Green Domestic Product?

SANTIAGO – One of the recurrent themes at the United Nations’ spectacularly unsuccessful Rio+20 summit in June was the need to change how we measure wealth. Many argue that we must abandon our “obsession” with Gross Domestic Product and develop a new “green” accounting standard to replace it. In fact, doing so could be a serious mistake.

GDP is really just an account of the market value of all goods and services. This sounds like a good indicator of wealth, but, as is frequently pointed out, it includes things that do not make us richer and leaves out things that do.

For example, if people are not compensated for the harm done by pollution, its adverse effects will not be included in GDP. If we pay to clean up pollution, this increases GDP, but no wealth has been created. Likewise, there is economic value produced when wastewater is naturally cleaned by wetlands, but no transaction has occurred, so it is not counted in GDP.

It is worthwhile to consider these limitations of GDP as a measure of wealth. And it could make sense to produce a better GDP, which adds uncounted benefits, subtracts the costs of externalities, and excludes activities that generate no wealth. Unfortunately, many of the proposed “green” substitutions, however well intentioned, may not address these limitations adequately and could, in fact, produce worse outcomes.