Natural Capital Part of Inclusive Wealth Index (IWI)
The first ever Inclusive Wealth Report 2012 was released this month at the Rio+20 Conference in Brazil. The report was a joint project of the UN University International Human Dimensions Programme (IHDP) on Global Environmental Change and UNEP, and will be released as a biennial series of reports about the sustainability of countries.
As UN Under-Secretary-General and UNEP Executive Director Achim Steiner puts it, the IWR 2012 is expected to move “from black to red” as a more reliable wealth index of nations. Because conventional indices like GDP (gross domestic product) and HDI (Human Development Index) have been criticized as not completely reflecting the true wealth of a nation for its exclusion of nature-based assets, the Inclusive Wealth index might be a more valuable assessment in the future.
As natural capitals continue to decline its true importance in making up the wealth of nations is recognized. According to the report, wealth is the “social worth of an economy’s assets: reproducible capital; human capital; knowledge; natural capital; population; institutions; and time.”
The inclusive wealth index (IWI) looks at the economic productive-base of a nation based on its capital assets:
Produced or manufactured capital (PC) – investments, infrastructure such as roads and factories, goods, etc.
Human capital (HC) – levels of education, skills, knowledge, creativity, etc.
Natural capital (NC) – forests, fossil fuels, fisheries, agricultural land, etc.
By including natural capital in the measurement of a nation’s wealth, the index takes into account the real cost of a growing economy which often happens at the expense of the natural capital base. This is where IWI may become invaluable to its primary audience – governments.
In fact, the IWI reveals significant discrepancies in measuring nations’ wealth when compared to GDP and HDI. For example, China registered an incredible 422% economic production growth in the last two decades when measured by the GDP. But when assessed by the IWI China’s economy only grew by 45%, because the index took into account the decline in natural capital. The United States scored 37% growth in GDP but only 13% in IWI while Brazil had a 31% GDP score but 18% in IWI.
The report found that 19 out of 20 countries assessed suffered depletion of their natural capital. Japan alone did not register depletion in its natural capital mainly due to increased forest cover. Russia, Saudi Arabia, Colombia, South Africa, Venezuela, and Nigeria not only suffered decline in their natural capital but in their overall inclusive wealth as well, setting them on an unsustainable course. Increasing growth in population in respect to IWI was a major factor in creating unsustainable conditions for the five countries above, with the exception of Russia. A summary of IWR 2012’s key findings can be found at the UNEP site.
Recommendations from the report include incorporating the IWI within nations’ planning and development ministries for making of sustainable policies and increased investment in renewable natural capital like reforestation among others.
Dr. Pablo Muñoz, Science Director of the IWR, UNU-IHDP, stated in a press conference that “While most economies analyzed in the Inclusive Wealth Report 2012 and the world more generally have been enjoying positive economic growth rates, a look at the broader capital base indicates that this has come at high physical costs. These expenses should be reflected in the balance sheet of nations.”
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