New Economic Index
When it comes to measuring the economy, gross domestic product (GDP) is the most common method. It has been widely used to compare economic wealth across countries and regions and as a goal in each country/region's economic policies. However, there are likely many who doubt whether most economic indexes up to this point, which have focused only on material wealth, can truly reflect the prosperous and sustainable society that we desire. When we consider the prosperous society that we should actually aim for, there is a wide range of problems to resolve, including those of health and education problems, climate change, and various resources, as well as the still insufficiently resolved problems of poverty and disparity. An index is needed that can be used as a goal for resolving such problems and achieving a sustainable society. This matter has been widely debated academically and, in fact, development of such indexes is steadily progressing.
The Inclusive Wealth Index (IWI) can now be presented as the representative index of national wealth. The IWI could be called a comprehensive wealth or genuine saving index that inclusively comprises the indexes proposed thus far for assessing social sustainability. One example of a current commonly discussed index is the Human Development Index, which assesses each country's degree of attainment of only three elements—health, education, and income (due to the insufficiency of internationally applicable data at the time of its creation)—focusing on human wealth and defining the expansion of individual options and freedom as the goal of development. Other indices include the environmental performance index and ecological footprint, which are more focused on environmental aspects. However, such indices reduce sustainability to a specific facet of the differing factors of the economy, environment, and people. Such indices could not be described as denoting inclusive sustainability.
The IWI is an index that estimates, on a monetary value basis, the overall capital that is responsible for the creation of our prosperous societies and economies. It has been developed as a new index that combines the environment, economy and society, originating with the UN's Wealth Measurement Project, which was advanced with the participation of such contemporary economic authorities as the late Kenneth Arrow, a Nobel laureate of Stanford University, and Sir Partha Dasgupta of the University of Cambridge.
What Is Being Measured?
The IWI is calculated mainly from the sum of the three kinds of capital that have been discussed; human capital, which comprises human wealth; manufactured capital, which comprises economic (material) wealth; and natural capital, which comprises such factors as natural resources and environmental factors that must be used and managed sustainably. Of course, it is difficult to estimate such an index accurately. However, that has become possible with the development in recent years of various scientific measurement methods and economic techniques for estimating each kind of capital.
The human capital of education and health, for example, represents the present value of the fact that receiving a higher education can increase lifetime earnings, and the length of the lifespan over which it is secured. It is based on the development of a technique for estimating "stock" in the economics of education. Human capital can also be calculated by dividing it into its health and educational aspects, separating the contribution to the stock of human capital in terms of health into health capital and the contribution in terms of education into educational capital.
With respect to natural capital, its value as resources used directly in our lives can be derived from market prices and the amount available. However, it is difficult to estimate the indirect effects that natural capital has on us. Forest resources, for example, contain multiple kinds of value, including the effect of mitigating natural disasters and the value they contribute to our cultural pursuits as recreation value. Measuring such value has been regarded as difficult, but methods to assess and measure value in the field of environmental economics have been developed in past decades, and there actually are promising results in estimating value from numerous previous studies that looked at a wide variety of forests. By conducting a meta-analysis of such prior studies it is possible to show justifiable value per area of forest. It has therefore become possible to measure capital that previously was difficult to index by integrating past analytical results in a variety of fields in this way.
UN's Inclusive Wealth Report 2018
The IWI is an index that can secure sustainability because of its characteristic of showing the stock of the target resource in a given country or region. That is, it is an index that can show, through comparison with the current generation, whether sufficient wealth (capital) that will form the foundation for economic and social activities for future generations is being secured. Thus, if the IWI is passed on to future generations without decreasing, the sustainability of future generations will be secured. It is therefore possible to make an index that can incorporate past discussions of sustainability. The author has previously presented the UN's Inclusive Wealth Report, which is a compilation of the estimates of the IWI for each country and related analytical results. As in 2014, the report was published, and its utility can be said to have increased (see Managi and Kumar, 2018 for the 2018 report, which is the latest edition).
Let us focus on the relationship between the IWI and the sustainable development goals (SDGs), which are the UN goals for 2030. Most important concept in the SDGs is "inclusive growth." Prior to the SDGs, however, it was unclear what to measure, and how to measure it, when speaking about inclusive growth. The presentation of the recent Inclusive Wealth Report made it clear that inclusive growth is achieved by growth of inclusive wealth and the capital assets of which it is comprised in each country and region. It is possible, therefore, to translate inclusive growth in the SDGs as growth in inclusive wealth.
The Inclusive Wealth Report measures aspects such as the natural environment, education, and health, which used to be difficult to compare, as economic value, by country over time. The share of each capital asset in the wealth of the entire world, it is now understood, has a value nearly equal to or greater than that of produced capital (21%), which represents infrastructure development, with health capital at 26%, educational capital at 33%, and natural capital at 20%.
Natural capital breaks down into 53% renewable resources and 47% non-renewable resources. More specifically, oil (22%), coal (17%), and gas (7%) account for a significant share of resources. Stating that the value of a capital, such as an energy resource, increases, means that its value as a stock increases. In Japan, which has few resources to begin with, it is possible to make use of infrastructure and human capital and thereby increase the contribution to society by promoting appropriate resource use. We can see the degree of changes not only for the existing energy resources of oil, coal, and gas but also for currently promoted renewable resources.
Fruits from Utilization in Local Communities
The establishment of this kind of sustainability index has the potential to contribute more broadly than at the national level. For example, it could be useful in designing systems for local governments. In Japan, the continued existence of many municipalities into the future is in peril due to the problem of population decline associated with the dwindling birthrate and an aging population. In such a situation, the IWI, which is an index of future sustainability, could be a useful reference in discussions of the kinds of measures required to sustain and revitalize municipalities.
At present, Kyushu University's Urban Institute, of which the author is the Director, is releasing data on inclusive wealth at the level of municipalities across Japan (http://www.managi-lab.com/). Such estimates of inclusive wealth have begun to be used in discussions as an index of actual urban development in places such as Fukui Prefecture, Hisayama and Miyawaka in Fukuoka Prefecture and Hofu in Yamaguchi Prefecture. The town of Hisayama in particular, which has signed a partnership agreement with the aforementioned Urban Institute, put together its fiscal 2018 budget and is implementing sustainable town development based on its calculated IWI. This kind of comprehensive index allows us to more carefully ascertain priority policy issues and to make ongoing assessments based on an objective index. This enables local governments to not only more easily make comparisons to identify the predominant features of their municipality, but also provides them with a guide for sustainable social development.
Of course, since the IWI is ultimately an index for securing the foundation needed for a future sustainable society, well-being, which is the satisfaction of the current generation, and economic indexes such as GDP, which has been viewed as important thus far, must still be taken into consideration. By combining the IWI and existing indexes, it should be possible to develop policies that more effectively leverage each country's particular characteristics. This index is capable of comprehensively assessing the sustainability of various economic entities at the municipality level, not just at the national level. It could enable the creation of further indexes that would be important guides for future socioeconomic policies.
December 13, 2018