Valuing Bhutan’s True Wealth Using the new National Accounts to inform enlightened GNH policies Karen Hayward, Linda Pannozzo, and Ronald Colman GPI Atlantic With contributions from Robert Costanza and Ida Kubiszewski, Institute for Sustainable Solutions, Portland State University, and David Batker, Earth Economics February 2012 BHUTAN WILL BE THE FIRST COUNTRY IN THE WORLD TO CREATE GNH ACCOUNTS THAT PROPERLY VALUE OUR PRECIOUS NATURAL, SOCIAL, CULTURAL, AND HUMAN RESOURCES, AND THE COSTS OF THEIR DEPRECIATION, ALONG WITH THE MANUFACTURED AND FINANCIAL RESOURCES THAT ARE PRESENTLY COUNTED. SUCH FULL-COST ACCOUNTS ARE THE NECESSARY FOUNDATION OF A GENUINE WELLBEING AND SUSTAINABILITY-BASED ECONOMIC SYSTEM AND WILL ASSESS THE TRUE BENEFITS AND COSTS OF ECONOMIC ACTIVITY. - LYONCHHEN JIGMI Y. THINLEY PRIME MINISTER, ROYAL GOVERNMENT OF BHUTAN ii Note to Readers This document is written as a “prospective” description of what a new set of National Accounts for Bhutan might look like, based on the prior work of these particular authors and contributors. Such accounts, it is proposed, would include proper measures of natural, social, cultural, and human capital in addition to the produced capital conventionally measured, in order to assess Bhutan’s true wealth as a nation and to account more accurately for the full benefits and costs of economic activity. Such accounts would be the foundation of a new wellbeing and sustainability-based economic paradigm that advances the values, principles, and practices of Bhutan’s holistic Gross National Happiness development philosophy. However, it must be recognised that such a sharp departure from GDP-based accounting, conventional balance sheets, and the dominant current global “economic growth” paradigm is a very major undertaking that will require extensive consultations with Royal Government of Bhutan policy makers and officials and with top global experts on the structure of the new accounts, their constituent components, the methodologies used to assess non-market values, and much more. Therefore, all references in the following pages as to what Bhutan’s new National Accounts “will” look like must be strongly tempered with the understanding that this is a prospective ‘vision’ document reflecting only the views and experience of the authors and contributors, and that everything proposed is subject in practice to detailed review, consultation, and revision. At the same time, such a detailed and seemingly definitive outline was deemed necessary in order to give policy makers in Bhutan an idea of what such accounts might actually look like, how they could actually operate in practice, and what benefits they can provide in improving the evidence base of policy. Bhutan’s movement from a conventional GDP-based accounting system and economic paradigm to a holistic model, accounting for environmental, social, and cultural values in accord with GNH principles, began in December 2010 and March 2011 with two workshops and training sessions hosted by the National Statistics Bureau and conducted by contributors to this report. At that time it was decided to develop not only this “prospectus” overview of the new National Accounts, but also three sample demonstration accounts in the fields of natural capital, social capital, and human capital, so that the new system would not appear purely conceptual and theoretical but show in hard numbers and application of actual methodologies how the new accounts could work in practice. To that end the authors and contributors have, in the past 9 months, also developed the first ever economic valuations of Bhutan’s ecosystem services (natural capital) and voluntary work (social capital), and the National Statistics Bureau has for the first time assessed the direct economic costs of alcoholism in Bhutan (human capital). Select results will be released in February 2012 alongside this report. iii Preface In this day and age, economic valuation is an essential strategy and tool to draw policy attention to vital natural and social assets that remain hidden in the conventional accounts, and thus to re-direct policy attention to their protection and restoration. Bhutan is poised to become the first nation in the world to adopt a full-cost accounting system as the basis for its new National Accounts. This will enable Bhutan to formulate policies, allocate resources, and present budgets that properly account for the value of natural, human, social and cultural wealth, in addition to that of the manufactured and financial capital captured in conventional accounting mechanisms. Conventional balance sheets and GDP (Gross Domestic Product)-based accounts give no value to nature or other assets that are essential preconditions for human happiness and for the wellbeing of life forms, and they therefore fail to account for a nation’s true wealth. In fact, when forests are cut down and other natural resources are depleted and degraded, GDP goes up and the economy “grows” even as we destroy the natural capital on which our children will depend for their lives and livelihood. That’s because GDP and our standard economic growth statistics only count the resources we extract and sell in the market and fail to count what we leave behind. In conventional accounts, even pollution and natural disasters are “good” for the economy, because all the costs of repairing disaster damage and cleaning up pollution make GDP grow. So, for example, forest fires, landslides, earthquakes, “dirty” industry, coal mining, and increased car sales make GDP grow, but the costs of air pollution, carbon emissions, and congestion remain invisible in our present national accounts. Similarly, sickness, war, crime, and cigarette sales make the economy grow (and are therefore misleadingly counted as economic gain) simply because money is being spent on drugs, weapons, prisons, and respiratory illness treatments, even though the social ills that cause such expenditures signify a decline in wellbeing. Such deceptive accounting necessarily leads to policy distortions and misguided investments. For example, it is doubtful that Fukishima nuclear power plant would ever have been built in a full-cost accounting system. Instead, the supposed economic benefits of nuclear power were counted as part of Japan’s GDP, but the costs of nuclear power were ignored. In fact, all the money spent trying to stop a nuclear melt-down, fighting the Fukishima fires, and repairing Japan’s disaster damage made GDP grow again! It is no wonder that policy makers worldwide daily make decisions that are disastrous for nature: — they are getting the wrong signals from their accounts and progress measures. That is not a GNH approach. Bhutan’s pioneering GNH-based National Accounts that properly value our precious natural, social, cultural, economic, and human resources will provide the foundation of a new wellbeing and sustainability-based economic system. In an era when the degradation and destruction of nature threaten human life on earth, the United Nations, the World Bank, the OECD, the Stiglitz iv Commission1 appointed by France’s President Sarkozy, and many others have all recommended valuations of natural and social capital, but no country has yet revised its National Accounts to put that recommendation fully into practice. All of them still rely on narrow and out-dated GDP measures to assess prosperity and progress. So Bhutan’s ground-breaking new National Accounts, to be developed in the next five years, matter not only to this country but will be closely watched globally. And the information that the new National Accounts provide will provide far more accurate information to policy makers that help them make wise decisions that properly account for and protect Bhutan’s rich natural, cultural, social, and human wealth. The purpose of the new National Accounts, therefore, is to provide a more comprehensive set of measures that can accurately identify our strengths so that we can build on them and protect them rather than take them for granted, and that can identify our weaknesses so that we can work to overcome them as soon as we detect early warning signals. Thus, the new National Accounts, using the best available data and measurement methodologies, are intended to provide policy makers with practical and realistic tools on which to base GNH policies and to measure progress towards genuinely sustainable prosperity and true wealth. This new accounting system will naturally support policies that shift behaviours towards sustainability and that build a GNH society that nurtures the happiness and wellbeing of individuals, families, communities, and the natural world. As such, the new accounts are in line with the Honourable Prime Minister’s stated goal to bring GNH principles, values, and practices fully into the fabric of Bhutanese society. But how do we properly and accurately account for the value of our forests, soils, water resources, biodiversity, clean air, and protected areas, and for the costs of forest fires, pollution, climate change, soil degradation, natural disasters, and traffic congestion — or the value of our education, population health, unpaid work, safety and security, and culture? At the 2009 U.N. Climate Change Conference in Copenhagen, Bhutan swore to remain a net carbon sink in perpetuity, but how, for example, do we assess the economic value of our forests in sequestering carbon from the atmosphere? Fortunately, the data sources and methodologies to undertake these valuations and assessments now exist. Over the