Environment

A Greener Way to Calculate GDP


Kampala's Nakivubo Swamp provides as much as $2 million a year in purification services

Photograph by Yannick Tylle

Kampala's Nakivubo Swamp provides as much as $2 million a year in purification services

Flanked by homes and factories, the Nakivubo Swamp in the Ugandan capital, Kampala, would appear to be ripe for development. But the city has instead chosen to keep Nakivubo largely in its natural state because it filters sewage and industrial effluent that would otherwise flow directly into Lake Victoria. “Economic logic prevailed,” says Pavan Sukhdev, a former Deutsche Bank (DB) economist who in 2010 led a United Nations study called The Economics of Ecosystems and Biodiversity. A sewage treatment plant would have “cost $2 million per year to do what the swamp was doing for free, and they don’t have that money.”

That decision has provided ammunition for Nobel prize-winning economist Joseph Stiglitz and lawmakers from scores of nations seeking ways to save oceans and the atmosphere. The idea is to move beyond gross domestic product as the primary measure of national well-being and take into account the value of water retention, air-scrubbing, and coastal protection provided by trees, soil, and reefs.

Ignoring this “natural capital”—worth $44 trillion, the World Bank estimates—“is like grading a corporation based on one day’s cash flow,” Stiglitz wrote in a new World Bank report titled Moving Beyond GDP. An accounting framework that considers the environment could affect planning for projects from new soda-bottling plants to pipelines, power stations, and canals. “It might sound like a hippie thing, to go beyond GDP,” says European Union climate chief Connie Hedegaard. But “we have to measure our growth in a more modern and intelligent way.”

The idea is getting plenty of attention among the lawmakers and economists in Rio de Janeiro for the June 20-22 Rio+20 summit on sustainability, marking the 20th anniversary of the first Earth Summit in the city. Ministers in Rio have rubber-stamped 49 pages of recommendations on how to preserve the diversity of plants, eradicate poverty, protect oceans, and clean the air.If enough countries say “they’re willing to do this in Rio, it might tip the balance into seeing this as an issue whose time has really come,” says Mary Barton-Dock, director of the environment department at the World Bank.

Hurricane Katrina illustrates how failure to account for natural capital can backfire, says Barry Gardiner, a former British environment minister pushing for what’s known in the U.K. as “GDP-plus.” When the U.S. Army Corps of Engineers built a 76-mile shipping channel roughly paralleling the Mississippi River, they cleared about 19,400 acres of wetlands to create a shortcut to the Gulf. They also made a path for salty water to infiltrate surrounding marshes, degrading a further 600,000 acres of wetlands surrounding New Orleans, according to the National Wildlife Federation.

The loss of the swamps destroyed a buffer for storm surges that protected the city from hurricanes, according to a 2009 study in the Journal of Coastal Research. The total economic cost of the channel, including Katrina’s damage, was “hundreds of billions of dollars,” the study concluded. The Army Corps of Engineers declined to comment.

Some economists say such an alternative to GDP could create problems. Bjorn Lomborg, a professor at Copenhagen Business School in Denmark, contends that the economic potential of developing land near the Nakivubo Swamp could outstrip the cost of building a new sewage treatment plant. “There is a reason why few if any large, rich cities have undeveloped wetlands in their midst,” Lomborg wrote in an e-mail. “We can actually end up worse off, depriving countries of jobs, wealth, and welfare for small environmental benefits.”

In March the UN’s Statistical Commission adopted the System of Environmental-Economic Accounts, the first international standard of natural capital accounting, putting the new system on par with global methods of GDP measurement. The declaration negotiated in Rio recognizes “the need for broader measures of progress to complement GDP in order to better inform policy decisions,” though it deleted an earlier reference to the “limitations” of GDP.

The G-77 group of developing nations, which includes China and India, has expressed concern that the measures may give rich nations a reason to meddle in their affairs. They watered down efforts to include GDP-plus in the conclusions for the Rio meeting. “There is a general mistrust,” says Chee Yoke Ling, director of the Third World Network, which tracks the policies of developing nations at the UN talks.

Like Uganda with its swamps, some countries already take into account environmental wealth. Canada, Germany, Japan, Mexico, and Australia are among 24 nations to use some form of natural capital accounting, the World Bank says. While the U.S. doesn’t produce a balance sheet of natural capital with its national statistics, environmental services are measured in some areas. The Agriculture Department’s Conservation Reserve Program pays farmers and landowners $1.8 billion a year to use land in a way that cleans air, filters water, and preserves wildlife. Since 1991, New York has spent more than $1.5 billion buying property and paying landowners to protect watersheds around the Croton River and in the Catskills, where New York City’s water originates.

Some developing countries are taking similar steps. Presidents and ministers from 10 African nations signed a declaration in Botswana on May 25 that says they will integrate the value of natural capital into national accounting. With a balance sheet of their natural assets, including minerals and fossil fuels, governments can be held accountable for depleting them, says Dieter Helm, a professor of energy policy at the University of Oxford. He cites Britain’s shrinking North Sea oil production. “We consumed it all, had a party, pretended we were all better off than we actually were,” he says. “You shouldn’t be able to squander the future without knowing that that’s what you’re doing.”

The bottom line: Taking environmental factors into account could lead to a better assessment of economic progress, some economists say.

With Eric Roston and Chisaki Watanabe
Morales is a reporter for Bloomberg News in London.

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