Author: Arun Subramanian.
Read part 1 here
Essential Consumption index
The computation of this index will indicate the production and consumption of essentials (one can define a set of 10 essentials covering food and health), and must be measured bottom-up in the country to indicate how the basic physiological needs of citizens have been met. The measure will include two values – the gross value computed across the country and a secondary value that indicates the largest segment(s) of population (summing up to 60% of the population which in the case of India can be the last rung of population) with the lowest per capita consumption values.
Let us further consider India as an example. Rama Bijapurkar in her book “We Are Like That Only”₆, has categorized the population of India into three income groups – top 10% as Tier 1, next 30% as Tier 2 and bottom 60% as Tier 3. In her analysis, when income of groups Tier 2 and Tier 3 were compared with that of Tier 1 population, the Tier 2 earned one third (1/3) the income of Tier 1 group, while those in Tier 3 earned one seventh (1/7) that of the income of Tier 1.
Pie chart 2 indicates the income share amongst the three tiers of the populations in the year 2006. The size of the population across the groups differs greatly, and it is largest at the bottom. We notice a consumption that is very different, and these numbers cannot be ignored.
Pie chart 3 indicates the consumption share of the three tiers – the ratio of value of consumption expenditure between the groups was observed to be 34:36:30. This is for year 2006. This consumption pattern has been generalized as the consumption of essentials for the three tiers of the population. For this paper, the data for 2006 is assumed for 2016, and for years 2017, 2018 and 2019, a rational change is made to the data of 2006. This change is for the sake of the study.
The essential consumption index comprising the overall consumption index, and the specific index for the suggested group will reveal
- the divergence or spread, as can be seen on the histogram below
- growth comparison – years 2017, 2018 and 2019 depict this change as consumption patterns change
- the divergence for policy makers to study for prudent interventions that may be necessary, and
- consumption pattern spread across the demographics of a country’s population; a very useful input parameter for investors.
The histogram on the left-hand side reveals one part of the story, while that on the right-hand side speaks more. In this hypothetical case, the bottom 60% population’s consumption expense is 30% of the entire country.
Inclusive Wealth Index
The United Nations Environment Program defined a metric called the Inclusive Wealth Index (IWI) as a proposed alternative to GDP. This index combines production abilities with economic sustainability and human well-being.
Inclusive wealth includes all three forms of capital. It is not merely the current income, and is dynamic in nature. This includes economic gains, ecosystem definition and social practices that future generations are bequeathed with, comparable with what we inherited, to ensure that the welfare across generations does not decline with time.
IWI for a nation or economy is measured in terms of the sum of the three capitals. For our present study, we accept the computation of the three forms of wealth as is. Progress in one form of capital could be at the expense of another, but if the overall sum is positive, it spikes up IWI. And if this trend continues over a period of time, it could deplete the capital component at whose expense the economy seems to be growing.
Instead, if we could represent each capital by its gross value, and determine a tri-variate value as the wealth indicator of the economy, it will hold out the truth instantaneously for production wealth, human wealth and natural wealth. This should be broken down further across each industry so that every sector’s measure across the 3 forms of capital is understood. The graph below illustrates a break-up per industry, showing the value of the three forms of capital for it. The values are hypothetical and only illustrate the measurement model.
The orange colored dotted line denotes the minimum acceptable value for human capital. The dotted line in grey colour represents the same for natural capital. Every industry contributes to the three forms of capital, and is represented with gross values.
This representation allows us to view good as well as adverse impacts of production on nature and humans. The tannery industry in this model, for example, will need to work on raising the working conditions for humans and better production techniques to lessen the adverse impact on nature. By this hypothetical data, one may question the viability of specific industry/industries. If this means adopting a different or advanced technology, then it should be planned and executed.
Analysis of industries that are essential, but harmful, industries that strengthen the economy with their produced goods, but need to work more on other forms of capital and so on are very insightful. With a benchmark set for each form of capital (ideally across all industries) that is made public, organizations can understand their priorities and work on them to foster a robust and all-round economic growth.
Policy changes – proposal
A change in the measuring indices will be greatly helped if current policy and business practices are reviewed and altered so that it enhances the overall wealth of the nation in terms of a balanced progress in all three forms of capital. Impact of produced capital on human and natural capital must be beneficial and where required, a rework must be planned and implemented swiftly.
Here are a few proposals for consideration that will be elaborated in a second paper.
Human capital includes skill, health, safety and education and a salary that must include a “net saving potential” per month after basic expenses (food, home, health, family needs) are met. Value based education and health support is missing in several countries. Within a definite time-span this should also be included. With these in place, a baseline for sustainable human capital must be drawn per country and further localized where necessary. This must be uniform across all industries.
An empathetic and strong government that helps and supports people is key to a stable country. Government, in addition to maintaining law and order and protecting citizens in general, aims to
- help the needy in terms of their immediate essentials,
- provide an opportunity for the needy to turn independent instead of depending on government support eternally,
- strengthen education system,
- provide a basket of industries that can gainfully employ the educated,
- provide a smooth, easy and yet just window of opportunity for entrepreneurs to set up organizations, build them and flourish, and
- provide corruption free governance services to all citizens.
These are six mandates that safeguard a country, providing for all round development, and aiming to become a self-sustained economy in quick time.
Growth of production alters the balance with nature greatly. In the case of production of goods and services, every industry must be measured based on three norms: the consumption of final products, the longevity of the products, and the management of the waste generated. The consumption is measured, similar to the produced capital Index. Longevity of products is an indicator of quality and more importantly indicates reduced obsolescence.
Industry policies globally must outline a computation of by-products, toxic wastes, quantum of air pollution, for every industry. This is a fixed input to output to pollution ratio per industry that will be revised as processes improve, over a two to three-year cycle. This is doable as governments have in the past, appointed several committees and commissions to determine the various output products, their classification for VAT (Value Added Tax) purposes and assigned tax rates to them. Open defecation is now banned and even shamed; similarly, industry units polluting the environment should be treated as industry equivalent of open defecation and must be shamed and banned (or utmost reduced to a trickle).
Resources used in the process of manufacturing, processing and production such as water and energy must be evaluated beyond mere meter-based payment for use. Water is not a perennial source, and therefore must be rationed. The first right to use is for living beings to live. Water crisis ranks just behind climate change and weapons of mass destruction as the most impactful risk in the upcoming future.
Longevity of products helps reduce wastes generated on account of new products. This is specially seen in fashion, electronics and automobile industries. Models vanish from the market before consumers start feeling comfortable with them. Newer models are launched even faster. All these cause serious environmental issues as they are discarded and sent to a landfill, in a society where recycling industry is underappreciated and unsupported. Dumping is rampant, and poorer countries are typically identified to receive the waste that is dumped for a small fee. The volume of waste in the electronics industry is in the range of 50 million tonnes generated every year globally. Dumping such volumes and enabling their role in killing people slowly is akin to direct murder and must be treated accordingly by law.
The global lockdown has impacted every country. It has made us realise that we need to evaluate our actions and their outcomes locally and treat economic production and consumption with caution and precise evaluation. More importantly,
.. with corporates’ gratuitous spending all but put to a stop with the pandemic, creating and abiding by a newer paradigm, is no longer a utopian and undoable idea, but a caring, thoughtful and necessary approach.
It sets up a robust framework in terms of right measures and evaluating wealth accurately and wholesomely.
The world faces two threats – increasing natural capital depletion/extinction, and a widening gap between the rich and poor.
Both of them are significant symptoms of a very imbalanced economy, the imbalance caused by a skewed measure, leading us down the spiral of unsustainable existence.
Natural capital is grossly under-priced and at the same time, over-exploited.
The proceeds from production capital are not being sufficiently deployed in human capital for welfare in an equitable manner, thus, accelerating inequalities.
Let us make the course correction by fittingly measuring ourselves (country and organizations) with proper (DHARMA-ALIGNED) indices, and not merely accounting for production and consumption.
Arun Subramanian is an independent advisor working with multiple start-ups and angel investors, providing them with strategic consulting for product development and business process efficiency since August 2017. Arun has 20 years of global experience building enterprise-grade solutions with BaaN and with SAP. (View More)
- Corporate Foresight – Roehrbeck Rene
- We Are Like That Only – Rama Bijapurkar