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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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At the same time there has been considerable effort over the past 20 years to develop statistical methodology for environmental accounting (a broad framework that includes natural capital accounting) under the aegis of the United Nations (UN) Statistical Commission. The Commission established the London Group on Environmental Accounting and later a high-level body, the UN Committee of Experts on Environmental Accounting, to develop methodological guidelines. In 2003 the Handbook of National Accounting: Integrated Environmental and Economic Accounting, commonly referred to as the SEEA, was produced (United Nations et al. 2003). This manual is currently under revision and will become part of the statistical standard, like the System of National Accounts that establishes methodology for national accounts.

Further support for the comprehensive wealth approach to sustainable development is provided in the recent report by Stiglitz, Sen, and Fitoussi (2009).

The report proposes ways to modify and extend conventional national accounts in order to provide a more accurate and useful guide for policy. An important component of the proposed changes, to better reflect sustainability of economies, is comprehensive wealth. The Stiglitz-Sen-Fitoussi report recommends the compilation of accounts for each category of asset reported in this book, and changes in the assets, which correspond to the components of adjusted net saving.

The Agenda for Future Work on Natural Wealth Constructing detailed wealth accounts for 152 countries on a regular basis that are comparable both across countries and over time is a daunting task. We drew on a large number of databases compiled by national and international agencies.10 Specific natural resources are included in the accounts when they meet two criteria: (a) reliable data on price and volume are available on a regular basis, not from occasional or one-off studies, and (b) data are available for a large number of countries, if not for all. There are some natural resources where the available data do not meet these criteria, notably fisheries, certain minerals, and certain water services such as hydropower. As a result, the value of natural capital is underestimated, and for specific countries this omission can be significant.

In addition, some components of natural capital, the regulating ecosystem services and environmental damages, do not appear explicitly in the wealth

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 17

accounts. Many of these services are already included in the value of agricultural land, but because they are only implicit, supporting what we value indirectly, their values are hidden. For example, the value of natural pollinators or groundwater is incorporated in the value of agricultural land. Fully accounting for the value of these ecosystem services would not add to the wealth of nations but would change the composition, for example by shifting part of the asset value from agricultural land to groundwater or forests. This information is useful for management of natural resources, because if policy makers are unaware that services critical to agriculture are provided by forests or wetlands, they may make decisions about forests that inadvertently reduce the productivity and value of agricultural land.

But the land accounts—focusing on agricultural land, which is most important for developing countries and can be most readily measured—are not complete.

We are missing ecosystem services associated with other types of land, notably residential and commercial land, but also other public land that is not under protected status.11 For these properties, the aesthetic amenity services provided by natural landscapes can be very important, especially in high-income countries where people are willing to pay high prices for lakeside or beachfront homes, for example. If the value of these ecosystem services were included in the natural capital accounts, it would likely increase the share of natural capital in total wealth, especially in high-income countries.

The missing natural capital, treatment of ecosystem services, substitutability among different types of capital, and implications for the wealth accounts are discussed in more detail in the chapter annex. Filling the gaps in concepts, methods, and data, particularly for natural capital, constitutes an important agenda for improving the coverage and usefulness of wealth accounting.

Summing Up The work reported in this book offers lessons about how countries can develop sustainably. The analysis of wealth accounts over the decade from 1995 to 2005 shows development to be a process of building wealth. Furthermore, in this process, the composition of wealth shifts away from natural capital and toward produced capital and, increasingly, intangible capital. The important role of the changing composition of wealth in the development process points to the need for comprehensive wealth accounting.

Intangible capital dominates the wealth accounts of all countries. Investing in human capital is important in this process, but building good institutions and governance is equally important because this provides the basis for more efficient use of, and higher economic returns to, all forms of capital.

For developing countries, where natural capital is a large share of comprehensive wealth, sound management of natural capital to build wealth is critical.





18 THE CHANGING WEALTH OF NATIONS

However, even when a country’s share of comprehensive wealth is small, it is essential to focus on management of natural capital because it differs in key ways from produced and intangible capital. Natural capital can provide a wide range of local and global public goods. Many forms of natural capital are nonrenewable, or renewable only under certain management regimes. Losses of natural capital may lead to irreversible changes, and the potential for substitution is often limited. While produced and intangible capital share these characteristics to some degree—for example, provision of public goods, and limited substitutability—the danger of irreversible change is far less than for natural capital. If produced capital is damaged or destroyed, it can usually be replaced.

Box 1.1 looks in more detail at the issue raised at the beginning of this chapter:

if our concern is with increasing social welfare—the sum of present and future well-being—then we need to shift our focus from measuring output to measuring wealth and its changes over time. In this book we document how this can change our perspective on the process of development by emphasizing the shifting roles of natural, produced, and intangible capital as countries grow and develop.

If we wish truly to understand economic development, then simple backwardlooking indicators of output growth, such as GDP growth rates, will not suffice.

Countries need to know where they are going, in addition to where they have been. To what extent have economic actors—households, firms, and governments—increased the wealth of nations by saving and investing for the future?

To what extent have institutional reform, technical progress, and investment in human capital accelerated the process of development? These questions have particular force and urgency in developing countries, where, our numbers show, many of the most resource-intensive economies are actually consuming wealth, and where the potential value of human capital is constrained by the quality of institutions and governance. How we measure development will drive how we do development.

BOX 1.1 Measures of Economic Performance: Wealth or Production?

The key to increasing standards of living lies in building national wealth, which requires investment and national savings to finance this investment. We have examined wealth accounts at three points over a decade; savings/investment is the dynamic behavior that explains how an economy moves from one point to the next. The companion to total or comprehensive wealth is adjusted net saving (ANS), also called genuine saving, defined as national net saving adjusted for the value of resource depletion and environmental degradation and credited (continued)

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 19

for education expenditures (a proxy for investment in human capital).

Since wealth changes through saving and investment, ANS measures the change in a country’s national wealth. The rule for interpreting ANS is simple: if ANS is negative, then we are running down our capital stocks and future well-being will suffer; if ANS is positive, then we are adding to wealth and future well-being.

While wealth is typically a large number that changes slowly, ANS is an incremental measure and can change rapidly. Thus, ANS provides an early warning signal if an economy is on a downward path. Furthermore, ANS is very policy-sensitive: if government decides to spend more on education or enacts policies to increase private sector investment, the results will show up immediately in ANS. Small, negative ANS may not produce changes that are immediately noticeable, but if it is sustained over time, wealth and well-being will eventually decline. ANS for Sub-Saharan Africa, shown in the figure below as a percentage of gross national income (GNI), clearly shows an unsustainable trend since 1994—although, as noted earlier, this trend is driven mainly by a small handful of resource-rich states, particularly oil producers.

While ANS is theoretically sound and relatively easy to implement, national saving is not an important indicator in the macroeconomic toolkit.

The concept of accounting for depletion and degradation of natural capital is widely recognized, but countries have far more often experimented Adjusted Net Saving in Sub-Saharan Africa as a Percentage of Gross National Income % GNI —2 —4 —6 —8 Source: Authors’ calculations based on World Bank data.

–  –  –

BOX 1.1 (continued) with adjustments to conventional macroeconomic aggregates such as GDP or net national income (NNI), subtracting depletion and degradation of natural capital. Even the three countries that regularly compile wealth accounts, Norway, Australia, and Mexico, compile adjusted NNI or related indicators rather than ANS (see chapter 8). The major reason for this seems to be that macroeconomists most often focus on measures of output (GDP) rather than on well-being, a distinction that the landmark report by Stiglitz, Sen, and Fitoussi (2009) makes very clear.

The information used to calculate ANS can also be used to adjust net national income, but the interpretation of the latter is less clear. The next figure shows NNI for Sub-Saharan Africa after adjusting for depletion and degradation. Adjusted NNI typically follows a trend line over time at a lower level than NNI, but adjusted NNI alone does not tell us whether growth is sustainable or not. However, if we add consumption to the graph, as seen in the figure, the interpretation becomes clear: a gap arises between consumption and adjusted NNI that becomes especially pronounced after 2004. This gap between consumption and adjusted NNI shows that Sub-Saharan Africa is consuming more than its current (net) income. It can only do this by liquidating its capital, which will leave its citizens poorer and with less capacity to generate income in the years to come. This gap is closely related to ANS, lacking only the adjustment to reflect investment in human capital.

Consumption and Adjusted Net National Income in Sub-Saharan Africa, 1990–2008

–  –  –

9,000 8,000 7,000 6,000 5,000 4,000

–  –  –

Source: Adapted from Hamilton and Ley 2010.

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 21

Annex: Missing Natural Capital and Ecosystem Services In this annex we discuss missing natural capital and ecosystem services. We identify obstacles to measurement and the likely impact of those omissions on measures of wealth.

Missing Natural Resources: Minerals, Fisheries, and Water Minerals The wealth accounts include four energy resources and 10 major metals and minerals. Because of a lack of data, the accounts omit a number of mineral resources, such as diamonds, uranium, and lithium, even though they are extremely important for specific countries. Information about the volume and value of annual production is generally available, but information about reserves and the costs of production—needed to calculate asset values—is not. As a result, the value of natural capital is underestimated, and for certain countries this omission can be significant.

Fisheries Fisheries are not included in the wealth accounts because of a lack of information about fish stocks and uncertainty about their future.12 But this omission probably has a smaller impact on global and country wealth accounts than the omission of minerals. The key issue here is management. Poor management is seen in the economics of fishing and in the depleted state of the world’s fisheries (FAO 2009).

Under current management, most commercial fishing operates with high net losses and is kept going only by extensive subsidies (Milazzo 1998; World Bank and FAO 2009). There are notable exceptions to this, such as fisheries in Iceland, New Zealand, and Namibia, where better management allows substantial rents to be generated. But in the majority of cases, very little if any rent is produced. Subsistence and small-scale fishing in developing countries often operates under open-access conditions that tend to erode resource rents.

So the majority of fisheries have little or no economic value under current management.

Water Water resources encompass a wide array of services, from drinking water and agricultural water to hydroelectric power and wetland services. Hydropower is one of the “missing” resources in the natural capital accounts. Among the countries that construct asset accounts for natural capital (discussed in chapter 8), only Norway includes hydropower in its wealth accounts. In a case study of the Lao People’s Democratic Republic, the World Bank estimated hydropower

22 THE CHANGING WEALTH OF NATIONS

as part of the country’s wealth accounts (World Bank 2010c). But there is not sufficient information across countries to include hydropower in the wealth accounts at this time.



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