This post was authored by Richa Gupta during an internship at Fields of View.
(Please read the previous blog ‘Measures of Wealth and Prosperity’ on Inclusive Wealth Index)
Inclusive Wealth = (social value of manufactured capital) + (social value of human capital) + (social value of natural capital)
Natural capital encompasses the world’s stock of natural assets, such as fossil fuels (oil, coal, natural gas), minerals (bauxite, nickel, copper, iron, zinc, etc.), agricultural land (croplands, pasturelands), and forest resources (timber and non-timber forest resources). In the context of Inclusive Wealth, human capital comprises of education and health, and manufactured capital consists of equipment, roads, and machinery. Another variable used to compute IWI is its health capital, which includes health capital by age, and probability of dying by age.
So, rather than being ranked in terms of GDP, countries are ranked according to inclusive wealth. To take an example, USA’s inclusive wealth was almost $118 trillion in 2008 (with prices at those of the base year, 2000), whereas its GDP was only a fraction of that value. So, this observation implies that the USA is rich in either human capital or natural capital, or even both (in this case, it is human capital).
|Country||2008 Inclusive Wealth ($ tr)||2008 Real GDP ($ tr)|
Source: United Nations, World Bank
As written by the Inclusive Wealth Project, “The index measures an asset’s wider value to society, and not the price for which it could be bought or sold”. Professor Partha Dasgupta was one of the specialists who came up with the IWI; he criticised the GDP for neglecting the social value of natural ecosystems, and also observed that while the GDP and HDI indicators were rising for most of the third-world countries, their sustainable economic development (i.e., the approach that fosters economic growth while preserving environmental quality) was negative, except in the case of China. As said by Prof. Dasgupta, “Adam Smith did not write about the GDP of nations, nor the HDI of nations; he wrote about the ‘Wealth of nations’. […] Leading economics journals and textbooks take nature to be a fixed, indestructible factor of production. The problem with this assumption is that it is wrong: nature consists of degradable resources”.
The first Inclusive Wealth Report was released in 2012, and included statistical data from 20 countries. It is the first of a series of biennial reports, whose twenty included countries accounted for approximately 56% of the world’s global GDP, from 1990 to 2008. It was a core project by the UNU-IHDP (United Nations University’s International Human Dimensions Programme), in collaboration with the UNEP (United Nations Environment Programme). Before and after the 2012 report was published, the following statistics were noted:
|Country||% growth in economy from 1990 to 2008, based on GDP||% growth in economy from 1990 to 2008, based on IWI|
This implies that these four countries substantially depleted their stocks of fossil fuels, fisheries, and forests—while simultaneously raising their Gross Domestic Product. Moreover, while India was ranked second in GDP per capita, according to the IWI report (with a 4.3% per year increase in GDP per capita), it ranked 6th in the Inclusive Wealth Index per capita, with a positive growth of 0.9 % per annum.
The following diagram, as published by the Inclusive Wealth Index website, depicts the per capita growth rate of IWI of the 20 countries (according to 2012 IWR). As can be seen, Colombia, Nigeria, South Africa, Saudi Arabia, Venezuela, and Russia experienced negative IWI growth rates—and were hence deemed unsustainable.
Furthermore, it was observed that although 5 countries (Colombia, Nigeria, Russia, Saudi Arabia, Venezuela) portrayed positive GDP per capita and HDI, they had negative IWI per capita growth rates. This depicts the deficiencies of not only the GDP, but also of the Human Development Index Hence, this graph also illustrates the importance of measuring economic health based on the IWI.