COVER STORY • Future Design – Thinking About Our Legacy to the Next Generation • 7Inclusive Wealth &Policy Making
AuthorChiaki Matsunaga

By Chiaki Matsunaga & Shunsuke Managi

Inclusive Wealth & Inclusive Wealth Index
The Inclusive Wealth Report 2012 was released by the United
Nations Conference on Sustainable Development (Rio+20), held in
June 2012. This report proposed “Inclusive Wealth” as an expressionof a country’s or region’s “wealth” and an “Inclusive Wealth Index”
as a standard economic indicator to be used as a yardstick forevaluating sustainability. With sustainability having been a vague
concept to date, this index has the advantage of being an easy way todetermine whether national and regional policies have improved
sustainability based on a rise or fall in the index, and significant
expectations are being placed on the index as an indicator of theachievement of the Sustainable Development Goals (SDGs).
One of the distinctive features of Inclusive Wealth is, as the termsuggests, the simultaneous incorporation of various types of wealth.
In other words, in addition to sustainability, Inclusive Wealth can beseen as a common index that makes it possible to express themonetary value of wealth derived from sources like people andnature, in addition to money and goods. Another feature is that it
indicates a country’s or region’s sustainability.

Relationship Between Inclusive Wealth& Sustainability

24 Japan SPOTLIGHT • March / April 2019used to measure the total capital referred to as Inclusive Wealth. In
other words, the stock of Inclusive Wealth generates the flow ofwell-being. Chart 1 shows the theoretical framework of Inclusive
Wealth.
First, Inclusive Wealth fuels a society’s production activities.
Inclusive Wealth consists of produced capital, human capital, andnatural capital (and adjustment factors), and by providing to
production activities, the resulting output can be seen as a flow thatis created. For example, produced capital is used at factories to
produce consumer electronics, while roads and natural capital
produce the lumber used to make furniture and houses, while humancapital generates output including higher incomes through improved
labor productivity. If these are seen as investments, the output
corresponds to investment profit from Inclusive Wealth.
Next, the output created is channeled to consumption andinvestment (savings in the case of individuals). This consumption iswhat provides well-being to the current generation. At the same time,
CHART 1

Inclusive Wealth framework
Inclusive Wealth (stock)
Human capital

Produced capital

Natural capital

Production

Feed back tocapital=What, then, is the connection between the Inclusive Wealth Index
and sustainability? The Inclusive Wealth Index was designed toexpress the theory of Inclusive Wealth, which can be explained by
the relationship among Inclusive Wealth, well-being, wealth, andsustainability.
Inclusive Wealth is “the wealth held by society that will generate
well-being for people living today and for future generations”, and the
Inclusive Wealth Index represents its monetary value. In this case,“well-being” refers to the happiness that people enjoy. On the surface,
this appears to be the same as “wealth” but the “wealth” we arereferring to is not just for the current generation, but also includes thewell-being that will be enjoyed by the current generation’s children,
grandchildren, and future generations. In other words, the Inclusive
Wealth Index can be said to include Future Design (FD).
This well-being has the features of the flow discussed byeconomists that occurs within a certain period. On the other hand,“wealth held by society” has the features of stock that can be derived
from accumulated reserves at a certain point in time, and can be

AuthorShunsuke Managi

Direct effects

Investment profit from
Inclusive Wealth

Consumption

Current generation’swell-being

Index ofsustainability

Investment

Future generations’
well-being

Source: Shunsuke Managi, Shinya Ikeda, Hiroki Nakamura, “Inclusive Wealth – A New
Economic Index for Regional Revitalization” (Iwanami Booklet No. 961), Iwanami
Shoten, 2016

https://www.jef.or.jp/journal/

COVER STORY 7

investment builds up the various types of Inclusive Wealth capitalstock, and manufacturing and consumption by the next and future
generations lead to the well-being of future generations. If output
were to be excessively consumed by the current generation, the wellbeing of future generations would be diminished. Conversely, an
excessive increase in investment depresses the current generation’swell-being. In other words, a balance between consumption andinvestment is needed.
The tie-in to sustainability is that investment builds up newreserves. In a society in which the following year’s Inclusive Wealthwill be less than its current Inclusive Wealth, well-being will diminish
with each passing year and will ultimately run out. We can clearly seethat this is not a sustainable society. On the other hand, if Inclusive
Wealth increases from year to year, the well-being that can bederived increases with each passing year. In other words, anInclusive Wealth Index that increases with time can be seen as
indicating sustainability, and the degree of sustainability can be
determined by the rate of growth in the Inclusive Wealth Index.

Society’s Sustainability from the Viewpoint of
Inclusive WealthWhat, then, is a society’s actual sustainability? To answer this, wewill introduce some of the research findings on the relationshipbetween wealth and sustainability from Kyushu University’s Urban
Institute. The institute has been measuring Inclusive Wealth Indexes
in Japan at the national, prefectural, and municipal level.
Chart 2 shows adjusted Inclusive Wealth Index growth rates for2010 through 2015 at the prefectural level using the latest data. As
noted above, a positive growth rate means that sustainability is being
achieved, while a negative growth rate means that sustainability is
being lost, and this chart ranks the sustainability of all 47 of Japan’s
prefectures.
On the left, the ranking of overall adjusted Inclusive WealthIndexes shows Shiga Prefecture at No. 1, followed by Hiroshima andAichi at No. 2 and 3, with 22 prefectures, or close to half, withpositive growth rates and negative growth rates for No. 23 and lower.
With regard to per capita growth rates, No. 1 Fukushima
Prefecture’s adjusted index is 6.9%, and both Hiroshima and Shigaare above 6.0%. Fukushima Prefecture’s result can be attributed tothe effect of reconstruction from the 2011 Great East Japan
Earthquake combined with a population outflow caused by the
nuclear power plant accident. In addition, there is a trend of local
governments in prefectures with large concentrations of populationin urban areas having a lower per capita index compared with theiroverall index, but almost two-thirds are in positive territory, which ismore than on an overall or geographic size basis.
In addition, the bottom three prefectures are the same in bothindexes, in almost all cases with growth rates lower than -10.0%,
meaning that they lost a significant degree of sustainability over thefive years since 2010.
In this way, by measuring wealth and its sustainability
incorporating a variety of elements like human and natural wealth inaddition to goods, we can see a country’s or region’s strengths andweaknesses, and gain important information for determining what asociety’s policies for enrichment should be.

Using Inclusive Wealth in Policy Evaluation
Traditionally, GDP has been the primary economic index used todetermine a society’s wealth, with a different meaning from our useof the term “wealth”. GDP captures the flow of goods and services
over a year, but cannot measure the stock of sustainability. A
society’s economic situation changes over a relatively short time,and GDP can be used to understand a society’s well-being at thepresent or a point in the past, but it is difficult to use GDP tounderstand the well-being of future generations. On the other hand,
the Inclusive Wealth Index is able to measure a society’s
sustainability based on the wealth being allocated to future
generations’ production activities and consumption. Whenconsidering policies that will contribute to the well-being of society
in the future as well as in the present, the Inclusive Wealth Index canbe seen as a useful basis for judgment in addition to existing
economic indicators.
Numerous local governments, including Minamata in Kumamoto
Prefecture, Fukui Prefecture, Hisayama and Miyawaka in Fukuoka
Prefecture, and Hofu in Yamaguchi Prefecture, as well as private
sector companies, have made cooperative agreements and carriedout joint research with Kyushu University’s Urban Institute, and aremeasuring local wealth using the Inclusive Wealth Index with the aimof utilizing this in policy and project evaluation and decision-making.
In Hisayama in particular, a decision to use the Inclusive WealthIndex in town planning was announced in November 2017, and asurvey was sent to all households. The city also announced in
December 2017 that it had concluded a cooperative agreement with
the institute to use the Inclusive Wealth Index in formulating thebudget proposal for the following fiscal year. This was the first time
the results of the Inclusive Wealth Index had been used in actual
policy making in Japan.
The survey aimed to examine how the town’s residents evaluate
government services, local nature, traditions and other resources,
and social capital like people and their ties to the local region. In
particular, the survey used a contingent valuation method todetermine the monetary value of social capital by asking residents
how much they would be willing to pay for various social capital.
This is within the theoretical framework of Inclusive Wealth and the
Inclusive Wealth Index, and corresponds to a shadow price.
The survey was distributed to all of Hisayama’s roughly 3,000
households, and 1,544 responses were received. The survey had
three parts: (1) Individual attributes including location and number ofJapan SPOTLIGHT • March / April 201925

COVER STORY 7

CHART 2

Inclusive Wealth Index growth rates by prefecture (2010-2015)
Overall growth rate (%)(Prefectures)
Shiga
Hiroshima
Aichi
IbarakiFukuokaMie
MiyagiMiyazaki
ShimaneTochigi
Kanagawa
SaitamaOita
Shizuoka
Tokyo
Iwate
Kumamoto
Fukushima
Gunma
Okinawa
Chiba
Yamaguchi
Kyoto
Gifu
NagasakiNiigata
Ishikawa
Tottori
Ehime
Hyogo
Fukui
Osaka
Hokkaido
Wakayama
Yamagata
KagawaAomori
Kagoshima
Okayama
NaganoYamanashi
Akita
Kochi
Nara
Tokushima
Saga
Toyama

-20

-15

-10

-5

Per capita growth rate (%)
0

5

10

Positive growth

Negative growth(Prefectures)
Fukushima
Hiroshima
Shiga
IbarakiShimaneIwate
MiyazakiMie
Oita
Tochigi
Yamaguchi
Shizuoka
Miyagi
Aichi
Kumamoto
Nagasaki
Gunma
Fukuoka
Gifu
Niigata
Aomori
Ehime
Akita
Kanagawa
Kyoto
TottoriWakayama
Yamagata
Saitama
Fukui
Chiba
Kochi
Kagoshima
Hokkaido
Ishikawa
Yamanashi
Hyogo
NaganoTokyo
KagawaOsaka
Okinawa
Nara
Okayama
Tokushima
Saga
Toyama

-20

-15

-10

-5

0

5

10

Positive growth

Negative growthNote: Overall amounts and per capita amounts are adjusted Inclusive Wealth Indexes with adjustment factors subtracted from the Inclusive
Wealth Index.

Source: Urban Institute, Kyushu University

years of residence, age, occupation, family structure, individual andhousehold income, and whether the household had engaged involunteer activities during the past year; (2) The importance and how
much they would be willing to pay for each of five government
functions (promoting health, creating an environment and building
facilities for childrearing, promoting education, sports and culturalactivities, creating urban environments and environments for dailyliving, and promoting industry); and (3) Others.
The amount of social capital of Hisayama calculated using these
responses regarding how much people would be willing to pay isshown in Chart 3. As per the theoretical framework of Inclusive
Wealth, whereby the amount of various capital in the Inclusive Wealth
26 Japan SPOTLIGHT • March / April 2019

Index is derived by multiplying the shadow price by the amount of
capital, the amount of each type of social capital was calculated by the
triple product of the average amount each individual would be willingto pay, the number of households and the volume of capital existingin the town. As Chart 3 shows, the largest portion was parks andgreenery, with the existing 12 parks and green areas having a value ofapproximately ¥83.3 million. This corresponds to roughly one-fourthof the town’s social capital. Child day care and nurseries accounted
for roughly the same percentage, with the town’s total current
facilities for 120 children having a value of approximately ¥82.7
million. The next largest portion was medical and social welfare
volunteerism, and these three items together accounted for roughlyCOVER STORY 7

CHART 3

Amounts of Hisayama’s social capital
Job placement centersfor older persons
7,211
Commercial &Firefighting organizations
8,068

industrial associations
5,751
Abandoned or
uncultivatedfarmland295

After-school
childcare facilities
8,462
Health screening
13,161English-language
education
14,261Childrearing
support centers
14,414

Parks & greenery
83,283Cultural & sports facilities
14,580Bus operations
15,059Child day care
& nurseries
82,699Support for foreign language& overseas studies
16,378Conclusion

Medical & social welfare volunteerism
31,332

Unit: 1,000 yen

Source: Report on Hisayama’s Inclusive Wealth survey

TABLE

Results of cost-effectiveness analysis
Social capitalamount (yen)Budget(1,000 yen)

Building & maintainingparks & greenery

83,282,928

1,900

43.8

Support for foreign
language & overseas
studies

16,378,289

1,500

10.9

Policies for abandoned or
uncultivated farmland

294,961

39

7.6

Medical & social welfare
volunteerism

31,332,258

7,659

4.1

Childrearing support
centers

14,413,524

8,070

1.8

Subsidies to commercial &industrial associations

5.751,139

4,100

1.4

After-school childcare
facilities

8,462,092

11,0670.8

English-language
education

14,261,386

20,0000.7

Job placement centers forolder persons

7,211,296

10,5300.7Child day care & nurseries

82,698,589

134,390

0.6

Health screening

13,161,276

62,6490.2

Project

60% of Hisayama’s social capital.
Next, a cost-benefit analysis was conducted by dividing
the fiscal 2017 budget amount for each project(corresponding to a cost-benefit ratio) to grasp the effectof each project related to the amount of various types ofsocial capital. The results are shown in the Table. Building
and maintaining parks and greenery stands out above therest at 43.8, and is followed by support for foreign
language and overseas studies, policies for abandoned or
uncultivated farmland, and medical and social welfare
volunteerism. Six of the total 14 projects, or roughly half,
had a cost-benefit ratio of 1 or higher, meaning that theiramount of social capital was greater than the amount in
the budget.
By continuing to measure its Inclusive Wealth, thegrowth rates will clearly show whether these publicprojects have contributed to the town’s sustainability, andthis information will be useful for future policy making.

Social capitalamount/ Budget

Cultural & sports facilities

14,580,091

77,5820.2

Bus operations

15,058,960

89,4230.2

Firefighting organizations

8,067,769

54,3120.1

Source: Report on Hisayama’s Inclusive Wealth survey

This article has discussed the possibilities for the use of
Inclusive Wealth and the Inclusive Wealth Index for policy
evaluation from the perspective of FD. There are naturally
limits to assigning a monetary value to the various types
of wealth possessed by a society; there is still room for
debate as to how to quantify the people and their ties tothe local region and the qualitative effects of local
traditions and natural features included in social capital,and how to account for changes in the values of future
generations with regard to the wealth that is left to themby the current generation, and technological advances. In
addition, the effects of government policies and related
projects on the various types of capital that make up
Inclusive Wealth, and how different types of capital willinteract with each other, are not clear and we would like toaddress these in the future.
Nevertheless, as we have noted, from the standpoint ofcomprehensiveness and suitability regarding the various
wealth possessed by a society and sustainability, Inclusive
Wealth and the Inclusive Wealth Index can be considered
useful tools for evaluating government policies and publicprojects. We hope that the expanded and more in-depth
use of Inclusive Wealth in policy making will lead to social
progress that incorporates FD.Chiaki Matsunaga has a Ph.D. in Engineering from Kyushu University. Her
current research field is urban engineering and economics.
Shunsuke Managi has a Ph.D. in Economics from the University of Rhode
Island. He is also the director of Inclusive Wealth Report and co-chair of World
Congress of Environmental and Resource Economics.

Japan SPOTLIGHT • March / April 201927