shaping up to be? There is an “equivalence theorem whereby the framework allows the move from the constituents of well-being to their determinants”. Sounds profound. What does it mean? It refers to the various capital assets a country is able to accumulate – note they’re talking about country, not household, not social network. “This asset base is called the productive base of the nation. The productive base forms the basis for sustainable development and provides a tangible measure for governments to use and track over time”. Again, this is not so good – we want to see inclusive wealth as being easily understood by households (let’s say rural households) and by local administrations (like panchayats in India).

The IWR 2012 goes on to say that “more importantly, the framework provides information for policy-makers – particularly planning authorities – on which forms of capital investment should be made for ensuring the sustainability of the productive base of an economy”. Again not good, because the IWR 2012 has mentioned spirituality and social ties ande environmental security – so why return like a lost child to “the productive base” when ‘productive’ can continue to mean what it does today? A closer reading will no doubt provide answers.

The IWR 2012 has said, predictably and quite justified, that traditional indicators such as gross domestic product (GDP) per capita and the Human Development Index (HDI) have been the main determinants used to measure the progress of nations. “GDP per capita was developed just after World War II by economist Simon Kuznets. It was constructed by Kuznets to measure the level of economic production and to provide guidance to policy-makers on which sectors of the economy are growing and which are slowing, and the throughput that is used by the economy” – a concise definition of GDP worth keeping in mind to see why it has so needed replacing for at least the last generation.

GDP was always meant to be used strictly as an indicator for economic production. Somewhere along the line, GDP came to be used by policy-makers to measure the overall progress and performance of a nation (they were lazy, to begin with, and the gradual realisation of environmental costs from the pursuit of progress made alternatives politically inconvenient to adopt, especially when these implied the well-being of citizens). “This caused some fundamental problems, not with the indicator itself, but with the way it has been used. Increases in total economic production do not translate into improvements in well-being. They might increase employment and might increase the income of individuals, but all these are just possible outcomes and not automatic consequences of economic growth.” That is a truth well worth repeating at every available forum. From a very cursory reading, the IWR 2012 is a very well-conceived beginning to find a Grand Indicator that will once and for all consign GDP to the corner in which it belongs.

Written by makanaka

June 18, 2012 at 11:55

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