Applicability of the Inclusive Wealth Index to Policy Making

Authors: Shunsuke Managi, Faculty Fellow, RIETI & Kenta Tanaka, Associate Professor, Musashi University

When it comes to measuring the economy, gross domestic product (GDP) is the most common method. It has been widely used to compare economic wealth across countries and regions and as a goal in each country/region’s economic policies. However, there are likely many who doubt whether most economic indexes up to this point, which have focused only on material wealth, can truly reflect the prosperous and sustainable society that we desire. When we consider the prosperous society that we should actually aim for, there is a wide range of problems to resolve, including those of health and education problems, climate change, and various resources, as well as the still insufficiently resolved problems of poverty and disparity. An index is needed that can be used as a goal for resolving such problems and achieving a sustainable society. This matter has been widely debated academically and, in fact, development of such indexes is steadily progressing.

The Inclusive Wealth Index (IWI) can now be presented as the representative index of national wealth. The IWI could be called a comprehensive wealth or genuine saving index that inclusively comprises the indexes proposed thus far for assessing social sustainability. One example of a current commonly discussed index is the Human Development Index, which assesses each country’s degree of attainment of only three elements—health, education, and income (due to the insufficiency of internationally applicable data at the time of its creation)—focusing on human wealth and defining the expansion of individual options and freedom as the goal of development. Other indices include the environmental performance index and ecological footprint, which are more focused on environmental aspects. However, such indices reduce sustainability to a specific facet of the differing factors of the economy, environment, and people. Such indices could not be described as denoting inclusive sustainability.

The IWI is an index that estimates, on a monetary value basis, the overall capital that is responsible for the creation of our prosperous societies and economies. It has been developed as a new index that combines the environment, economy and society, originating with the UN’s Wealth Measurement Project, which was advanced with the participation of such contemporary economic authorities as the late Kenneth Arrow, a Nobel laureate of Stanford University, and Sir Partha Dasgupta of the University of Cambridge.

Read the entire article on the RIETI website

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