A growing population and expansion in economic activities have an impact on resource use and environmental degradation. Advanced countries grew at the cost of degrading the environment, while developing countries are trying to balance their environmental degradation in accordance with their growth.
The wellbeing or standard of living of a nation cannot be compared well with per capita income or with the market value of all finally produced goods and services. The changing pattern in the standard of living has a diverse implication for the environment. The comparison would be misleading if the environment is not taken into account.
Environmental goods are not marketed but still have a non-market value which is ignored by the usual GDP calculation. Besides, the GDP only includes monetary flows which may not necessarily increase the wellbeing of the nation. So, it is difficult to say that GDP is a good indicator of a country’s wellbeing.
Although economists use various methods – such as GDP, GNP etc – to calculate the national income, these measures are limited in that they don’t take into account the natural capital.
According to the Pakistan Strategic Country Environmental Assessment Report (2006), the average annual cost of environmental and natural resource damage in Pakistan is about six percent of GDP. These include the costs of water quality, hygiene, sanitation, cost of urban air pollution, costs of salinity, soil erosion and rangeland degradation and cost of deforestation. So, there is a need for an environmentally-adjusted domestic product.
Besides, this also calls for reconciling macroeconomic theory which focuses on the depreciation of manufactured capital in computing the net domestic product while ignoring the depreciation of natural capital. In the circular flow of income, the natural capital contributes to both household and firms sectors. But its contribution/depreciation is not accounted in the usual national income accounts.
We should go for alternatives to GDP, such as Environmentally-Adjusted Net Domestic Product (NDP), Index of Sustainable Economic Welfare (ISEW), genuine progress indicator, genuine saving, satellite accounts, etc. These measures have the advantage of accounting for the environment while estimating the national income.
The NDP subtracts both the depreciation of manufactured and natural capital from the GDP. The Index of Sustainable Economic Welfare (ISEW) uses current flow of services to humanity from all sources, defensive expenditures and creation of man-made capital followed by deducting the depletion of natural capital.
Satellite accounts include both developed natural assets and non-produced environmental assets in quantitative form. Similarly, the genuine progress indicator approach adds cost of underemployment, the loss of leisure time, and the loss of old-growth forests to the Index of Sustainable Economic Welfare.
Another approach is genuine saving which has developed by the World Bank. This takes into account the Gross Domestic Savings, produced capital depreciation, education expenditures, depletion of natural resources and pollution damage. During the year 2000, East Asia & Pacific had the highest genuine saving (29.7 percent of the GDP) as compared to low-income nations (4.8 percent), middle-income nations (15 percent), high-income nations (13.5 percent) , Europe & Central Asia (5.6 percent), Sub-Saharan Africa (3.4 percent), Middle East & North Africa (-0.3 percent) and world level (13.6 percent).
The writer is assistant professor in the Department of Environmental Economics at PIDE, Islamabad.