ssue Brief November 2012

Food & Water Watch 1616 P 5t. NW, 5uite 300 Washington, DC 20036 www.foodandwaterwatch.org
W
henever you read a report or hear on the news that the economy is growing, what you are
hearing is that the Gross Domestic Product (GDP) is growing. But while GDP measures
economic activity, it does not measure the distribution of the wealth created by that activity, or
the quality of our air and water, or the quality of our schools. Yet, when we hear GDP is growing
many of us believe that the country is doing beter than it was. Given that economists, politicians
and the media treat GDP this way, it is no surprise that we think this way.
In the wake of the 2007 economic crisis, state governments and
some economists are pursuing a renewed push for alternative
measurements of our national well-being. Recognizing that per-
sistent unemployment coupled with economic growth reveals the
divorce between the GDP and our general welfare (a point already
recognized by the developer of GDP), alternatives to GDP are
becoming more fashionable. For instance, United Nations Secre-
tary-General Ban Ki-Moon called for an alternative to GDP to be
produced at the Rio+20 conference held in June 2012.
1
Unfortunately, these alternatives are being pursued at a time when
financial actors are pushing an aggressive efort to financialize
nature. From water markets to pollution markets, Wall Street has
its ambitions set on expanding into new and newly profitable
areas. By extending the paradigm of market valuation beyond the
market, these alternatives to GDP will facilitate the financializa-
tion of nature, placing our essential, common resources under the
power of Wall Street bankers.
The financialization of nature is the process of replacing environ-
mental regulation with markets. In order to bring nature under
the control of markets, new commodities need to be created by
the commodification, marketization and ofen privatization of our
common resources. It is a means of transferring the stewardship of
our common resources to private business interests.
Relying on market-based schemes to protect the environment and
fight climate change is misguided. In 2007, former World Bank
chief economist Nicholas Stern described climate change as the
greatest and widest-ranging market failure.
2
In the wake of the
largest financial crisis in 75 years, one both created and spread by
the use of innovative financial instruments, the push to advance
market-based schemes and reliance on financial instruments to
fight climate change or distribute water must be seen for what it
is: an opportunity for polluters to buy the right to pollute and for
speculators to gamble on our essential resources. Such schemes
transfer control from local communities to external shareholders,
further concentrate pollution in poor communities and exacerbate
inequality.
AIternatives to Gross Domestic Product
and the FinanciaIization of Nature
2
A Brief History of Gross Domestic Product
The GDP of a country is the measurement of the total monetary
value of all production of goods and services within a given coun-
try and within a given time. Rises and falls in GDP show whether
or not the total value of production within a country is growing
or shrinking. In other words, GDP is a measurement of economic
activity and is a guide to whether an economy is expanding or
contracting.
In the United States, the Bureau of Economic Analysis at the
Department of Commerce releases quarterly estimates of GDP as
well as final annual GDP measurements. These figures are widely
reported in the press and are taken as a guide to the economic
health of the country. When news reports claim that the economy
has grown or shrunk by a given percent, they are reporting the
estimated percentage increase or decrease in GDP.
Although countries have long tried to maintain records of econom-
ic production and of national wealth, GDP is a fairly recent devel-
opment. In the 1930s, economists working for the U.S. government
developed the National Income and Product Accounts (NIPA),
which track both the total production in the country and the total
of incomes earned.
3
Simon Kuznets, an economist working at the
National Bureau of Economic Research, was tasked with develop-
ing the national accounts in order to provide a comprehensive
account of the state of the economy and of eforts to recover from
the Great Depression. The original set of accounts was presented
to Congress in 1937.
4

Since that time, the accounts, and GDP in particular, have gone
through many transformations and adjustments. At the same
time, GDP has grown in prominence. Today, GDP and GDP per
capita are taken not only as measures of the growth of economic
output, but also as signs of the well-being of the nation.
Criticism of Gross Domestic Product
Criticisms of the limitations of GDP are longstanding relative
to its history. Simon Kuznets himself cautioned that these mea-
surements had limitations for what they could tell us about the
economic well-being of the country.
As an aggregate of the total market value of production and
services, GDP counts as positive contributions many expenditures
that are not beneficial for well-being. Some critics note that GDP
does not distinguish between the quantity of a given expenditure
and the quality of that expenditure. Money spent on alcohol and
gambling is just as good by GDP standards as money spent on
books and exercise, as Lew Daly and Stephen Posner note.
5
A further criticism of GDP is that it does not distinguish between
expenditures that contribute to social well-being and what are
called defensive expenditures. Spending on education is an
example of an expenditure that benefits social well-being. Defen-
sive expenditures merely try to protect the current status without
making improvements. Examples include expenditures to clean
up from industrial accidents, health care costs to treat avoidable
illnesses and health issues, and military spending.
6
One of the principle criticisms of GDP as inadequate for measur-
ing the well-being of the country is that it fails to account for the
distribution of the wealth and income generated by the production
it measures.
7
Although this can be mitigated to some extent by re-
porting GDP per capita, it is still the case that even this measure-
ment obscures the true distribution of wealth and income. Some
people will receive a vastly larger share of the economic output
of the country than the per capita average, and some will receive
much less. At best, GDP per capita is a crude measure of living
standards.
8
GDP simply cannot track inequality.
9
Despite these flaws in GDP, the real issue that proponents of
alternatives fix upon is that GDP is no longer used solely for the
purpose intended. As one report states, GDP is being misused
as an indicator of something it doesnt measure and was never
intended to measure.
10
As indicated above, even Simon Kuznets
himself cautioned that GDP should not be used to chart anything
other than economic growth. As early as 1934, he told Congress
that [g]oals for growth should specify more growth of what and
for what.
11
In 1972, William Nordhaus and James Tobin argued, in
an essay that pioneered the alternative GDP movement: GNP is
not a measure of economic welfare. Economists all know that.
12

Indeed, even Alan Greenspan has recognized this fact, stating that
GDP is not necessarily a measure of welfare or even a significant
measure of standards of living.
13

While technical fixes for the way GDP is calculated could correct
some of the problems with it, the broader problem of the misap-
propriation of GDP as a sign of social well-being and progress
defies a technical fix. From economists to policymakers, news
reporters to the general public, growing GDP has become synony-
mous with our social and economic welfare.
3
Lew Daly and Stephen Posner contend, [d]epending on GDP
promotes an economic model devoted to growth at all costs,
where more is equated with beter and an expanding economy
equals social progress even as average households do not benefit
and the critical non-market dimensions of our lives and nation
are depleted for lack of adequate investments and protections.
14

They further contend that the problem lies in how GDP has come
to play such a defining role in public debates about economic per-
formance and social progress.
15

The authors of a Boston University report on alternatives to GDP
agree. The real issue, beyond the technical problems of GDP, is
that GDP has been widely adopted as a measure of something it
was never intended to measure.
16
But would replacing GDP with
an alternative really solve this problem, or would it contribute
to the further degradation of our environment by facilitating the
financialization of nature?
Brief History of AIternatives
to Gross Domestic Product
In 1968, U.S. Senator Robert Kennedy made a speech at the Uni-
versity of Kansas in which he highlighted the deficiencies of using
Gross Domestic Product (or GNP, since this was prior to 1991).
17

Four years later, William Nordhaus and James Tobin published
their paper that initiated the movement for alternatives to GDP.
Nordhaus and Tobin developed a measure of economic welfare
that was meant to begin to move beyond GDP and incorporate
broader measures of social welfare.
18
The atempt to find an
alternative grew from there. By 2000, one researcher was able to
claim that there were literally hundreds of alternative indicator
programs in use.
19
The basic purpose of alternatives to GDP is to provide an indicator
of social well-being or general welfare. They are specifically meant
to address the fact that GDP has been misappropriated to this
role. The basic components of the most prominent alternatives,
including the GPI (Genuine Progress Indicator), follow a similar
patern. They involve estimating expenditures and weighing these
estimates with inequality indices. They add non-market benefits
including various unpaid social functions such as parenting and
housework, but also public infrastructure. Deductions are then
made for the defensive costs, such as cleaning up from pollution.
Degradation of the environment, now considered natural capital,
is also deducted.
20
What is calculated is an aggregate that reflects
a particular understanding of the general welfare of the nation.
Perhaps the two most prominent of these atempts to provide an
alternative, at least in terms of adoption by state governments, are
the Index of Sustainable Economic Welfare (ISEW) and its succes-
sor, the Genuine Progress Indicator (GPI).
21
The ISEW was devel-
oped in the 1980s by Herman Daly and John B. Cobb.
22
In 1995,
Redefining Progress developed the ISEW into the GPI, having
altered the methodology, but not the purpose, of the ISEW.
23
The atempts to develop alternatives to GDP have not been limited
to the United States. Various world leaders including U.N. Secre-
tary-General Ban Ki-Moon and Connie Hedegaard, EU commis-
sioner for climate action, urged the Rio+20 conference to pursue
alternatives to GDP.
24
In 2008, then-French President Nicolas
Sarkozy created a Commission on the Measurement of Economic
Performance and Social Progress to investigate developing alterna-
tives to GDP for use in France.
25
And the Organisation for Eco-
nomic Co-operation and Development (OECD) has been pursuing
alternatives to GDP since 2004, working with the World Bank,
European Parliament, European Commission, and World Wildlife
Fund, among others.
26
What is important is that these alternatives seek to go further
than GDP, which is limited to calculating only those activities that
are expressed in market values. This is their major innovation.
Non-market values such as parenting, in-home food prepara-
tion and volunteer activities are all subsumed under GPI. Nature
itself is subsumed under the GPI as it seeks to value water and air
purification and other ecosystem services.
27
The concern driving
this subsumption of non-market values under GPI is that these
non-market values are un-quantified and un-valued, and thereby
inaccessible for policy development.
28
In fact, for their proponents,
it is this characteristic of alternatives to GDP such as GPI that
makes them capable of replacing GDP as a measure of well-being.
4
Criticism of AIternatives
to Gross Domestic Product
As with GDP, there are many technical criticisms of alternatives
to GDP. Eric Neumayer, for example, has criticized the ISEW/GPI
model because it seeks to mesh together two incompatible mea-
surements, that of current welfare and sustainability.
29
Another
criticism argues that the social factors taken as adding to social
well-being are in many instances subjective. The persons who
develop the particular index that is being used determine what
counts as having social benefit.
30
One can easily imagine that an
alternative to GDP could be developed that would reflect fun-
damentally diferent values than those expressed in the GPI, for
instance. In fact, this subjective aspect of determining what does
and does not count as contributing to social well-being means that
there will likely be variations in GPI from one state to another.
31

A newer criticism of alternatives to GDP centers on whether or not
they contribute to the financialization of nature. As argued above,
the need for an alternative is made using the point that GDP is
not and was never meant to be an indicator of social progress or
the general welfare of the nation. Thus, by focusing on GDP in
both reporting on the state of the economy and in policy decisions,
we are pursuing a narrow indicator that leaves out all the impor-
tant non-market values that make up a healthy, well-functioning
society.
Basically, GPI seeks to go beyond GDP to account for the non-
market values that GDP leaves out. To do this, it has to assign
market values to the non-market values. In a sense, it is not so
much a replacement of GDP as it is an expansion of it.
While the purpose of the alternatives to GDP is to capture the full
socio-economic efects of economic activity, the means of doing
so is to extend market values over non-market values. In other
words, the most prevalent alternatives, such as GPI, extend the
domain of the market and seek to create market values where
none exist. In order to achieve this, GPI must calculate market
values for a variety of non-market activities. These values will
then be presented as costs or prices of the non-market activities.
Only now, they will no longer be non-market, they will be part of a
renewed and expanded market.
So, for proponents of GPI, the answer to the depletion of non-mar-
ket values (destruction of forests, pollution of water, etc.) caused
by the overweening power of the market is to expand the mar-
ket to include those values. As such, the market will allocate the
newly marketized commodities based on market eficiency, e.g.,
the ability to pay. An example from the water markets proves the
point: in 2012, natural gas companies seeking water for hydraulic
fracturing outbid Colorado farmers, freezing out farms.
32

To achieve this goal of expanding market values to include non-
market values, a new universal economic measure must be
developed that subsumes those previously non-market values. GPI
is still a form of economic/market reductionism that seeks a new
single quantitative measure of a broadened understanding of the
market.
John Talberth, who helped develop the GPI at Redefining Progress,
admits that GPI requires natural capital accounting, or the estab-
lishment of monetary values for a countrys environment: Proper
valuation of natural capital and ecosystem services is essential to a
rigorous metric.
33

It seems, therefore, that GPI will be a major part of spreading
financialization, justifying natural capital accounting, and perpetu-
ating payments for environmental services. Blayne Haggart noted
of GDP, Although it is an objective, positive measure of economic
growth, its use as a proxy for social welfare represents a judge-
ment [sic] as to the importance of market activity and economic
growth.
34
It is hard to see how this criticism does not also apply
to GPI. If use of GDP a measure of economic activity renders
a judgment as to the importance of the market, extending the
market paradigm to subsume the natural environment must surely
extend that judgment, even as it claims to displace economic
growth from its place of prominence.
A rigorous GPI, founded on proper valuation of natural capital
and ecosystem services, would certainly contribute to the finan-
cialization of nature. The financialization of nature follows upon
the commodification, marketization and ofen privatization of
our common resources. Strictly speaking, commodification is the
commercialization of something not generally seen as a product.
Whereas a widget is a commercial product, nitrogen pollution has
not traditionally been viewed as a commodity.
Commodification turns an inherent value into a market value, en-
abling it to be bought and sold on a market. The commodities can
then be priced and a market can be created for them. Privatization
transfers control and management of these commoditized re-
5
sources from public ownership to private ownership. At this point,
financialization acts upon the commodity as an asset and applies
various financial instruments to it, such as through a water futures
contract or a nitrogen credit option.
35
The valuations necessary for an alternative to GDP such as GPI
are the same valuations necessary for the commodification and
marketization of our common resources. In fact, the point of the
valuations made for GPI is the extension of market values over and
incorporating non-market values. GPI is not merely supportive of
financialization of nature; it is itself the financialization of nature.
AIternatives to the AIternatives
While GPI explicitly facilitates the financialization of nature, there
are other alternatives to GDP that avoid the trap of trying to pro-
vide market values for non-market values. These non-monetary,
non-market alternatives can still help to guide public policy and
can still help us to beter understand the true extent of social well-
being in our society.
The Footprint model has grown in popularity in recent years, so
that it is now possible to calculate ones carbon footprint or water
footprint. For example, a households water footprint is calculated
from national averages of water use associated with such fixtures
and devices as shower heads, dishwashers, washing machines,
etc.
36
In addition, the water used in the production of the food
you eat and the clothes you wear, as well as the gasoline that pow-
ers your car, can be part of calculating the footprint.
Broader calculations of an Ecological Footprint can also be
made. Ecological Footprint accounts reveal how much land and
water area a human population requires to produce the resources
it consumes and to absorb its waste. They also track how much
productive area or biocapacity is available.
37
Without at-
tempting to price the natural environment on which a countrys
economy relies, the footprint model calculates whether or not a
given country is overextending its environmental resources.
What the various footprint models demonstrate is that it is pos-
sible to address concerns about the limits of GDP without resort-
ing to extending the market valuation paradigm embedded in the
GDP.
Further evidence of this is the Gross National Happiness Index
of Bhutan. Unlike GPI or other indices generated by economists,
the GNH seeks to measure happiness without reducing it to an
aggregate of market values. Assessment of GNH is done through
a survey format meant to be understandable to the general public.
It does not create market values for non-market values, it asks
the Bhutanese people themselves to assess their happiness.
38
ConcIusion
While it is true that use of Gross Domestic Product as an indica-
tor of social well-being extends GDP beyond what it measures,
adopting the Genuine Progress Indicator or related alternatives
will facilitate the financialization of nature.
Policymakers should seek an alternative to GDP not by replacing it
with another aggregator, but by replacing it with a pool of mea-
surements that, taken together, can inform policy decisions and
beter reflect our social values. In this pool, GDP can still play an
important role, especially if recalibrated so that it no longer counts
as positive contributions any economic activity for negative and
defensive measures. Other potential measures in the pool would
be GDP per capita and Gini coeficients for measuring inequality.
Added to these economic measurements, the pool should include
a non-monetary, footprint model as an alternative to GDP that
captures the environmental resources being used for the economic
output of the country or state and measures whether or not that
usage is sustainable over the long term.
By using a pool of measurements, with each member of the pool
taken as giving only that information it actually provides, it is pos-
sible to have a clearer understanding of the social well-being of the
country or state without facilitating the financialization of nature.
Food & Water Watch works to ensure the food, water and fish we consume is safe, accessible
and sustainable. So we can all enjoy and trust in what we eat and drink, we help people take
charge of where their food comes from, keep clean, affordable, public tap water flowing freely to
our homes, protect the environmental quality of oceans, force government to do its job protecting
citizens, and educate about the importance of keeping shared resources under public control.
Copyright November 2012 by Food & Water Watch. All rights reserved. This issue brief can be viewed or downloaded at www.foodandwaterwatch.org.
Endnotes
1 Rio+20 United Nations Conference on Sustainable Develop-
ment, http://www.uncsd2012.org.
2 Stern, Nicholas. Stern Review on The Economics of Climate
Change (pre-publication edition). Executive Summary. HM Trea-
sury, London, U.K. 2006 at i.
3 GDP: One the Great Inventions of the 20th Century. Survey of
Current Business. January 2000 at 6.
4 Ibid. at 7.
5 Daly, Lew and Stephen Posner. Beyond GDP: New Measures for a
New Economy. Dmos, 2011 at 5.
6 Daly and Posner, 2011 at 5.
7 Costanza, Robert et al. Beyond GDP: The Need for New Measures of
Progress. The Pardee Papers. No. 4. January 2009 at 10.
8 Holden, Michael. Per Capita Gross Domestic Product: An Appropri-
ate Measure of Living Standards? The Case of Newfoundland and
Labrador. (PRB 03-14E). Parliamentary Research Branch. Library
of Parliament. Ottawa. September 2003 at 11.
9 Haggart, Blayne. The Gross Domestic Product and Alternative Eco-
nomic and Social Indicators. (PRB 00-22E). Parliamentary Research
Branch. Library of Parliament. Ottawa. December 2000.
10 Costanza et al., 2009 at 4.
11 Kuznets, Simon. How to Judge Quality. New Republic. October 20,
1962 at 29.
12 Nordhaus, William and James Tobin. Is Growth Obsolete?
Economic Research: Retrospect and Prospect. National Bureau of
Economic Research General Series No. 96E. Columbia University
Press. 1972 at 4. Gross National Product (GNP) measures the total
income of U.S. citizens whether that income is generated domes-
tically or abroad. GDP measures only domestic production. The
Bureau of Economic Analysis stopped using GNP and started
using GDP in 1991.
13 GDP: One the Great Inventions of the 20th Century. 2000 at 12.
14 Daly and Posner, 2011 at 6.
15 Ibid. at 4.
16 Costanza et al., 2009 at 7 to 10.
17 Remarks of Robert F. Kennedy at the University of Kansas, March
18, 1968. Available at http://www.jfklibrary.org/Research/Ready-
Reference/RFK-Speeches/Remarks-of-Robert-F-Kennedy-at-the-
University-of-Kansas-March-18-1968.aspx. Accessed October 11,
2012.
18 Nordhaus and Tobin, 1972 at 4.
19 Haggart, 2000.
20 Talberth, |ohn, Cliord Cobb and Noah Slattery. The Genuine Prog-
ress Indicator 2006. Redening Progress. 2006 at 3.
21 Both the Maryland and Vermont state governments have ad-
opted a form of GPI to inform state policy. See http://www.green.
maryland.gov/mdgpi/index.asp and http://www.uvm.edu/giee/.
22 Kuik, Onno. The Index of Sustainable Economic Welfare. VU Univer-
sity, Institute for Environmental Studies. Amsterdam.
23 Costanza et al., 2009 at 12.
24 Rio+20, Use Rio+20 to overhaul idea of growth, urges EU climate
chief. Available at http://www.uncsd2012.org/index.php?page=vi
ew&nr=810&type=230&menu=39. Accessed November 15, 2012.
25 Commission on the Measurement of Economic Performance and
Social Progress, http:llwww.stiglitz-sen-toussi.frlenlindex.htm.
In January 2010, the Sarkozy government introduced a National
Sustainable Development Strategy.
26 Costanza et al., 2009 at 32.
27 Daly and Posner, 2011 at 5.
28 Ibid. at 12.
29 Neumayer, Eric. The ISEW: Not an indicator of sustainable eco-
nomic welfare. Social Indicators Research, vol. 48. 1999 at 78.
30 Haggart, 2000.
31 See the GPI developed for Maryland and that developed for
Vermont, http://www.green.maryland.gov/mdgpi/index.asp and
http://www.uvm.edu/giee/.
32 Finley, Bruce. Colorado farms planning for dry spell losing auc-
tion bids for water to fracking projects. The Denver Post. April 1,
2012.
33 John Talberth. Measuring What Matters: GDP, Ecosystems
and the Environment. Available at http://www.wri.org/sto-
ries/2010/04/measuring-what-matters-gdp-ecosystems-and-
environment. Accessed October 4, 2012.
34 Haggart, 2000.
35 See: Food & Water Watch. Don t Bet on Wall Street: The Financializa-
tion of Nature and the Risk to Our Common Resources. 2012.
36 See, for instance, H2OConserve. About the Water Footprint Cal-
culator. Available at http://www.h2oconserve.org/?page_id=503.
37 Global Footprint Network. :KDW+DSSHQV:KHQDQQQLWH*URZWK
Economy Runs Into a Finite Planet? Annual Report 2011. 2011 at 35.
38 The Centre for Bhutan Studies. A Short Guide to Gross National
Happiness Index. Thimpu, Bhutan. 2012.