It used to be that single-digit – or better yet, double-digit – GDP growth was precisely the medicine that economic doctors prescribed to ailing patients –underdeveloped economies. More recently, Africa has been applauded for celebrating single-digit growth in 30 African countries in 2008. Sudan and Equatorial Guinea even host two of the fastest-growing GDPs in the world, the former despite US sanctions.

But is GDP a valid tool in determining real economic development?

GDP methodologies, initially formulated in the US and UK in the early 1930s, were strictly designed as a specialised tool to monitor trends in total economic activity during the Great Depression which began with Wall Street's crash in October 1929.

GDP was later used as an economic scorecard justifying the US's participation in World War II (1939) to a still bankrupt nation. The development of the International Monetary Fund and the World Bank during the Bretton Woods conference witnessed the adoption of the GDP methodology, the US dollar and other economic policies as the dominant traditions of the global financial architecture.

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Eighty years later, Wall Street has crashed again, sparking yet another global recession, with the IMF claiming in October 2008 that the global economy was teetering on 'the brink of systemic meltdown'.

The US$56-trillion crash of US financial institutions was primarily caused by derivatives: Toxic assets that were not required by law to be recorded, and by default, could not be tracked. These assets were subsequently traded in unobserved vacuums. The law could not regulate what it did not know existed.

The crash, known as the 'Panic of 2008', catalysed a growing awareness of debased 'paper' wealth delinked from real asset-based value.

This led to the fundamental question of what constitutes real wealth, beyond narrow tools such as GDP.

It is a question that development institutions, civil society, economists, environmentalists, scientists and governments all over the world are currently interrogating. In 2005, the World Bank launched a report titled assessed the economic value of intact ecosystem services versus their value when modified, exploited or destroyed.

'Recently economists have been focusing their work on capturing the true economic value of the world's natural or nature-based assets. For example, an intact hectare of mangroves in a country like Thailand is worth more than US$1,000. Converted into intensive farming, the value drops to an estimated US$200 a hectare and the same for aquaculture,' said Dr Achim Steiner, director of the UN Environment Programme, in an interview with the report's author.

Should development models, geared to spur 'paper' growth redefine 'development' by factoring in the innate value of ecosystem services?

'Yes, I think that is an important point. The overriding issue is that if we are not putting a value to the services provided by intact natural resources – if you didn't know that the mangrove provides US$1,000 in intact services – then you're going to be focusing on the US$200 only, because the relevant data isn't available,' says Hamilton. 'In the case of exhaustible resources, these rents must be invested if total wealth is not to decline,' the report states.

'With exhaustible resources such as diamonds, what we're asking is whether government is investing the revenue or consuming it through expenditure. The quality of institutions and the rule of law (governance) is what make countries prosperous. If “genuine savings” are negative, the question that has to be asked is how they are using it. Dependence on natural capital alone brings very low returns,’ said Hamilton.

'Genuine savings' (GS) is described by the report as an indicator of sustainability, and a means of framing natural resources within the bigger picture of development finance: ‘GS highlights the fiscal aspects of environment and resource management, since collecting resource royalties and charging pollution taxes are basic ways to both raise development finance and ensure efficient use of the environment.’

The World Bank states that consumption rather than investment ‘is common in resource-rich countries’.

The results documented in the report reveal many export-oriented African countries are in the negative, such as Gabon (-US$2,241), Nigeria (-US$210) and Congo (-US$727). ‘In sub-Saharan Africa (SSA), the poorest region in the world, the number of people living in extreme poverty has almost doubled, from 164m in 1981 to 314m today. Genuine saving rates in the region have been hovering around zero’, thus decreasing investment in intangible capital.

Intangible capital constitutes less than US$7,000 per capita in SSA. According to the report, the region dominated the bottom 10 low-income countries list for total wealth, save for the presence of Nepal, while Europe dominated the top list, including the US and Japan. The variations of intangible capital depend almost exclusively (90 per cent) on the quality of rule of law and education.

Switzerland, ranked first with US$648,241 in wealth per capita, has 1 per cent natural capital and 84 percent intangible capital; the US came in fourth place with US$512,612 in wealth per capita with 2 per cent natural capital and 82 per cent intangible capital. Madagascar – number one on the bottom 10 list, was characterised by high levels of natural capital (33 per cent – e.g. titanium) and US$5,020 wealth per capita; Nigeria, amongst other African countries such as Algeria and the Congo, experienced negative intangible capital (-71 per cent), with US$2,748 wealth per capita.

One question that arises concerns the quality of the Bank's indicators and the methodologies used to quantify data. ‘For simplicity purposes’, the report proceeds on the assumption that ‘all resource rents are invested in produced capital’.

Yet according to the African Union (AU), each year more than US$148bn –derived from resource revenues – is siphoned from the continent in capital flight. The UK-based Tax Justice Network states that 60 per cent of all capital flight is caused by multinational companies' internal mispricing, with just 3-5 per cent spirited away by the political elite.

‘It's there implicitly,’ said Hamilton, ‘We didn't use hard figures, but indirectly, it was taken into account.’ ‘How was it taken into account without hard figures?’ I asked him. ‘We are more concerned with how government invests the revenues it has,’ he responded. The report states that governments should be ‘taxing natural resources to the point where the private sector is just willing to risk capital’. But the rents from exhaustible resources are restricted by the IMF and World Bank-imposed reforms, making tax 'holidays' mandatory in a bid to attract foreign investment.

Hamilton responded: ‘You want to be sure the government gets the right revenue, their share of the wealth. But at the same time, you don't want to overtax. This is what the IMF is saying.’

John Christensen, former economic advisor to the famously secretive tax haven of Jersey, disagrees: ‘The IMF is in favour of the highly flawed incentive of tax holidays. Many countries have lost huge sums of revenue because tax incentives undermine the revenue base of developing countries.’

VALUE DEGRADATION

Similarly, potentially sustainable resources such as fertile land and forests are often degraded or deforested for cash crops – in line with the World Bank development model. These crops are sold to markets at artificially depressed prices.

Northern subsidies – currently standing at US$1bn per day – have devalued the world prices used by the Bank, for example, for agricultural commodities, through export credits, subsidies and by manipulating the free market through large portfolios.

Reforms have also undermined intangible capital and rule of law by reprioritising state expenditure toward intangible capital – e.g. education, healthcare and industry; repositioning underdeveloped regions as export-oriented economies; and exposing local firms, farmers and factories to heavily subsidised trade via WTO-imposed trade liberalisation.

These reforms are mandatory due to outstanding odious debt – low-income countries serviced around US$560bn in 2006 – forcing developing countries to embark on mass privatisation of state services, and resources being auctioned off piecemeal to corporations under the Heavily Indebted Poor Countries initiatives.

‘There have been discussions about [developing countries'] government expenditure getting cut across the board because of the policies you mentioned. More attention should have been paid, but lessons have been learned,’ said Hamilton. When asked whether this was articulated in the report, he replied, ‘It's there implicitly, but not directly.’

The legal innate rights of the environment must recognised – as Ecuador has recently done, with communities acting as guardians of 'common trusts'. This move facilitated the democratisation of national wealth, without privatising or nationalising it.

Crucially, the role of government must also be redefined, not – as stipulated in the report – as owners, but as managers of the political ecology, heading public resource portfolios instead of endorsing the corporate financial 'trickle-down growth' model.

This would catalyse a paradigm shift away from obsolete paper GDPs to sustainable economics – and development – effectively halting Africa's free fall into real poverty.

* This article first appeared in African Business.
* Khadija Sharife is a journalist and visiting scholar at the [email protected] or comment online at http://www.pambazuka.org/.