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Inclusive wealth is the aggregate value of all capital assets in a given region, including
human capital Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
,
social capital Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationships ...
,
public capital Public capital is the aggregate body of government-owned assets that are used as a means for productivity.Aschauer, D. A. (1990). Why is infrastructure important? Conference Series roceedings Federal Reserve Bank of Boston. Pp. 21-68. Such asset ...
, and
natural capital Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. All of ...
. Maximizing inclusive wealth is often a goal of
sustainable development Sustainable development is an organizing principle for meeting human development goals while also sustaining the ability of natural systems to provide the natural resources and ecosystem services on which the economy and society depend. The desi ...
. The Inclusive Wealth Index is a metric for inclusive wealth within countries: unlike gross domestic product (GDP), the Inclusive Wealth Index "provides a tool for countries to measure whether they are developing in a way that allows future generations to meet their own needs". The
United Nations Environment Programme The United Nations Environment Programme (UNEP) is responsible for coordinating responses to environmental issues within the United Nations system. It was established by Maurice Strong, its first director, after the United Nations Conference on ...
(UNEP) published reports in 2012, 2014, and 2018 on inclusive wealth. The 2018 "Inclusive Wealth Report" found that, of 140 countries analyzed, inclusive wealth increased by 44% from 1990 to 2014, implying an average annual growth rate of 1.8%. On a
per capita ''Per capita'' is a Latin phrase literally meaning "by heads" or "for each head", and idiomatically used to mean "per person". The term is used in a wide variety of social sciences and statistical research contexts, including government statistic ...
basis, 89 of 140 countries had increased inclusive wealth per capita. 96 of 140 countries had increased inclusive wealth per capita when adjusted. Roughly 40% of analyzed countries had stagnant or declining inclusive wealth, sometimes despite increasing GDP. Many countries showed a decline in natural capital during this period, fueling an increase in human capital.


Inclusive Wealth Index

The Inclusive Wealth Index (IWI) was developed by UNEP in partnership with
Kyushu University , abbreviated to , is a Japanese national university located in Fukuoka, on the island of Kyushu. It was the 4th Imperial University in Japan, ranked as 4th in 2020 Times Higher Education Japan University Rankings, one of the top 10 Desig ...
. The Index calculation is based on estimating stocks of human, natural and produced (manufactured) capital which make up the productive base of an economy. Biennial Inclusive Wealth Reports (IWR) track progress on sustainability across the world for 140 countries. The IWI is UNEP's metric for measuring intergenerational well-being. Implementing the IWI has been undertaken by many individual countries with UNEP support by a scientific panel headed by Sir Partha Dasgupta of
Cambridge University , mottoeng = Literal: From here, light and sacred draughts. Non literal: From this place, we gain enlightenment and precious knowledge. , established = , other_name = The Chancellor, Masters and Schola ...
. Inclusive wealth is complementary to Gross Domestic Product (GDP). In a 'stocks and flows' model, capital assets are stocks, and the goods and services provided by the assets are flows (GDP). A tree is a stock; its fruit is a flow, while its leaves provide a continuous flow of services by pulling carbon dioxide from the atmosphere to store as carbon. It is a multi-purpose indicator capable of measuring traditional stocks of wealth along with skill sets, health care, and environmental assets that underlie human progress. The effective management of this capital supports the ultimate purpose of an economy – societal well-being.


Conceptual framework

Produced capital (also referred to as manufactured capital) includes investment in roads, buildings, machines, equipment, and other physical infrastructure. Human capital comprises knowledge, education, skills, health and aptitude. Natural capital includes forests, fossil fuels, fisheries, agricultural land, sub-soil resources, rivers and estuaries, oceans, the atmosphere and ecosystems, more generally. Social capital includes trust, strength of community and institutions, and the ability of societies to overcome problems. An economy's institutions and politics determine the social value of its assets, because they influence what people are able to enjoy from them. IWI does not directly measure social capital, which is considered to be embedded in other capital types. Not all components of capital that are conceptually components of wealth are currently included in the Inclusive Wealth methodology. This is due to difficulties in measuring certain assets, as well as data availability and comparability constraints.


Methodology

The conceptual framework looks at well-being at time ''t'' as: V(t)=\int_^ U(C_\tau)e^ d\tau Denoting produced, human, and natural capital as 𝐾, 𝐻, and 𝑁, the change in inclusive wealth 𝑊 is expressed by: dW=(K,H,N,t)/dt= p_k (dK/dt) + p_H(DH/dt) + p_N (dN/dt) \delta V/\delta N where 𝑝𝐾, 𝑝𝐻 and 𝑝N are the marginal shadow prices of produced, human, and natural capital, respectively. They are formally defined by, p_K \equiv \delta V/\delta K, p_H\equiv \delta V/ \delta H, p_N \equiv \delta V /\delta N given a forecast of how produced, human, and natural capitals, as well as other flow variables, evolve in the economy in question. Practically, shadow prices act as a weight attached to each capital, resulting in the measure of wealth, or: IWI = p_K (K)+ p_H(H)+p_N(N) In practice, ''W'' and ''IWI'' can be used interchangeably, although they can differ in that IWI also uses shadow prices on the margin. In addition, the unit of IWI is monetary rather than utility. This does not affect the sustainability assessment overall.


Natural capital

The components of natural capital include renewable resources (agricultural land, forests, and fisheries) and nonrenewable resources (fossil fuels and minerals). The inclusion of fossil fuels within an indicator that tracks sustainability may appear counterintuitive because fossil fuels are often considered liabilities or stranded assets. The mechanism assumed in the IWI framework is the business-as-usual scenario of the imperfect economies that form the basis of our societies. The shadow price of any type of natural capital represents its marginal contribution towards social wellbeing. In this context, the potential benefit of fossil fuels for driving investment in other types of capital, outweighs the drawbacks of the social costs of carbon.


= Non-renewable resources

= Non-renewable natural capital resources are oil, coal, natural gas, minerals and metals. To measure a fossil fuel, data measures the stock and compared to data from other years, in order to develop a time-series that reflects accurate flows. The unit shadow price for non-renewables is the price net of extraction cost, also called the rental price. The rental rate of the total price is assumed constant.Narayanan, B., Aguiar, A. & McDougall, R. (2012). "Global Trade, Assistance, and Production: The GTAP 8 Data Base." Center for Global Trade Analysis, Purdue University. Retrieved fro

purdue.edu/databases/v8/v8_doco.asp.
Ideally, the marginal cost of extraction should be used for corresponding remaining stock, but this is hard to obtain. The accounting for minerals is similar to that used for fossil fuels. For rental rates, the sectoral rental rates of different mineral industries are used, as well as United States Geological Survey, U.S. Geological Survey data.


= Renewable resources

=


Timber

Timber stocks included in IWI estimates are those that are commercially available. To calculate the quantity of timber available, the total forest area, excluding cultivated forest is multiplied by the timber density per area and percentage of total volume that is commercially available. The exclusion of cultivated forest from this category is debatable, as it is regarded as contributing to timber and non-timber values. Forest cultivation is categorized as a production activity in the System of National Accounts. Following the estimation of physical stocks, shadow prices are computed to convert the wealth into monetary terms. The
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
's approachWorld Bank. (2006). ''Where is the wealth of nations''? Washington, DC: World Bank. uses a weighted average price of two commodities for industrial roundwood and fuelwood. Country-specific GDP deflators are used to convert prices from current to constant units, and regional rental rates for timber are applied, which are assumed to be constant over time. To obtain the proxy value for the shadow price of timber, the average price over the study period (1990 to 2014) is taken. Wealth corresponding to timber value is taken as the product of quantity, price and average rental rate over time.


Non-timber forest benefits

Aside from the provisional ecosystem service of timber production, forests yield many other services. These additional ecosystem services are accounted for in the following manner: Non-cultivated forest area is retrieved from FAO (2015). The fraction of the forest area that contributes to human well-being is assumed to be 10%. The unit benefit of non-timber forest to inter-temporal social well-being is obtained from the Ecosystem Service Valuation Database (ESVD) database. This is expressed as USD/ha/year. Finally, to translate this benefit into capital asset value, we take its net present value, using the discount rate of 5%.


Fishery stocks

Fishery stocks cannot be estimated based on habitat area, unlike forest or agricultural lands. Marine fishery habitats often cross national borders. Global fish stocks are often assessed using trends in catch or harvest data. With a country's harvest and effort data, along with a catchability coefficient, stocks can be estimated using the Schefer production function. For estimating fishery stocks in countries that lack sufficient effort data, a resource dynamic approach is taken.


Agricultural land

Agricultural land is composed of cropland and pastureland. Data from
Food and Agriculture Organization The Food and Agriculture Organization of the United Nations (FAO)french: link=no, Organisation des Nations unies pour l'alimentation et l'agriculture; it, Organizzazione delle Nazioni Unite per l'Alimentazione e l'Agricoltura is an intern ...
(2015) is employed to quantify cropland and pastureland area. Market prices are often unavailable for agricultural land. A shadow price is computed as the net present value of the annual flow of services per hectare, in line with
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
(2011). IWI assumes the shadow price of pastureland is equal to that of cropland.


Shadow price

Shadow prices are the estimated price of a good or a service that does not have a market price. The calculation of shadow prices is central to the IWI, particularly for natural capital. Various non-market valuation techniques provide estimates for these prices. The use of shadow prices for natural capital is controversial, mainly regarding the knowledge gap surrounding how to represent production functions of life-supporting ecosystems. Nevertheless, shadow prices based on willingness to pay measures are considered the best available approach for estimating their value.


Human capital

The main components of human capital are health and education, but also parenting, on-the-job training, informal education and migration. Human health is affected by daily well-being, productivity and lifespans. The latter is computed as a proxy for health-related human capital, largely because the options for quantifying the others are limited. The shadow price of health capital is the value of a statistical life year (VSLY). IWI methodology focuses on the return on formal education, acknowledging that non-formal education such as early childhood learning and vocational training also contribute to wealth. Using data from Barro and Lee (2013), educational attainment is proxied by the average years of schooling per person. The rate of return on education is assumed to be 8.5%, and then multiplied by the educated population.


Produced capital

Produced capital, also referred to as manufactured capital, includes physical infrastructure, land, facilities of private firms, and dwelling places. IWI uses the
perpetual inventory In business and accounting/accountancy, perpetual inventory system or continuous inventory system describes systems of inventory where information on inventory quantity and availability is updated on a continuous/real-time basis as a function of do ...
method (PIM), which is a simple summation of gross investment net of depreciation that occurs in each period.


Adjustments

Three adjustments influence wealth and social well-being, but are not covered by the official capital assets: carbon damage, oil capital gains, and total factor productivity. Carbon damage can be regarded mostly as an exogenous change in social well-being. Calculation involves: * Obtain global carbon emissions for the period under analysis (1990 to 2014); * Derive global damage as a function of emissions; and * Allocate global damage to countries according to their potential effect on global warming. Oil prices are notorious for rapid fluctuations. Oil-rich nations benefit from spiking oil prices. Conversely, rising oil prices may result in reductions in social well-being for oil importing countries. An annual increase of 3% in the price of oil is assumed, corresponding to the annual average oil price increase during 1990–2014,BP. (2015). ''Statistical Review of World Energy 2015''. Retrieved fro

review.
implying that even if no oil is withdrawn, a nation can enjoy 3% growth in wealth.
Total factor productivity In economics, total-factor productivity (TFP), also called multi-factor productivity, is usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs. Under some simplifying assumptions about the production technology, growt ...
(TFP) measures residual contributions to social well-being.UNU-IHDP, & UNEP. (2012). Inclusive Wealth Report 2012: Measuring Progress toward Sustainability. Cambridge: Cambridge University Press. IWI includes TFP as an adjustment term. A non-parametric analysis called Malmquist productivity index is employed, which is based on the concept of data envelopment analysis.


History

IWI was inaugurated in 2012 with the launch of the Inclusive Wealth Report (IWR) at the
United Nations Conference on Sustainable Development The United Nations Conference on Sustainable Development (UNCSD), also known as Rio 2012, Rio+20 (), or Earth Summit 2012 was the third international conference on sustainable development aimed at reconciling the economic and environmental goals ...
(Rio+20). IWR 2012 compared the relative change of natural capital against produced capital and human capital. The results showed that changes in natural capital can significantly impact a nation's well-being, and that it is therefore possible to trace changes in components of wealth by country and link these to economic progress. The 2014 and 2018 IWRs expanded scope to cover 140 countries. The main focus of IWR 2014UNU-IHDP, & UNEP. (2014). Inclusive Wealth Report 2014: Measuring Progress toward Sustainability. Cambridge: Cambridge University Press. was to estimate the education component of human capital. In IWR 2018, health was added to human capital, and fisheries were added to natural capital. Changes in inclusive wealth are calculated using 25 year annual average growth rates. The results show that the growth of inclusive wealth is positive for many countries. Top performers include
Republic of Korea South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korean Peninsula and sharing a land border with North Korea. Its western border is formed by the Yellow Sea, while its ea ...
,
Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, borderin ...
and
Malta Malta ( , , ), officially the Republic of Malta ( mt, Repubblika ta' Malta ), is an island country in the Mediterranean Sea. It consists of an archipelago, between Italy and Libya, and is often considered a part of Southern Europe. It lies ...
among others. However, in many countries, the population is growing more quickly than the inclusive wealth. These places experienced negative per capita wealth growth. Some of the negative per capita growth of wealth occurred in countries that experienced absolute gains in wealth. IWI looks at each country's assets and assesses the changing health of these assets over 25 years. IWR 2018 shows that 44 out of the 140 countries have suffered a decline in inclusive wealth per capita since 1992, even though GDP per capita increased in all but a handful of them. This statistic shows that their growth is unsustainably depleting resources.


Inclusive Wealth Index and Sustainable Development Goals

Sustainable Development Goal (SDG) 17 calls for developing "measurements of progress on sustainable development that complement GDP." The inclusive wealth index is one way of measuring progress on the SDGs and positive development trajectories. Infrastructure and industrialization can occur in line with sustainability considerations. On a global level, produced capital per capita has experienced the largest increase compared to human and natural capital, often at the expense of the latter. The IWI framework provides data and guidance in monitoring the trade-offs without compromising other development goals. IWI provides governments a new and holistic guide. If inclusive wealth (adjusted for population and wealth distribution) increases as governments try to meet SDGs, the SDGs will be sustainable; if it declines, the SDGs will be unsustainable. It could be that the goals are reached, but are not sustainable because the development paths that nations choose to follow erode their productive capacities.


2018 Inclusive Wealth Index


References

{{reflist Economic indicators Sustainable development Sustainable Development Goals United Nations Environment Programme Wealth