Whenever you read a report or hear on the news that the economy is growing, what you are

Transcription

1 Whenever you read a report or hear on the news that the economy is growing, what you are hearing is that the Gross Domestic Product (GDP) is growing. But while GDP measures economic activity, it does not measure the distribution of the wealth created by that activity, or the quality of our air and water, or the quality of our schools. Yet, when we hear GDP is growing many of us believe that the country is doing better than it was. Given that economists, politicians and the media treat GDP this way, it is no surprise that we think this way. In the wake of the 2007 economic crisis, state governments and some economists are pursuing a renewed push for alternative measurements of our national well-being. Recognizing that persistent unemployment coupled with economic growth reveals the divorce between the GDP and our general welfare (a point already recognized by the developer of GDP), alternatives to GDP are becoming more fashionable. For instance, United Nations Secretary-General Ban Ki-Moon called for an alternative to GDP to be produced at the Rio+20 conference held in June Unfortunately, these alternatives are being pursued at a time when financial actors are pushing an aggressive effort to financialize nature. From water markets to pollution markets, Wall Street has its ambitions set on expanding into new and newly profitable areas. By extending the paradigm of market valuation beyond the market, these alternatives to GDP will facilitate the financialization of nature, placing our essential, common resources under the power of Wall Street bankers. The financialization of nature is the process of replacing environmental regulation with markets. In order to bring nature under the control of markets, new commodities need to be created by the commodification, marketization and often privatization of our common resources. It is a means of transferring the stewardship of our common resources to private business interests. Relying on market-based schemes to protect the environment and fight climate change is misguided. In 2007, former World Bank chief economist Nicholas Stern described climate change as the greatest and widest-ranging market failure. 2 In the wake of the largest financial crisis in 75 years, one both created and spread by the use of innovative financial instruments, the push to advance market-based schemes and reliance on financial instruments to fight climate change or distribute water must be seen for what it is: an opportunity for polluters to buy the right to pollute and for speculators to gamble on our essential resources. Such schemes transfer control from local communities to external shareholders, further concentrate pollution in poor communities and exacerbate inequality.

2 The GDP of a country is the measurement of the total monetary value of all production of goods and services within a given country and within a given time. Rises and falls in GDP show whether or not the total value of production within a country is growing or shrinking. In other words, GDP is a measurement of economic activity and is a guide to whether an economy is expanding or contracting. In the United States, the Bureau of Economic Analysis at the Department of Commerce releases quarterly estimates of GDP as well as final annual GDP measurements. These figures are widely reported in the press and are taken as a guide to the economic health of the country. When news reports claim that the economy has grown or shrunk by a given percent, they are reporting the estimated percentage increase or decrease in GDP. Although countries have long tried to maintain records of economic production and of national wealth, GDP is a fairly recent development. In the 1930s, economists working for the U.S. government developed the National Income and Product Accounts (NIPA), which track both the total production in the country and the total of incomes earned. 3 Simon Kuznets, an economist working at the National Bureau of Economic Research, was tasked with developing the national accounts in order to provide a comprehensive account of the state of the economy and of efforts to recover from the Great Depression. The original set of accounts was presented to Congress in Since that time, the accounts, and GDP in particular, have gone through many transformations and adjustments. At the same time, GDP has grown in prominence. Today, GDP and GDP per capita are taken not only as measures of the growth of economic output, but also as signs of the well-being of the nation. Criticisms of the limitations of GDP are longstanding relative to its history. Simon Kuznets himself cautioned that these measurements had limitations for what they could tell us about the economic well-being of the country. As an aggregate of the total market value of production and services, GDP counts as positive contributions many expenditures that are not beneficial for well-being. Some critics note that GDP does not distinguish between the quantity of a given expenditure and the quality of that expenditure. Money spent on alcohol and gambling is just as good by GDP standards as money spent on books and exercise, as Lew Daly and Stephen Posner note. 5 A further criticism of GDP is that it does not distinguish between expenditures that contribute to social well-being and what are called defensive expenditures. Spending on education is an example of an expenditure that benefits social well-being. Defensive expenditures merely try to protect the current status without making improvements. Examples include expenditures to clean up from industrial accidents, health care costs to treat avoidable illnesses and health issues, and military spending. 6 One of the principle criticisms of GDP as inadequate for measuring the well-being of the country is that it fails to account for the distribution of the wealth and income generated by the production it measures. 7 Although this can be mitigated to some extent by reporting GDP per capita, it is still the case that even this measurement obscures the true distribution of wealth and income. Some people will receive a vastly larger share of the economic output of the country than the per capita average, and some will receive much less. At best, GDP per capita is a crude measure of living standards. 8 GDP simply cannot track inequality. 9 Despite these flaws in GDP, the real issue that proponents of alternatives fix upon is that GDP is no longer used solely for the purpose intended. As one report states, GDP is being misused as an indicator of something it doesn t measure and was never intended to measure. 10 As indicated above, even Simon Kuznets himself cautioned that GDP should not be used to chart anything other than economic growth. As early as 1934, he told Congress that [g]oals for growth should specify more growth of what and for what. 11 In 1972, William Nordhaus and James Tobin argued, in an essay that pioneered the alternative GDP movement: GNP is not a measure of economic welfare. Economists all know that. 12 Indeed, even Alan Greenspan has recognized this fact, stating that GDP is not necessarily a measure of welfare or even a significant measure of standards of living. 13 While technical fixes for the way GDP is calculated could correct some of the problems with it, the broader problem of the misappropriation of GDP as a sign of social well-being and progress defies a technical fix. From economists to policymakers, news reporters to the general public, growing GDP has become synonymous with our social and economic welfare. 2

3 Lew Daly and Stephen Posner contend, [d]epending on GDP promotes an economic model devoted to growth at all costs, where more is equated with better and an expanding economy equals social progress even as average households do not benefit and the critical non-market dimensions of our lives and nation are depleted for lack of adequate investments and protections. 14 They further contend that the problem lies in how GDP has come to play such a defining role in public debates about economic performance and social progress. 15 The authors of a Boston University report on alternatives to GDP agree. The real issue, beyond the technical problems of GDP, is that GDP has been widely adopted as a measure of something it was never intended to measure. 16 But would replacing GDP with an alternative really solve this problem, or would it contribute to the further degradation of our environment by facilitating the financialization of nature? In 1968, U.S. Senator Robert Kennedy made a speech at the University of Kansas in which he highlighted the deficiencies of using Gross Domestic Product (or GNP, since this was prior to 1991). 17 Four years later, William Nordhaus and James Tobin published their paper that initiated the movement for alternatives to GDP. Nordhaus and Tobin developed a measure of economic welfare that was meant to begin to move beyond GDP and incorporate broader measures of social welfare. 18 The attempt to find an alternative grew from there. By 2000, one researcher was able to claim that there were literally hundreds of alternative indicator programs in use. 19 The basic purpose of alternatives to GDP is to provide an indicator of social well-being or general welfare. They are specifically meant to address the fact that GDP has been misappropriated to this role. The basic components of the most prominent alternatives, including the GPI (Genuine Progress Indicator), follow a similar pattern. They involve estimating expenditures and weighing these estimates with inequality indices. They add non-market benefits including various unpaid social functions such as parenting and housework, but also public infrastructure. Deductions are then made for the defensive costs, such as cleaning up from pollution. Degradation of the environment, now considered natural capital, is also deducted. 20 What is calculated is an aggregate that reflects a particular understanding of the general welfare of the nation. Perhaps the two most prominent of these attempts to provide an alternative, at least in terms of adoption by state governments, are the Index of Sustainable Economic Welfare (ISEW) and its successor, the Genuine Progress Indicator (GPI). 21 The ISEW was developed in the 1980s by Herman Daly and John B. Cobb. 22 In 1995, Redefining Progress developed the ISEW into the GPI, having altered the methodology, but not the purpose, of the ISEW. 23 The attempts to develop alternatives to GDP have not been limited to the United States. Various world leaders including U.N. Secretary-General Ban Ki-Moon and Connie Hedegaard, EU commissioner for climate action, urged the Rio+20 conference to pursue alternatives to GDP. 24 In 2008, then-french President Nicolas Sarkozy created a Commission on the Measurement of Economic Performance and Social Progress to investigate developing alternatives to GDP for use in France. 25 And the Organisation for Economic Co-operation and Development (OECD) has been pursuing alternatives to GDP since 2004, working with the World Bank, European Parliament, European Commission, and World Wildlife Fund, among others. 26 What is important is that these alternatives seek to go further than GDP, which is limited to calculating only those activities that are expressed in market values. This is their major innovation. Non-market values such as parenting, in-home food preparation and volunteer activities are all subsumed under GPI. Nature itself is subsumed under the GPI as it seeks to value water and air purification and other ecosystem services. 27 The concern driving this subsumption of non-market values under GPI is that these non-market values are un-quantified and un-valued, and thereby inaccessible for policy development. 28 In fact, for their proponents, it is this characteristic of alternatives to GDP such as GPI that makes them capable of replacing GDP as a measure of well-being. 3

4 As with GDP, there are many technical criticisms of alternatives to GDP. Eric Neumayer, for example, has criticized the ISEW/GPI model because it seeks to mesh together two incompatible measurements, that of current welfare and sustainability. 29 Another criticism argues that the social factors taken as adding to social well-being are in many instances subjective. The persons who develop the particular index that is being used determine what counts as having social benefit. 30 One can easily imagine that an alternative to GDP could be developed that would reflect fundamentally different values than those expressed in the GPI, for instance. In fact, this subjective aspect of determining what does and does not count as contributing to social well-being means that there will likely be variations in GPI from one state to another. 31 A newer criticism of alternatives to GDP centers on whether or not they contribute to the financialization of nature. As argued above, the need for an alternative is made using the point that GDP is not and was never meant to be an indicator of social progress or the general welfare of the nation. Thus, by focusing on GDP in both reporting on the state of the economy and in policy decisions, we are pursuing a narrow indicator that leaves out all the important non-market values that make up a healthy, well-functioning society. Basically, GPI seeks to go beyond GDP to account for the nonmarket values that GDP leaves out. To do this, it has to assign market values to the non-market values. In a sense, it is not so much a replacement of GDP as it is an expansion of it. While the purpose of the alternatives to GDP is to capture the full socio-economic effects of economic activity, the means of doing so is to extend market values over non-market values. In other words, the most prevalent alternatives, such as GPI, extend the domain of the market and seek to create market values where none exist. In order to achieve this, GPI must calculate market values for a variety of non-market activities. These values will then be presented as costs or prices of the non-market activities. Only now, they will no longer be non-market, they will be part of a renewed and expanded market. So, for proponents of GPI, the answer to the depletion of non-market values (destruction of forests, pollution of water, etc.) caused by the overweening power of the market is to expand the market to include those values. As such, the market will allocate the newly marketized commodities based on market efficiency, e.g., the ability to pay. An example from the water markets proves the point: in 2012, natural gas companies seeking water for hydraulic fracturing outbid Colorado farmers, freezing out farms. 32 To achieve this goal of expanding market values to include nonmarket values, a new universal economic measure must be developed that subsumes those previously non-market values. GPI is still a form of economic/market reductionism that seeks a new single quantitative measure of a broadened understanding of the market. John Talberth, who helped develop the GPI at Redefining Progress, admits that GPI requires natural capital accounting, or the establishment of monetary values for a country s environment: Proper valuation of natural capital and ecosystem services is essential to a rigorous metric. 33 It seems, therefore, that GPI will be a major part of spreading financialization, justifying natural capital accounting, and perpetuating payments for environmental services. Blayne Haggart noted of GDP, Although it is an objective, positive measure of economic growth, its use as a proxy for social welfare represents a judgement [sic] as to the importance of market activity and economic growth. 34 It is hard to see how this criticism does not also apply to GPI. If use of GDP a measure of economic activity renders a judgment as to the importance of the market, extending the market paradigm to subsume the natural environment must surely extend that judgment, even as it claims to displace economic growth from its place of prominence. A rigorous GPI, founded on proper valuation of natural capital and ecosystem services, would certainly contribute to the financialization of nature. The financialization of nature follows upon the commodification, marketization and often privatization of our common resources. Strictly speaking, commodification is the commercialization of something not generally seen as a product. Whereas a widget is a commercial product, nitrogen pollution has not traditionally been viewed as a commodity. Commodification turns an inherent value into a market value, enabling it to be bought and sold on a market. The commodities can then be priced and a market can be created for them. Privatization transfers control and management of these commoditized re- 4

5 sources from public ownership to private ownership. At this point, financialization acts upon the commodity as an asset and applies various financial instruments to it, such as through a water futures contract or a nitrogen credit option. 35 The valuations necessary for an alternative to GDP such as GPI are the same valuations necessary for the commodification and marketization of our common resources. In fact, the point of the valuations made for GPI is the extension of market values over and incorporating non-market values. GPI is not merely supportive of financialization of nature; it is itself the financialization of nature. While GPI explicitly facilitates the financialization of nature, there are other alternatives to GDP that avoid the trap of trying to provide market values for non-market values. These non-monetary, non-market alternatives can still help to guide public policy and can still help us to better understand the true extent of social wellbeing in our society. The Footprint model has grown in popularity in recent years, so that it is now possible to calculate one s carbon footprint or water footprint. For example, a household s water footprint is calculated from national averages of water use associated with such fixtures and devices as shower heads, dishwashers, washing machines, etc. 36 In addition, the water used in the production of the food you eat and the clothes you wear, as well as the gasoline that powers your car, can be part of calculating the footprint. Broader calculations of an Ecological Footprint can also be made. Ecological Footprint accounts reveal how much land and water area a human population requires to produce the resources it consumes and to absorb its waste. They also track how much productive area or biocapacity is available. 37 Without attempting to price the natural environment on which a country s economy relies, the footprint model calculates whether or not a given country is overextending its environmental resources. What the various footprint models demonstrate is that it is possible to address concerns about the limits of GDP without resorting to extending the market valuation paradigm embedded in the GDP. Further evidence of this is the Gross National Happiness Index of Bhutan. Unlike GPI or other indices generated by economists, the GNH seeks to measure happiness without reducing it to an aggregate of market values. Assessment of GNH is done through a survey format meant to be understandable to the general public. It does not create market values for non-market values, it asks the Bhutanese people themselves to assess their happiness. 38 While it is true that use of Gross Domestic Product as an indicator of social well-being extends GDP beyond what it measures, adopting the Genuine Progress Indicator or related alternatives will facilitate the financialization of nature. Policymakers should seek an alternative to GDP not by replacing it with another aggregator, but by replacing it with a pool of measurements that, taken together, can inform policy decisions and better reflect our social values. In this pool, GDP can still play an important role, especially if recalibrated so that it no longer counts as positive contributions any economic activity for negative and defensive measures. Other potential measures in the pool would be GDP per capita and Gini coefficients for measuring inequality. Added to these economic measurements, the pool should include a non-monetary, footprint model as an alternative to GDP that captures the environmental resources being used for the economic output of the country or state and measures whether or not that usage is sustainable over the long term. By using a pool of measurements, with each member of the pool taken as giving only that information it actually provides, it is possible to have a clearer understanding of the social well-being of the country or state without facilitating the financialization of nature. 5

6 1 Rio+20 United Nations Conference on Sustainable Development, 2 Stern, Nicholas. Stern Review on The Economics of Climate Change (pre-publication edition). Executive Summary. HM Treasury, London, U.K at i. 3 GDP: One the Great Inventions of the 20th Century. Survey of Current Business. January 2000 at 6. 4 Ibid. at 7. 5 Daly, Lew and Stephen Posner. Beyond GDP: New Measures for a New Economy 6 Daly and Posner, 2011 at 5. 7 Costanza, Robert et al. Beyond GDP: The Need for New Measures of Progress. The Pardee Papers. No. 4. January 2009 at Holden, Michael. Per Capita Gross Domestic Product: An Appropriate Measure of Living Standards? The Case of Newfoundland and Labrador. (PRB 03-14E). Parliamentary Research Branch. Library of Parliament. Ottawa. September 2003 at Haggart, Blayne. The Gross Domestic Product and Alternative Economic and Social Indicators. (PRB 00-22E). Parliamentary Research Branch. Library of Parliament. Ottawa. December Costanza et al., 2009 at Kuznets, Simon. How to Judge Quality. New Republic. October 20, 1962 at Nordhaus, William and James Tobin. Is Growth Obsolete? Economic Research: Retrospect and Prospect. National Bureau of Economic Research General Series No. 96E. Columbia University Press at 4. Gross National Product (GNP) measures the total income of U.S. citizens whether that income is generated domestically or abroad. GDP measures only domestic production. The Bureau of Economic Analysis stopped using GNP and started using GDP in GDP: One the Great Inventions of the 20th Century at Daly and Posner, 2011 at Ibid. at Costanza et al., 2009 at 7 to Remarks of Robert F. Kennedy at the University of Kansas, March 18, Available at Reference/RFK-Speeches/Remarks-of-Robert-F-Kennedy-at-the- University-of-Kansas-March aspx. Accessed October 11, Nordhaus and Tobin, 1972 at Haggart, The Genuine Progress Indicator Both the Maryland and Vermont state governments have adopted a form of GPI to inform state policy. See maryland.gov/mdgpi/index.asp and 22 Kuik, Onno. The Index of Sustainable Economic Welfare. VU University, Institute for Environmental Studies. Amsterdam. 23 Costanza et al., 2009 at Rio+20, Use Rio+20 to overhaul idea of growth, urges EU climate chief. Available at ew&nr=810&type=230&menu=39. Accessed November 15, Commission on the Measurement of Economic Performance and In January 2010, the Sarkozy government introduced a National Sustainable Development Strategy. 26 Costanza et al., 2009 at Daly and Posner, 2011 at Ibid. at Neumayer, Eric. The ISEW: Not an indicator of sustainable economic welfare. Social Indicators Research, vol at Haggart, See the GPI developed for Maryland and that developed for Vermont, and 32 Finley, Bruce. Colorado farms planning for dry spell losing auction bids for water to fracking projects. The Denver Post. April 1, John Talberth. Measuring What Matters: GDP, Ecosystems and the Environment. Available at Accessed October 4, Haggart, See: Food & Water Watch. Don t Bet on Wall Street: The Financialization of Nature and the Risk to Our Common Resources See, for instance, H2OConserve. About the Water Footprint Calculator. Available at 37 Global Footprint Network. Economy Runs Into a Finite Planet? Annual Report at The Centre for Bhutan Studies. A Short Guide to Gross National Happiness Index. Thimpu, Bhutan Food & Water Watch works to ensure the food, water and fish we consume is safe, accessible and sustainable. So we can all enjoy and trust in what we eat and drink, we help people take charge of where their food comes from, keep clean, affordable, public tap water flowing freely to our homes, protect the environmental quality of oceans, force government to do its job protecting citizens, and educate about the importance of keeping shared resources under public control. Copyright November 2012 by Food & Water Watch. All rights reserved. This issue brief can be viewed or downloaded at