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 https://mgiep.unesco.org/wp-content/uploads/2014/12/IWR2014-WEB.
would like thank Partha Dasgupta and Pablo Munoz for this insightful