Defining economic progress by using Gross Domestic Project as our key measure is seriously flawed and will continue to lead New Zealand into decline across economic, social and environmental fronts.
This isn’t just the mantra of left-wing economists and NGO community any more. In the last month we have seen the release of reports and calls for change from mainstream financial advisors Standard and Poor’s, warning about the long-term economic costs associated with income inequality, and Lincoln University academics Paul Dalziel and Caroline Saunders, calling for broader national measures for wellbeing progress.
How is New Zealand doing?
So what is wrong with using Gross Domestic Product to measure our financial success? According to the Government, New Zealand has weathered the global financial crisis pretty well compared to many other countries and our GDP in recent times has been looking favourable. We’re doing OK, aren’t we?
The issue is, when you look closely at GDP it doesn’t tell the full story of economic progress. It neglects to measure the things that really matter to people – things like health care, safety, a clean environment, equality and a host of other indicators of wellbeing – issues that also impact our economic performance.
GDP is essentially just a sum of national spending and it is not able to make distinctions between transactions that add to wellbeing, those that undermine it, and those that do not involve an economic transaction (like voluntary work). GDP doesn’t account for negative factors such as inequity of income and the cost of crime or pollution. For example, Amnesty International’s latest figures show that in the last 30 years the rate of child poverty in New Zealand has almost doubled, despite the fact that GDP has been growing steadily over the same time period.
The rise of ‘wellbeing economics’
This isn’t a new discussion. In the mid-1990s, an international movement began redefining progress using a set of Genuine Progress Indicators with local academics including Marilyn Waring, Ross McDonald and others participating in global discussions about genuine progress. Bhutan led the way by creating its own National Happiness Index.
Building on from this, a new framework that’s emerging internationally to better understand economic policy is ‘wellbeing economics’. In their new book on the topic, Professors Paul Dalziel and Caroline Saunders say that the purpose of economic activity should be to promote the wellbeing of people. Therefore, instead of measuring economic growth for its own sake, we should be measuring how well the economy enables all New Zealanders to “lead the kind of lives they value and have reason to value”.
Wellbeing economics aims to address issues like unemployment and poverty directly, rather than assuming these problems will be solved automatically with higher economic growth.
I believe this type of thinking, with a shift in values from a ‘welfare state’ to a ‘wellbeing state’ holds great potential for rethinking economic progress.
The argument is lent greater weight by the new report from Standard & Poor’s, which claims that inequality is holding back the US economy. The wealthy tend to save their money rather than spend it, while the poor have limited money to spend. At the same time, cuts are made to spending on education and infrastructure, which makes economic forecasts even gloomier. Sound familiar? This is a salutary warning to New Zealand: if we don’t address inequality it’s likely to impact on future economic growth.
The price of clean water, air and land
When we consider the growing number of social, equity, access and environmental issues we face, our measures of progress and wellbeing need a radical overhaul. The challenge in shifting to a fuller measure of our economic and wellbeing performance has been around valuing things and ‘pricing’ them to fit an existing economic framework. What is the cost of depleting natural resources, dirty water and air, or declining social conditions?
In the sustainability sphere, attempts to value nature have increased in intensity. The theory is that by putting a price on the natural world, it will be protected through market mechanisms. We’ve already seen examples of prices being put on the environment in New Zealand, such as the emissions trading scheme, however the pricing is low and so often leads to environmental outcomes which are far worse. But it is very tricky to get this right. Individual benefits often are much greater than those of the local community. How do we put a ‘price’ on clean water, air and land?
To quote the cautionary words of George Monbiot, columnist in The Guardian, “what we are talking about is giving the natural world to the City of London, the financial centre, to look after. What could possibly go wrong?”
New forms of business reporting
We need some way of allowing ethics and shared values (people, planet and community) to have a stronger place above economics. We need to work at integrating social and environmental indicators into measures of economic progress so that we can value what really matters. A small number of businesses are attempting to do this via integrated reporting which, when done really well, provides a much deeper and comprehensive assessment of an organisation’s activities beyond traditional financial reporting, by recognising the value that exists in other areas.
There has been some excellent work by New Zealand Post Group, which has recently produced the first integrated report in New Zealand. It selected six areas of value, which it termed ‘our people’, ‘our environment’, ‘our relationships’, ‘our networks’, ‘our finances’ and ‘our expertise’. For each, the company explained how it has been creating value and how it plans to keep doing so over the medium and long term. This turns a traditional Sustainability Report into an informative strategic tool with much broader metrics beyond pure financials.
Other companies around the world adopting integrated reporting include household names such as Unilever, Marks & Spencer, Microsoft, Volvo, Coca Cola and Deutsche Bank. I look forward to increasing numbers of New Zealand companies following suit.
Embedding social and environmental solutions into business models
At the values end of the scale, there are a large number of small businesses whose raison d’être has been to address social or environmental issues. They have embedded social and/or environmental solutions into the fabric of their business models. Te Whangai Trust operates a commercial plant nursery that trains people who are long-term unemployed, ex-offenders and at-risk young people to grow native plants that are sold, together with environmental services. They have established a robust model that returns social, environmental, cultural and financial benefits to their organisation and the community where they’re based.
At the Sustainable Business Network we’re well underway with a work stream focused on embedding social value into business models, together with work streams on the circular economy, smart transport and restoring New Zealand’s food system. We’re adapting a new campaign called The Big Shift and ‘Six Steps to System Change’ Framework, created by our UK partner Forum for the Future, that will take into account different values – social, environmental and financial.
Collaboration is critical to achieving the significant progress required across all sectors to improve New Zealand’s performance across all fronts. We’re working with businesses, government, academics and NGOs to understand the issues we face and find solutions to improve our systems. Using The Big Shift (#theBIGshift) we will be identifying practical steps of bringing about change through commercial and collaboration opportunities.
We’ll be launching this progressive campaign at our conference, Project NZ: The Big Shift, in Auckland on 17-18 September, when pioneering businesses will explore where New Zealand is sitting on the path to a model economy and identify where there are opportunities for genuine progress.
Business has a pivotal role to play. I am optimistic that this decade will mark a turning point, with business starting to bring about a big shift in genuine economic progress. I am yet to be convinced that we can successfully use the existing economic models to put a value on the non-financial things like nature or wellbeing, but I will watch with interest.
CEO, Sustainable Business Network
This article first appeared in the NZ Herald on 14 August 2014 as part of a Live Chat series hosted by Element and the Centre for NZ Progress.