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Inclusive Wealth Index: New Economic Indicator Launched

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The world’s fixation on economic growth ignores a rapid and largely irreversible depletion of natural resources that will seriously harm future generations, according to a report which today unveiled a new indicator aimed at encouraging sustainability – the Inclusive Wealth Index (IWI).
The IWI, which looks beyond the traditional economic and development yardsticks of Gross Domestic Product (GDP) and the Human Development Index (HDI) to include a full range of assets such as manufactured, human and natural capital, shows governments the true state of their nation’s wealth and the sustainability of its growth.
This graph shows the average annual economic performance of 20 countries when assessed with IWI per capita, GDP per capita and HDI over a period of 19 years (1990-2008).

Credit: UNU-IHDP


The indicator was unveiled in the Inclusive Wealth Report 2012 (IWR), a joint initiative launched at Rio+20 by the International Human Dimensions Programme on Global Environmental Change (UNU-IHDP) hosted by the United Nations University and the United Nations Environment Programme (UNEP). The report looked at changes in inclusive wealth in 20 countries, which together account for almost three quarters of global GDP, from 1990 to 2008.

Despite registering GDP growth, China, the United States, South Africa and Brazil were shown to have significantly depleted their natural capital base, the sum of a set of renewable and non-renewable resources such as fossil fuels, forests and fisheries.

Over the period assessed, natural resources per-capita declined by 33 per cent in South Africa, 25 per cent in Brazil, 20 per cent in the United States, and 17 per cent in China. Of all the 20 nations surveyed, only Japan did not see a fall in natural capital, due to an increase in forest cover.

If measured by GDP, the most common indicator for economic production, the economies in China, the United States, Brazil and South Africa grew by 422 per cent, 37 per cent, 31 per cent and 24 per cent respectively between 1990 and 2008.

However, when their performance is assessed by the IWI the Chinese and Brazilian economies only increased by 45 per cent and 18 per cent. The United States’ grew by just 13 per cent, while South Africa’s actually decreased by 1 per cent.

The report focuses on the sustainability of current resource bases, and does not analyze the rest of the 19th and 20th centuries, when many developed countries following an accelerated growth path may have depleted natural capital.

“Rio+20 is an opportunity to call time on Gross Domestic Product as a measure of prosperity in the 21st century, and as a barometer of an inclusive Green Economy transition—it is far too silent on major measures of human well-being namely many social issues and the state of a nation’s natural resources,” said UN Under-Secretary General and UNEP Executive Director Achim Steiner.

“IWI is among a range of potential replacements which world leaders can consider as a way of bringing great precision to assessing wealth generation in order to realize sustainable development and eradicate poverty,” he added.

Wealth accounting, the concept behind the IWI, draws up a balance sheet for nations and shows countries where their wealth lies. By taking into account a wide array of capital assets a nation has at its disposal to secure society’s well-being, it presents a more comprehensive picture and informs policy makers on the importance of maintaining their nation’s capital base for future generations.

“The IWR stands for a crucial first step in changing the global economic paradigm by forcing us to reassess our needs and goals as a society.” said Professor Anantha Duraiappah, Report Director of the IWR and Executive Director at UNU-IHDP. “It offers a rigorous framework for dialogue with multiple constituencies representing the environmental, social and economic fields.”

The importance of keeping an eye on the full range of a country’s capital assets becomes particularly evident when population growth is factored in. When population change is included to look at the IWI on a per-capita basis, almost all countries analyzed experienced significantly lower growth. This negative trend is likely to continue for countries that currently show high population growth, like India, Nigeria and Saudi Arabia, if no measures are taken to increase the capital base or slow down population growth.

The IWR presents the inclusive wealth of 20 nations: Australia, Brazil, Canada, Chile, China, Colombia, Ecuador, France, Germany, India, Japan, Kenya, Nigeria, Norway, the Russian Federation, Saudi Arabia, South Africa, USA, United Kingdom and Venezuela.

The countries selected represent 56% of world population and 72% of world GDP, including high, middle and low-income economies on all continents. A few countries were chosen based on the hypothesis that natural capital is particularly important to their productive base – as in the case of oil in Ecuador, Nigeria, Norway, Saudi Arabia and Venezuela; minerals in countries such as Chile; and forests in Brazil.

Key findings from the report are:

  • While 19 out of the 20 countries experienced a decline in natural capital, six also saw a decline in their inclusive wealth, putting them on an unsustainable track, Russia, Venezuela, Saudi Arabia, Colombia, South Africa and Nigeria were the nations that failed to grow. The remaining 70 per cent of countries show IWI per-capita growth, indicating sustainability.
  • High population growth with respect to IWI growth created unsustainable conditions in five of the six countries mentioned above. Russia’s lack of growth was due largely to a drop in manufactured capital
  • 25 per cent of countries which showed a positive trend when measured by GDP per capita and HDI were found to have a negative IWI per capita. The primary driver of the difference in performance was the decline in natural capital
  • With the exception of France, Germany, Japan, Norway, the United Kingdom and the United States, all countries surveyed have a higher share of natural capital than manufactured capital, highlighting its importance
  • Human capital has increased in every country and is the prime capital form that offsets the decline in natural capital in most economies
  • There are clear signs of trade-off effects between the different forms of capital
  • Technological innovation and/or oil capital gains (due to rising prices) outweigh decline in natural capital and damages from climate change, moving a number of countries – Russia, Nigeria, Saudi Arabia and Venezuela – from an unsustainable to a sustainable trajectory
  • 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.

Recommendations

While inclusive wealth has increased for most countries, the report shows that an examination of natural capital is crucial for policy makers.

Even though a reduction in natural capital can be offset by the accumulation of manufactured and human capital, which are reproducible, many natural resources such as oil and minerals cannot be replaced. As a result, a more inclusive definition of wealth that will secure a legacy for future generations is urgently needed in the discussion of sustainable economic and social development.

The report, which will be produced every two years, makes the following specific recommendations:

  • Countries witnessing diminishing returns in natural capital should invest in renewable natural capital to improve their IWI and the well-being of their citizens. Example investments include reforestation and agricultural biodiversity
  • Nations should incorporate the IWI within planning and development ministries to encourage the creation of sustainable policies
  • Countries should speed up the process of moving from an income-based accounting framework to a wealth accounting framework
  • Macroeconomic policies should be evaluated on the basis of IWI rather than GDP per capita
  • Governments and international organizations should establish research programmes to value key components of natural capital, in particular ecosystems.

UN Under-Secretary General and Rector of the United Nations University, Prof. Konrad Osterwalder, concluded that using the IWI would safeguard the interests of many developing nations.

“The Millennium Development Goals (MDGs) have functioned as an important tool to focus international attention and action around key pressing global issues,” he said. “As 2015 fast approaches, the deadline for meeting the MDGs, it is clear that the opportunities for many developing countries to achieve their goals may be compromised if the present rates of decline of various crucial ecosystem services continue.”

“In order to reverse this decline, we need a natural capital accounting framework that takes into consideration the value of ecosystem services in relation to the wealth of nations, ” he added. “The notion being that if we are better able to take account for our natural capital, we are more likely to protect it.”

“With the Inclusive Wealth Report we have a new measure of economic progress that includes natural capital. Ideally, from now on, it will be essential that national and international agencies make use of inclusive wealth per capita as a yardstick to measure economic progress. I commend all those who have been involved with the preparation of this groundbreaking report which could play an important role in promoting the shift to a green economy, ” he concluded.

“While most economies analyzed in the Inclusive Wealth Report 2012 and the world more generally have been enjoying positive economic growth rates, a look at the broader capital base indicates that this has come at high physical costs. These expenses should be reflected in the balance sheet of nations,” said Dr. Pablo Muñoz, Science Director of the IWR, UNU-IHDP.

“An increase in total wealth does not necessarily indicate that future generations may consume at the same level as the present one; as population grows, each form of capital is more thinly spread over the society,” said Sir Partha Dasgupta, Professor Emeritus of Economics at Cambridge and Science Advisor to the IWR.

Contacts and sources:

Anne Kathrin Raab
International Human Dimensions Programme


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