GDP looks at only one part of economic performance — income — but says nothing about wealth and assets that underlie this income. For example, when a country exploits its minerals, it is actually depleting wealth. The same holds true for over-exploiting fisheries or degrading water resources. These declining assets are invisible in GDP and so, are not measured.
Wealth accounting, including natural capital accounting (NCA), is needed to sustain growth. Long-term development is a process of accumulation and sound management of a portfolio of assets — manufactured capital, natural capital, and human and social capital. As Nobel Laureate Joseph Stiglitz has noted, a private company is judged by both its income and balance sheet, but most countries only compile an income statement (GDP) and know very little about the national balance sheet.
The other major limitation of GDP is the limited representation of natural capital. The full contribution of natural capital like forests, wetlands, and agricultural land does not show up. Forestry is an example – timber resources are counted in national accounts but the other services of forests, like carbon sequestration and air filtration are ignored. So, GDP can give misleading signals about the economic performance and well-being of a country.
Partly as a result, ecosystems are deteriorating worldwide, and with them, the capacity to support human well-being and sustainable economic growth.
The concept of accounting for natural capital has been around for more than 30 years. A major step towards achieving this vision came with the adoption by the UN Statistical Commission of the System for Environmental and Economic Accounts (SEEA) in 2012. This provides an internationally agreed method to account for material natural resources like minerals, timber and fisheries.
Video credit: Irish Forum on Natural Capital
Text credit: ‘Natural Capital Accounting in Brief’ from WAVES (2015)