Inclusive Wealth Index Shows Economic Impact of Natural Capital

Last week, I wrote about how we need to move beyond GDP as our primary indicator of progress if we want to achieve true sustainable development. This week, at Rio +20, the International Human Dimensions Programme on Global Climate Change (IHDP) and UNEP launched a new indicator called the Inclusive Wealth Index (IWI). Going beyond GDP, the IWI includes natural capital, in addition to human and manufactured capital, when looking at a country's capital assets to see the true wealth and sustainability of its growth. Under the IWI, natural capital calculations include fossil fuels, minerals, forest resources, agricultural land and fisheries. Ecosystem services and water accounting were not included due to lack of reliable data.

Every two years, IHDP will release a report that calculates the IWI for 20 countries that account for the majority of global GDP. The first report found that 19 out of 20 countries saw a decline in their natural capital from 1990 to 2008 and six countries had a decline in their overall IWI, indicating unsustainable growth. And, though most countries saw growth in their IWI, it was at a much slower rate than GDP growth. China, for instance, saw its GDP grow by an impressive 422 percent between 1990 and 2008, but its IWI growth over the same time period was just 45 percent, indicating the toll growth took on the country's natural capital.

One of the main reason alternative indicators are important is that they take things that we value on a visceral level, like the environment, and put them into the universal language of capital. Ideally, we would be able to value natural resources for their inherent worth but that, very unfortunately, seems unlikely. As it stands now, the only way natural resources are counted are based on their economic value when they are extracted or used. Forests are counted not by the value they provide in terms of clean air and carbon sinks, but by how many products they produce. With GDP as our primary indicator, if all the fish in the sea were caught and sold, we would see a big jump in global GDP from the commercial activity but the negative environmental and economic impacts of not having any more fish would not be reflected.

The IWI is an important data tool. The next step is for governments to start to incorporate it into their national accounting and policy making. Expectations for Rio +20 are low but if governments could agree to use the IWI as part of their overall economic accounting, it would be a substantial step towards true sustainable development.