Beyond GDP

Measuring progress, true wealth, and the wellbeing of nations

March 2015 newsletter

In this edition of the Beyond GDP newsletter:

Interview

Inclusive Wealth Report 2014 increases its ambition and scope

Sir Partha Dasgupta is the Frank Ramsey Professor of Economics at the University of Cambridge. He initiated the Inclusive Wealth Report and continues to contribute to its further development as Science Advisor. Professor Dasgupta has spent most of his professional life working on poverty and inequality issues. His cutting-edge research covers welfare and development economics, the economics of technological change, population, environmental and resource economics, game theory and the economics of malnutrition.

Dr. Pablo Muñoz is currently leading the data and modeling work of the Inclusive Wealth Report (IWR) project. One of his major tasks in the project concerns the development of a wealth accounting system and its corresponding empirical measures for computing the wealth indicator. His previous work emphasized the direct and indirect environmental impacts of international trade and improved understanding of how consumption activities in one specific world region may affect global ecological change.

The Inclusive Wealth Index (IWI) is a joint project of the UN University International Human Dimensions Programme (UNU-IHDP) and the United Nations Environment Programme (UNEP). It aims at measuring the overall wealth of a country by looking at human and natural capital, in addition to produced capital.


What makes the Inclusive Wealth Index different to other indices?

Partha Dasgupta: It is important to understand that the IWI is an index based on an analytical framework – many other indices have no such framework. The peculiarity of the IWI is that it focuses on the “means” (or determinants of well-being) not in the “ends” (or constituents of well-being). Indices of overall happiness or well-being are trying to measure the end itself, while the IWI is measuring the means (input or source) to achieve those ends. The definition of sustainability of the IWI is that overall wealth per capita should not decrease over time, meaning that future members of the society have at least the same amount of wealth (e.g. financial capital, natural capital, and human capital) at their disposal as the current generations have.

For the aggregation and normalisation of different asset classes (Manufactured capital, Natural capital or Human capital) the IWI uses shadow prices (i.e. prices to reflect marginal value to society of an additional unit rather than market prices). These shadow prices are sometimes based on market prices but are more often derived from other sources. If a country implements a project with a positive internal rate of return, the IWI records a net positive outcome.

In 2012 IWI released its first report; the second report was released on 10 December 2014. What are the new elements of IWI 2014?

Pablo Munoz: Among the notable improvements, the 2014 edition extends the country samples from 20 to 140 countries, encompassing about 95% of the world population and 99% of the global GDP. We have also expanded the time span from 1990-2008 to 1990-2010 and we improved our measures of total factor productivity and forest wealth accounts.
Some of our key findings are:

  • Empirical evidence shows positive average growth in per capita inclusive wealth – and thus progress toward sustainable development – in 85 of the 140 countries evaluated (approximately 60 percent). Gains in inclusive wealth among the countries analysed were in general smaller than those in GDP and the Human Development Index (HDI); 124 of 140 nations experienced gains in GDP, while 135 of 140 showed improvements in HDI over the same period.
  • Human capital is the foremost contributor to growth rates in inclusive wealth in 101 out of 140 countries. In 27 countries produced capital was the primary contributor. On average, human capital contributed 55 percent of overall gains in inclusive wealth, while produced capital contributed 32 percent and natural capital 13 percent.
  • Population growth and the depreciation of natural capital constitute the main driving forces of declining wealth per capita in the majority of countries. Population increased in 127 of 140 countries, while natural capital declined in 116 out of 140 countries. Although both factors each negatively affect growth in wealth, changes in population were responsible for greater declines
  • Produced capital, the capital type most measured, represents only about 18 percent of the total wealth of nations. The remaining capital types constitute 82% of wealth:  54% in human capital and 28% in natural capital.
  • After adjusting for carbon damage, oil capital gains, and total factor productivity, the number of overall progressing countries drops from 85 to 62 (out of 140). Results show that all three factors negatively affected inclusive wealth in most of countries; of the three, total factor productivity adjustments had the greatest negative effect.

From your experience with the use of the IWI, which data or information gaps in the current IWI are most damaging for its ability to provide sound information to policy makers?

Partha Dasgupta: Climate change effects are difficult to capture and hence remain a limiting factor in policy recommendation. Shadow prices can tell us more if we can measure the full benefits of assets, as some assets produce multiple benefits which the current shadow pricing system does not integrate yet. We have observed this in our analysis of natural capital assets.

If we want to give better direction to decision-makers to protect the common natural capital, we must keep understating the importance of capital assets for human well-being so as to adjust our set of social prices to better reflect reality.

 

At the moment only ecosystem services with some market values are integrated into the calculations. How well do you think the values represent the services, and what has been their contribution to the IWI? Do you have any plans to go further? What are the main obstacles?

Pablo Munoz: When accounting for the resource base of a nation, going beyond produced capital, there are many challenges in terms of data and methods to capture the contribution of other asset categories such as human and natural capital. One example could be for instance the inclusion of ecosystem services resulting from nature. Many of these services are indeed not in the market, and policies may ignore their importance when implementing projects.

In this edition of the IWR, we ‘weighted’ the contribution of several of the forest ecosystem services by those values reported by the TEEB (The Economics of Ecosystems and Biodiversity) initiative. With the insights of the TEEB report, we improved our approach in estimating the shadow (or social) prices for the “non timber forest benefits”. Estimates report that the value of the services provided by a forest hectare rage between US$ 2000- 3000per hectare per year. These shadow prices not only capture benefits such as food, but also regulating and recreation services. We hope to keep integrating ecosystem services provided by other types of biomasses.

 

The loss of species plays an important role in biodiversity production. How can the IWI place a measurable value on the future research lost due to the extinction of species?

Partha Dasgupta: We could have avoided this issue if more environmental objectives were integrated in the Millennium Development Goals. As they were not, we are lagging well behind biodiversity production goals and biodiversity indicators.

Pablo Munoz: There is still an important body of work to be developed in this area to better reflect how biodiversity is contributing to human well-being in order to make visible such contributions also in the indices of social progress. We are in very early development steps in this area in the IWR.

The issue of social cohesion features strongly in the discussion on Beyond GDP. Do you have any plans to include this issue in the IWI?

Partha Dasgupta: Although social cohesion is not included as an explicit capital category as some people would think appropriate, this does not mean that social capital and social cohesion are ignored by the IWI as they are captured indirectly. The effects of institutional and social factors need to be assessed on a country by country basis.

A teacher’s productivity (e.g. contribution to knowledge-building) is calculated in shadow prices. The shadow prices in this example would measure the additional value for society of hiring an additional teacher. A teacher in Norway and one in Zimbabwe will create comparatively different levels of human capital. In Zimbabwe, poor standards, lack of training, lack of equipment and widespread corruption would mean that the additional value of the teacher is much smaller than it could potentially be. This is not the case in Norway, given the highly developed institutional standards.

Pablo Munoz: A very important component in the calculations of the IWI is total factor productivity, which captures some of the “social capital” or “social cohesion” of a country. Total factor productivity seeks to measure the real role technological innovation and creativity plays in production, as well as other implicit capital types not yet accounted in building the inclusive wealth of the country. Total factor productivity does not explicitly capture the contribution of one particular asset, but instead captures the contributions of several “missing” assets – assets not explicitly accounted for in our wealth calculations. The total factor productivity growth measures represent the contribution of ‘residual’ production factors to GDP growth after the three types of capital (human, produced, and natural capital) are accounted for. For example, estimations capture types of social capital which influence the value of financial capital (e.g. institutions, which allow efficient capital allocation) or human capital (e.g. efficient job markets and habits that allow well educated people to find the right jobs).

 

Currently the distribution of all capital forms (both intra-generational and inter-generational distribution) does not influence the IWI. In order to better tackle increasing inequality concerns, do you wish to change that in the future?

Pablo Munoz: It would be highly desirable to obtain estimates of inclusive wealth for different types of households in order to capture inequality in wealth, not income. There are some figures to my knowledge, but they only relate to manufactured capital. It would still need to factor in human capital and natural capital. Measures of the latter, that is natural capital, at household level, seem to be particularly challenging. Moreover, complications are added if we expect to produce time series of such measures so as to capture aspects of inter-generational well-being.

How is the IWI being used in policy and how could it best be used to take full advantage of the added value of the IWI?

Partha Dasgupta: The essential message the IWI sends to policy-makers is that any capital asset can be sustained, with the right framework and approach, if decisions are well-informed. If economic growth is achieved at the expense of future development, the IWI makes it visible.
In India, the Head of the National Statistical Office organised an expert group which drafted a recommendation report on how to include the results of the IWI 2012 report into public policy and into the national data collection and compilation system. Recently the Financial Times of India published an article about the lack of progress in implementing the recommendations of the expert group and the Head of the National Statistical Office has written an open letter reassuring the public that progress has been made and the project has not been abandoned.

Pablo Munoz: After the publication of the IWR 2012 meetings and panel discussions with ministers of all 20 sample countries were organised.

What are the next steps planned for the dissemination of the IWI?

Pablo Munoz: A panel discussion of academics and government officials was held on 10 December, in New Delhi, India, with an audience of 200 people. The report is available at http://mgiep.unesco.org/wp-content/uploads/2014/12/IWR2014-WEB.

 

We would like thank Partha Dasgupta and Pablo Munoz for this insightful interview.


Quote

Enrico Giovannini

"We have an opportunity now to mobilise political will, financial resources and new technologies to fix this. The UN has a crucial role, working with governments, civil society and the private sector, to make the data revolution a revolution for sustainable development. The world we want is a world that counts and we can build it."

Enrico Giovannini, Co-chair of the Independent Expert Advisory Group to UN Secretary General Ban Ki-moon


In the spotlight

To include or to miss out? – The dilemma of which dimensions to include in a sustainability index

Policy makers and development practitioners have become increasingly aware of the limitations of using GDP as an indicator of progress. In light of multiple economic, social and environmental crises there is a growing consensus for the need for developing alternative indicators to measuring sustainability and using these in policy making towards progress of our societies.

However sustainability is a very broad concept, and there are many ways in which it can be defined and measured. Famously, the Brundtland Commission (1987) defines sustainable development as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs".

In order to measure sustainability a number of key methodological choices must be made. Firstly, there is the choice between using a set of indicators (many numbers) vs. one index (or composite indicator – one number). There is an increasing preference for developing composite indicators, because they can communicate complex phenomena simply and powerfully, even though they are more subject to criticism for their potential limitations. Secondly, both for indicator sets and for composite indices one needs to carefully select the component indicators (on which the indicators set or index is based), while adopting a clear conceptual framework.

The choice of indicators for indicators sets and indices is challenging and needs to be driven by a number of considerations. Firstly, developers of indices or indicator sets need to decide on the issues that they want to measure, which will be largely based on the theoretical framework and on the value judgements applied. Secondly, there is the important question of data availability, and of the quality criteria for the indicators, as problems could relate to “insufficient robust data” and “consistency of aggregation”.

If an issue is regarded as valuable for inclusion in the sustainability index, it is nevertheless possible that robust data are lacking, and if data are available, the form may not necessarily fit the chosen theoretical framework. In such cases, the developer of the index will need to strike a balance between two challenges: either omitting the issue and its measurements from the index (and implicitly setting its importance or weighting to zero), or choosing to include data that lacks quality or does not fit readily into the chosen aggregation framework. Both choices will attract heavy criticism.
For example, the highly documented environmental sustainability index, the Ecological Footprint, is criticised on the one hand for methodological choices which convert every dataset into “global hectares” - a synthetic unit - and on the other hand for encompassing only some measures of environmental sustainability into its framework.

Examples demonstrating the difficulties in striking this balance can be found for any composite indicator which tries to measure economic, environmental and social sustainability:

The UNDP Inclusive Wealth Index (IWI) measures the progress of sustainable development using the assumption that sustainable development is when wealth per capita does not decrease over time. In the IWI wealth per capita not only includes financial or other produced capital but also human capital and natural capital. Instead of applying a standard weighting scheme, the IWI aggregates each category with respective shadow prices (i.e. prices to reflect marginal value to society of an additional unit rather than market prices) as relative weights. The disadvantage of that consistent methodology is the difficulty of integrating issues where shadow prices are difficult to calculate. So for example if a country is reducing its stock of forest, the IWI will show this loss of natural capital using estimates of the lost future timber income and some estimates on “Non timber forest benefits” mainly based on recreational uses of the forest. However it is likely that the loss of forest also goes hand in hand with a loss of biodiversity in the forest and this is currently not fully captured in the IWI estimates due to lack of data. The same argument applies for issues like social cohesion where the current estimates are not able to capture all benefits which society derives from social cohesion.

The World Economic Forum (WEF) Global Competitiveness Index (GCI) calculates the microeconomic and macroeconomic activities that drive national competitiveness. Although the GCI stands as a reliable measure of productivity and economic performance, the WEF has recently recognised that other important elements in the development process must be accounted for, in order for it to measure an equitable and just society accurately. By adjusting the GCI by two (social and environmental) sustainability factors, the sustainability adjusted global competitiveness index (SGCI) gives a better understanding of these goals. Each adjustment factor is calculated on the basis of a broad range of environmental and social variables. The weighting of those variables is not performed within a systematic framework but via subjective but transparent value judgements. This allows the SGCI to include very diverse variables (Gini index of income, Youth unemployment, Access to improved drinking water, Stringency of environmental regulation, No. of ratified international environmental treaties) in its calculation. On the other hand if variables move in different directions over time the subjective decision of the indicator developer will determine the overall development of the index value.

These examples illustrate the complexity of developing a composite sustainability indicator. Despite their inherent limitations, such indices evidently provide useful insights, particularly in tackling important environmental and social factors which are always ignored by single indicators such as GDP. In addition such indices have the power to summarise complex phenomena in one single figure, which has a great advantage in terms of communication as they easily reach policy makers, the media and general public.

In practice, even indices which miss certain dimensions of sustainability can be used (including for policy making) if the user can dig deep into the sub-indices and identify the root causes of trends in time and among countries, understand the shortcomings, and can resort to complementary indicators if necessary.

If that transparency is available then comprehensive sustainability indicators can be useful for policy makers to help them be aware of the possible trade-offs of decisions that they will take. This has the potential to improve governance and policymaking, integrating wider wellbeing, social, environmental, economic and progress concerns, improving the added-value of policy and contributions to sustainability.


In brief

December 2014

Inclusive Wealth Report reveals weak growth of global wealth

Worldwide from 1992 to 2010 GDP showed a gain of 50%. However, according to the second biennial Inclusive Wealth Report (IWR), when changes in human capital, natural capital and produced capital are considered, global wealth increased by an "anemic" 6% over the same period. Relatively low increases in human capital combined with vast losses in natural capital largely explain this trend, despite enormous growth in produced capital. The Inclusive Wealth Index, first launched at the Rio +20 conference, presents countries with a new approach to measuring their wealth, growth and societal progress in more inclusive and sustainable ways, complementing GDP by quantifying two key but poorly understood components of wealth: natural capital and human capital. It is a joint initiative of the UN University – International Human Dimensions Programme (UNU-IHDP) and the UN Environment Programme (UNEP).


November 2014

UN Experts group releases “A World That Counts” report

The Independent Expert Advisory Group on a Data Revolution for Sustainable Development (IEAG) has delivered its report "A World That Counts: Mobilising The Data Revolution for Sustainable Development". This experts group has been initiated by UN Secretary-General Ban Ki-moon in order to make concrete recommendations on improving data for achieving and monitoring sustainable development. The report makes three main recommendations: First, the promotion of innovation to address data gaps; second, the mobilisation of resources to cope with inequalities between developed and developing countries and between data-poor and data-rich people; and third, the leadership and coordination to improve data quality and to prevent data abuses. 


October 2014

Real Britain Index - an appropriate measure of living standards?

The New Economics Foundation (NEF) has developed the Real Britain Index (RBI), which aims to provide a more suitable indicator for measuring inflation than the Consumer Price Index (CPI). As the latter is based on average ‘baskets of goods’, the RBI takes into account the different spending patterns of households, depending on their income. By calculating the real inflation rate for each income decile in the UK, the RBI reveals that especially low earners, but also medium earners have constantly been confronted with higher inflation rates than indicated by the CPI. Between 2011 and 2013, data shows that the earnings of the top 10% have recovered, whereas the poorest 10% have experienced a fall in their income by 14.8% due to price rises and welfare cuts, pointing at the rising inequality within the UK.

 

EC holds expert conference on “Moving 'beyond GDP' in European economic governance”

A high-level expert conference on "Moving beyond GDP in European economic governance" was held by the European Commission in cooperation with the Italian Presidency of the Council. Around 175 stakeholders from national and international administrations, statistical offices and research institutes attended the conference. It provided an overview of the progress made in measuring well-being and societal welfare and discussed whether the Beyond GDP agenda has contributed to improve policy making. In spite of remarkable achievements in the capacity to measure different aspects of development and quality of life, GDP still occupies a central role in shaping and communicating policies. The panels with the outgoing EU commissioners Laszlo Andor and Janez Potočnik also clearly pointed to existing processes like Impact Assessment and the European Semester as the best ways to embed Beyond GDP thinking in policy making. 


September 2014

Kick-off meeting of the Independent Advisory Expert Group: UN initiative on data revolution

The Independent Expert Advisory Group (IEAG) on a data revolution for sustainable development first met at the end of September 2014. This group has been initiated by UN Secretary-General Ban Ki-moon in order to make concrete recommendations on measures necessary to close data gaps, to see opportunities for new innovations and to strengthen national statistical capacities. The suggestions are expected to significantly shape the post-2015 development agenda. Enrico Giovannini, co-chair of the IAEG, and Eva Jespersen, UNDP’s representative on the IAEG, further stressed that issues such as participation, human security or sustainability are vital components of human development, but not easy to measure. A data revolution should help to improve the measurement of such aspects, both conceptually and statistically. 

 

Agenda

Upcoming events

The Reindustrialisation of Europe: Innovation, jobs and growth
Brussels, Belgium, 24 February 2015.
More information

Expert Group Meeting on the indicator framework for post-2015 development
New York, USA, 25-26 February 2015.
More information

The 2015 European Circular Economy Conference
Brussels, Belgium, 5 March 2015.
More information

NETGREEN database of green economy indicators - Stakeholder workshops on resource efficiency and ECO-Innovation
Brussels, Belgium, 11 March 2015.
More information

 

The Beyond GDP newsletter is issued up to 4 times a year by the European Commission, DG Environment and DG Eurostat.
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