Moving #BeyondGDP - Q&A with Dr. Sofia Ahlroth

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Senior Environmental EconomistWorld Bank Group
7 January 2019
Research

On 9 January 2019, the Green Economy Coalition, the Green Growth Knowledge Platform and the Partnership for Action on Green Economy held a High-Level Media Debate on the question, "What makes your country wealthy?" In the lead up to the event, we asked thought leaders to share their insight on new approaches to wealth accounting and the challenges of moving beyond GDP. Here we hear from Dr. Sofia Ahlroth, Senior Environmental Economist for the World Bank.

 

1) Why does how we measure wealth matter?

Wealth is the underpinning of a society’s ability to produce present and future income, and well-being for its people.

Comprehensive wealth accounts, which include produced, human, and natural capital, enable countries to apply a productivity measure that shows whether they are increasing in wealth or if their income is based on depleting their natural capital. 

If only some of these assets are measured, and others are not, wealth measurement can have misleading results, unsuited to inform public and private decisions alike. As stated by Stiglitz, Sen & Fitoussi: ”What we measure affects what we do; and if our measurements are flawed, decisions may be distorted.” 

As stated in the Changing Wealth of Nations 2018, natural capital is the most important asset for low-income countries, accounting for almost 50 % of the wealth of low-income countries, and around 30 % in lower-middle income countries. In higher income countries, natural capital per capita is three times higher than in low-income countries, although it is only 3% of total wealth. While progress is being made in measuring natural capital, it is quite likely that these are conservative under-estimates of the true value of natural capital. They are likely to be higher, once all natural assets (i.e. including water, fisheries, etc.) and ecosystem services provided by natural capital (such as water regulation or flood protection) are properly accounted for.

 

2) What are the benefits and risks of putting a dollar value on nature?  

Valuing in monetary terms natural capital and the services it delivers provides important information on its contribution to the economy and people’s livelihoods. In the absence of estimates of such contribution, it is difficult to make a case for allocating scarce resources to the conservation of nature or of the benefits it generates for society.

However, it is important to keep in mind that it is often only some services, or some aspect of these services, that can be valued. It is equally important to consider the time horizon of different types of capital. If renewable natural capital is managed sustainably it can produce benefits in perpetuity, in contrast to non-renewables and produced capital. If managed unsustainably, the impact on growth and wellbeing can be far more adverse than a snapshot from the current situation may show. For example, the widespread loss of forestland can have significant, potentially irreversible effects that are not fully accounted for in the monetary value of forests.

When natural capital is measured in conjunction with other forms of capital to generate estimates of comprehensive wealth, there is a risk of over-estimating the degree of substitutability among different forms of capital; i.e. to assume that the loss of natural capital can be compensated by corresponding increases in physical or human capital. As an indicator of sustainability, changes in per capita wealth should, therefore, be used together with:

i)   biophysical indicators of natural capital stress; and

ii)   indicators of the quality of governance and institutions – which reflect social capital.

 

3) What do you consider to be the main barriers to moving beyond GDP?

Measuring natural capital and ecosystem services, especially at the global or even national is not straightforward, and in many cases there is no consensus on how it should be done. The UN is working towards developing a standard for ecosystem accounting by 2020, but the most challenging part remains to be the valuation in monetary terms. It will also take a lot of resources for countries to develop natural capital accounts that encompass all important aspects of their natural capital and ecosystem services.

 

4) How could moving beyond GDP impact policy, people, and how we do business?

Incorporating natural capital into national accounts can support inclusive development and better economic management. For example, land and water accounts can help countries interested in hydropower to assess the value of competing land uses and find the optimal solution. Ecosystem accounts can help biodiversity-rich countries manage the tradeoffs between ecotourism, agriculture, subsistence livelihoods, and ecosystem services like flood protection. In this way, ecosystem accounting is a tool for maximizing economic growth while identifying who benefits and who bears the cost of ecosystem changes, helping governments gauge whether their growth is inclusive.

In addition to only measuring current income flows (and thus future income flows or wealth), a major limitation of GDP is that the full contribution of natural capital, like forests, wetlands, and agricultural land, does not show up. Forestry is an example – timber resources are counted in national accounts but the other services of forests, like carbon sequestration and air filtration, are ignored. So, GDP can give misleading signals about the economic performance and well‐being of a country.

Not knowing the value of natural capital can result in losses that negatively affect the poor. For example:

  • Failing to value the coastal protection services provided by mangroves can lead to a massive conversion of mangroves into shrimp farms, at the cost of livelihoods (from loss of fish habitat and other mangrove products) and increased damage from storms.
  • Lack of information about the value of forests for maintaining downstream water resources, grazing for livestock, and soil retention, can lead to clear-cutting and the loss of these services.

The key is to measure not just the total value of natural assets, but also how these benefits are distributed, how much goes to each stakeholder group, and the extent to which each group – especially the poor - depends on them.

 

5) Are there specific countries, companies, or people in this space that you recommend taking a closer look at?

Countries like the Netherlands, Australia, Sweden, and UK have extensive experience in developing and using Natural Capital Accounting (NCA). In the developing world, countries typically do not have as long of an experience in doing so, but many are taking significant strides in developing natural capital accounts, acknowledging the vital importance of their natural capital for achieving a sustained long-term economic growth. Some of those doing so are the ones that are part of the WAVES global partnership (see below): Botswana, Colombia, Costa Rica, Guatemala, Indonesia, the Philippines, Rwanda, Zambia, and Uganda.

 

6) How does your work fit into this larger goal/discussion of moving beyond GDP?

The Wealth Accounting and the Valuation of Ecosystem Services (WAVES) is a World Bank-led global partnership that aims to promote sustainable development by ensuring that natural resources are mainstreamed in development planning and national economic accounts.

This global partnership brings together a broad coalition of UN agencies, governments, international institutes, nongovernmental organizations, and academics to implement NCA where there are internationally agreed standards, and develop approaches for other ecosystem service accounts.

By working with central banks and ministries of planning and finance across the world to integrate natural resources into development planning through NCA, we hope to enable more informed decision making that can ensure genuine green growth and long-term advances in wealth and human well-being.

 

E-mail: sahlroth@worldbank.org

Sectors: 
Finance


The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.