In the search for a better system to account for our economy, researchers have looked at various options. We explored the GDP option and the sustainability analysis option in the past few articles. However, as we have seen both these systems are at odds with each other and it seems like there is room for only one amongst these two alternate systems. Since the modern economic system is based on the market system, it seems like the de-facto winner in this fight!
The subject of environment, however, is too important to be just ignored because a correct metric could not be found. It is for this reason that the search for alternate measures has gained some momentum. One such alternate measure is the Green GDP. The Green GDP was adopted by economic superpowers like China as early as 2004. India plans to adopt it by 2015. This has lent considerable credence to this concept and analysts all over the world now also pay careful attention to the Green GDP supplement that is released with the original GDP figures.
In this article, we will explore the concept of Green GDP in detail.
Why Implement Green GDP?
The major arguments in favor of the Green GDP system that have been cited by researchers and have been accepted by many countries are as follows:
- Interrelationship between market and nature: The heart of the Green GDP approach lies in the belief that nature and market are not mutually exclusive variables. In fact both of them have a deep interconnected relationship.
Natural resources fuel market growth and excessive market growth has the potential to destroy natural resources. Hence, there is a need to actively manage this relationship between these variables. Also, since measurement is the first step towards management, there is an immediate need for a metric which can measure the relationship between them and summarize it.
- Comparison across peers and periods: Countries like China have also stated that Green GDP can be used to make comparisons for the same country across various years or it could be used to compare a country‚Äôs environmental status with that of another country. The idea is to include reports like depletion analysis in the GDP reports. This will enable analysts to predict even more accurately how the growth of those economies will be affected in the future.
- Accountability: Last but not the least it will bring some accountability to government‚Äôs worldwide. It has become a common practice to ensure that the market system grows while the natural system perishes.
What Green GDP Does Not Include?
When it comes to green accounting, there is a tendency to believe that a monetary value will be put on the natural resources. Just like companies have assets like machines and factories, nations also have assets like mountains, forests, rivers and oceans.
However, assets usually denote private ownership. That is the reason they have value in the first place. In the absence of private ownership, these assets cannot be transferred to other people and hence they would not have any value.
Economic assets like oceans, mountains and forests do not have private ownership. These are public goods that can be enjoyed by everyone at no cost. Hence, valuing these assets and including them in a national balance sheet would not make any sense. Also, on a realistic level it is not possible to count each and every asset and attach a monetary value to it. It must therefore be clear that green GDP is not about building fictitious assets in a country‚Äôs balance sheet and this is generally excluded from any calculation.
What Does Green GDP Include?
Green GDP includes the services which are provided by the environment. For instance, if any geographical region has a better quality of water than other regions, the people in this region are expected to live healthier and more productive lives.
There is a tangible and measurable cost attached to the medical expenses associated with bad water or polluted air. It is therefore possible to set a baseline for the quality of natural resources available in an environment and the benefits that they provide in terms of savings.
Most importantly Green GDP includes a depletion analysis. This is the document which explains the process of depletion of natural resources in an economy. It also explains whether the trend is sustainable or not. This information is valuable to investors who invest based on the natural resources of a country that can be utilized. Depletion of the natural resources would therefore scare investors away maintaining an ecological balance. It must however be noted that depletion analysis is an information only document. It has no legal backing and the participants are still free to do as they see fit.
Challenges Facing Green GDP
The biggest challenge facing the Green GDP is that of realistic accounting. Since we are essentially measuring the intangible, it is very difficult to estimate the monetary values associated with them. The Green GDP system is not perfect. However, it is developing. Many scholars and researchers are working towards a solution wherein Green GDP can become more pragmatic and realistic.
The idea is to ensure that the flaws of the GDP system are not replaced by another flawed system. The process might take time but seems to be on the right track.
Authorship/Referencing - About the Author(s)
The article is Written By ‚ÄúPrachi Juneja‚ÄĚ and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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