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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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Thus, the per-hectare value for recreation is multiplied by one-tenth of the forest area in each country to arrive at annual recreation benefits. Estimation of watershed protection values considers deforestation; deforestation rates are from Global FRA 2005 (UNFAO 2006). The annual rate of forest area changes over 1990–2000 is used as the deforestation rate for 1995, while the annual rate of forest area changes over 2000–2005 is used for 2000 and 2005. Nontimber (minor) forest product values for 2005 are also from Global FRA 2005; these values are assumed to be constant over years. Nontimber forest resources under each type of benefit are valued as the net present value of benefits over a time horizon of 25 years. 12 Crop Land Country-level data on agricultural land prices are not widely published. Even if local prices were available, it could be argued that land markets are so distorted that a meaningful comparison across countries would be difficult. We have therefore chosen to estimate land values based on the net present value of land rents, assuming that the products of the land are sold at world prices.

The return to land is computed as the product of rental rate and revenues from crop production. A constant rental rate of 30 percent is assumed across all crops considered. Production is yield multiplied by harvested area. Cereals, fruits, nuts, oil crops, pulses, starchy roots, stimulants, sugar crops, and vegetables are the crop categories considered with data from the FAO. Yields and areas are from the FAO’s prodSTAT database. Production is calculated based on yield

BUILDING THE WEALTH ESTIMATES: METHODOLOGY 149

and harvested area for each single crop; these data are then aggregated into the Global Trade Analysis Project (GTAP) 6 Data Base sectors to obtain output for each GTAP sector (Dimaranan 2006). Values of production are then multiplied by world prices. The World Bank’s Development Economics Prospects Group is the primary data source for prices in major crop categories such as rice and wheat. For the remaining crops, world median export unit values from the FAO are used. Five-year-average values of yield and unit export values are used to do the estimates (2001–05 for 2005, 1996–2000 for 2000, and 1991–95 for 1995).

Harvest areas are the current year value.

Annual land return is the summation of returns from all agricultural sectors considered. In order to reflect the sustainability of current cultivation practices, the annual return in year t is projected to the year (t 24) based on growth in production (land areas are assumed to stay constant). The growth rates are 0.97 percent and 1.94 percent in developed and developing countries, respectively (Rosengrant, Agcaoili-Sombilla, and Perez 1995). The net present value of this flow was then calculated using a discount rate of 4 percent over a 25-year time horizon.

Pasture Land Pasture land is valued using methods similar to those for crop land. The returns to pasture land are assumed to be a fixed proportion of the value of output. On average, costs of production are 55 percent of revenues, and therefore, returns to pasture land are assumed to be 45 percent of output value. Value of output is based on the production of meat, milk, and wool valued at international prices.

Annual pasture land return is calculated as the product of the total revenue from all the commodities and the rental rate for pasture land, which is assumed to be 45 percent.

In order to reflect the sustainability of current grazing practices, the annual return in year t is projected to the year (t 24) based on growth in production.

The growth rates are 0.89 percent and 2.95 percent in developed and developing countries, respectively (Rosengrant, Agcaoili-Sombilla, and Perez 1995). The net present value of this flow is then calculated using a 4 percent discount rate over a 25-year time horizon.

Production and unit export values are from the FAO databases prodSTAT and tradeSTAT, respectively. Five-year-average values of production and unit export values are used to calculate revenues. Missing values for price are filled with the regional average or the world average if the regional average is missing.

Protected Areas Protected areas provide a number of benefits that range from existence values to recreational values. They can be a significant source of tourism income.

150 THE CHANGING WEALTH OF NATIONS

These values are revealed by a high willingness to pay for such benefits. The establishment and good maintenance of protected areas preserves an asset for the future, and therefore protected areas form an important part of the natural capital estimates. The willingness to pay to preserve natural regions varies considerably, however, and there is no comprehensive data set on this.

Protected areas (International Union for Conservation of Nature categories I–VI) are valued at the lower of per hectare returns to pasture land and crop land—a quasi–opportunity cost. These returns are then capitalized over a 25-year time horizon, using a 4 percent discount rate. Limiting the value of protected areas to the opportunity cost of preservation probably captures the minimum value, but not the complete value, of protected areas.

Data on protected areas are taken from the World Database on Protected Areas, which is compiled by United Nations Environment Programme’s World Conservation Monitoring Centre. Where the value of a protected area is missing, it was assumed to be zero.





Net Foreign Assets Finally, net foreign assets of an economy are subtracted from total wealth net of produced and natural capital to estimate the residual or intangible capital.

Net foreign assets are calculated as total assets minus total liabilities. The database used was an updated and extended version of the External Wealth of Nations Mark II database developed by Lane and Milesi-Ferretti (2007). This database contains data on total assets and liabilities in (millions of) current U.S. dollars for the period 1970–2007 and for 178 economies. Total assets are the sum of foreign direct investment (FDI) assets, portfolio equity assets, debt assets, derivatives assets, and foreign exchange reserves. Total liabilities are the sum of FDI liabilities, portfolio equity liabilities, debt liabilities, and derivatives liabilities.

Calculating Adjusted Net Saving Adjusted net saving measures the change in value of a specified set of assets, that is, the investment/disinvestment in different types of capital (produced, human, natural). The calculations are not comprehensive, as they do not include some important sources of environmental degradation such as underground water depletion, unsustainable fisheries, and soil degradation.

This results from the lack of internationally comparable data rather than from intended omissions. A detailed description of the methodology used to obtain adjusted net saving can be found on the World Bank’s Environmental Economics Web site.13 Table A.2 summarizes the definitions, data sources, and formulas used in the calculations.

TABLE A.2 Calculating Adjusted Net Saving Component of Savings Definition Formula Sources Technical Notes Observations

–  –  –

Source: Authors.

Note: ANS adjusted net saving; CO2 carbon dioxide; CO2D CO2 damages; Depr depreciation; ED energy depletion; EE education expenditure; FAO Food and Agriculture Organization; FAOSTAT Food and Agriculture Organization of the United Nations database; GDP gross domestic product; GNI gross national income; GNS gross national savings; IEA International Energy Agency; IMF International Monetary Fund; MD mineral depletion; NFD net forest depletion;

NNS net national savings; OECD Organisation for Economic Co-operation and Development; PM particulate matter; PMD particulate matter damages; PV present value; UN United Nations; UNCTAD United Nations Conference on Trade and Development; UNECE United Nations Economic Commission for Europe;

UNESCO United Nations Educational, Scientific, and Cultural Organization; USGS U.S. Geological Survey; WDI World Development Indicators Database;

WRI World Resources Institute; WTP willingness to pay.

BUILDING THE WEALTH ESTIMATES: METHODOLOGY 157

Calculating the Adjusted Net Saving Gap Population growth is a problem in most developing nations, since it exerts pressure on the physical and natural resources of an economy. Hence, we look at two country-specific measures: change in wealth per capita and the adjusted net saving gap. Change in wealth per capita is genuine savings per capita net of the impact of population growth on per capita wealth. The adjusted net saving gap as a share of gross national income (GNI) is a measure of how much extra saving effort would be required in order for a country to break even with zero change in wealth per capita.

Under the assumption of an exogenous growth rate of population g, change in wealth per capita is expressed as

–  –  –

Notes 1 A proof that the current value of wealth is equal to the net present value of consumption can be found in Hamilton and Hartwick (2005).

2 The choice of a service life of 20 years is intended to reflect the mix of relatively long-lived structures and short-lived machinery and equipment in the aggregate capital stock and investment series. In a study that derives cross-country capital estimates for 62 countries, Larson et al. (2000) also use a mean service life of 20 years for aggregate investment.

3 Again, by choosing a 5 percent depreciation rate we try to capture the diversity of assets included in the aggregate investment series.

t )i 4 That is, Kt It i (1 k0 for t 20.

i0 5 Kunte et al. (1998) based their estimation of urban land value on Canada’s detailed national balance sheet information. Urban land is estimated to be 33 percent of the value of structures, which in turn is estimated to be 72 percent of the total value of physical capital.

6 The U.S. Geological Survey definition. It is clear that an increase in, say, the price of oil, or a reduction in its extraction costs, would increase the amount of “economically extractable”

158 THE CHANGING WEALTH OF NATIONS

oil and thereby increase the reserves. Indeed, U.S. oil production has surpassed several times the proven reserves in 1950.

7 Coal is subdivided into two groups: hard coal (anthracite and bituminous) and soft coal (lignite and subbituminous).

8 British Petroleum maintains data on proven reserves of oil and gas for 48 and 50 countries, respectively, and production data for 48 and 47 countries, respectively. International Energy Annual 2006 provided data on hard and soft coal reserves in 60 and 51 countries/regions and production data for 66 and 41 countries/regions, respectively (USEIA 2006, tables 8.2 and 5.1). Far fewer countries had data on reserves for the 10 metals and minerals considered; limited information came from the U.S. Geological Survey’s 2006 Minerals Yearbook and Mineral Commodity Summaries (USGS 2006a, 2006b). Reserves data on bauxite, copper, lead, nickel, phosphate, tin, zinc, gold, silver, and iron ore were available for 12, 12, 10, 16, 15, 10, 7, 8, 7, and 15 countries, respectively.

9 The World Bank (1997) chose T 20 in its study on indicators of environmentally sustainable development.

10 When data are missing, and if a country’s forest area is less than 50 square kilometers, the value of production is assumed to be zero.

11 In Global FRA 2005, see the table titled “Designated Functions of Forest—Primary Function 2005,” http://www.fao.org/forestry/32035/en/. In Global FRA 2000, see table 15, “Forest in Protected Areas/Available for Wood Supply.” 12 When data are missing, and if country’s forest area is less than 50 square kilometers, the value of nontimber forest benefits is assumed to be zero.

13 http://www.worldbank.org/environmentaleconomics.

References Bohm, B., A. Gleiss, M. Wagner, and D. Ziegler. 2002. “Disaggregated Capital Stock Estimation for Austria—Methods, Concepts and Results.” Applied Economics 34 (1): 23–37.

Dimaranan, Betina V., ed. 2006. Global Trade, Assistance, and Production: The GTAP 6 Data Base. West Lafayette, IN: Center for Global Trade Analysis, Purdue University.

Eurostat. 2002. Natural Resource Accounts for Forests. Luxembourg: Office of the European Communities.

Fankhauser, S. 1994. “The Social Costs of Greenhouse Gas Emissions: An Expected Value Approach.” Energy Journal 15 (2): 157–84.

Fortech (Forestry Technical Services). 1997. “Marketing of PNG Forest Products: Milestone 2 Report: Logging and Processing Costs in Papua New Guinea.” Fortech, Canberra.

Global Witness. 2001. Taylor-Made: The Pivotal Role of Liberia’s Forests and Flag of Convenience in Regional Conflict. London: Global Witness.

Hamilton, K., and J. M. Hartwick. 2005. “Investing Exhaustible Resource Rents and the Path of Consumption.” Canadian Journal of Economics 38 (2): 615–21.

Haripriya, G. S. 1998. “Forest Resource Accounting: Preliminary Estimates for the State of Maharashtra.” Development Policy Review 16: 131–51.

BUILDING THE WEALTH ESTIMATES: METHODOLOGY 159

Jorgenson, Dale W., and Barbara M. Fraumeni. 1992. “The Output of the Education Sector.” In Output Measurement in the Service Sectors, ed. Z. Griliches, 303–41. NBER Studies in Income and Wealth, vol. 56. Chicago: University of Chicago Press.

Kunte, A., K. Hamilton, J. Dixon, and M. Clemens. 1998. “Estimating National Wealth:

Methodology and Results.” Environment Department Paper 57, World Bank, Washington, DC.

Lampietti, J., and J. Dixon. 1995. “To See the Forest for the Trees: A Guide to Non-Timber Forest Benefits.” Environment Department Paper 13, World Bank, Washington, DC.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2007. “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004.” Journal of International Economics 73 (2): 223–50.

Larson, Donald F., Rita Butzer, Yair Mundlak, and Al Crego. 2000. “A Cross-Country

Database for Sector Investment and Capital.” World Bank Economic Review 14 (2):

371–91.

Lopina, Olga, Andrei Ptichnikov, and Alexander Voropayev. 2003. Illegal Logging in Northwestern Russia and Exports of Russian Forest Products to Sweden. Moscow: World Wildlife Fund Russia.



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