Gross Domestic Product (GDP) looks at only one part of economic performance—income—but says nothing about wealth and assets that underlie this income. For example, when a country exploits its minerals, it is actually depleting wealth. The same holds true for over‐exploiting fisheries or degrading water resources. These declining assets are invisible in GDP and so, are not measured.
Wealth accounting, including natural capital accounting (NCA), is needed to sustain growth. Long‐term development is a process of accumulation and sound management of a portfolio of assets—manufactured capital, natural capital, and human and social capital. As Nobel Laureate Joseph Stiglitz has noted, a private company is judged by both its income and balance sheet, but most countries only compile an income statement (GDP) and know very little about the national balance sheet.
A major limitation of GDP is the limited representation of natural capital. The depletion of natural capital – including assets like forests, water, fish stocks, minerals, biodiversity and land – poses a significant challenge to achieving poverty reduction and sustainable development objectives. The issue is especially important in developing countries as shown in a World bank publication, The Changing Wealth of Nations 2018. Low-income countries depend on natural capital for 47 percent of their wealth. And yet, in several of these countries, natural capital is being depleted without any corresponding investments in human capital (such as education or health) or produced capital (such as infrastructure), leading to an overall decrease in wealth and a failure to improve standards of living among the poor.