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When will ‘economic growth’ account for environmental costs?

David Shearman

Customers at a vehicle service station.  Consumers have so far defied higher prices for petrol, food and rent and have been spending more in 2022, providing crucial support to the economy. How long this can continue will be a key factor affecting the national economy and inflation this year. “Petrol station” by Brianna Laugher is licenced by CC BY-SA 2.0

Human health and the natural environment are indivisible. A recent article in the journal The Lancet reminds us that “economic decisions on the environment have major impacts on human health, and health and wellness depend on a flourishing environment.”

Those living in vast cities may find this statement difficult to grasp and many economists certainly do, for the words “natural environment” have now to be changed to “natural capital” for their understanding.

We live in a world where economic thinking rules our lives, whereas many believe it should be our servant in delivering an equitable and secure future.

When leaders of most Western nations continue to puff out their chests to announce their latest increase in Gross Domestic Product (GDP), or rate of growth, they expose their impotence to manage a nation’s future by failing to recognize environmental costs.

Or as written more politely by Stephen Posner and Lydia Olander, in The Hill, “While congressional leaders debate trillions of dollars of federal spending, they have a critical blind spot” for they are “not informed by a complete accounting of the nation’s assets, leaving out many critical services that nature provides.”

After nearly 70 years of GDP in economic ideology and practice, the World Bank is having second thoughts about GDP as a measure of “growth” for it takes no account of natural and human capital used to achieve it.

Indeed the bank’s “The Changing Wealth of Nations 2021 Managing Assets for the Future” report now seriously questions the use of GDP in its present form and may at long last provide a glimmer of hope for the world to have a sustainable future.

On “natural capital,” the report states “mismanagement of nature and failure to consider the longer-term impacts of our actions can carry severe consequences, even if they might not be immediately evident. We therefore need an expanded economic toolkit, including broader measures of economic progress, to secure our collective prosperity and even sustain our existence as a species.”

The report notes that “in countries where today’s GDP is achieved by consuming or degrading assets over time, for example by overfishing or soil degradation, total wealth is declining. This can happen even as GDP rises, but it undermines future prosperity.”

In the run-up to the 2022 election, the Australian government proudly announced a current GDP of 4 percent, yet it could well be minus 4 percent if the loss on natural capital is accounted for, due to prodigious land clearing, urban expansion and extensive environmental damage from mining. This may also be the case in the U.S. but there has been little attempt to measure it.

The issue is of pressing importance because world food supply is threatened by war, harvest failures from extreme events due to climate change, and by supply problems. This is a threat to one of our life support systems, the living soil, the ecology of which together with the surrounding services from biodiversity provide our food. The research of many scientists defining these threats should galvanize action.

The World Bank 2021 report may have been influenced by the report “The Economics of Biodiversity,” by  the highly respected economist Professor Partha Dasgupta, who pointed out that GDP does not include such “depreciation of assets” as the degradation of the biosphere. Economic progress has been based on the extraction of resources from nature and the dumping of waste back into it. When extraction and dumping exceed nature’s capacity to repair itself, natural capital shrinks as do biodiversity and the essential environmental services they provide.

A basic tenet of any policy or practice is that it should be able to measure its effect accurately so it is now vital to establish environmental accounting to place a value on natural capital.

Indeed, one has to ask why the U.S. administration has been tardy to adopt the UN System of Environmental-Economic Accounting (SEEA) which commenced in 2012, when about 90 countries have already done so. The answer may be that U.S. economists favour a free-market system that embodies market deregulation – a leading reason why the consumption of natural capital has been disregarded. And recent articles from U.S. business schools also fail to consider the environment in relation to the U.S. economy.

It is also important to recognise that for too long governments have failed to acknowledge and use the inherent knowledge of many indigenous peoples on land management. Free-market systems have moved western civilizations far from such understanding.

Reform must be initiated by a fundamental change in the thinking of economists and by politicians of both persuasions. Bipartisan reforms will become all the more necessary when climate-driven conflicts emerge. Such reforms could offer security, especially to rural constituencies who understand food production. Given the unprecedented impact that human populations have had on land health, the recent sobering UN land report should be essential reading for all legislative members as they consider their economic policies – not just climate action.

A vital step in developing the World Bank’s “expanded economic toolkit” should be to educate the public and business on reforming how GDP is calculated, and placing a value on natural systems – so providing an incentive for government to provide protection. Currently, “real GDP” denotes GDP adjusted for inflation. Let us now have “true GDP,” which encompasses environmental loss.

We also must realize that reform of GDP is only one of a myriad of reforms needed to complete the jigsaw puzzle of actions needed in the next few decades if the planet is to remain viable for human life, as well as for other living species. The other areas requiring action – including climate change, pollution, chemical toxicity, water security, sea and land ecology, population growth, consumption and human conflict – must all fit together in a coherent manner because they are interrelated. Only fitting them together will make it possible to ensure our survival.

Dr David Shearman (AM, Ph.D., FRACP, FRCPE) is a professor of medicine at the University of Adelaide, South Australia and co-founder of Doctors for the Environment Australia. He is co-author of “The Climate Change Challenge and the Failure of Democracy” (2007) commissioned by the Pell Centre for International Relations and Public Policy.


This article is reproduced with the author’s permission

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