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Inclusive Wealth Index shows more than half of countries 'consuming beyond their means'

New perspective on growth of world wealth, 1992-2010: GDP up 50 percent; 'Inclusive Wealth' 6 percent; Looking beyond GDP, new index measures progress toward sustainability; combines changes in human capital, natural capital, produced capital

Terry Collins Assoc

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Credit: Inclusive Wealth Report

An innovative yardstick -- the Inclusive Wealth Index -- offers 140 countries a new perspective on their economic performance in recent decades, one that extends beyond Gross Domestic Product to help reflect sustainable development.

Worldwide from 1992 to 2010 GDP showed a gain of 50%. However, according to the second biennial Inclusive Wealth Report (IWR), released today, when changes in human capital, produced capital and natural capital are considered together, global wealth increased by an "anemic" 6% over those years.

Human capital -- measured in levels of education, skills and abilities -- is the main source of world wealth, comprising 57% of total Inclusive Wealth, according to the report. Human capital grew just 8% overall worldwide between 1992 and 2010.

Natural capital such as forests, sub-soil resources and other ecosystems, meanwhile, comprise 23% of total Inclusive Wealth and declined by about 30% worldwide in the period.

The relatively low increases in human capital, combined with vast losses in natural capital, largely explain the anemic overall growth in Inclusive Wealth worldwide despite enormous gains in produced capital, says Dr. Partha Dasgupta, Chair of the report's science advisory group.

"This report on changes recorded in three key types of wealth-related capital challenges the narrow perspective presented by GDP. And it underscores the need for integrating sustainability into economic evaluation and policy planning," says Dr. Dasgupta, Professor Emeritus of Economics, University of Cambridge. "Looking beyond GDP and adopting an Inclusive Wealth Index internationally is central to the post-2015 sustainable development agenda being negotiated within the UN Sustainable Development Goals."

Published by Cambridge University Press (and available in full at http://bit.ly/1FTtpjs), the report is a joint initiative of the UN University - International Human Dimensions Programme and the UN Environment Programme, in collaboration with the UNESCO Mahatma Gandhi Institute of Education for Peace and Sustainable Development, ASCENT Africa Sustainability Centre, the Malaysian Industry-Government Group for High Technology, Science to Action (S2A), the Ministry of Environment - Government of Japan, UN University - Institute for Advanced Study of Sustainability, and endorsed by the Science and Technology Alliance for Global Sustainability.

The report was authored by 22 leading authorities from several of the world's most renowned universities and institutions.

The table at http://bit.ly/15Pj9vH shows per capita changes in human capital, natural capital, produced capital, overall Inclusive Wealth change, and the percentage change in GDP over time * for all 140 countries covered in the 2014 report (up from 20 countries covered in the inaugural IWR two years ago).

In the USA, India and China, for example, wealth measured by GDP from 1990 to 2010 rose 33%, 155% and 523% respectively.

However, when measures of natural, human and manufactured capital are considered together, the USA's Inclusive Wealth rose by 13%, India 16% and China 47% over that time.

Startling differences between GDP and the Inclusive Wealth Index are evident in many places, including Ecuador (37% GDP vs. -17% IW), Guyana (97% GDP vs. -2% IW), Qatar (85% GDP vs. -53% IW), Tanzania (67% GDP vs. -37% IW), Uganda (95% GDP vs. -6% IW).

Charts, national data: http://bit.ly/1ygySj7

"The 2014 Inclusive Wealth Report offers a new perspective on the sustainability of economic growth and advances global efforts to improve the quantification of two key but poorly understood components of wealth: natural capital and human capital," report director Anantha Duraiappah, Director of the UNESCO / Mahatma Gandhi Institute of Education for Peace and Sustainable Development.

"For more than half a century we have appraised progress of nations on the basis of how much is produced, consumed, and invested; we have measured that progress in U.S. dollars and aggregated the data into an easy-to-compare metric: Gross Domestic Product."

"The implicit assumption, however, that the resource base upon which this growth depends is infinite clearly isn't true. Less than 50% of the 140 countries assessed are on a sustainable trajectory; more than half are consuming beyond their means."

The report is a tool for making macroeconomic decisions on what and where to invest, Dr. Duraiappah adds, as well as "a key educational resource that can be used by students of both economics and sustainability science to understand the human development and economic growth of countries and their inter-linkages through trade and environmental pressures such as climate change."

Says Science Director of the report, Dr. Pablo Muñoz of UN University's International Human Dimensions Programme on Global Environmental Change: "The inclusive wealth index is a more comprehensive way of measuring national wealth and progress -- a complement to GDP, not its replacement. The shift to sustainability as a core development pillar demands an index that can quantify, measure, and track sustainability."

(Wealth data for all countries cover the period 1990-2010 except for Croatia, Kazakhstan, Kyrgyzstan, Lithuania, Russian Federation, Slovenia, Tajikistan, and Ukraine, for which the data starts from 1991; for Czech Republic and Slovakia from 1992).

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Background

The Inclusive Wealth Report 2014 is a joint initiative of the UN University - International Human Dimensions Programme (UNU-IHDP) and the UN Environment Programme (UNEP), in collaboration with the UNESCO Mahatma Gandhi Institute of Education for Peace and Sustainable Development (UNESCO-MGIEP), ASCENT Africa Sustainability Centre, the Malaysian Industry-Government Group for High Technology (MIGHT), Science to Action (S2A), the Ministry of Environment - Government of Japan, UN University - Institute for Advanced Study of Sustainability, and endorsed by the Science and Technology Alliance for Global Sustainability.

Authors

Adnan Alsaati, Massachusetts Institute of Technology, USA

Kenneth Arrow, Stanford University, USA

Giles Atkinson, London School of Economics and Political Science, UK

Edward Barbier, University of Wyoming, USA

Ross Collins, Massachusetts Institute of Technology, USA

Elorm Darkey, University of Milan, Italy and Université catholique de Louvain, Belgium

Partha Dasgupta, University of Cambridge, UK

Anantha Duraiappah, UNESCO Mahatma Gandhi Institute of Education for Peace and Sustainable Development, India

Cecília Fernandes, UN University International Human Dimensions Programme on Global Environmental Change, Germany

Barbara Fraumeni, Central University for Finance and Economics, China

Haripriya Gundimeda, Indian Institute of Technology Bombay, India

Nabila Jamshed, UNESCO Mahatma Gandhi Institute of Education for Peace and Sustainable Development, India

Pushpam Kumar, UN Environment Programme, Kenya

Gang Liu, Statistics Norway, Norway

Shunsuke Managi, Tohoku University, Japan

Kevin Mumford, Purdue University, USA

Pablo Muñoz, UN University International Human Dimensions Programme on Global Environmental Change, Germany

Kira Petters, University of Bonn, Germany

Vivek Sakhrani, Massachusetts Institute of Technology, USA

Noelle Selin, Massachusetts Institute of Technology, USA

Rodney Smith, University of Minnesota, USA

Kenneth Strzepek - United Nations University, Finland, and University of Colorado / Massachusetts Institute of Technology, USA

Science Advisory Group

Mame Baba Cisse, Ambassador of Senegal in Malaysia

Ligia Costa, Fundação Getulio Vargas, Brazil and Institut d'études politiques de Paris (Sciences Po), France

Justin Lin, Peking University, China

Jane Lubchenco, Oregon State University, USA

Harold Mooney, Stanford University, USA

Zakri Abdul Hamid, Government of Malaysia

Structure / content, IWR 2014

The IWR has been expanded from 20 countries from the inaugural report (2012) to 140 countries in 2014. And it reflects the most recent data, from 2009 and 2010 (in addition to the original 1990 to 2008 data).

While IWR 2012 included a special focus on natural capital, IWR 2014 does the same for human capital.

IWR 2014 is presented in three parts and eight chapters, each beginning with key messages.

Chapter 1: Accounting for the inclusive wealth of nations: key findings of the IWR 2014

Key messages

Empirical evidence shows average positive growth in per capita inclusive wealth - and thus progress toward sustainable development - in 85 of the 140 countries evaluated (approximately 60%).

Gains in inclusive wealth were in general less than those in GDP and HDI: 124 of 140 nations (89%) experienced gains in GDP, while 135 of 140 (96%) showed improvement in HDI over the same period.

Human capital is the foremost contributor to growth rates in inclusive wealth in 100 out of 140 countries. In 28 countries produced capital was the primary contributor. On average, human capital contributed 54% of overall gains in inclusive wealth, while produced capital contributed 33% and natural capital 13%.

Population growth and natural capital depreciation constitute the main driving forces of declining wealth per capita in the majority of countries. Population increased in 127 of 140 countries, while natural capital declined in 127 of 140 countries. Although both factors each negatively affect growth in wealth, changes in population were responsible for greater declines.

Produced capital, the capital type for which by far the most exhaustive (and reliable) data exists, represents only about 18% of the total wealth of nations. The remaining capital types, which together constitute 82% of wealth (54% in human capital and 28% in natural capital), are currently treated as, at best, satellite accounts in the System of National Accounts.

After adjusting for carbon damage, oil capital gains, and total factor productivity, the number of overall progressing countries drops from 85 to 58 of 140 counties (41%). Results show that all three factors negatively affected inclusive wealth in most of countries; of the three, total factor productivity adjustments had the greatest negative effect.

Chapter 2: The IWR and Policy Lessons

Key messages

Countries striving to improve their citizens' well-being - and do so sustainably - should reorient economic policy planning and evaluation away from targeting GDP growth as a primary objective toward incorporating inclusive wealth accounting as part of a sustainable development agenda.

Investments in human capital - in particular education - would generate higher returns for IW growth, as compared to investments in other capital asset groups, in countries with high rates of population growth.

Investments in natural capital, in particular agricultural land and forest, can produce a twofold dividend: First, they can increase IW directly; second, they can improve agricultural resiliency and food security to accommodate anticipated population growth.

Investments in renewable energy can produce a triple dividend: First, they can increase IW directly by adding to natural and produced capital stocks; second, they improve energy security and reduce risk due to price fluctuations for oil-importing countries; third, they reduce global carbon emissions and thus carbon-related damages.

Investments in research and development to increase total factor productivity, which decreased in 65 percent of countries, can immediately contribute to growth in inclusive wealth in nearly every country.

Countries should expand the asset boundary of the present System of National Accounts (SNA), which currently captures only 18% of a country's productive base, to include human and natural capital, which are now measured only through satellite accounts, if at all.

Chapter 3: Human Capital Measurement: A Bird's Eye View

Key messages

Measuring human capital can serve many purposes: it can help one better understand what drives economic growth; assess the long-term sustainability of a country's development path; measure the output and productivity of the educational sector; and facilitate informed discussions on social progress and well-being. In spite of this, human capital has not yet been included within the asset boundary of the SNA.

The multifaceted nature of the concept of human capital creates substantial challenges for its measurement. By focusing on formal education and economic returns for individuals - rather than on human capital in general and all the benefits due to human capital investment - we can begin from an empirically manageable and practical point of departure. All existing approaches to measuring human capital have both advantages and disadvantages. However, the monetary measures generated from the cost-based and the income-based approaches should arguably be designated a "core" status. One reason for this is to enable direct comparison of figures with those for traditional produced capital covered by the SNA, the construction of which is a primary task of national statistical offices.

Drawing on country experiences and international initiatives in the field of human capital measurement, one may conclude that an international trend is emerging toward an income-based approach, specifically the lifetime income approach. Estimates based on this approach can be used to assess the relative contribution of a range of factors (demographic, education, and labor market) to the evolution of human capital, and facilitate corresponding policy interventions.

Despite significant progress having been made, there remain considerable challenges regarding data availability, and detailed methodological choices inherent in applying monetary measures. Further research should therefore be encouraged, including toward the compilation of quality data for use in international and inter-temporal comparisons; the construction of experimental satellite accounts, in order to better understand and reconcile the discrepancies between estimates based on the cost-based and the income-based approaches; and, eventually, toward incorporating human capital measures into the SNA in the future.

Chapter 4: Human Capital: Country Estimates Using Alternative Approaches

Key messages

Human capital is critical to individual and societal well-being.

The educational attainment of a country's younger cohort is frequently higher than the educational attainment of the older cohort; high levels of youth educational attainment correlate to high potential for improved well-being and economic growth in the future. Human capital indicators which depend solely on educational attainment information fail to capture the full potential of a country's population. Human capital measures including information on present and future demographic trends, education, and wage or income components are essential for appropriate policy formulation and analysis.

Chapter 5: Health Capital

Key messages

Health is an essential characteristic of human well-being.

Health capital is an important part of inclusive wealth.

The economic model of health capital presented in this chapter allows health to affect human well-being through three distinct channels: direct well-being, productivity, and longevity.

Most health capital services influence human well-being directly rather than through the production of goods and services that are counted in GDP.

In the absence of better estimates of the direct and productivity effects, gains in life expectancy should be used as the primary measure of health capital.

Annual gains in health capital in the United States are worth approximately US$10,000 per person in monetary terms.

Chapter 6: Forest Wealth of Nations

Key messages

Forest ecosystems provide a huge range of tangible and intangible benefits for human well-being. These are of immense value and represent an important component of national and global wealth.

Demographic trends and economic growth are exerting increasing pressure on forest capital. Accounting more fully for this wealth, and how it is changing as a result of economic and social activity, is urgently required. The estimates in this chapter provide a tentative first step in this direction.

From a global perspective, in 2010 for the selected countries, forest wealth amounted to more than US$273 trillion. On the face of it this wealth, in absolute terms, seems concentrated in relatively few countries. However, for many other countries, forest capital remains an important component of national wealth. Many of these countries (although not all) have experienced alarming losses in forest capital over the past 20 years.

From an accounting perspective, these losses are frequently hidden from view. It is thus essential that nations pursue better accounting to understand quantity, quality, and distribution of forest wealth. Indeed, keeping forest wealth intact - and, more- over, investing in forests to reverse past losses - is an important pre-condition for sustaining development.

Chapter 7: Challenges to Ecosystem Service Valuation for Wealth Accounting

Key messages

In recent years, substantial progress has been made by economists working with ecologists and other natural scientists in valuing some ecosystem goods and services.

However, difficulties in measurement, data availability, and other limitations still preclude the valuation of certain ecosystem services.

There is often uncertainty associated with estimated ecosystem service values, and even more so with scaling up of local values to regional or national levels or updating these values annually, which poses problems for their use in wealth accounts.

In the absence of reliable estimates, the temptation is to use "second-best" estimates, or to transfer values from other locations; however, such methods should be used with caution and only under specific circumstances, at the risk of generating unrealistic values.

Progress in incorporating ecological capital in wealth accounts therefore requires developing more accurate methods of valuing ecosystem goods and services and applying them to a wider range of ecosystems.

Chapter 8: Using Inclusive Wealth for Policy Evaluation: The Case of Infrastructure Capital

Key messages

Wealth accounting to date has focused primarily on the assessment of past performance in economies, by measuring changes to produced, natural, and human capital.

In order to use inclusive wealth for policy evaluation, we must estimate the impacts of a given policy on the trajectories of the capital stocks that comprise wealth. Infrastructure is an important policy domain because proposed changes to current systems affect many, if not all, capital stocks, which results in capital stock interactions and trade-offs.

A systems view of policy evaluation is necessary in order to map and quantify these impacts and trade-offs; this can be managed using conceptual and mathematical models that capture integrated physical and economic processes.

To illustrate how one might conduct wealth-based policy evaluation, we use two infrastructure case studies - coal-fired power generation in China and the High Aswan Dam in Egypt. The case studies rely on integrated physical and economic models to quantify capital stock impacts of past infrastructure decisions.

Such models can be used to evaluate prospective infrastructure systems as well, although doing so requires careful consideration of future uncertainty. Scenario analysis is a useful and flexible method for incorporating uncertainty into wealth-based policy evaluation.

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