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Bankers link natural capital to national wealth

By John Talberth - posted Friday, 12 November 2010

Just as the long run solvency of a business depends on maintaining its buildings and equipment in good working order, the long run sustainability of a national economy depends on maintaining its stocks of forests, wetlands, farmland, marine ecosystems and other forms of natural capital. By doing so, future generations will have the same opportunities as we do to enjoy the benefits natural capital yields in the form of timber, fish, food, clean water, recreation and other "ecosystem services."

During the 2010 Convention on Biological Diversity meeting in Nagoya,, the World Bank announced a new global partnership that will give developing countries the tools they need to integrate these ecosystem services into national accounting systems. This would mean that traditional economic performance metrics like gross domestic product (GDP) reflect the long-term costs of depleting natural capital and the long-term benefits of restoring it.

The goal is to promote better management of natural environments by making a direct link between natural capital and national wealth.


The World Bank Initiative is Long Overdue

Depleting natural capital by converting natural forests to soybean plantations, mangroves to shrimp farms, and farmland to cities may create jobs, income, and boost GDP in the short-term. Eventually, however, the economy pays when the costs of storm surges rise, food and water shortages appear, soil productivity declines, recreation and tourism industries suffer, fish and wildlife become extinct, and traditional know how vanishes. Depleting natural capital also depletes the Earth's capacity to sequester global warming pollution. According to a forthcoming World Bank publication,

The Changing Wealth of Nations, the economic value of natural capital exceeds $44 trillion, with $29 trillion of that in developing countries. Failure to account for this wealth and its loss is a gaping hole in our national accounting systems. The new World Bank Initiative is a long overdue step in the right direction.

The movement to "green" GDP and national accounts to value natural capital and ecosystem services has proceeded in fits and starts for decades. While dozens of new approaches have been developed such as the Genuine Progress Indicator, Green Savings, and Green GDP, the traditional GDP-based framework of progress only became more ingrained in our economic thinking and policy structure in recent years.

However, the political landscape has changed dramatically in the wake of the economic crisis and opportunities for fundamental changes in how we measure economic performance and social progress are now significantly more promising than they have ever been. The World Bank initiative is coming at a time when nations of the world are calling for alternative metrics capable of measuring a nation's true wealth and providing advance warning of economic crises on the horizon.

Challenges Ahead

Architects of green accounts must grapple with three measurement challenges: how to define standardized units, how to measure physical quantities and how to assign values. None of these tasks are easy. Unlike conventional accounts that track the value of goods sold (such as houses, cars, and food) many ecosystem services are not traded so the unit of measurement is not always obvious.

Consider the ecosystem service of pollination. Should economists assume it is already captured in agriculture products sold or should they use a proxy, such as the number of pollinators or pollinations? Another complication involves double counting. Should a given forest be valued once for its recreational value, and again for its value for hunting and fishing, or are these values essentially the same? If the accounts are to be integrated into existing national income accounts, then double counting must be avoided.


Fortunately, economists have at their disposal a wide range of peer reviewed methods for tackling these challenges. While the field of ecosystem service valuation is quite new and still evolving, it nevertheless has progressed to the point where it can be demonstrated at a larger scale as indicated by the United Nations Environmental Program's recent report on The Economics of Ecosystems and Biodiversity (TEEB).

The TEEB report describes the cutting edge of ecosystem service valuation methods, and provides many case studies that will be useful to the World Bank's initiative. The pros and cons of various valuation approaches will need to be carefully weighed to avoid under or over valuing services and risking the credibility of the entire effort.

Replacing or supplementing GDP and national accounts with a measure of sustainable economic welfare that takes natural capital into account is not an end to itself but rather a means for guiding policy. For the past 50 years, growth in GDP has been an overall policy objective pursued by governments at every level. Obsession with GDP growth has spurred policies to liquidate natural capital as quickly as possible. By correctly valuing changes in our stocks of natural capital and the ecosystem services that they provide will help advance a science of new metrics capable of inspiring more sustainable policy choices.

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About the Author

John Talberth is Senior Economist with the People and Ecosystem Program with the World Resources Institute.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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