Macroeconomic models help policy makers predict how the economy might respond to different policies—such as new taxes or subsidies—or to shocks, such as natural disasters or changes in global prices for oil, grain, or other goods. These models provide a comprehensive picture of the entire economy, summarizing many transactions that drive economic growth, create jobs, set prices, influence government debt, and shape the balance of trade.
Traditional macroeconomic models often overlook the way nature responds to policies and economic shocks. For example, if a government introduces subsidies to boost grain production, farmers may respond by expanding cultivation onto land previously covered by forests. But while this increases food security, it also causes the loss of forests, increasing the price of wood and incurring a range of other, less obvious, costs.
Forests provide crucial regulating services that often go unrecognized in economic models. For example, they support bees and other pollinators that are vital for food and cash crops. They also help rainwater soak into the ground, replenishing water reserves for agriculture and drinking, especially during dry seasons. They reduce runoff and sediment, keeping drinking water cleaner and helping prevent irrigation channels and hydropower reservoirs from clogging up. They can also play a key role in mitigating floods, reducing the risk of loss of life and property.
But such benefits are not traded in markets and so are not reflected in traditional macroeconomic models. As a result, models can overstate the economic gains of policies by failing to account for the wide-ranging costs of losing natural ecosystems.
Until recently, the macroeconomic models used by the World Bank to support client governments faced the same limitation: they did not account for the critical role played by natural capital and ecosystem services in the economy. But a new initiative linking the bank’s key macroeconomic models—MANAGE-WB and MFMod—with biophysical models that track land use and ecosystem services has rendered them nature aware, ensuring they consider the dynamic feedback loop: economic activities influence land use, which in turn affects ecosystem services, and which then feeds back into the economy, impacting productivity, jobs, and even a country’s fiscal health. The new report, Mainstreaming Nature into World Bank Macroeconomic Models, details this process.
With nature-aware MANAGE-WB and MFMod, World Bank economists can help client government agencies to:
- Quantify the contributions made by natural capital and ecosystem services: For the first time, World Bank teams can measure how healthy ecosystems boost economic performance
- Evaluate "nature-smart" policies: Seeing the contributions policies make to gross domestic product (GDP) growth, job creation, and climate resilience allows decision-makers to assess the true benefits and costs of investing in conservation and restoration
- Spot hidden risks: The models can flag policies that might seem economically beneficial in the short term but lead to long-term environmental and economic harm.
To test and refine these nature-aware models, the report includes pilot studies in three countries, focusing on different ecosystem services.
India: forests and mangroves: Exploring the economic impacts of afforestation and forest restoration, and the coastal protection and carbon sequestration benefits of mangroves, the India pilot clearly shows that nature-based solutions have positive impacts on GDP and employment, while also reducing flood damage and increasing carbon sequestration.
Uganda: terrestrial ecosystems: Looking at GDP losses due to erosion and drought caused by climate change, the Uganda pilot shows that additional losses of erosion mitigation and pollination services lead to deeper GDP losses.
Sri Lanka: mangrove restoration: Examining the economic effects of mangrove restoration, particularly in coastal protection and carbon storage, the Sri Lanka pilot finds that restoration efforts could lead to higher GDP and avoided carbon losses, even after accounting for land use tradeoffs.
The next step is to mainstream nature-aware models into the World Banks’s regular diagnostic and policy analysis work. By making the value of nature visible in economic terms, the World Bank is empowering countries to build more resilient, sustainable, and prosperous futures. This is not just about protecting nature; it is about recognizing that a healthy planet is the ultimate foundation for a thriving economy and livable future for all.
