Toward a New Growth Score Card
By considering pollution costs and lost resources, countries can better gauge how they're doing. ECONOMICS: ALTERNATIVE ACCOUNTING STRATEGY
IT looked like a fine decade for Indonesia. Through the 1970s and early '80s, growth was running at over 7 percent a year. Indonesian farmers were producing more each year. But those numbers didn't tell the whole story. The growth took a toll that official balance sheets didn't show. The nation was selling mineral wealth that couldn't be replaced, for example. Farming more intensively tends to wear out the soil. When the World Resources Institute in Washington tried to construct this missing side of the balance sheet, a very different picture emerged.
Real growth - the kind that could be sustained - was just over half the official rate. Net investment was only about one-third the original figure. Soil exhaustion canceled out the increased farm yields, which were ``almost wholly at the expense of potential future output,'' the institute's report said.
Indonesia had been robbing from the future to pay for the present - liquidating capital, in a sense. But the official balance sheets, called ``national income accounts,'' didn't tell it that.
It was a little like driving a car with a speedometer but no gas gauge or windshield. Indonesians could tell how fast they were going. But not how much gas they were using, or whether they were headed for an economic cliff.
This is a problem that all nations are facing, industrialized and developing countries alike. The traditional score card of economic progress, the gross national product (GNP), only tells how much a nation is producing. It doesn't tell whether a nation is using up its resources, or befouling its air and water, in the process. In fact, more pollution can actually boost the GNP, since money spent cleaning up oil spills and the like appears on the balance sheets as more growth.
``It's simply amazing to me that we have allowed this bizarre system of accounts to remain in place,'' says Sen. Albert Gore Jr. (D) of Tennessee, one of a handful of officeholders to take an interest in this arcane but crucial subject. ``It makes black, white; up, down; and inside, outside.''
In government counting rooms, the wheels of change turn slowly. But turn they do. In an obscure office at the United Nations, an international commission is revising the guidelines for national income accounts for the first time in 20 years. The proposed changes are cautious, and many observers think they should go much further.
That the UN body is moving at all, however, reflects how strongly some nations - especially developing ones - feel about the issue.
``Everyone agrees now that this is an issue that has to be dealt with prominently,'' says Jan Van Tongeren of the United Nations Statistical Office, which is staffing the project.
National income accounts are a fairly recent development. The United States didn't begin the practice until World War II when economic planning became imperative, and economists became high priests of growth. In the wake of the Depression, people thought growth was the only thing that mattered.
National income accounts were central to this process, a way of keeping score. The practice spread to third-world countries that sent students to the US to learn economic management.
``Nothing has changed since World War II,'' says Mason Gaffney, an economist at the University of California at Riverside.
But economic problems have changed, and for at least 20 years a small cohort of economists has been saying that nations need new gauges to guide them through these new concerns. At the outer boundary, such critics are pointing to the limits of economic thinking itself: For nations as for individuals, they observe, growth can be just excess weight.
The South Commission, a conclave of developing countries, has pointed to medicine as an example. To conventional economists, it might be better to spend money on costly medical treatment rather than on prevention because the medical supplies and services boost the nation's GNP.
A more immediate concern has been to chart growth more realistically, by taking pollution and lost resources into account. The standard accounting, for example, includes depreciation for buildings and equipment, to reflect wear and tear. But resources such as oil and fertile soil are assumed to be infinite.
Similarly, the accounts treat outlays for cleaning up pollution as yet more production - more growth - rather than as a cost of growth. By this measure, the catastrophic oil spill in Alaska could appear on the nation's books as a boon to the economy.
``Generating pollution increases the national income,'' Mr. Gaffney observes. ``Then cleaning it up increases it still more.''
The United States could get away with such oversights for many years. In effect, it had so much gas in the tank that the lack of a gauge didn't matter much.
Developing countries, by contrast, don't have that luxury. In their view, the standard accounting - reinforced by international lenders - locks them onto a development path that leads to economic drainage. ``The construction of more effective development indicators has become urgent,'' a recent report of the South Commission said.
Such thinking does not go unchallenged. Ronald Utt, chief economist for the Heritage Foundation, a conservative think tank, maintains that the GNP wasn't intended to measure well-being, only growth. To go beyond gross output is to enter the realm of ``errant political judgment,'' he says. Mr. Utt also contends that nations can't account for lost mineral resources because, with new discoveries, they never know exactly how much they have left.
Advocates counter that nations need a running tally of resource flows, even if they don't know their ultimate reserves. Regarding the GNP, they point out that it has become a synonym for national well-being, even if it wasn't supposed to be.
``If the GNP fails to rise for a quarter, we declare a recession, and all kinds of things happen,'' says Robert Repetto, the economist who headed the World Resources Institute study.
Says Herman Daley, an economist at the World Bank, proposals for reform ``are not trendy or super-environmental. It's getting back to a real definition of income.''
Until recently, few outside the economics subculture took notice of this debate. The issue fell to government statisticians, whose main concern was consistency from year to year. ``Even if it's wrong, at least it's consistent,'' is how Alan Kneese, an economist at Resources for the Future in Washington, sums up the thinking.
Lurking in the background are powerful economic interests: coal and other resource companies, for example, which are not eager to divulge what they have in the ground.
But economic necessity is shaking this resistance. Environment is becoming a business issue: Corporations are marketing ``ecologically friendly'' products, and Fortune magazine included an ``air quality rating'' in a recent survey of business climates in major American cities.
Such countries as France and Norway have moved beyond the US in accounting for natural resources.
Thus far, the UN Statistical Office has confined its proposed changes to ``satellite'' accounts that supplement the traditional accounting. Mr. Van Tongeren says the bookkeepers can only move as fast as the societies they chart. ``Our accounting system follows the value system of the society,'' he says. ``We don't impose. We are reflecting.''
Advocates, however, say the UN is lagging. ``That's always safer for them,'' says Henry Peskin, a consultant to the World Bank, speaking of the satellite accounts. ``It pushes things a bit into the background.''
``It's going to be a long haul,'' Mr. Peskin adds. ``But there seems to have been more interest in the past year than I've ever seen.''