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GDP: A False Accounting System?

Posted in Finance Articles, Total Reads: 6365 , Published on May 07, 2011

Many countries proudly announce that their Gross Domestic Product (GDP) per capita is growing but, in reality, if the depletion of natural resources is taken into consideration, the GDP for almost all nations would be declining. The most common number used to rank a country’s economy is the GDP (gross domestic product)- the annual revenue generated by the domestic economy. This number is divided by the population of the country to calculate the GDP per capita. Countries can be compared in terms of the people’s earning using the average revenue generated per person annually. For example, the GDP per head of the United States was $41,530 whereas that of Egypt was $1,030. Although these accepted numbers describe the size of the economy, there is an accounting anomaly of enormous proportions. 

GDP-false accounting system

Calculation of GDP ignores natural capital. Usually Corporations don’t pay for the natural capital they use, nor do they figure it into their account books e.g., fishing companies pay the cost of catching fish but don’t pay for the depletion of fish stocks, farmers too don’t pay for the water they take from an underground water supply. While deforestation counts the value of the timber as an increase in wealth, the damage done to nature’s ability to absorb carbon-dioxide is not accounted for. Similarly oil companies pay for drilling and refining but pay nothing for the black liquid they take from the Earth. In other words, Corporate balance sheets put a “zero” value on the Earth’s resources.

Capitalist corporations are intensely driven to improve earnings. If resources are free, Management takes advantage of them. Today’s market system allows people to decide what goods and services they want and corporations meet those needs, but the prices don’t reflect nature`s trust fund. As a result, organizations waste precious resources, e.g. they cut forests and dredge the sea with life-destroying nets. Not including natural capital in corporate or government accounting gives a false view of our current balance sheet. Today’s capitalism does not assign any value to the largest stocks of capital it employs - natural capital. It liquidates natural capital and calls it income. Corporates have been sentenced time and again for doing this with other capital but not with natural capital. But costs of natural capital must be accounted for. Although difficult to assess exactly what these values are, but approximate assessments have been made by many organizations. Any realistic value would be better than treating natural capital as having zero value.

Corporations not only ignore natural capital but also do not pay for the damage they do to the environment. They have created a hole in ozone layer in the atmosphere; pollute rivers by dumping effluent wastes into it. Nobody pays for or even thinks about destroying much of the oceans’ web of life by deep-sea fishing trawlers or causing global warming by Air-conditioning systems etc.  Due to technological advancement, mining companies have procured increasingly powerful machines that can grind up mountains of ore. Poorer-quality ores are used to make metals more abundant. Costs of stripped forests, the mountains of slag, destruction of nearby villages and toxic chemicals spilling into rivers too are not factored into the costs of production. E.g. a cleanup at abandoned mining sites in the costs an estimated $33 billion to $72 billion. 

GDP of a country should therefore take into account the value of its natural resources also.  Consideration for natural resources means that business houses should pay for both, the damage caused to and the use of natural resources. A proposal of accounting for natural capital may lead to protests from business executives everywhere, but there may be more acceptable ways of achieving a similar result — for example fishing licenses, or a tax on carbon emissions or charges for removing water from an aquifer. Laws relating to use of natural resources are nonexistent. But entrepreneurs should then invent new ways to profit within the guidelines of the new principles by which new major profits will be generated for planetary well-being. Placing zero value on nature’s capital encourages us to trash the Earth and destroy natural resources that are essential for the future. We must recognize the magnitude and consequences of natural capital depletion to save the Earth. Therefore it is essential to employ policies that protect natural capital and realize the true value of our natural resources before it is too late. 

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