The GDP Effect


A better way must be found to measure the prosperity and progress of mankind. Where the environment is concerned, there's no such thing as a free lunch.


                     Former World Bank President, Barber Conable, and former 
                     UN Environment Programme Director, Mostafa Tolba



a cartoon Economists working out the cost of the Kobe earthquake recently came to a startling conclusion: Japan will actually make money out of the catastrophe.

Five thousand five hundred people were killed, 33,000 injured, and the bill for damage has already exceeded US$110 billion. Yet the income generated by the huge rescue and clean-up effort means that, according to calculations based on Gross Domestic Product (GDP), the earthquake will turn out "slightly positive on balance."
Any accountant will tell you an economy's true output is the difference between what it produces and what it loses. The benefits and the costs. But environmental damage caused by man, whether it's oil spills or ravaged rain forests, is not deducted from GDP as a cost to the economy. In fact, it contributes to the GDP in the form of income, when someone is paid to put it right.

Because the environmental costs are not taken into account when GDP is calculated, we think we are much wealthier and healthier than we actually are.

"This is dangerous", says Claude Martin, Director General of WWF International, "since governments, international banks, aid agencies, politicians, the press, and the business sector all use GDP as a primary basis for decisions about the future."


THE JAPANESE EXAMPLE

According to conventionally calculated GDP, Japan is one of the richest countries in the world per capita. But how reliable a guide is this to real wealth and welfare?

Researchers at the University of Tsukuba tried to find out. They corrected Gross National Product (GNP, a variation of GDP) by accounting for social and environmental costs over a 30-year period. Until 1980, the corrected GNP soared, creating a new "wealth" record every year.

After 1980, everything was turned on its head. Japanese GNP continued to rise, but the corrected GNP plunged to less than one tenth of the former's value within five years. The Japanese have a lot of cash, the research confirmed, but their quality of life is falling.

This doesn't only apply to Japan, of course. Traffic pollution, long commuting times, and work-induced stress are a feature of life in every industrialized country. Yet they are not seen as costs in the traditional calculation of GDP.


TRUE GDP: A NEW INDICATOR

An environmentally adjusted GDP, a True GDP, would make for better-informed decisions and encourage sustainable development. How do we calculate a new GDP? By placing money values on the loss and use of nature's resources and deducting them from the traditional GDP.

One attractive possibility is tax reform to reduce resource use and increase employment by decreasing tax on human labour. Industry and con-sumers forced to pay spill-over costs for the environmental damage they cause would think twice before inflicting it and the money received could be set aside for investment in nature.

There would be winners and losers with a nature-adjusted GDP. Countries would see environmentally damaging industries go out of business, while sectors that enhance the environment would increasingly contribute to economic growth. Financial institutions would then alter funding policies to encourage good businesses and discourage the bad.

The need for a system of more accurate economic indicators has never been greater. In the UK, national income rose by 230% between 1950 and 1990. But the cost of water, air, and noise pollution is reckoned to be $35.4 billion, 6% of national income over this period.

In Brazil, the inclusion of timber depletion costs in agricultural output reduces the latter by a fifth. In the Philippines, depreciation for forestry, soil erosion, and coastal fisheries amounts to 4% of GDP, which is greater than the annual rise in external debt.

It is neither sustainable nor economically prudent to continue ignoring these real costs. Nature needs to be given value at a micro- and macro-economic level for GDP to make sense.


COSTING A RUBBER PLANTATION

Loggers, for instance, are not required to consider the costs of the trees they fell. Labour, transport, saws and ropes, yes. But trees, no. Logging is counted entirely as generating income. The spill-over cost is picked up by society as a whole. The managers of a rubber plantation in Nigeria did their sums properly before expanding into the Okomu Forest Reserve. They found that the true costs of the development outweighed the benefits. Direct investment was initially estimated to be just $450,000, compared to expected turn-over of $1.58 million. At first, it seemed logical that the project should go ahead.

Later, however, the spill-over cost of clearing the trees was taken into account. After consideration of the potential loss of fuel wood and building materials, food and clothing from wildlife, as well as tourism and traditional medicine, the overall cost turned out to be $1.64 million. The true costs far exceeded the potential income.

If the internationally agreed system for calculating GDP is not changed, we will continue to plunder the planet's natural resources and pollute the environment as if it were an infinite resource - without ever registering a fall in the GDP.

Think of the earth as a bank account. We live off the interest on its capital. GDP is the interest. Natural resources are the capital. When resources are eroded, the interest must fall. But under the present system,we spend capital while pretending it is only interest. Balance expenditure against that and we are spending more than we have. We are living beyond our means.

The present system of calculating GDP is past its sell-by date. It came out of a 1928 League of Nations meeting, at a time when mass production and mass pollution were about to change the face of the earth.

As a complement to conventional national accounts, the UN introduced the System for Integrated Environmental and Economic Accounting (SEEA). Though far from perfect, this could lead to the calculation of True GDP and replace the old system.


THOSE WHO SHOULD ACT NOW

WWF is challenging international organizations and national governments to switch over to the True GDP by 31 December 1999. They should immediately acknowledge the flaws in the current system and commit themselves to making the change. "This is the same timetable as the European Commission sets in its own Fifth Environmental Action Programme," says Tony Long, Director of WWF's European Policy Office.

The World Bank and the UN Statistical Commission should form and lead an international working group that includes the International Monetary Fund, the OECD, and the European Union. Its task will be to develop and implement a new, comprehensive, and reliable accounting system to meet the challenges of the next century.

The working group must mobilize financial, technical, and institutional support, allowing national statistical offices to compile new accounts that value natural resources and put a cost on pollution. Developing countries must be adequately represented. There should be open debates on methodologies and policy applications, fully involving non-governmental organizations.

The group should also take the lead in publishing adjusted national economic indicators.

Unless there is an internationally coordinated effort to implement a more accurate system of national accounts, "growth" today will mean poverty tomorrow.


WHO WOULD YOU PREFER TO BE?

The early riser on $40,000 a year, two hours to work, two hours back again, half an hour for lunch - a hard-drinking, heavy-smoking, stressed-out, crèche-paying city worker? Or the stay-at-home, slipper-wearing, child-minding telecommuter on a few thousand dollars a year less, shying away from extortionate transport costs, traffic jams, and vehicle smog? It would depend on how long you wanted to live, for how long you were prepared to risk burn-out.

The same goes for the environment. The earth has a finite amount of resources, on which future economic activities depend. Failure to account for the use of these resources in the GDP means their burn-out rate is hidden.


WHY THE PRESENT SYSTEM IS FLAWED

Wages, imports, taxes, budget deficits, government spending and borrowing, depreciation in the value of machines, vehicles, and buildings are all accounted for in the System of National Accounts (SNA), the global economic information system. But the environment, the fundamental basis for any economy, is not included. The SNA is for monitoring the behaviour of national economies. It provides a basis for economic policy- and decision-making. The SNA is also used for international comparison, to score countries' economic performance as a teacher measures the performance of students.

Imagine the economy is a car. The SNA is the dashboard behind the steering wheel. For safe driving, all dials and indicators must work accurately. Without a dial telling you how much petrol is in the tank, or whether the engine is overheating, you would feel threatened. The same applies to the economy. A flawed GDP means wrong information. For a more accurate GDP, the depletion of the environment must be taken into account. That is how governments can make the right decisions about the road ahead.



"There is no doubt that the destruction of the environment is an expense. It is important to be able to show how (this) expenditure breaks down between different activities and what it adds up to every year, as revealed by a calculation of Environmentally-adjusted Domestic Product (EDP)."


Swedish Governmental Commission for Environmental Accounting

a cartoon


THE ACTION PLAN 1995


Firm commitments to change to True GDP from governments, parliaments, international organizations, the EU, and industry federations

International working group set up, coordinated by World Bank and UNSTAT

EU begins publishing nature-adjusted national accounts on pilot basis

JANUARY 1997

EC publishes environmental pressure indices and performance indicators for main economic sectors

DECEMBER 1997

European system of integrated environmental and economic accounting system introduced

At least ten EU states have a nature-adjusted SNA

Ten developing countries set up nature-adjusted SNA, helped by World Bank and UNSTAT

International working group introduces guidelines for nature-adjusted SNA

IMF requires its members to submit nature-adjusted accounts

31 DECEMBER 1999

Full global implementation of nature-adjusted SNA

European system of integrated accounting formally adopted



"...traditional economic concepts (e.g. GDP as traditionally conceived) may be losing their relevance for future policy design."


a cartoon


The UK bill for water, air, and noise pollution from 1950 to 1990 is over $35.4 billion.

GDP is down 17% in Indonesia after taking into account net changes in petroleum, forestry, and soil resources.

Soil erosion in Zimbabwe cost $25 million in 1990 -30% of agricultural GDP.

Depleted fisheries, forestry, and land cost Costa Rica $4 billion from 1970 to 1990 - equal to losing a year's GDP.

Top: China loses around $1 billion in forests every year.
Bottom: Over $20 billion of EU development aid is allocated annually to European regions on the basis of a falsely calculated GDP.

If GDP is adjusted by costs associated with resource depletion, pollution, and accidents, the result is a Genuine Progress Indicator (GPI) four times lower than by traditional calculations.



Published by WWF - World Wide Fund For Nature (known in the USA and Canada as World Wildlife Fund), CH 1196 Gland, Switzerland. Written by Tony Snape. Illustrations by Benoît Jacques. Any reproduction in full or in part of this publication must mention the title and credit the above-mentioned publisher as the copyright owner.


(7M) AUGUST '95 © 1986 WWF symbol copyright ® WWF Registered Trademark owner printed on 100% recycled paper





Copyright 1996, The World Wide Fund For Nature