For The Jakarta Globe, 2 December 2010
World elites have gathered in Cancun, Mexico, to discuss solutions to the accumulating problems of rapid climate change. Some are pessimistic that this round of talks will result in concrete binding agreements. However, I see light in this gathering of world political power because of some important changes in, of all things, the world of statistical measurement. The influential World Bank has begun a revolution in the development paradigm by changing the way development is measured.
This is not only a statistical improvement, but a radical reorientation that overhauls not just the metrics but the way development is seen in mainstream economics with potentially far-reaching consequences.
Wealth measurement must include natural assets, World Bank President Robert Zoellick said on Oct. 28. In mainstream economics, the depletion of natural resources is not counted in the measurement of national wealth.
A country’s economy may grow very rapidly, but its natural assets may also be depleted very quickly and this dynamic is not accounted for in conventional views of what constitutes prosperity.
With this new measurement, the World Bank will adjust its view of national wealth to account for environmental costs. There should be no debate on the trade-off between economic growth and environmental quality, because the cost of environmental damage will be included in the scorecard of development.
Zoellick and his staff will begin developing a new set of statistics designed to measure and support sustainable development policies. He clearly hopes it will provide a new tool for decision makers as they choose and implement development projects.
Actually, the concept is not new. I learned it 37 years ago when I took the Introduction to Macroeconomics course at the School of Economics at the University of Indonesia. We were warned about the weaknesses of the statistical models, including the failure to include non-monetized goods and services. We did not learn fully how to calculate the depletion of natural assets simply because it could not be monetized.
The problem is that economists tend to ignore this measurement of deteriorating natural wealth. We also rarely discuss net national income and wealth in macroeconomic discussions.
Unfortunately, I am not the only forgetful economist out there. Many generations of economists have been educated in this way. Environmental economists are very aware of this problem, of course, but they are not the mainstream economists who set the broad benchmarks for what we call development. They are sometimes accused of slowing economic growth. How often have we heard this debate about the trade-off between economic growth and environment quality? It has unfairly made economists and environmentalists antagonists.
Happily, I observe that most economists are aware of this weakness. However, they do not have the power to change it. They may hold important seats in government, but they suffer from an inferiority complex when they consider the big-name economists in Washington and the rest of the world.
Changing the way certain statistics are defined could result in lower economic growth figures, which would be misinterpreted as poor performance and mismanagement. It requires courage to fine-tune a statistical instrument, particularly when it reveals a truth that policy makers would rather not see.
Paradigm change requires political support. John M. Keynes revolutionized the teaching of economics in the 1930s, defining what we know today as macroeconomics with the strong political support of US President Franklin D. Roosevelt. Widjojo Nitisastro was able to change the paradigm of development planning in Indonesia in the middle of the 1960s, from an almost total lack of economic analysis to the application of economic analysis, because he received strong support from President Suharto.
Therefore, as the president of the World Bank, Zoellick’s statement is revolutionary. Earlier, top economists and Nobel Prize winners such as Joseph Stiglitz and Amartya Sen voiced the need to move away from the traditional concentration on national income as the determining measurement of economic development, but they did not have the political power to implement the change.
This statistical adjustment, of course, is not a panacea for poverty alleviation, but it is a very important step toward justice in economic development, aligning with the Indonesian government’s vision of achieving economic growth with justice. Driving growth at the expense of the natural world will not provide justice to the people of Indonesia — or anywhere else — either in this generation or, more important, future generations.
The government ought to play a strategic role by supporting the World Bank and this key turning point in its perspective. Indonesia will soon assume leadership of Asean for one year. Jakarta can use this opportunity to prod its Asean neighbors to design a set of new statistics that will capture true sustainable development. Furthermore, as a member of the powerful G-20, Indonesia’s support will be very influential.
In the interim, Indonesia ought to measure and publish statistics on the country’s natural assets. This should be published every quarter alongside conventional macroeconomic indicators.
If successful, President Susilo Bambang Yudhoyono and Indonesia will leave behind a legacy in the economic development literature. Indonesia can be remembered as a success story in pioneering the sustainable development paradigm unleashed by the World Bank.
I am sure our ministries and experts can do this.