GDP is too narrow as an indicator of prosperity


Do figures on natural capital actually deliver the information that we need for the necessary changes in industry and society?

New Economy of Nature: Natural Capital and Gross Domestic Product as a Controversial Indicator

The introduction of the gross domestic product (GDP) post-1945 as an indicator of the output of an economy was a radical new development. GDP expresses the total value of all products and services produced within a country in the course of a year. However, it was a controversial indicator from the start, among others because it only captures transactions that have a market price and does not distinguish between beneficial and detrimental costs to society.

This means, for example, that the financial burden to society of the destruction of species-rich habitats is not reflected in the GDP, while expenditure on cleaning up after an oil spill increases the GDP, because the work involved has a market price. The indicator thus says nothing about the quality of life and environmental standards in a country, about distribution issues, social impacts of accidents and the state of the natural environment.

This article is part of our dossier "New Economy of Nature".

Our web dossier illustrates what the concept of the „New Economy of Nature“ stands for, explains nature’s role in the Green Economy and why this approach has been of increased interest to economy and politics recently. 

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Despite this, trends in national GDP are regarded throughout the world as the most important measure of economic growth and prosperity of a country and serve as the basis of both global and national economic and development policies.

There have for some time been calls for additional indicators or a set of key indicators to correct the imbalanced calculation of GDP. The additional indicators would help to depict the state of the environment and social conditions. Supporters of the economic valuation of nature take up this point.

They argue that calculating the monetary value of nature makes it easier to expand the concept of GDP to include indicators of environmental health and make visible the true cost of environmental destruction. The monetary valuation of nature, so the argument goes, makes the environmental costs of economic growth visible and thus enables more environmentally friendly policies to be formulated.

Political interests decide what should be measured and hence what is politically relevant

A closer look at the history of GDP, however, reveals a cautionary tale. It shows that the decision about what is measured is always swayed by political interests. But the influence of political interests is often forgotten or ignored, because indicators expressed in numbers are perceived as objective and ‘hard facts’. This pull towards numbers and perception of such numbers as objective indicators was also apparent in the discussion about the selection and calculation of possible additional indicators, such as those proposed by the German Bundestag’s Enquete Commission ‘Growth, Prosperity and Quality of Life – Paths to Sustainable Economic Activity and Social Progress in the Social Market Economy’ in 2013.

For the majority of countries of the global South, introduction of GDP marks the moment at which their diverse economies based on informal local and regional economic systems and complex traditional economic practices were labelled as ‘poor’. Economists who developed the underlying calculations on which the GDP is based, repeatedly stressed that such different economies as those of the African and European continents cannot be compared on the basis of a single metric. Numerous footnotes to this effect in the meeting documents show the concerns raised about providing an indicator that would be reduced to a number prone to misinterpretation. Nevertheless, policy makers homed in on this number. As a result, the political debate and the range of options for political action and economic development became correspondingly focused only on improving this one number while the limitations of this number for comparison of diverse national economies that economists who developed the number were so keen to underline, were forgotten.

A glance at the origins of GDP reveals striking parallels with the pros and cons of an economic valuation of nature. For example, the historian Daniel Speich Chassé writes: "Within the discipline of economics there were initially major reservations about global comparison of the metrics of national income accounting. While macroeconomic experts had concerns about the possibility of an internationally comparable epistemic concept and economic statisticians described fundamental problems in measuring economic parameters in poor countries, the controversial form of knowledge quickly assumed growing importance in international organisations. Because the figures offered the prospect of a novel means of reducing global diversity to such an extent that action on the level of international policy appeared possible."[1]

Economic valuation obscures the need for qualitative changes

A very similar development can be seen in international climate policy. With the introduction of CO2 as a unit of measurement, international policy has focused increasingly on quantitative approaches: CO2 serves as a benchmark for emission trading systems or for equating fossil and forest carbon via REDD+ carbon credits, and it provides the logical framework for risky large-scale technologies such as BECCS that promise negative emissions. In so doing, policy fails to concentrate its efforts on qualitative changes in industry and society – changes that take account of local conditions and aim to adapt global trade and industry so that they remain within planetary boundaries. Instead, climate policy’s focus on the CO2 metric results in nature being redefined so that it fits into our economic system.

These experiences make it questionable whether the state of ecosystems and their functions can be described solely in terms of natural capital and whether it is really possible to formulate a better policy on this basis – a policy that subordinates economic growth to the conservation of natural habitats.