Sir Partha Dasgupta: GDP is not fit for purpose

From Nine To Noon, 10:07 am on 25 February 2021

Sir Partha Dasgupta is the author of a landmark review calling for transformational change in our economic approach to nature. He is Emeritus Professor of Economics at the University of Cambridge and and Chair of the Management Board of its Centre for the Study of Existential Risk.

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Photo: AFP / FILE

He was appointed by the British Chancellor of the Exchequer to lead an independent global review to assess the economic benefits of biodiversity and the economic costs of its loss.

That review, released earlier this month, finds prosperity has come at a "devastating" cost to the natural world. Sir Partha says nature must be recognised as an asset and that our traditional measure of economic prosperity - Gross Domestic Product - is no longer fit for purpose.

So, just how bad have things got? The overreach of the earth’s natural capital is relatively recent he says.

“The over reach which humanity has inflicted in terms of the demands we make on the biosphere is really rather recent.

We are looking at about 40 or 50 years or so. Since the end of the Second World War so we are looking at a new phenomenon at a global level.”

Mother nature, he says, offers a “whole bundle of goods and services”.

But we have been using these resources at a rate the biosphere can not replenish.

Crude estimates, he says, indicate we would need about 1.6 Earths today to meet our demands on a sustainable basis.

Land use change and the waste products generated from economic activity are dumped back into the biosphere making it less able to offer the bedrock services we rely on, Sir Partha says.

But mother nature is not charging for these vital services. So, how do we make a case for a price?

Sir Partha Dasgupta

Sir Partha Dasgupta Photo: / CC3

“We feel it is absolutely reasonable that we pay when we leave the supermarket with the goods at the counter.

“We don’t quarrel over it, we were not obliged to enter, but if you take things from there you pay the price that is charged.

“Mother nature is not charging for its services and so we are not paying for it.”

Because our demands in the distant past were rather small, he says, this didn’t matter.

It was as if supply was infinitely large, he says. But our demands on nature have cumulatively increased since.

The report has framed these public goods by regarding nature as an asset, he says.

“Unarguably our most precious asset, because without it we are not going to be here, we are part of it, it is our home.”

The review takes the various eco-systems as a central organising idea of an asset, he says.

“We mustn’t think that the market is the only way for arriving at prices or values.”

The review takes the view that a whole category of assets has been missing in our calculations, he says.

“It is not as though nature is foreign to economics or central banks, they are foreign only because they chose to make nature foreign.”

GDP has moved from its original narrow purpose to something much wider and had caused perverse outcomes, he says.

“GDP was not meant for the use to which it’s been put in recent decades. It’s invaluable for short run macroeconomic management because you need a measure of economic activity.”

But somehow after war it transformed into index of success, Sir Partha says.

“The problem with GDP is that it doesn’t include the depreciation of capital and one of the natural capital, or nature, which is somewhat different from buildings and roads in that you can really depreciate it very fast.

"We could depreciate building very fast too if we chose too, they do get depreciated if there is a war, but since we don’t think of war as being an actual state if affairs we think of about 4 to 5 percent as a depreciation allowance.

“But when it comes to natural capital you can actually completely wipe out natural capital pretty fast.”

For example, when you wipe out chunks of the tropical rainforest and turn them into farmland, he says.

So, a nation needs a balance sheet, just as a private company does, he says. And the review recommends moving to a system of accounts which includes value a measurement of the assets

“So the wealth of a nation, in contrast to the GDP of the nation, is the balance sheet of the nation.”

When that balance sheet expands, the nation is wealthier, he says.

We tend to subsidise the use of natural capital, he says. Nature’s goods and services are not free in fact the price is often negative.

“To the extent that it’s now about 4 to 5 percent of global GDP is in the form of subsidy.

“Now that is absolutely outrageous, you are not only regarding nature to be valueless, but you are saying it is actually a pest. You are paying yourself to destroy it.”

An example of how we might derive income from one source and transfer it to the protection of another, he says, is the high seas.

“The high seas belong to nobody, but they are a finite resource. There is an enormous amount of services that the oceans provide the whole climate system is mediated by the oceans - a huge asset.”

Nobody pays a rent for it because it is nobody’s property, he says, and yet it is a massive public good.

“So, one possibility would be for humanity, the governments of the world, to create a transnational institution which is responsible for imposing taxes for its use.

“You wouldn’t call it a tax you would just call it a rent.”

Money collected could be used for other public goods for example the tropical rainforests, he says.

They are public goods as huge sinks of carbon but sit within national jurisdictions.

“You could use the revenue generated from the high seas, the rents collected from that, to subsidise the protection and preservation and restoration of these public goods which are within jurisdictions or nations.”