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«ENVIRONMENT AND DEVELOPMENT The Changing Wealth of Nations ENVIRONMENT AND DEVELOPMENT A fundamental element of sustainable development is ...»

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The Changing

Wealth of Nations

Measuring Sustainable

Development in the New Millennium

ENVIRONMENT AND DEVELOPMENT

The Changing

Wealth of Nations

ENVIRONMENT

AND

DEVELOPMENT

A fundamental element of sustainable development is environmental sustainability. Hence, this series was created in 2007 to cover current and emerging issues in order to promote debate and broaden the understanding of environmental challenges as integral to achieving equitable and sustained economic growth. The series will draw on analysis and practical experience from across the World Bank and from client countries. The manuscripts chosen for publication will be central to the implementation of the World Bank’s Environment Strategy, and relevant to the development community, policy makers, and academia. Topics addressed in this series will include environmental health, natural resources management, strategic environmental assessment, policy instruments, and environmental institutions, among others.

Titles in this series:

The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium Convenient Solutions to an Inconvenient Truth: Ecosystem-Based Approaches to Climate Change Environmental Flows in Water Resources Policies, Plans, and Projects: Findings and Recommendations Environmental Health and Child Survival: Epidemiology, Economics, and Experiences International Trade and Climate Change: Economic, Legal, and Institutional Perspectives Poverty and the Environment: Understanding Linkages at the Household Level Strategic Environmental Assessment for Policies: An Instrument for Good Governance Strategic Environmental Assessment in Policy and Sector Reform: Conceptual Model and Operational Guidance The Changing Wealth of Nations Measuring Sustainable Development in the New Millennium © 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

RIGHTS AND PERMISSIONS

The material in this publication is copyrighted. Copying and/or transmitting portions or all of this workwithout permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly.

For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance

Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone:

978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.

All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422;

e-mail: pubrights@worldbank.org.

ISBN: 978-0-8213-8488-6 eISBN: 978-0-8213-8554-8 DOI: 10.1596/978-0-8213-8488-6 Library of Congress Cataloging-in-Publication Data The changing wealth of nations : measuring sustainable development in the new millennium.

p. cm. — (Environment and development) Includes bibliographical references and index.

ISBN 978-0-8213-8488-6 — ISBN 978-0-8213-8554-8 (electronic)

1. Economic indicators. 2. Sustainable development.

I. World Bank.

HC59.15.C434 2010 338.9’27—dc22 Cover photos: Kirk Hamilton/World Bank (outer circle);

Scott Wallace/World Bank (inner circle) Cover design: Naylor Design

CONTENTS

xi Foreword xiii Acknowledgments xiv Abbreviations

–  –  –

CHAPTER 1 3 Introduction and Main Findings: The Changing Wealth of Nations 5 How Does Wealth Change with Development?

9 Harnessing Natural Capital for Development 11 Extending and Deepening Wealth Accounts 16 The Agenda for Future Work on Natural Wealth 17 Summing Up 21 Annex: Missing Natural Capital and Ecosystem Services 24 Notes 25 References CHAPTER 2 27 Wealth and Changes in Wealth, 1995–2005 27 Changing Global Wealth 29 Changing Composition of Wealth 31 Changing Wealth Per Capita 33 Wealth Creation in Developing Countries 37 Savings and Changes in Wealth 41 Population Growth and the Adjusted Net Saving Gap 42 Conclusions 44 Annex 2.1: Countries Excluded from the Analysis of Changes in Wealth 45 Annex 2.2: Per Capita Wealth, 1995 and 2005, and Changes in Per Capita Wealth and Population, 1995–2005, by Region and Income Group 49 Notes 49 Reference





vvi CONTENTS

CHAPTER 3 51 Changes in Natural Capital: Decomposing Price and Quantity Effects 52 Decomposition: A Note on the Methodology 53 Contribution of Land and Subsoil Assets to Changes in Wealth 59 Summing Up: Land Values and Subsoil Assets 61 Annex 3.1: Decomposition Methodology 63 Annex 3.2: Decomposition of Changes in Total Wealth by Income Group and Region, 1995–2005 67 Annex 3.3: Decomposition of Changes in Total Wealth in Selected Countries in the Middle East and North Africa and Sub-Saharan Africa, 1995–2005 71 Notes 71 Reference

–  –  –

116 Annex 6.2: Recasting the Data to be Consistent with World Bank Methodology 117 Notes 117 References CHAPTER 7 119 Linking Governance to Economic Consequences in Resource-Rich Economies: EITI and Wealth Accounting 121 Governance, Accountability, and Transparency along the Extractives Value Chain 123 EITI and Transparency 123 EITI++: Extending Good Governance along the Value Chain 124 Wealth Accounts: Extending Transparency to Macroeconomic Performance 125 Summing Up 127 Notes 127 References CHAPTER 8 129 Country Experiences with Wealth Accounting 130 Current Country Practices 133 Mineral and Energy Accounts 134 Other Natural Capital Accounts 136 Balance Sheets 136 Wealth Accounting in Recent Initiatives 137 Summing Up 138 Notes 138 References Appendixes 141 Appendix A: Building the Wealth Estimates: Methodology 161 Appendix B: Total Wealth, Population, and Per Capita Wealth in 1995, 2000, and 2005 173 Appendix C: Wealth Estimates in 2005 185 Appendix D: Calculating Adjusted Net Saving as a Percentage of Gross National Income, 2008 197 Appendix E: Effect of Population Growth on Savings and Changes in Wealth Per Capita, 2005 203 Appendix F: Decomposition Analysis as a Percentage of Change in Total Wealth, by Economy, 1995–2005 213 Index viii CONTENTS Boxes

18 1.1 Measures of Economic Performance: Wealth or Production?

38 2.1 Adjusted Net Saving and Missing Capital 44 2A.1 Countries with Wealth Accounts in 2005 but Not in 1995

–  –  –

“What is not measured is not managed” is one of the truisms of management science, and it points to a weakness in the indicators we use to gauge development progress. As this book demonstrates, natural resources account for over 20 percent of the wealth of developing nations. Yet indicators like the growth rate of gross domestic product (GDP), used by ministries of finance and development everywhere, do not account for the depletion of those natural resources.

Not only are natural resources an important share of national wealth, but the composition of natural wealth varies widely across developing countries and regions. Some countries are blessed with mineral and energy resources which can generate significant revenues for governments but which may also distort development by providing “easy money.” Some countries are rich in crop and pasture lands, which places a premium on protecting soil fertility and managing the water resources which underpin productive use of the land. Other countries have magnificent forests, as well as wild lands with abundant biodiversity, which can draw ecotourists to visit from all over the world. Without sound management, this natural patrimony is at risk.

This book is about development and measuring development progress. While precise definitions may vary, development is, at heart, a process of building wealth—the produced, natural, human, and institutional capital which is the source of income and wellbeing. A key finding is that it is intangible wealth— human and institutional capital—which dominates the wealth of all countries, rising as a share of the total as countries climb the development ladder. The accounting of wealth in over 100 countries over the decade from 1995 to 2005 points to the important progress that has been made in developing countries.

–  –  –

The first chapter of the book ends by suggesting that “how we measure development will drive how we do development.” We invite the reader to join us in an exciting endeavor—taking a truly comprehensive approach to development by building the wealth of nations.

–  –  –

The Changing Wealth of Nations has been written by a team including GlennMarie Lange, Kirk Hamilton, Giovanni Ruta, Lopa Chakraborti, Deval Desai, Bram Edens, Susana Ferreira, Barbara Fraumeni, Michael Jarvis, William Kingsmill, and Haizheng Li. Research assistance was provided by Justin Ram.

The contributions of Xiaolin Ren and Jana Stoever to the development of the database are gratefully acknowledged.

The report received insightful comments from the peer reviewers, Giles Atkinson, Jan Böjo, Richard Damania, and Marian Delos Angeles.

We are grateful to colleagues inside and outside the World Bank who provided useful feedback. Our thanks go to Milan Brahmbhatt, Julia Bucknall, Kevin Carey, Charles di Leva, Marianne Fay, Michael Levitsky, Eduardo Ley, Ian Noble, Per Ryden, Apurva Sanghi, Susanne Scheierling, Jon Strand, Mike Toman, Dominique van der Mennsbrugghe, and Jeff Vincent.

Finally, we are indebted to the late Professor David Pearce, the father of much of the economics of sustainable development, John O’Connor, who led the first work on wealth accounting at the World Bank, and three individuals—John Dixon, Partha Dasgupta, and Karl-Goran Mäler—who have contributed not only to theory and practice, but have also tirelessly championed the cause of applying environmental economics to development problems through their writing and teaching across the developing world.

The financial support of the Government of Sweden is acknowledged with gratitude.

–  –  –

PERHAPS THE EARLIEST ASSESSMENT OF THE WEALTH OF

nations was the Domesday Book, prepared at the command of William the Conqueror in 1085–86. According to the Anglo-Saxon Chronicle, the book aimed to record “what, or how much, each man had, who was an occupier of land in England, either in land or in stock, and how much money it were worth.” William’s goal in measuring the wealth of England was fiscal. He needed to know the value of crown lands in the conquered territory, as well as the value of individual landholdings that could be subject to taxation. Our goals in this book are both more modest and more ambitious than those of William the Conqueror: more modest because we will not present accounts at the level of individual property holdings, and more ambitious because we set forth broad wealth accounts for over 120 countries for the years 1995, 2000, and 2005.

When we pose the question of “how much money it were worth” for assets such as land, we are inevitably asking a question about the future: what is the flow of rents (or economic profits) that this asset can sustain in the future? This concern with futurity is, we argue, the principal reason to build wealth accounts.

If we extend this concept to comprehensive wealth—produced capital; natural capital; and human, social, and institutional capital—then measuring changes in wealth permits us to measure the sustainability of development. This is an urgent concern today in the poorest developing countries, as we will show.

4 THE CHANGING WEALTH OF NATIONS

More generally, measuring changes in real, comprehensive wealth provides an indication to governments of whether policy, broadly conceived, is producing increases in both current and future well-being—what economists would term “social welfare.”1 It certainly could be argued that the fundamental duty of government is to ensure that its policies lead to increases in social welfare.

Today, wealth accounts are an integral part of the System of National Accounts (SNA), which provides the basis for the measurement of economic progress used by ministries of finance around the world (European Commission et al.

2009).2 However, wealth accounts are not nearly as widely implemented as are the measures of production and income. The traditional indicator of economic progress is growth in gross domestic product (GDP), a broad measure of the value of production occurring within a nation’s borders. The problem with GDP growth as an indicator, however, is that it treats both the production of goods and services and the value of asset liquidation as part of the product of the nation.

Thus, a country could grow its GDP by depleting stocks of forests and minerals, for example, but this growth would not be sustainable.



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