Fields of View and IWI

In order to demonstrate the components and capabilities of the Inclusive Wealth Index (IWI), Fields of View is planning on using it in a game as a policy design exercise. This computer supported game will simulate different scenarios, and will enable physical interaction among the participants. The game looks at different aspects of the IWI: interconnectedness of parameters, relating qualitative and quantitative parameters, different indices, and possibilities of change for the future.

The target audience of the game are undergraduate students of economics and sustainability studies, in addition to policy-makers. It is assumed that the participants understand the mechanism of national budgets, and can perform basic mathematical operations.

This game has been designed to complement traditional teaching methods. The learning objectives of the game are as follows:

  • Understanding the components that are used to calculate the IWI, and how it compares other development indices such as GDP, HDI, etc
  • Learning how changes in national policies can alter different indices, and what advantages the IWI offers in understanding these changes
  • Encouraging players to develop a futures orientation, and apply the same to shape real-life sustainable economic policies

In this case, the players will be asked to prepare a national budget for a given country—using their judgment based on the national indices (IWI, GDP, etc.) they’re given. Based on these standard development indicators, the players will determine a fiscal budget plan and basic monetary policy.

The game is divided into a briefing, gameplay, and debrief session. In the briefing session, participants will be given a survey to determine their decision-making preferences—which will give them some information about the socio-political context of that country. As part of the gameplay session, the players set national targets (ex. levels of employment, sustainability, poverty levels), and use preferred strategies to achieve them. The game proceeds in multiple rounds, wherein each round simulates one year of operation. The country’s economic prosperity (after each round) will then be published to the participants, and will be calculated using indicators like GDP, HDI, and IWI. Finally, the debrief session looks at the advantages and disadvantages of using different development indicators, and examines the ability of the IWI to reflect upon a country’s economic health.

The system dynamic model of the game can also be used as an interactive way of engaging players with the IWI. For example, an online interactive visualization could be developed for policymakers and students to see the effects of different policies on the future economy. The inputs and interventions will be based on data from the Inclusive Wealth Reports, and from information generated by the game.

Eventually, the IWI could become a more appropriate and comprehensive indicator than GDP or HDI to measure the sustainable development of an economy. But we have realized that this requires serious involvement of different types of audience, such as students, policymakers, politicians, educators, economists, and other such groups.

To draw audiences from different backgrounds to understand the IWI and explore the implications of planning with IWI, we are in the process of building a game called Levers of Change. All the players will be responsible for a country’s well-being, and will plan for investing in different forms of capital, such as the human, natural, and produced capital. Players should be able to balance their economic growth with sustainable development to achieve sustainable goals. The game will challenge players to plan accordingly to ensure global sustainability.

The game design process relies on the functions and indicators in the IWR 2014 report. IWI accounts the wealth of all major socio-economic and environmental parameters and is represented as an index through incorporating several complex statistical models and mathematical formulas. We are triangulating data of quantity and price of produced crops, permanent cropland and pastureland from Food and Agriculture Organization of the United Nations (FAO) to calculate wealth of agricultural land. Similarly, we triangulated statistics on forest area, and stock of timber for all listed countries from FAO. We are also validating data on production, and reserves of oil, coal, and natural gas from US Energy Information administration to calculate the wealth of fossil fuels. We apply the similar procedure for the data on production, reserve, and price of all minerals from US Geological Survey to measure the wealth of minerals.

The most interesting part of the study is to calculate wealth of natural capital. Mathematical functions to calculate the wealth of different natural resources involve multiple numbers of independent variables, such as quantities or natural stock of resources, real prices, and rental prices. The major challenges in calculating natural capital are to identify all independent variables for the model and to validate units of all variables.

Conclusion of IWR 2014

This post was authored by Richa Gupta during an internship at Fields of View.

(Please read the previous blog ‘The Inclusive Wealth Report 2014’ on Inclusive Wealth Index)

These two reports have led to the development of several recommendations for the included countries. These include the incorporation of Inclusive Wealth into planning post-2015 Sustainable Development Goals (SDGs), and the evaluation of macroeconomic policies (such as monetary and fiscal policies) based on IWI rather than on GDP per capita—as this would ensure sustainable and long-term, rather than purely short-term, growth.

Additionally, nations experiencing diminishing returns (that is, the decrease in marginal output) of natural capital are encouraged to invest in reforestation, agricultural biodiversity, and renewable natural capital. Moreover, as said by Dr. Anantha Duraiappah, director of the UNESCO / Mahatma Gandhi Institute of Education for Peace and Sustainable Development, “The report is a tool for making macroeconomic decisions on what and where to invest”. And lastly, as written in the Inclusive Wealth Report 2014, “The inclusive wealth index is […] 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”.

However, although the IWI is a better indicator of economic growth and prosperity, it still has its own limitations. For example, it does not factor in happiness levels, suicide rates, life satisfaction, and the accessibility of housing. It also doesn’t take social capital of a country into account; social capital is a form of economic and cultural capital wherein goods and services are produced for a common good rather than for selfish interests, and transactions are characterised by trust, cooperation, and reciprocity.

In addition, natural capital is often difficult to accurately price. For example, the UN cannot include common access resources like clean air—since it is not directly owned by anyone, and is available for people to use without payment. Hence, when the Inclusive Wealth Index is computed, only natural capital with a market price can be included (such as petroleum, gas, metals, and timber). The Economist suggested another example: bees create honey, which can be sold on the market. But they also pollinate nearby apple trees, a useful service that is not purchased or priced. So, calculations of the Inclusive Wealth Index will invariably be rough, unless economists make a conscious effort to quantify the value of clean air, pollination, and the myriad of others.

But despite its limitations, the concept of Inclusive Wealth has been widely embraced, since it represents development based on concern for the environment and future generations. And it has been predicted by Professor Dasgupta that eventually, people will drop the adjective “inclusive”, and will only call it “wealth”—since, after all, economic wealth is not synonymous with solely income, but also with human capital, the environment, and sustainability.

 

The Inclusive Wealth Report 2014

This post was authored by Richa Gupta during an internship at Fields of View.

(Please read the previous blog ‘The Inclusive Wealth Report 2012’ on Inclusive Wealth Index)

The Inclusive Wealth Report of December 2014 covers information from 140 countries, and was released in New Delhi, India. It laid a special emphasis on human capital. The report concluded that 85 of the 140 countries were producing sustainably, in terms of inclusive wealth, while the consumption patterns of the 55 others were considered unsustainable.

The report also found the extent to which human capital and natural capital are huge indicators of wealth, as compared to only produced capital (which is accounted for by the Gross Domestic Product). For instance, while global GDP rose by 50% from 1992 to 2010, the IWI rose by a relatively paltry 6%. As said by Dr. Partha Dasgupta, chair of the 2014 Report’s science advisory group, “vast losses in natural capital (and small increases in human capital) largely explain the anaemic overall growth in Inclusive Wealth worldwide despite enormous gains in produced capital”.

Components of Global Inclusive Wealth, from 1990 – 2010

Type of Capital % of total Inclusive Wealth % change from 1990 to 2010
Produced Capital 20 + 50
Human Capital 57 + 8
Natural Capital 23 – 30

The following statistics also show the extent to which the Gross Domestic Product is an inadequate standard of a nation’s wealth and prosperity:

As can be extrapolated from the December 2014 report, in the US, India and China, wealth measured only by GDP (from 1990 to 2010) rose by 33%, 155% and 523% respectively.

However, when measures of the social values of natural, human and manufactured capital were considered, the USA’s Inclusive Wealth Index rose by 13%, India’s by 16%, and China’s by 47%—over the same span of time. These are gaping disparities, and provide an indication of the narrow scope of the Gross Domestic Product. The statistics of a few other countries have been tabulated below:

Country % change in GDP from 1990 to 2010 % change in Inclusive Wealth from 1990 to 2010
US +33 +13
India +155 +16
China +523 +47
Ecuador +37 –17
Guyana +97 –2
Qatar +85 –53
Tanzania +67 –37

 


 

The Inclusive Wealth Report 2012

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)
United States 117.8 14.7
Japan 55.1 4.8
China 20.0 4.5
Germany 19.5 3.7
Britain 13.4 2.8
France 13.0 2.9
Canada 11.1 1.5
Brazil 7.4 1.7
India 6.2 1.2

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
China +422 +45
USA +37 +13
Brazil +31 +18
South Africa +24 -1

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.

Measures of Wealth and Prosperity

This post was authored by Richa Gupta during an internship with Fields of View.

 

The Gross Domestic Product (GDP) has long been used to measure the prosperity and health of an economy. The GDP is defined as the market value of all final goods and services produced in a country’s economy, over a given time period (usually a year) [1]. It includes the four components of spending—spending by consumers, firms/businesses, the government, and foreigners (on exports).

 

According to the expenditure approach, GDP = Consumption + Gross Investment + Government Spending + (Exports – Imports)

 

There are other variations of GDP that are also in use, such as the NDP (Net Domestic Product), GNP (Gross National Product), and NNP (Net National Product). That said, all of them still factor in variables related to a country’s manufactured/produced output.

 

 

It is essentially the annual measure of a country’s output, but adjusted to account for depreciation (depreciation refers to reduction in the value of an asset, such as a car or house, over time).

 

  • Gross National Product = GDP + (net income inflow from abroad) – (net income outflow to foreign countries)

 

The GNP is the total value of a country’s output (final goods and services) produced by a country’s residents (domestically produced goods and services).

 

 

The NNP is the monetary value of domestically produced goods and services, minus depreciation.

 

Despite its variations, the Gross Domestic Product is largely used as a metric of a country’s prosperity and economic health. Nominal GDP (i.e. GDP evaluated at current market prices) is used to determine the economic performance of a country and to make international comparisons.

 

However, widely used as the GDP is, it has still come under criticism for not accounting for a range of factors; for example, it cannot accurately measure standards of living, such as levels of education, health, life expectancy, and quality of life. Furthermore, it does not look at negative environmental externalities caused by production, such as compromised air quality, water pollution, and land degradation. It also fails to look at the sustainability of capital stock used; capital stock is the total amount of a firm’s capital, represented by the value of its issued stock. All in all, the GDP of a country cannot give policy-makers an indication about the economy’s future; it’s all about the present. In fact, as said by Danish politician and former environmental minister, Ida Auken, “we need to move beyond GDP as soon as possible”.

 

Since GDP on its own cannot account for negative environmental externalities, a modification of the Gross Domestic Product was duly proposed, called the Green GDP. Green GDP is an index of economic growth that factors in environmental quality to the conventional GDP. It monetises the loss of biodiversity, and takes into consideration external costs caused by climate change. For example, if there is an oil spill in a country’s ocean, the money used to clean up the spill and to treat subsequent illnesses will invariably be included in the country’s GDP—thereby making it appear better off than it was before the spill. China was one of the first countries to measure its performance based on Green GDP; the first green GDP report for 2004 was consequently published in September 2006.

 

Green GDP = GDP – (value of environmental degradation) – (price of fixing environmental damage) [2]

 

However, Green GDP does not look at human capital. Moreover, as remarked by renowned economists Joseph Stiglitz, Jean-Paul Fitoussi, and Amartya Sen, “[Green GDP does not] characterize sustainability per se. Green GDP just charges GDP for the depletion of or damage to environmental resources”.

 

Another index was also decided upon—the Human Development Index, or HDI. The HDI not only takes a country’s value of output into consideration, but also looks at four important criteria: life expectancy at birth, mean years of schooling, expected years of schooling, and gross national income per capita.  So, the HDI is a much more comprehensive measure of a country’s development, since it includes a social aspect as well.

 

However, GDP, Green GDP, and HDI are insufficient when it comes to gauging environmental sustainability This observation has led to the inception of the Inclusive Wealth Index (IWI), which computes a country’s wealth by also taking the environmental and sustainability dimensions into account. It was launched by the United Nations at Rio+20 (a conference on sustainable development), in an attempt to develop a divergent way of gauging prosperity. A country’s Inclusive Wealth Index includes natural capital, in addition to produced/manufactured capital and human capital. Measuring sustainability of a country is critically important, since, as stated by the Sustainable Housing Foundation, “our global future depends on it”.

[1] Tragakes, E. (2012) Economics for the IB diploma [With CDROM]. 2nd edn. Cambridge: Cambridge University Press.

 

[2] Tragakes, E. (2012) Economics for the IB diploma [With CDROM]. 2nd edn. Cambridge: Cambridge University Press.