Wednesday, February 8, 2012

GDP Unfit for Purpose

By OneWorld

Of all the Rio Principles that have been shamefully neglected since 1992, the most damaging from the perspective of sustainable development is Principle 16:

National authorities should endeavour to promote the internalization of
environmental costs

“Environmental costs” refer to the depletion of the earth’s natural capital -
ecosystems, biodiversity and mineral resources - and the damage caused by any
waste pollution.

These costs remain external to our evaluation of national economies. Gross domestic product (GDP) is calculated as the value of goods and services produced within a country without adjustment for any change in environmental assets or citizens’ well-being.

The more damaging the economic activity, the more perverse are the results. For example, the construction of a new airport will deliver a positive result to a nation’s economic growth in GDP. Climate change, noise pollution, loss of habitat and the increase in inequality (airports benefit richer rather than poorer families) are all excluded from the calculations.

Yet GDP is universally regarded as the most important of all economic indicators. The phrase “economic growth” has unequivocally positive connotations, elevating policies which favour the present at the expense of the future.

The same forces are at play within individual corporations. Like national accounts, their balance sheets do not present the “true and fair view” so prized by accountants because they do not internalize environmental costs. Like politicians, shareholders will be aware that short term strategies often produce the highest profits because there is no need to take account of the long term damage to the planet.

The cumulative effect of this inverse relationship between economic growth and sustainability is alarming. Towards a Green Economy, a major report for policymakers published by the UN Environment Programme (UNEP) in 2011, concludes: “over the last quarter of a century, the world economy has quadrupled….in contrast 60% of the world’s major ecosystem goods and services that underpin livelihoods have been degraded or used unsustainably.”

This uncontrolled lurch towards our planetary boundaries is often branded as the failure of capitalism, deregulated open markets or our obsession with growth. These economic mechanisms do have much to answer for but the root dysfunction is the externalization of social and environmental costs.

The majority of the world’s economists acknowledge that the familiar method of calculating GDP is no longer fit for purpose. But none has been able to articulate a practical solution, not even when the world’s economic system was on its knees in the 2008 banking crisis