Mark Brandon is the Managing Partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Wednesday, September 27, 2006

Green Net National Product

Discussing economic statistics and accounting principles are usually not useful for driving blog traffic and newsletter subscriptions. However, if investment decisions on the corporate, government and individual levels are based on the numbers (and they are), and the numbers have a serious flaw that ignores environmental degradation (and they do), then we have a problem. If the world truly wants to move to sustainability, one of the most effective measures we can adopt is an update of economic statistics and accounting measures.

One of the most widely cited economic statistics in Gross Domestic Product (GDP), which as the name suggests, is supposed to be a reflection of the production occurring within the borders of a country. To illustrate, pretend that we have two countries: Country A, whose chief export is database software, and Country B, whose chief export is aluminum cans. If Country A sells $100,000 worth of software, its GDP goes up by an equivalent amount. If Country B produces $100,00 worth of aluminum cans, the same happens. However, Country B's process of making those cans destroyed several acres of cropland because aluminum extraction is a dirty business. It does not take a ph.D in economics to see that these two undertakings are not equal in benefit to its country. Yet, GDP measures them equally.

To use a real life example, many small African countries have experienced an explosion in GDP because their (often corrupt) rulers have made deals to develop the oil infrastructure. The resulting oil sales explode the country's GDP. But, when you consider that the lion's share of the profits either went to foreigners or corrupt rulers, what do you have? The country liquidates its natural resources, thus becoming poorer by one measure, while not that many people share in the wealth. A recent Fortune article cited the case of a gold and copper mine which resulted in huge gains in GDP for Papua New Guinea. Much of the income went to BHP Billiton, while the indigenous population was left with a poisoned river from mine tailings, destroying the livelihoods of at least 40,000. Most would argue that the country is poorer for the experience, yet national statistics do not reflect it.

This phenomenon works at the corporate level, too. For the last two years, the media has focused on multi-billion dollar quarters for oil giants such as Exxon (NYSE:XOM), Chevron (NYSE:CVX), and British Petroleum (NYSE:BP). Yet, the stock prices have not really reflected the exuberance in their earnings reports. The reason is that they are only liquidating reserves that were already carried on their balance sheets. They have not been able to replace these reserves with new oil field finds (the recent discovery of a giant Gulf of Mexico field excepted). Shell Oil (NYSE:RDS.B) was embroiled in an accounting scandal a few years ago over the exaggeration of proven reserves. Again, earnings reports are not telling the full story.

Another mercilessly flogged number is the trade deficit. Here, the equation tries to make two countries look like individuals. For the U.S., much of the public is convinced that we are becoming poorer because of our trade deficit with China. For example, if China sells us a $1,000 laptop, the trade deficit goes up $1,000. However, probably 90 percent of the profits from this $1,000 went to one of a few U.S. behemoths, Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), or Apple (NASDAQ:AAPL). Which country is better off? The more useful measure is what these countries (or companies) are doing to add value to the raw materials. Apple has had a significant trade deficit with its component suppliers since the company's founding, but that is not a useful measure. It is useful to know what Apple does to add value to its motley collection of components. The same should be evaluated when two countries are being compared.

Despite the apparent shortcomings, economists and the media continue to use them only because they have always used them. It is also convenient to keep compiling it the same way, so as to compare it with last year's figures. A movement is afoot to more adequately account for environmental degradation. One of these measures, Green Net National Product (GNNP), not only adjusts for environmental degradation but also for the flow of earnings. This would not only mitigate the flaws in GDP, but also the trade deficit numbers.

Among its chief proponents is The World Bank. They have provided an excellent 235-page manual "Estimating the Cost of Environmental Degradation", which is free. Warning: this publication may induce sleep.

5 Comments:

Blogger sine said...

hi..
i read ur blog which has ben very insightful in the concept of GNNP.i am a research student from india trying to find out correlations b/w gnnp and infrastructure growth..if u have any articles pertaining to this topic i would request u to enlighten me with the same..
thankin u

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