The current set of regulations for measuring macroeconomic activity borrows from the widely used System of National Accounting (SNA). A popular metric within the SNA, the Gross Domestic Product, is defined as “the market value of all final goods and services within a country in a given period of time” (Mankiw, 2009). While GDP might be considered an accurate measure of the size of an economy given that it records all monetary transactions relating to the production of goods and services (Costanza et al., 2009), it does not caputre the overall wealth and well being of a country.
GDP fails to account for a country’s stocks and flows of natural capital and accumulation of human capital. The human economic system is only part of the social and environmental space on which its existence depends. Using GDP per capita as a measure of well-being assumes the aggregate share of income to be optimal and the weight of income inequality to be zero, both unjustifiable assumptions that distort the picture of well-being of a nation (Osberg and Sharpe, 2001).
Difficulties in incorporating ecosystem values into SNA
One of GDP’s foundational problems is that it includes only natural resources that are commoditized, i.e those that have a price and can be traded (Cha, 2013). Few ecosystem services have a market price – timber, select NTFPs and wild fish catch. As a consequence, most forest ecosystem services except for a few provisioning services are not included in GDP or SNA. Excluding services that carry real value from a measure of value addition can be detrimental to the future of those service, such as forests that provide micronutrients and dietary diversity to rural and forest-dependent people. In Tanzania, wild foods obtained from a forest-farm landscape mosaic contributed 31 per cent vitamin A, 26 per cent iron and 23 per cent calcium (Sunderland et al., 2013). Similarly, many ecosystem services that cannot be marketed or traded, such as the service of regulating clean air and water, waste assimilation and climate regulation among others, are not captured in GDP estimates.
Another limitation of GDP is that it only counts the value of final goods and services, because the value of intermediate goods is already said to have been included in the final good. Yet it is common to see the value of regulating and supporting ecosystem services used as inputs for various manufacturing sectors, not being captured in GDP. De Groot et al., (2002) note that complex ecological structures and processes, called ecosystem functions, help in the creation of ecosystem goods and services. For instance, agricultural products seldom contain the value of fertile soils provided by nature, yet when fertilizers are used in production, their cost is included in the final produce. This demonstrates that nature provides a number of essential services which are not accounted for and hence remain invisible.
Environmental goods and services are varyingly non-excludable (e.g. rainfall) and non-rivalrous (e.g. air). GDP often only includes private goods and services that are rivalrous and excludable. As ecosystem goods and services are a common resource, they often result in a free-rider problem where individuals benefit from actions for which they do not pay the full social costs (Jaeger, 2011). This therefore makes it impractical and at times unethical to create an effective direct market for these goods and services.
Figure 1: Nature of Goods
Source: Adapted from Mankiw, 2009 and Kotchen, 2012
The benefits of ecosystem services produced in one region or country can be experienced in neighbouring regions or countries, making it difficult to clearly identify the beneficiary. As a result of the regulating service provided by the Amazon basin of maintaining the hydrological cycle, the agribusiness, hydropower and other linked industries of Brazil and the La Plata basin further south benefit. Rainfall in the La Plata basin is derived from local evaporation, moisture from the Amazon basin, cold fronts from the South and air masses from the South Atlantic. Given this intricate network, deforestation of the Amazon rainforest in any one country affects the rainfall pattern and consequently industry growth of the entire La Plata basin (Bush et al., 2011).
Therefore, SNA limits the inclusion of ecosystem goods and services to only those which have the quality of being private goods that are excludable and rival. SNA keeps a record of only a small subset of ecosystem processes and components which are priced. The majority of ecosystem goods and services that cannot be traded remain unaccounted for.
Alternative national accounting systems that incorporate ecosystem service values
There is a need to move beyond the boundaries of GDP to measure a countries’ socio-economic progress and map the state of its natural capital. Some new frameworks that try to capture not just economic but also social and environmental change are discussed below:
System of Environmental-Economic Accounting (SEEA): The UN Statistical Division, together with the EU, FAO, IMF, OECD and World Bank developed the SEEA 2012, the first international statistical standard for environmental-economic accounting (United Nations, 2014). It builds on the SNA and is a multipurpose conceptual framework designed to better understand the interactions between the environment and the economy. The SEEA first enables physical valuation of environmental assets (stocks and flows) to be made, and then links physical and monetary information (United Nations, 2014). It then facilitates the provision of environmentally adjusted aggregate for depleting environmental assets.
Wealth Accounting and Valuation of Ecosystem Services (WAVES): Launched at the 2010 Convention on Biological Diversity, WAVES is a program to implement green national accounting. The WAVES framework prepares a national balance sheet that accounts not just for the manufactured assets but also for human capital (such as education, social capital including entrepreneurship and innovation), and natural capital (such as water, forests, and other ecosystems that provide vital goods and services) (WAVES, 2012). When presented together with GDP, WAVES better indicates the long-term growth prospect of a nation. GDP indicates if the economy is growing year-on-year, whereas WAVES indicates if that growth is sustainable. It is complementary to SEEA and helps in transitioning towards SEEA-based reporting by building capacity in countries to implement the SEEA and demonstrating the benefits of natural capital accounting to policymakers (WAVES, 2015).
Inclusive Wealth Accounting (IW): Inclusive wealth is a tool that demonstrates that the principal pillars of the wealth of nations, i.e. human capital and natural capital, have remained largely hidden due to the limitations of traditional economic indices (UNU-IHDP, 2015). The IW index measures nations’ wealth by carrying out a comprehensive analysis of a their productive base, and includes manufactured, human and natural capital. It attempts to capture a broader sense of human well-being and progress by directing its focus not on the constituents of well-being but rather the determinants of well-being (UNU-IHDP, 2015). IW maintains that a country’s wealth is its social value, not the monetary value of all its capital assets (UNU-IHDP, 2015). According to IW, national assets include:
Manufactured capital (roads, buildings, machines, and equipment),
Human capital (skills, education, health), and
Natural capital (sub-soil resources, ecosystems, the atmosphere).
Durable assets such as knowledge, institutions, culture, religion, which are more broadly categorised as social capital are taken to be enabling assets capital (UNU-IHDP, 2015). They enable the production and allocation of manufactured, human and natural capital assets.
Few countries have begun adopting holistic national accounting methods in addition to their SNA; for example, Canada, Australia and New Zealand have adopted SEEA, while Botswana, Colombia, Costa Rica, Rwanda and Philippines have implemented WAVES, and Australia, Brazil, China, and France have adopted IW accounting. While it must not be assumed that the acceptance and usage of such holistic accounting frameworks will automatically result in the reversal of environmental degradation, it certainly can be seen as a step in the right direction. Much effort needs to be expended in mainstreaming holistic accounting in order to push for inclusive and sustainable growth.
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