The wealth of nations revisited: Can economists see green beyond the greenback?

by on January 19th, 2010

If you want to know the current value of the FTSE or the Dow, you can find out in seconds. If you want to follow the Gross Domestic Product (GDP) of the US or the EU over time, a few keystrokes will get you the numbers you need.

But what if you want to know the value of the US or the EU or the world’s natural resource–seemingly non-trivial items such as forests, watersheds, fisheries, soils, pastures, wetlands and ecosystem services? Not only can’t you find a value, nobody can, because nobody is counting.

At a time when economists track every measure of global, national, and local economies as avidly as the vital signs of a patient in intensive care, doesn’t it seem strange that something as crucial to the wealth and health of nations as the natural resources and systems on which they rely remains as uncharted as the terra incognita of medieval maps?

Cambridge University professor Sir Partha Dasgupta is one of a handful of economists who see this blank space as not just strange but, as he puts it, “a gaping hole in how nature is embedded into economics.” He points out that as long as natural resources and ecosystem services are not measured and valued, they can’t be incorporated into economic models and will be ignored in economic decision making.

Dasgupta and a few of his colleagues are striving to flesh out adequate measures of what he calls natural capital and get them incorporated into mainstream economics.

Economics has been phenomenally successful in shaping the way decision makers at all levels think about and evaluate progress, Dasgupta says. In particular, GDP has become the canonical measure of development and the wealth of nations, and guides the economic choices and policies of every country.

The problem with GDP, says Dasgupta, is that it’s both inadequate and misleading.

It’s inadequate in that, although it is used to measure of the wealth of nations, it leaves out a vital part of that wealth–natural capital. It’s misleading because nations relying on GDP to measure progress can easily find themselves looking richer on paper, while in fact they are becoming poorer by degrading their natural resources. While conservationists have been warning of this for years, Dasgupta is one of the first economists to have the data to prove it.

In a recent article in Philosophical Transactions of The Royal Society B (doi: 10.1098/rstb.2009.0231), Dasgupta traces the development of five countries, Bangladesh, India, Nepal, Pakistan and China from 1970 through 2000. All five show seemingly healthy growth as measured by GDP, per capita GDP, and even HDI (Human Development Index, a composite measure of GDP per person, life expectancy, and education).

The catch is that when Dasgupta includes even a partial evaluation of the wealth lost through depleted natural resources and degraded ecosystem services, the balance sheets of four of those five countries shift into the red. Even as their GDPs and HDIs told these nations that they were getting richer, they were actually getting poorer; their development was unsustainable.

Research in this area has been surprisingly sparse, but consistent in showing that even valuing a small subset of their natural resources reveals that many nations are buying GDP growth at the expense of real wealth. “If I had all the numbers,” Dasgupta says, “it would be even worse.”

Although Dasgupta says that some of his colleagues continue to view nature as if it were an infinite source of resources and an equally infinite sink for waste products, most now accept that, in principal, it’s important to value natural capital. And most economists, he says, now grasp something he proved mathematically a decade ago, that it’s possible to develop a measure of comprehensive wealth that would incorporate nature and reflect human well being better than the GDP or the HDI.

This represents progress, but it seems painfully slow as forests continue to be razed, fisheries depleted, and carbon dioxide pumped into the atmosphere at a record pace. The first substantial study of changes in comprehensive wealth was carried out just 11 years ago, and far too few researchers have followed suit since then. In the meantime, thousands of economists worldwide continue to crank out GDP-based studies, which in turn continue to guide and justify the current pattern of economic decision making and development.

The good news, says Dasgupta, is that the World Bank and UNEP, the United Nations Environment Programme, are just now starting a project that will produce a world wealth report every two years. Initially this report will include just a few of the better-measured aspects of natural capital such as fisheries, but it will add other natural resources and ecosystem services over time. “This is the first systematic attempt to value natural capital for the whole world,” says Dasgupta, “It has never been done before.”

If all goes well, in a few years we may be able to punch a few keys and retrieve some realistic measures of the value of our natural resources and ecosystems. More importantly, decision makers will have actual data to show if their nation is developing sustainably or needs to change course.

If Dasgupta and his colleagues are right, it’s a vital step that comes not a moment too soon.

Robert Adler