viernes, 10 de junio de 2011

GDP as a way to measure successful outcomes... Not!

We tend to assume that our purpose as a specie is to improve our wellbeing. We try to define wellbeing in a way that is global, we assume that higher life expectancy, higher literacy rates and higher income per capita. Since there is a correlation of many of the factors that we consider to be associated with wellbeing to income per capita, and because measuring GDP (Gross Domestic Product - PIB in Spanish) and population are quite easy to do. We have focused on measuring the wellbeing of societies by considering only the growth rate of GDP per capita over time.

Ruhiira has deforested most (only 5% of original area remains)
of its land for agricultural expansion
and biomass requirements for cooking and heating
(No electricity was available)
But there are clear indicators that this approach is not the best way to measure success. We are being unsuccessful at achieving this era of global property. Increasing gaps between the richest individuals of the planet and the bottom one Billion that live with less than 1.25 USD per day (around 45 USD per month or 600 USD per year) are one of the symptoms of a sick system. Increased loss of biodiversity, ecosystem degradation and climate instability that affects future prospects of development are also showing alarming trends that tell us that no everything is going as planned.

For example, take two poor countries, both have a GDP of 100 and both have 100 ha of remaining natural forests. These forests provide ecosystem services in the form of biomass (10USD per year if substituted by natural gas), protection against soil erosion (50 USD per year), water recharge to underground reservoirs and in general protection from extreme runoff (30 USD), finally provides natural habitat to species that also provide ecosystem services such as pollination (10 USD). In country A a leader that has understood the importance of sustainable development, decides to start a national agroforestry business and maintain the natural forest intact,  The wood provided by this sustainable agroforestry scheme provide 400 USD per year. So country A has now a GDP of 500 USD.

El desierto the Atacama, what can you observe from the picture?
What do you think is the GDP of the area? 0?
well no they have the largest deposits of
 copper and other minerals that you crave for.
Still I would not like to live in there...
Country B, is more short sighted and decides to take advantage of the forests that exist and starts cutting them to sell them as precious wood, a revenue of 1000 USD. So country B has a GDP of 1,100 now.

GDP tells us that country B was more effective than country A in increasing the wellbeing of its population, right?

Well actually no, in 10 years time, A will be having a GDP of 500 USD and Country B will have a GDP of 100 USD. Damned. What went wrong? We are not considering the transformation of natural capital. In the end most of the wealth that countries produce still come in one way or another from natural capital. Country A created 400 units of wealth maintaining 100 units of natural capital per year untouched, in reality country A is more efficient in the creation of wealth. Country B created 1000 units of wealth by destroying 100 units of natural capital that will not replenish, so in fact the destruction of natural capital in 20 years is 2000, the real wealth created by country B is 1000 - 2000 = -1000. Country A in the same period created 400x20 + 100x20 = 500x20 = 10000 units of wealth. Now makes sense?
This is called GDP efficiency, its the ability of a country to create wealth by minimizing the loss of natural capital.

Los Viveros de Coyoacan provide
one million tree seedlings per year
for reforestation projects around Mexico City
(AKA the city of hope)
Another example, assume that the same two poor countries discover large amounts of oil. Country A decides to use the revenue from oil to build roads, the roads are a ublic good that allows the majority of the population to increase tranportation and especially trade. In a few years 80% of the population has managed to increase their income per capita by 200%. Country B gives the right of exploitation of the oil to a local private company, the CEO being a close cousin of the president (could be a multinational but don't want to enter in the discussion related to foreign investment), the family of the president manages to become very very rich and there are some spillover effects to other industries that are owned by a handful privileged in this country. After a couple of years the GDP of A and B are the same, but in country A 80% of the wealth is concentrated by 60% of the population and the poorest individual lives with 5 USD a day. In country B 80% of the wealth is concentrated by 20% of the population and the poorest individuals live with less than 1USD per day. Where do you think there is more wellbeing?
Average GDP per capita is the same right? So? Is it the same situation?

I call this GDP distribution, I want to live in country A, and you?

Let's start using our brains...

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