Going beyond national income to measure a country’s wealth

Changes in the gross domestic product (GDP) have long been the standard for deciding how well a country is doing. But GDP only captures the monetary value of goods and services that flow in national economies. It says nothing about the state of a country’s assets, which is equally important to chart a nation’s journey toward wellbeing and sustainability. For example, GDP measures the income generated from natural resources, without looking at changes in a country’s wealth in land, forest and biodiversity.

Using alternative indicators to measure wealth can show imbalance in investment priorities that hold countries back. In Ethiopia, for example, researchers found that agriculture generated 40% of GDP in 2022, while manufacturing accounted for 4%. Yet only 8% of investment in infrastructure such as roads, railways and machinery was devoted to agriculture. The findings point to a missed opportunity to strengthen a sector that is critical to building the country’s wealth.

“Farmers still mostly use oxen, which has implications for land degradation and productivity. The country needs more investment in agriculture, especially modern technologies,” said Mesfin Tilahun Gelaye, associate professor at Ethiopia’s Mekelle University.

Gelaye is one of several country leads in IDRC-supported research, developed in partnership with the International Institute for Sustainable Development (IISD) and three universities in Ethiopia, Indonesia and Trinidad and Tobago. The study explores the advantages and challenges of applying comprehensive wealth measurement.

“There is a real appetite among many countries to move beyond GDP,” said Bhim Adhikari, an environmental economist and senior program specialist at IDRC. “We supported the IISD study because this is a critical area where countries lack data and the necessary skills and expertise.” 

The origins and limitations of GDP

The international community adopted GDP as the primary way to measure a country’s economic progress at the Bretton Woods conference of 1944. GDP can provide an aggregate measure of income in an economy during a given period. However, it overlooks changes in vital assets that can help gauge the environmental costs of economic growth, the impacts of climate change, and the gaps between rich and poor and levels of investment in human potential.

A new approach for measuring comprehensive wealth focuses on five assets:  

• produced capital (manufactured assets like houses and transport infrastructure);  
• natural capital (both the market value of natural resources and their non-market value as ecosystems and biodiversity);  
• human capital (the collective knowledge and skills of the labour force);  
• financial capital (assets such as stocks, bonds and bank deposits); and  
• social capital (norms and behaviours that support society, including inclusivity and trust).

The “beyond GDP” movement, which emerged in the 1990s, has been recently driven by the World Bank, the United Nations and the UN Environment Programme. In 2016, drawing on such methodologies, IISD measured Canada’s comprehensive wealth — one of the first such studies to look at a single country. It found relatively slow growth in comprehensive wealth and much faster growth in consumption in Canada, which raised concerns about long-term sustainability.

“With the IDRC-funded study, we applied the same approach to countries without a strong capacity in statistics, over the 25 years between 1995 and 2020,” said Livia Bizikova, lead, Monitoring and Governance of IISD's Tracking Progress program. “We worked with universities in the three countries on quality control, while they collected the data and assessed it.”

Measuring comprehensive wealth exposes the trade-offs hidden by GDP

The three-country study has generated interesting, and often surprising, findings. For example, GDP growth rates in Trinidad and Tobago belied a reality that comprehensive wealth measurements would have laid bare: the growth has been due to an overreliance on the production of depleting fossil fuels, suggesting that the country is on an unsustainable path.

The research team in Indonesia discovered that annual GDP growth averaging 2.8% between 1995 and 2020 is much lower than the average of 4.3% growth in comprehensive wealth over the same period. The discrepancy between the two results points to Indonesia’s inability to translate its wealth into GDP growth.

“That additional income would have been enough to push Indonesia into the World Bank’s class of upper middle-income nations much sooner,” said Alin Halimatussadiah, the country research lead and head of the Green Economy and Climate Research Group at the University of Indonesia. Indonesia gained upper middle-income country status in 2019, lost it due to the economic impacts of the COVID-19 pandemic and regained it in 2023.

The country’s wealth generation has come from human capital — more skilled workers and higher levels of education — that contrasts with slow growth in natural capital.

“We haven’t fully utilized the value of natural capital,” said Halimatussadiah.

Indonesia ranks among the top producers of timber, fish, coal, natural gas, oil, nickel, gold, tin and copper. The findings suggest that better management of this natural capital could translate to more income for Indonesians while still preserving it for future generations. Using data from the World Bank and the Food and Agriculture Organization, the researchers found that a single tree cut down in neighbouring Malaysia generated six times more wealth than one cut down in Indonesia.

Deepening and sharing the comprehensive view of wealth

While the research provided insight into the nature of wealth in the three countries, it was also challenging. In Indonesia, for example, reliance on top-down data in some areas like education made it difficult to come up with policy recommendations related to human capital. For both Indonesia and Ethiopia, non-marketed natural capital was also difficult to measure in monetary terms.

“Natural capital comprises a lot of things,” said Gelaye. “No one was measuring carbon 50 years ago, for example, but now we can put a price on it. Our knowledge develops gradually, and we learn by doing.”

The application of comprehensive wealth measurement shows how growth across the five types of capital must be stable or increase for development to be sustainable.

“The five capital portfolios weave together. If they are not all moving in the same direction, any increase in GDP could be misleading,” Gelaye explained. “It could benefit a few firms but come at the expense of natural resources or human wellbeing.”

IISD and the country teams continue to explore the insights that comprehensive wealth indicators offer for policymakers. They are focusing on the effects of climate change on natural capital and the effects of unpaid care work — often falling disproportionately to women — on human capital.

The researchers are also developing tools and materials to communicate the ideas of comprehensive wealth to national decision-makers, statisticians, young professionals and post-graduate university students in their countries and beyond.

This IDRC-supported research has helped to show how comprehensive wealth methodologies can complement GDP and how they are transferable and comparable between countries. The goal now is to share experiences with other countries in Africa, Asia and Latin America, to generate more meaningful measurement of how well countries around the world are progressing.