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Economics

Integrate new prosperity metrics into economic planning and policymaking

Nicholas Sorrenti via Unsplash

Economic growth, measured primarily by GDP, has long been a central goal of economic planning and policymaking. While GDP growth has supported positive trends such as poverty reduction, it has been accompanied by societal costs like climate change, environmental degradation and increasing inequality.

The limitations of GDP as a measure of prosperity

For decades, a central goal of the economic system has been the pursuit of economic growth, with gross domestic product (GDP) as the reigning macroeconomic metric. Governments use GDP to guide and monitor economic planning, design and assess the effects of economic policies, prepare national budgets, and compare the health of their economy against other countries. Development financing, debt relief and even UN membership fees are often contingent upon a country’s GDP. Businesses use GDP to monitor the state of the economy and industries and to make strategic decisions.

However, experts have long warned against conflating GDP with prosperity because it does not measure the quality of economic growth as it relates to ecosystem health, sustainability or people’s subjective and objective well-being. While GDP’s growth since 1960 — an increase of more than 7,000% — has been accompanied by benefits like poverty reduction, improved access to health and education, and reduced child mortality, this growth has come at a cost.

The Sustainable Development Index shows that most of the 163 tracked countries are not achieving human development within ecological limits or planetary boundaries, and 40% of countries have gotten worse over time. Income and wealth inequalities have also been on the rise since the 1980s, resulting in increased political instability and polarization. Recent research from the Earth Commission shows the world is not operating within the safe and just limits of what the planet can afford for seven out of eight earth systems, including climate, aerosol pollutants, natural ecosystems, working landscapes, surface water, groundwater, nitrogen and phosphorus. In other words, global economic development to date has resulted in extreme risks to earth system stability and human livelihoods.

Human activities pushed most earth systems beyond safe and just limits

 

Why GDP remains the dominant economic metric

GDP continues to be the dominant goal for economic planning and policymaking for three primary reasons. First, accounting rules and recommendations for measuring GDP are well-established by the United Nation’s System of National Accounts (SNA). The high degree of international acceptance of the SNA has led to widespread adoption by national statistical agencies, policymakers, international institutions and businesses, and has resulted in frequent conflation of GDP with prosperity.

Second, there is a lack of coordination across researchers, countries and international institutions on alternative progress indicators and “beyond GDP” metrics covering well-being, equity and sustainability dimensions. Most countries track a wide variety of such indicators but vary in terms of indicator selection, data collection and analysis methods, reporting practices, and ability to integrate findings into policymaking processes. Subsequently, there is a lack of comparability across countries for indicators representing dimensions of well-being, equity and sustainability.

And third, countries lack the technical and financial capacity, and sometimes political will, to develop and embed alternative prosperity indicators in their national statistical agencies and economic plans and policies.
 

How to remove GDP lock-in

To remove GDP lock-in, governments need to systematically integrate well-being, equity and sustainability goals into central economic planning. For instance, governments can work to de-silo policymaking across agencies and consider integrating goals across various national strategies that touch on climate, nature and equity issues (e.g., national development plans, nationally determined contributions and National Biodiversity Strategies and Action Plans). International institutions that support development efforts must also ensure their missions, decision-making processes and results frameworks are tied to these wider goals.

To increase global harmonization and uptake of alternative progress indicators, governments and international institutions can support the creation of a core set or dashboard of internationally-agreed upon well-being, equity and prosperity metrics and associated accounting rules, possibly linked to the UN Sustainable Development Goals. This set of metrics could be elevated to the same international level as GDP to increase acceptance, working through the SNA and satellite accounts.

Transforming Finance

Current investments and financial flows remain off track to protect people, nature and biodiversity. Watch this webinar recording to learn more.

Tracking progress on global outcomes

Key enablers and barriers to change

Data challenges

Currently, there are no data sources that track which countries and international financial institutions (IFIs) are adjusting their economic analytical approaches to mainstream climate, nature and equity. This is fundamentally tied to the need for governments, businesses and IFIs to establish and track indicators and goals for these aspects. Measuring how much they mainstream these aspects is also made more difficult by the varying perceptions of what constitutes “mainstreaming.” A survey approach such as that used by the OECD to track green budgeting practices, however, could be employed.

No international targets have been established for 2030 or 2050 for these indicators. However, ideally, all countries’ economic planning agencies and relevant IFIs are moving to ensure that they use the most fit-for-purpose analytical approaches for addressing complex questions around climate change, nature and biodiversity loss and improving equity. In some cases, countries may need to test which analytical approach is best suited for their national context. Ideally, all IFIs will also use the most fit-for-purpose macroeconomic models to inform development financing decisions.

There are also important enabling factors for promoting improved analytical approaches by governments. The Coalition of Ministries of Finance for Climate Action conducted a survey of ministries of finance and identified the following bottlenecks: 1) limited awareness of climate change issues; 2) lack of economic tools and models and associated skill sets; and 3) the need for increased financing and technical capacity to test and improve analytical approaches over time.

Governments can also improve analytical approaches by stimulating the academic and research community to strengthen economic theory on, for example, understanding processes of innovation and structural change and capturing diverse values and worldviews associated with nature. We identified proxy indicators for these enablers which focus on awareness and training or skill sets for economists.

Limited awareness of climate change issues can be reflected by both the economic analysis approach used and by research in mainstream economic journals that might inform analysis approach selection or awareness of global challenges. Lack of economic tools and associated skillsets is reflected by indicator NE-6, which assumes economics curricula in universities enhance economists’ skill sets and awareness of how major global challenges impact the economy. No datasets are available to track these two indicators, though we list initiatives and one-off research efforts that identified the importance of these enabling factors. A survey of relevant stakeholders could be deployed to track progress on these enablers.

Other shift Other shifts needed to transform the system

Embed climate, nature and equity into economic analysis

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Policies aimed at climate, nature and equity have major implications for traditional economic goals, and vice versa. However, the economic analysis toolkit used to understand the economy and evaluate policies is only beginning to incorporate them.

Transform economic policies to accelerate action for climate, nature and equity

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Governments use economic policies to meet national development goals, and fiscal policies in particular are critical to address climate change, protect biodiversity and promote equity. Governments can better tax environmental harms and invest in the green economy.