Our environment’s crucial role in the economy

15 June 2017
Dr Ryan Greenaway-McGrevy
Dr Ryan Greenaway-McGrevy

New Zealand was the first country in the world to bestow rights of personhood on a river. That same personhood also presents us with a unique opportunity to recognise how ecosystems contribute to our way of life, writes the University of Auckland's Dr Ryan Greenaway-McGrevy.

The Whanganui River has joined Te Urewera in having all the rights, duties and liabilities that come with personhood. This seemingly odd legal innovation has potentially profound implications for how we think about the contribution of the environment to the economy.

Let me explain.

It is self-evident that our society depends on the environment. Forests filter the air we breathe and the rain water we drink. The oceans provide us with food and medicine. Our rivers mitigate erosion, supply energy, and provide an array of recreational activities. The examples are innumerable. But have a look at our national accounts and not a single number is attributed to the ecosystems that provide these services.

Last year our gross domestic product – or GDP, the headline measure of production – was about $260 billion dollars. And while I can tell you that firms in the agriculture, forestry and fishing sector accounted for roughly 6 percent of that figure, or that manufacturing businesses accounted for about another 10 percent, I cannot parse out the contribution of the environment or our ecosystems.

Why is that? To answer this question, we must first understand GDP. The System of National Accounts 2008 (SNA) is the rulebook for constructing GDP, and paragraph 6.82 of the SNA states:  

The underlying rationale behind the concept of gross domestic product (GDP) for the economy as a whole is that it should measure the total gross value added from all institutional units resident in the economy. (The emphasis is mine.)

And what are these institutional units? Paragraph 4.2 provides the answer:

An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities.

In practice, this means households, governments, corporations and charities. These are the entities that can contribute to the economy. But Mother Earth? Not so much.

The problem is that an ecosystem cannot own assets or incur liabilities and that has proved to be a stumbling block to recognising the contribution of the environment to the economy.

Motivated by these and related concerns, there has been a growing chorus to replace GDP with an alternative, better measure of the well-being of a society, such as the Genuine Progress Indicator or the Human Development Index.

But GDP was never intended to be a measure of well-being. Simon Kuznets, Nobel Laureate and a key architect behind GDP, once said that “The welfare of a nation can scarcely be inferred from a measurement of national income”. (By accounting convention, domestic income is equivalent to domestic production, but I digress.)

The point is that even as a measure of domestic production, GDP does not recognise the contribution of the environment.

That is a problem, and a significant one at that, because it puts the people that rely on ecosystems at a disadvantage when it comes to trading off the costs and benefits of different economic activities or environmental regulation. For example, when it comes to regulation that would help clean up our waterways, we have a better grasp of the costs than we do of the benefits.

Not that researchers, government statisticians and policymakers have been ignoring the issue. For example, there is another official United Nations rulebook that begins to attribute value to the environment: The System of Environmental-Economic Accounting, or SEEA. (Full disclosure: In my former occupation I sat on the London Group, which was convened by the United Nations to put SEEA together.) Part one of the SEEA is an international statistical standard in environmental-economic accounting, meaning that it sits on an equal footing with the SNA in the eyes of the United Nations Statistics Division.

One benefit of the SEEA is its consistency with the SNA, because that allows a direct apples-to-apples comparison when analysing trade-offs. But it also means part one of the SEEA adopts the same definition of an institutional unit as the SNA. As we have seen, an ecosystem does not usually qualify as an institutional unit, and its contribution to economic production is consequently ignored. But what if we gave an ecosystem the same rights as a business or a person? Such an ecosystem is capable of owning assets, incurring liabilities, and engaging in economic activities and in transactions with other entities.

Which brings us back to the Whanganui: Allocating the rights of personhood to a river struck many as plain weird. But it could mean that we can begin to attribute production to these ecosystems in a way that is fully consistent with how we currently measure economic production elsewhere in the economy.

That said, it won’t be easy. Just how to put a dollar figure on ecosystem services remains an area of much ongoing research, debate, and controversy.

But that does not mean we should not try. And government statisticians may not have a choice in the matter: At some point these new environmental entities will be involved in some kinds of transactions with the broader economy. It remains to be seen how these transactions will be treated, but putting an ecosystem on an equal footing as a household or business in our national accounts would represent a formal recognition of what is a self-evident truth: That the environment contributes in a tangible way to our economy.

The framework is now in place for it to be done, should we choose to do so. New Zealand was the first country in the world to bestow rights of personhood on a river. That same personhood also presents us with a unique opportunity to recognise how ecosystems contribute to our way of life.

Associated links:

System of National Accounts 2008 (SNA)

 

Our environment’s crucial role in the economy was published on June 15 2017 on the Newsroom website and is reproduced here with permission.