In order for the human race to survive and prosper in the next century, our society must learn to create an economic system that meets our material needs without destroying the natural systems upon which all life depends. So far, the prevailing economic model has proven to be a dismal failure, as is evidenced by the myriad environmental crises facing the world, including the loss of biological diversity, global climate change, and the pollution of our land, air and water. Many steps are necessary to transition to a sustainable economy, but one simple measure that would go a long way toward rectifying our current follies would be improving the way we measure economic growth.
The prevailing methodology used for measuring the gross domestic product (GDP) of the United States and most other countries is fundamentally flawed, in that it does not account for the depletion of natural resources or the degradation of the environment. When industries extract raw materials such as petroleum, timber and fish and sell them in the market, the present system of accounting for GDP treats these activities as if producers had created wealth out of nothing. Venezuela, for example, sold about $25 billion of oil in 2002; this figure was added to the GDP along with revenues from manufacturing, construction, and so on.
According to common sense and reasonable accounting principles, however, this type of logic is a fallacy of the highest order. Oil companies in Venezuela did not produce the oil they sold out of thin air it was a tangible asset lying below the surface of the ground, available for use now or at some point in the future. When the oil companies extracted the oil and sold it, they drew down an asset, just as an individual would make a withdrawal from his savings account. If Venezuela had $200 billion of estimated petroleum reserves at the beginning of 2002, it would — have $175 billion in reserves at the end of the year.
A significant portion of the world’s economic growth is based on the depletion of natural resources, and relying on those assets is just as unsustainable as spending down savings to live beyond one’s means. Depleting aquifers, harvesting forests, and catching fish beyond their capacity to regenerate diminishes the wealth of a nation, and decreases the availability of those resources to future generations. Furthermore, eco systems provide beneficial services such as water filtration, carbon sequestration, and preservation of wildlife habitat, which increase their value beyond that of the physical resources they contain.
Studies by Robert Repetto, an economist at the World Resources Institute, found that the depletion of natural assets is responsible for several percentage points a year of GDP growth in Costa Rica and Indonesia. In fact, some countries that are heavily dependent on natural resource extraction would experience negative rather than positive GDP growth if natural assets were accounted for properly.
If measures of GDP were adjusted to account for changes in the value of natural capital, national governments would have incentives to manage their natural assets more sustainably and to invest in the maintenance and improvement of renewable resources such as forests and fisheries. During the Clinton administration, Repetto recommended that the U.S. government incorporate measures of natural assets into its national income accounts. Vice President Al Gore approved of the idea and directed the Bureau of Economic Analysis (BEA) to begin accounting for natural capital.
A Republican-controlled congressional committee, however, refused to appropriate funding for the BEA to collect and analyze the necessary data, claiming that this method of accounting was unproven, and commissioned a blue-ribbon panel of economists from the National Academy of Sciences to investigate the topic and write an in-depth report of their findings. The panel, chaired by William Nordhaus, a Yale economics professor, recognized the wisdom of accounting for sustainability, and advised the BEA to establish “satellite accounts” for natural resources, which would be a good intermediary step toward incorporating those accounts into the standard measure of GDP.
Unfortunately the Bush administration, which is doing its very best to set back the progress of environmental policy by several decades, jettisoned the entire plan. But members of Congress who are more enlightened than President Bush should support the idea of accounting for natural capital, and provide funding for the BEA to adopt the recommendations of the Nordhaus panel. Improving the way we measure economic growth alone would not lead to the development of a sustainable economy, but it would certainly be a step in the right direction.
Justin Pollard is a third-year student at the School of Forestry and Environmental Studies and the School of Management.