Economic theory supports the allocation of capital and investments throughout the U.S. $17-trillion — and global $75-trillion — economy. Conventional economic theory is rife with assumptions that not only paint a narrow, inaccurate and vastly oversimplified view of the future prospects and actual overall impacts of investment decisions, but also justify investments that, over the long-term, can drive societies over the proverbial cliff.
Efforts to move beyond narrowly defined conventional economic theory — and measures such as GDP — stretch back decades. On Dec. 10, a globe-spanning initiative on the part of United Nations agencies, universities and research institutes released the 2014 Inclusive Wealth Report.
Measuring human and natural as well as produced capital, the Inclusive Wealth Index (IWI) offers a broader, more comprehensive — and hence more useful more perspective than GDP — regarding the economic performance of 140 nations. Moreover, comparisons of national economic performance from 1990 to 2010 as measured by Inclusive Wealth contrast starkly with those based on GDP.
A more inclusive measure of national wealth and well-being
Introduced in 2012, development of the Inclusive Wealth Index and production of biennial Inclusive Wealth Reports coincides with development of the U.N. Sustainable Development Goals (SDGs). The U.N. SDGs are to serve as the strategic blueprint that will guide policy and decision making across the U.N. organization in the post-Millennium Development Goals (MDGs) era.
Authored by 22 leading authorities from some of the world’s most highly regarded universities and research organizations, IWI and IWR provide “an innovative yardstick [that] offers 140 countries a new perspective on their economic performance in recent decades, one that extends beyond Gross Domestic Product to help reflect sustainable development,” the IWI Project states in a press release.
Adding human and natural capital into the GDP equation
In addition to measuring produced capital, as is done in calculations of GDP, the Inclusive Wealth Report factors in measures of human and natural capital. As the IWI Project explains, human capital is measured in levels of education, skills and abilities.
The IWI Project’s pioneering work reveals that human capital is the main source of worldwide wealth and accounts for 57 percent of total Inclusive Wealth. Natural capital seeks to measure the extent, health and integrity of “forests, sub-soil resources and other ecosystems.” Natural capital, according to the 2014 report, represents 23 percent of total Inclusive Wealth.
This year’s second biennial global report highlights dramatic differences in economic performance for 140 nations over the 19-year period from 1992 to 2010, as measured by IWI and GDP. Whereas worldwide GDP rose 50 percent from 1992 to 2010, IWI rose a comparatively “anemic” 6 percent.
Small increases in human capital and “vast losses in natural capital largely explain the anemic overall growth in Inclusive Wealth worldwide despite enormous gains in produced capital,” Dr. Partha Dasgupta, chair of the 2014 report’s science advisory group and professor emeritus of economics at the University of Cambridge, was quoted as saying.
“This report on changes recorded in three key types of wealth-related capital challenges the narrow perspective presented by GDP. And it underscores the need for integrating sustainability into economic evaluation and policy planning.
“Looking beyond GDP and adopting an Inclusive Wealth Index internationally is central to the post-2015 sustainable development agenda being negotiated within the UN Sustainable Development Goals.”
Comparing national economic performance across three of the world’s largest economies, the 2014 report project team determined that GDP in China, India and the U.S. increased 523 percent, 155 percent and 33 percent respectively from 1990 to 2010. Adding human and natural capital into the equation, Inclusive Wealth rose 47 percent for China, 16 percent for India and 13 percent for the U.S.
More startling differences between GDP and Inclusive Wealth are apparent in other countries, the IWI Project highlights:
- Ecuador: 37 percent GDP vs. -17 percent IW
- Guyana: 97 percent GDP vs. -2 percent IW
- Qatar: 85 percent GDP vs. -53 percent IW
- Tanzania: 67 percent GDP vs. -37 percent IW
- Uganda: 95 percent GDP vs. -6 percent IW.
Data and charts of Inclusive Wealth spanning all 140 nations covered in the 2014 IWR are available here.
Published by Cambridge University Press, the full 2014 IWR is available here.
*Image credits: Inclusive Wealth Project