GDP an “unsustainable” measure of growth

Global wealth has grown overall, but at the expense of future prosperity and by exacerbating inequalities, according to the World Bank’s Changing Wealth of Nations report.

Countries that are depleting their resources in favour of short-term gains are putting their economies on an unsustainable development path, it warns.

While indicators such as Gross Domestic Product (GDP) are traditionally used to measure economic growth, the report argues for the importance of considering natural, human, and produced capital to understand whether growth is sustainable.

According to World Bank global director for Environment, Natural Resources, and the Blue Economy, Karin Kemper: “By ignoring polluting and climate warming impacts, fossil fuel assets have historically been overvalued, while assets that contribute to climate mitigation, like forests, are undervalued.”

“A deeper and more nuanced understanding of the sustainability of wealth is crucial to a green, resilient, and inclusive future,” said World Bank managing director for Development Policy and Partnerships, Mari Pangestu. 

“It is essential that renewable natural capital and human capital are given the same importance as more traditional sources of economic growth, so that policymakers take steps to enable long-term prosperity.”

According to the report, global wealth grew significantly between 1995 and 2018, and middle-income countries are catching up to high-income countries. However, growing prosperity has been accompanied by unsustainable management of some natural assets.

Low- and middle-income countries saw their forest wealth per capita decline 8% from 1995 to 2018, reflecting significant deforestation.

Meanwhile, the value of global marine fish stocks collapsed by 83% due to poor management and overfishing over the same period. The projected impacts of climate change may exacerbate these trends.

Global wealth inequality is growing, the report indicates. Low-income countries’ share of global wealth has changed little from 1995 to 2018, remaining below 1% of the world’s wealth, despite having around 8% of the world’s population. Over one-third of low-income countries saw declining wealth per capita.

Countries with declining wealth tend also to be degrading their base of renewable natural assets. For low-income countries, appropriately managing renewable natural capital, which accounts for 23% of their wealth, remains crucial.

Globally, the share of total wealth in renewable natural capital (forests, cropland, and ocean resources) is decreasing and being further threatened by climate change. At the same time, renewable natural capital is becoming more valuable as it provides crucial ecosystem services.

For example, the value of mangroves for coastal flood protection has grown more than 2.5 times since 1995 to over $547 billion in 2018. The value of protected areas per square kilometer has also rapidly increased.

The report shows that human capital, measured as the population’s expected lifetime earnings, is the largest source of worldwide wealth, comprising 64% of total global wealth in 2018. Middle-income countries increased their investment in human capital and in turn saw significant increases in their share of global human capital wealth.

Although the long-lasting effects of the COVID-19 pandemic are still unknown, low-income countries are likely to experience the most severe impacts, with a projected loss of 14% of total human capital.

Human capital is additionally constrained by gender gaps across all regions and income groups, with little improvement since 1995. Air quality also has serious consequences for both human capital and climate change, and accounts for over 6 million premature deaths annually.

The report outlines several priorities for policymakers to diversify and rebalance their national portfolios to be more resilient and sustainable. It recommends actively investing in public goods like education, health, and nature, to prevent unsustainable depletion, and manage future risks.

Recommendations also include policy and pricing measures that help reflect the social value of assets and to steer private investment toward better outcomes for all. This may include, for example, actions like repurposing fisheries subsidies, and taking action to price carbon and promote renewable energy assets.