GDP not a comprehensive wealth gauge of a country

This fixation on GDP is at odds with common sense. — The Jakarta Post

INDONESIANS know how important forests, farmland and minerals are to their well-being. Yet the government invests little in assessing the benefits provided by these valuable assets.

Instead, tracking each and every shift in gross domestic product (GDP) is what preoccupies decision makers.

This is true both here and abroad. GDP is measured four times a year by Statistics Indonesia (BPS) and similar offices the world over and plays an oversized role in deciding whether the country is “progressing” or not.If GDP is growing, the country is doing well and the government will be applauded. If not, the calls for change will be loud and clear.

This fixation on GDP is at odds with common sense.

Every corporate executive knows the value of the company’s income and assets, not just the former. This is because chief executive officers know that drawing down assets means income is sure to fall at some point.

Yet finance ministers focus almost exclusively on income (GDP), paying little attention to assets. This single-minded focus on GDP might have been justified generations ago, but it is no longer enough. United Nations (UN) secretary-general Antonio Guterres recognised this recently when he called for nations to find new measures of progress.

The question is, what lies beyond GDP?

One possibility noted by Guterres is for countries to begin regularly measuring their assets – or national wealth. Now, this sounds like common sense to us – assuming it is done properly.

In the past, national wealth was understood to include only produced and financial assets – things like factories, roads and corporate shares.

We need a much broader conception today. One that reflects the reality that wealth comes in many forms.

This new view of wealth must recognise that forests, farmland and minerals are, as we have already mentioned, valuable assets to be protected and managed. It must also recognise the importance of an educated and healthy workforce, with all the embedded skills, knowledge and capacities.

And it must recognise the value of the relationships among individuals, families and communities that permit peaceful and prosperous coexistence.

Such a conception already exists. It is known as comprehensive wealth and its components – produced, financial, natural, human and social capital – are all essential to the well-being of society. Why should countries measure comprehensive wealth?

Quite simply, without it, they are driving half blindfolded.

Leaders might know very well whether GDP is growing but have no idea whether that growth is sustainable.

Income that relies on liquidating assets – cutting forests at unsustainable rates, failing to invest in education and health care, polluting air and water and building up mountains of debt – is not income at all. It is quite the opposite.

It is the promise of well-being built on a deteriorating foundation. Only by measuring comprehensive wealth can the soundness of the foundation be assessed.The good news is that Indonesia is in a better position than most to assess the foundation of its well-being.

Thanks to the efforts of researchers at the University of Indonesia’s Institute for Economic and Social Research working in collaboration with the International Institute for Sustainable Development and Canada’s International Research Development Centre, we have a new picture of comprehensive wealth in Indonesia. It is a picture that should serve as a cautionary tale.

While the average comprehensive wealth per Indonesian citizen more than doubled overall since 1995, Indonesia’s precious natural resource wealth declined on average. This finding is very troubling for what it says about the country’s environmental stewardship.

But it just may offer a glimmer of hope for doing better – if decision makers are listening. Improved management of natural resources and the income they generate might just offer a way out of Indonesia’s middle-income trap.

New approach

This will require a new approach to natural resource management. An approach that ensures Indonesia’s resources are preserved for future generations and, at the same time, better capitalises on the economic benefits of using those resources today.Other countries already do this. Malaysia generates nearly six times the wealth Indonesia does for every tree cut.

As the world’s fourth biggest hardwood timber producer and steward of much of the world’s tropical forests, Indonesia cannot afford to “leave money on the table” like this. There is too much at stake.

For Indonesia, it is a question of escaping, or not, from the middle-income trap. For the world, it is a question of whether future generations will know about tropical forests only from picture books.Indonesia should be one of the first countries to heed the UN secretary-general’s call to begin regularly and comprehensively reporting national wealth. It has much to gain and, equally, much to lose by not doing so.

A call for this was already made in the communique from last year’s Think20 summit in Bali. That was before the results from the University of Indonesia study were available. Now that we have them before us, we reiterate this call.

Focus on sustainability

Indonesia, and all countries, should shift away from the current fixation on short-term growth. A new focus on sustainability for the future is essential.

Decision makers must be reminded of the connection between income and wealth and the need to invest in the latter to generate the former.

Regular reports on comprehensive wealth from BPS would do this.

An excellent start in this direction has already been made by the agency, though its efforts remain fledgling and incomplete.

Completing that important work would provide a framework for integrated decision-making across the three pillars of sustainable development, economy and environment and society. Given the all-too-evident shortcomings of the GDP growth paradigm, this cannot happen soon enough. — The Jakarta Post

Bambang Brodjonegoro is a professor of economics at the University of Indonesia. Robert Smith a senior associate at the International Institute for Sustainable Development. The views expressed here are the writers’ own.

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