The government has launched its first Reserve Bank review since the 80’s. The Reserve Bank affects issues from mortgage repayments to the cost of groceries – and under review will be its performance, inflation policy, board, operations, and governance.
Gross domestic product (GDP) is a deeply flawed measurement of economic national progress and its use reflects badly on economists. Its replacement must be on the agenda of the treasurer and a reformed Reserve Bank of Australia (RBA).
GDP, “the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period, normally one year” is used to measure the economy’s growth. Its rise is often announced by treasurers with chest-puffing pride signifying economic virility. Unfortunately, however, its use reflects an impotence to understand and manage the economy long term.
Modern society would not exist without accurate measurement. What if the failure to measure the necessary inflammability of cladding on our high rise buildings extended to defective construction due to faulty architect scale rulers?
The deaths and misery from a building collapse would be insignificant compared to the economic collapse, national and international, if guiding measurements of the health of the economy were spurious – and they are, and they have infiltrated the financial practice of many of our institutions.
This article expands the thoughts reflected in The Fifth Estate – Our View on the need for widespread financial reform. This needs to commence at the top of the economic tree – the RBA.
The World Bank report The Changing Wealth of Nations 2021 Managing Assets for the Future now notes that GDP fails to take account of natural and human capital.
Consequently, national accounts using GDP to measure growth are seriously incomplete and have been so for many decades during which natural capital has been increasingly consumed.
The World Economic Forum produced a New Nature Economy Report 2020 which said that over half of the world’s GDP is moderately or highly dependent on natural capital assets and ecosystem services either directly or through their supply chains. This amounts to $44 trillion of economic value generation.
Natural capital, the world’s biodiversity, provides our life support systems, productive soil, pollination, clean air, water filtration, mitigation of extreme weather events, decomposition of wastes and recirculation of nutrients.
In 2021 leading UK economist Professor Partha Dasgupta recognised that natural capital is taken as a given with no consideration that it is finite and we are now confronted by huge losses of environmental capital and services due to their increasing consumption.
The reader will now have connected the above words with the ecological footprint reports issued yearly on the Earth Overshoot Day. To maintain our standard of living in Australia we require the resources of 4.5 earths. Overall humanity is using nature 1.8 times faster than the planet’s bio-capacity to regenerate.
Yet none of these dire warnings have breached the economic citadel of the RBA occupied by the powerfully entrenched banking, academic, and business interests. Recently a survey by 20 leading economic experts produced a report on interest rates and economic growth using GDP and with no mention of their damage to our environmental sustainability.
It is therefore reassuring that the treasurer has ruminated on how to measure economic progress. Indeed one of his recent thoughts might be considered revolutionary or even revisionist for an economist – he has dallied on the inclusion of well being and possibly a Gross National Happiness Index.
Hopefully then the treasurer is on a journey to examine how we assess wellbeing, the natural environment and the economy through reform of GDP to include natural capital. Many reports show Australia’s natural environment is one of the most rapidly deteriorating of any developed country. Our environmental laws are grossly inadequate according to the Samuel Review and we have not commenced planning for an Environmental Protection Agency.
Every day the media reports damaging usage of natural capital from deforestation, land clearing, urban sprawl from population growth, and resource development. In NSW the Agriculture Minister has indicated that logging of native hardwood in state forest will continue as will that in Victorian forests to support the construction industry. This will deliver a short term boost to GDP and a long term debt for damage to Melbourne’s water catchments.
Indeed the recent 5 yearly report on Australia’s State of Environment details land clearing of 7.7 million hectares between 2000 and 2017 and 19 ecosystems have been showing signs of collapse or near collapse during the past 5 years.
Consequently we could speculate that Australia’s GDP could now reflect a decline in wealth if it included destruction of natural assets.
But increasing damage from future extreme weather events will make GDP even more irrelevant as a measure of national progress. The recent devastating East Coast floods which according to the New Insurance Council of Australia have caused $7 billion damage will require reparations over perhaps a decade to bring these regions back to square one. This raises the possibility that GDP will be positive, but with no national progress.
In his reforms the treasurer should consider replacing GDP with more appropriate measures of progress such as a Global Progress Indicator (GPI).
Indeed the treasurer’s reforms must embrace the entire financial system. One focus of the Jobs and Skills Summit was “maximizing jobs and opportunities from renewable energy, tackling climate change”. This should be widened to “tackling climate change and loss of natural capital due to inappropriate growth models”.
The widespread calls for RBA reform have come from economists and have predictably focused on interest rates policy without any vision of wider economic reform.
The Charter of the Reserve Bank includes “promoting the general welfare of the Australian people” and it’s coming review by three conventionalist economists should be widened to embrace other disciplines, the trade union movement, small business, agriculture, human health and the environment.
Currently, only one of nine current members of the board of the RBA has environmental expertise.
The crucial need is for economists with understanding and expertise in natural capital accounting so that the RBA leads the way by advocating true measurement of progress and wealth.
It is also vital that there be representation of economic alternatives to current economic growth models to breach the current citadel model of infinite growth in a planet of finite resources, which can only lead us to environmental collapse.
Treasurer Jim Chalmers has launched a review of the Reserve Bank of Australia to ensure it is the “world’s best central bank”.
He needs to institute a model to serve the people and national sustainability which will pervade all endeavors such as development and planning, for urban sprawl due to population growth is a key factor in loss of biodiversity and ecological services.
…..for urban sprawl due to population growth is a key factor in loss of biodiversity and ecological services……..but will anyone listen?