Published: 23 Sep 2009
- The shortcomings of GDP as a measure of
economic and social wellbeing have been
recognised for decades. Now
the economic and environmental crises have
created the political momentum for a radical
revision of national accounting methods.
The debate over how
to measure national prosperity is not new.
As the quote above illustrates, 'disillusioned
critics' of national accounting have been
around since at least the 1970s. Perhaps
surprising, though, is the fact that the
terms of the debate have changed so little.
Despite ever more evidence of its shortcomings,
economic growth has remained 'the reigning
fashion'.
Given the apparent lack
of change in 40 years, the disillusioned
critics may have felt more demoralised than
ever when France's President Sarkozy last
week questioned the use of gross domestic
product (GDP) as a measure of wellbeing.
At last, however, they may have cause for
optimism. As Sarkozy himself noted, the
global economic crisis and fluctuating commodity
prices of recent years have laid bare both
the deficiencies of our accounting structures
and our dependence on finite and fragile
natural systems.
Citizens, businesses and governments today
fret about the accumulation of huge debts,
exposure to concealed liabilities and the
effectiveness of huge untested rescue packages.
More than ever, there is global awareness
that our current tools are unreliable measures
of the state and sustainability of our economies.
Importantly, this demand
for better indicators is being met. Besides
the Stiglitz-Fitoussi-Sen Commission launched
by President Sarkozy, other activities include
the European Commission's 'Beyond GDP' process
and the United Nations Environment Programme
(UNEP) Green Economy Initiative.
Together these elements
suggest that the time may have come to move
from debate to action.
What's wrong with GDP?
In the last sixty years, GDP has come to
be seen as the primary indicator of the
state of national economies and social wellbeing
and a key guide to policymakers and investors.
Unfortunately, it wasn't designed for that
purpose so doesn't perform the role particularly
well.
Although a variety of
criticisms can be levelled against GDP,
from a sustainability perspective the key
concern is that it measures what an economy
produces, not the state of capital stocks
that underpin that output. Such stocks include
manmade capital but also other resources
— natural, social and human — which together
determine how much a society can produce.
At the micro level,
of course, accounting practice does acknowledge
the importance of capital (at least of the
manmade variety). Business accounts have
always included an element of depreciation
to reflect the decreasing value of a firm’s
productive capital over time. The rationale
is obvious: sustained output is only possible
if a firm invests in maintaining its capital
stock.
Oddly, governments and
international institutions pay less attention
to the underlying robustness of the economy
when calculating national accounts. In GDP,
'G' stands for 'gross', which means 'before
subtracting capital depreciation'.
Even when calculating
net domestic product (an aggregate far less
popular than GDP) the depreciation only
reflects changes in manmade capital, not
those public goods that are not produced
but play a vital role in determining economic
output — above all nature.
By focusing only on
flows of outputs, GDP provides misleading
signals to policymakers. Activities that
maximise production in the short term need
not preserve the capital stocks that are
central to long-term prosperity. Indeed,
focusing just on GDP actually creates incentives
to deplete capital stocks because the returns
are treated as income.
Ultimately, not recording
the cost of reinvestments to sustain healthy
ecosystems creates and conceals ecological
liabilities. This distorts our perception
of the future when restoring ecosystem services
will demand that we repay the debts.
The shape of things
to come
Decision-makers need the right indicators
to ensure that policies and investments
maximise wellbeing for current and future
generations. Equally, citizens need access
to such information to hold their governments
to account: robust and transparent information
is a prerequisite for public empowerment
and engagement.
In practical terms this
means that we must develop systems of national
accounting that fully incorporate the capital
stocks that determine our earnings.
Clearly, this poses
conceptual and practical difficulties. From
the environmental perspective, the key challenge
lies in defining, quantifying and valuing
natural capital. Whereas economic activity
is quantified in monetary terms and recorded
in business accounts, we have far fewer
systems to measure the scale and cost of
our impact on the environment.
To address this need,
the European Environment Agency and its
partners have been developing techniques
consistent with national accounts methods
to record the contribution of ecosystems
to society's welfare. The methods, collectively
known as ecosystem accounts, comprise both
physical and monetary accounts of stocks,
material and energy flows and services.
The EEA's basic approach
entails quantifying the level of investments
needed to ensure that ecosystems continue
to provide the same level of services. This
takes account of a variety of 'indicators
of ecological potential', accounting for
the state of the landscape, ecosystem production,
biodiversity, water, absorption of external
inputs and the capacity to support healthy
populations.
Over the next 18 months,
EEA will elaborate its natural capital accounting
methodology further. At the same time, EEA
is preparing land, carbon and water accounts
that will shed light on the physical changes
occurring in the European environment and
their interaction with local and national
economies. In addition, EEA will continue
to build up its network of data sources,
drawing on resources ranging from satellites
to local people and organisations.
Evidently, developing
a complete methodology, complemented with
all necessary data collection and analysis
processes will take years. EEA believes
strongly, however, that simplified ecosystem
accounts can and should be launched today.
In fact, the United
Nations System of National Accounts (SNA),
which sets out the standard methodology
for national accounting, provides a useful
example. First published in 1953, the SNA
manual totalled just 56 pages and provided
a much less comprehensive approach than
the 1000 page version produced in 2008.
The message is clear: start simple.
