Inclusive wealth

Inclusive wealth is the aggregate value of all capital assets in a given region, including human capital, social capital, public capital, and natural capital. Maximizing inclusive wealth is often a goal of sustainable development. The Inclusive Wealth Index is a metric for inclusive wealth within countries: unlike gross domestic product (GDP), the Inclusive Wealth Index "provides a tool for countries to measure whether they are developing in a way that allows future generations to meet their own needs".

The United Nations Environment Programme (UNEP) published reports in 2012, 2014, and 2018 on inclusive wealth. The 2018 "Inclusive Wealth Report" found that, of 140 countries analyzed, inclusive wealth increased by 44% from 1990 to 2014, implying an average annual growth rate of 1.8%. On a per capita basis, 89 of 140 countries had increased inclusive wealth per capita. 96 of 140 countries had increased inclusive wealth per capita when adjusted. Roughly 40% of analyzed countries had stagnant or declining inclusive wealth, sometimes despite increasing GDP. Many countries showed a decline in natural capital during this period, fueling an increase in human capital.

Inclusive Wealth Index

The Inclusive Wealth Index (IWI) was developed by UNEP in partnership with Kyushu University. The Index calculation is based on estimating stocks of human, natural and produced (manufactured) capital which make up the productive base of an economy. Biennial Inclusive Wealth Reports (IWR) track progress on sustainability across the world for 140 countries. The IWI is UNEP's metric for measuring intergenerational well-being. Implementing the IWI has been undertaken by many individual countries with UNEP support by a scientific panel headed by Sir Partha Dasgupta of Cambridge University.

Inclusive wealth is complementary to Gross Domestic Product (GDP). In a 'stocks and flows' model, capital assets are stocks, and the goods and services provided by the assets are flows (GDP). A tree is a stock; its fruit is a flow, while its leaves provide a continuous flow of services by pulling carbon dioxide from the atmosphere to store as carbon. It is a multi-purpose indicator capable of measuring traditional stocks of wealth along with skill sets, health care, and environmental assets that underlie human progress. The effective management of this capital supports the ultimate purpose of an economy – societal well-being.

Conceptual framework

Produced capital (also referred to as manufactured capital) includes investment in roads, buildings, machines, equipment, and other physical infrastructure. Human capital comprises knowledge, education, skills, health and aptitude. Natural capital includes forests, fossil fuels, fisheries, agricultural land, sub-soil resources, rivers and estuaries, oceans, the atmosphere and ecosystems, more generally. Social capital includes trust, the strength of community and institutions, and the ability of societies to overcome problems. An economy's institutions and politics determine the social value of its assets because they influence what people are able to enjoy from them. IWI does not directly measure social capital, which is considered to be embedded in other capital types. Not all components of capital that are conceptually components of wealth are currently included in the Inclusive Wealth methodology. This is due to difficulties in measuring certain assets, as well as data availability and comparability constraints.

Methodology

Source:

The conceptual framework looks at well-being at time t as:

Denoting produced, human, and natural capital as 𝐾, 𝐻, and 𝑁, the change in inclusive wealth 𝑊 is expressed by:

where 𝑝𝐾, 𝑝𝐻 and 𝑝N are the marginal shadow prices of produced, human, and natural capital, respectively. They are formally defined by,

given a forecast of how produced, human, and natural capital, as well as other flow variables, evolve in the economy in question.

Practically, shadow prices act as a weight attached to each capital, resulting in the measure of wealth, or:

In practice, W and IWI can be used interchangeably, although they can differ in that IWI also uses shadow prices on the margin. In addition, the unit of IWI is monetary rather than utility.

This does not affect the sustainability assessment overall.

Natural capital The components of natural capital include renewable resources (agricultural land, forests, and fisheries) and nonrenewable resources (fossil fuels and minerals).

The inclusion of fossil fuels within an indicator that tracks sustainability may appear counterintuitive because fossil fuels are often considered liabilities or stranded assets. The mechanism assumed in the IWI framework is the business-as-usual scenario of the imperfect economies that form the basis of our societies. The shadow price of any type of natural capital represents its marginal contribution towards social wellbeing. In this context, the potential benefit of fossil fuels for driving investment in other types of capital outweighs the drawbacks of the social costs of carbon.

Non-renewable resources Non-renewable natural capital resources are oil, coal, natural gas, minerals and metals. To measure a fossil fuel, data measures the stock and is compared to data from other years, in order to develop a time series that reflects accurate flows. The unit shadow price for non-renewables is the price net of extraction cost, also called the rental price. The rental rate of the total price is assumed constant.U.S. Geological Survey. (2015). Mineral commodity summaries. Retrieved from .

Renewable resources

Timber Timber stocks included in IWI estimates are those that are commercially available. To calculate the quantity of timber available, the total forest area, excluding cultivated forest, is multiplied by the timber density per area and percentage of total volume that is commercially available. The exclusion of cultivated forest from this category is debatable, as it is regarded as contributing to timber and non-timber values. Forest cultivation is categorized as a production activity in the System of National Accounts.

Following the estimation of physical stocks, shadow prices are computed to convert the wealth into monetary terms. The World Bank's approachWorld Bank. (2006). Where is the wealth of nations? Washington, DC: World Bank. uses a weighted average price of two commodities for industrial roundwood and fuelwood. Country-specific GDP deflators are used to convert prices from current to constant units, and regional rental rates for timberBolt, K., Matete, M., & Clemens, M. (2002). Manual for calculating adjusted net savings. Environment Department, World Bank, 1-23. are applied, which are assumed to be constant over time. To obtain the proxy value for the shadow price of timber, the average price over the study period (1990 to 2014) is taken. Wealth corresponding to timber value is taken as the product of quantity, price and average rental rate over time.

Non-timber forest benefits Aside from the provisional ecosystem service of timber production, forests yield many other services. These additional ecosystem services are accounted for in the following manner: Non-cultivated forest area is retrieved from FAO (2015).Food and Agriculture Organization of the United Nations (FAO). (2015). Global Forest Resources Assessment 2015 http://www.fao.org/forest-resources-assessment/explore-data/en/ The fraction of the forest area that contributes to human well-being is assumed to be 10%. The unit benefit of non-timber forest to inter-temporal social well-being is obtained from the Ecosystem Service Valuation Database (ESVD) database.van der Ploeg, S. and de Groot R.S. (2010). The TEEB Valuation Database – a searchable database of 1310 estimates of monetary values of ecosystem services. Foundation for Sustainable Development, Wageningen, the Netherlands. This is expressed as USD/ha/year. Finally, to translate this benefit into capital asset value, we take its net present value, using the discount rate of 5%.

Fishery stocks Fishery stocks cannot be estimated based on habitat area, unlike forest or agricultural lands. Marine fishery habitats often cross national borders. Global fish stocks are often assessed using trends in catch or harvest data.Pauly, D., Hilborn, R., & Branch, T. A. (2013). 'Fisheries: does catch reflect abundance?' Nature, 494(7437): 303-306. With a country's harvest and effort data, along with a catchability coefficient, stocks can be estimated using the Schefer production function.Yamaguchi, R., Sato, M., & Ueta, K. (2016). 'Measuring regional wealth and assessing sustainable development: An application to a disaster-torn region in Japan.' Social Indicators Research, 129(1), 365-389. For estimating fishery stocks in countries that lack sufficient effort data, a resource dynamic approach is taken.Martell, S., & Froese, R. (2013). "A simple method for estimating MSY from catch and resilience." Fish and Fisheries, 14(4): 504-514.

Agricultural land Agricultural land is composed of cropland and pastureland. Data from Food and Agriculture Organization (2015)Food and Agriculture Organization of the United Nations (FAO). (2015). FAOSTAT. Retrieved from . is employed to quantify cropland and pastureland area. Market prices are often unavailable for agricultural land. A shadow price is computed as the net present value of the annual flow of services per hectare, in line with World Bank (2011).World Bank. (2011). The changing wealth of nations. Washington, DC: World Bank. IWI assumes the shadow price of pastureland is equal to that of cropland.

Shadow price Shadow prices are the estimated price of a good or a service that does not have a market price. The calculation of shadow prices is central to the IWI, particularly for natural capital. Various non-market valuation techniques provide estimates for these prices. The use of shadow prices for natural capital is controversial, mainly regarding the knowledge gap surrounding how to represent production functions of life-supporting ecosystems. Nevertheless, shadow prices based on willingness to pay measures are considered the best available approach for estimating their value.Dasgupta, P. and A. Duraiappah (2012). "Well-being and wealth. In: IHDPUNU- UNEP Inclusive Wealth Report 2012", Cambridge University PressFarley, J. (2012). "Ecosystem services: The economics debate." Ecosystem Services 1: 40-

Human capital The main components of human capital are health and education, but also parenting, on-the-job training, informal education and migration.

Human health is affected by daily well-being, productivity and lifespans. The latter is computed as a proxy for health-related human capital, largely because the options for quantifying the others are limited. The shadow price of health capital is the value of a statistical life year (VSLY).Arrow, K. J., Dasgupta, P., Goulder, L. H., Mumford, K. J., & Oleson, K. (2012). 'Sustainability and the measurement of wealth.' Environment and Development Economics, 17(3): 317-353.

IWI methodology focuses on the return on formal education, acknowledging that non-formal education such as early childhood learning and vocational training also contribute to wealth. Using data from Barro and Lee (2013),Barro, R. & Lee, J. W. (2015). Education Matters: Global Schooling Gains from the 19th to the 21st Century. New York, NY: Oxford University Press. educational attainment is proxied by the average years of schooling per person. The rate of return on education is assumed to be 8.5%, and then multiplied by the educated population.

Produced capital