What is Wealth Accounting?
For every country, wealth is what underpins the income that the country generates. It includes buildings, manufactured assets such as the machinery used in factories, infrastructure such as highways and ports, and natural assets such as land, forests, fish, minerals and energy, as well as human and social capital. Wealth Accounting measures these assets and capital goods that are inputs to our economic well-being.
All countries follow the System of National Accounts (SNA) that provides an international standard for measuring national income and savings. The SNA, which has been in use since the 1950s, has some provision for doing wealth accounting but relatively few countries are doing it. Without wealth accounts, countries have a very incomplete picture of the prospects for future income, just as assessing the value of a business would be incomplete without analyzing its balance sheet.
Truly comprehensive wealth accounting would go beyond the SNA to include broader forms of wealth such as human capital and the benefits flowing from ecosystem services such as pollination and flood protection from mangroves.
Why is GDP not enough as an indicator?
Countries rely on GDP (gross domestic product) as a measure of its economic performance. However, GDP only measures current income and production. It tells us nothing about income for the long term. It does not answer questions like: are income and growth sustainable? Will the same level of income be available for our children? GDP says nothing about the assets that underpin this generation of income. For example, when a country exploits its minerals, it is actually depleting wealth.
How can wealth accounting help countries grow sustainably?
A country’s wealth includes produced capital (buildings, machinery, and infrastructure); natural capital such as land, forests, fish, minerals and energy; human and social capital; and net foreign assets. See Figure 1 below.
Comprehensive wealth accounting can provide an estimate of the total wealth of nations by measuring the value of these different components of wealth. Changes in wealth is an indicator to assess if a country is growing its income without depleting its stocks.
How is Wealth Accounting Related to WAVES?
Natural capital is especially important to many developing countries where it forms a large share of their total wealth. As shown in Figure 2, natural capital accounts for more than 30% of total wealth for low income countries. Natural Capital Accounting (NCA) focuses on this critical component of wealth.