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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 largest use of water is as an input to agriculture, and in most instances agricultural water does not have a market price.13 Growing reliance on shared, international water resources and depletion of groundwater are major concerns and warrant close monitoring. The value of groundwater is incorporated in the value of agricultural land, but it is not explicit in the natural capital accounts.

The value of other water resources may not be fully reflected in land values.

Wetland ecosystem services and the recreational value of water bodies are at least partly captured in land and produced capital, which includes residential and recreational properties, but the values are likely to be underestimated as described in the section below on ecosystem services. Water poses an especially difficult challenge for wealth accounting because the values are highly site-specific. There have been many case studies of the value of water services, but they are not readily scaled up to the national level.14 Pollution and Damages to Human Health Adjusted net saving includes a measure of the human health damage from particulate air pollution. The corresponding capital asset affected by pollution is human capital, which is part of intangible capital in the wealth accounts. Pollution damage is implicitly included in the intangible component of total wealth.

Ecosystem Services The Millennium Ecosystem Assessment (2003) classified all ecosystem services into four broad categories: provisioning, cultural and recreational, regulating, and supporting services. Provisioning and cultural/recreational services are mostly those that we use directly and recognize an economic value for, such as food, fiber, timber, and tourism. Most of the provisioning services (with the exception of fisheries and some water services) are included explicitly in the wealth accounts in the form of agricultural land and forest land values that produce food, fiber, timber, nontimber forest products, and so on.

Regulating and supporting services have value because they contribute indirectly to the production of goods and services that have economic values. For example, pollination services or groundwater services are valuable as inputs to agriculture. Many of these services are already included in the value of land assets, 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.

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 23

One “missing ecosystem service” likely to be of great economic significance, particularly in high-income countries, is the aesthetic service provided by natural landscapes, embodied in nonagricultural land values.15 People are willing to pay high prices for residences and, to some extent, for commercial properties in areas of great aesthetic beauty, such as lakefront, coastal, or woodland settings.

Case studies have quantified the value of a home with beachfront, for example, compared to one farther from the shore. The value of this important service of natural capital is not included in the comprehensive wealth accounts due to a lack of data. If this value were included, it would likely increase the share of natural capital in total wealth, especially in high-income countries.

Public goods, such as carbon storage and biodiversity, pose special challenges and are not well represented in the wealth accounts. The wealth accounts include an estimated value for protected areas, but it is certainly an underestimate. Protected areas provide many local and global ecosystem services, but these are largely nonmarket services that are difficult to measure. As with many other ecosystem services, the values are highly site-specific, and case studies do not provide values that can readily be scaled up to a national level. Given these severe data limitations, the wealth accounts apply what is a lower bound on the value of protected areas: the opportunity cost of an alternative land use, namely, agricultural use. This is certainly an underestimate because it does not include other ecosystem services that protected areas may provide, such as tourism, which is often far more economically valuable than the agricultural alternative, and biodiversity, whose value we do not know. This is a priority issue for future work.

Substitutability among Different Types of Capital Comprehensive wealth accounting combines all forms of wealth into a single measure that assumes a very high degree of substitutability among different forms of capital. Such a measure does not convey the very real limits to substitutability, impending thresholds for natural capital, or possible irreversibilities and catastrophic events. Given the poor state of many of the world’s ecosystems, these are serious concerns (Millennium Ecosystem Assessment 2003).

In addition, economic sustainability is not the same as human well-being.

Although the value of comprehensive wealth may be similar for countries, the well-being of citizens may be quite different, due to factors such as cultural capital that cannot be incorporated in economic values. A major review of current measures of economic performance such as GDP by Stiglitz, Sen, and Fitoussi (2009) discusses these issues; despite the limitations, the report recommends comprehensive wealth as one useful indicator of economic performance.





24 THE CHANGING WEALTH OF NATIONS

Notes 1 Strictly speaking, social welfare is equal to the present discounted value of current and future well-being. The link between change in real, comprehensive wealth and change in social welfare has been established in a large body of theoretical work by such authors as Hamilton and Clemens (1999), Dasgupta and Mäler (2000), and Asheim and Weitzman (2001). The theory has been tested empirically by Ferreira and Vincent (2005) and Ferreira, Hamilton, and Vincent (2008).

2 Note, however, that the SNA measure of wealth is much narrower than what is presented here, because the asset boundary includes only produced assets and natural assets that are subject to property rights. The expansion of the asset boundary for natural capital is discussed in the Handbook of National Accounting: Integrated Environmental and Economic Accounting, which is currently undergoing revision (United Nations et al. 2003).

3 Net financial assets are not available for all countries. The information assists in the analysis of intangible capital in chapter 5 and is reported in the appendixes.

4 Note that urban land is estimated as a simple markup of the value of produced capital. It is generally reported as part of produced capital in the aggregates presented in this book.

5 Throughout the book, all wealth figures are reported in constant 2005 U.S. dollar prices.

It is important to keep in mind that when we compare wealth across countries, we are using nominal market exchange rates. Because of this, wealth does not reflect the purchasing power of the income generated by wealth in a given country. To get an idea of the purchasing power of wealth, we would have to use purchasing power parity (PPP) exchange rates, which are often used to compare GDP across countries. Consequently, the wealth accounts are most appropriate for making comparisons across broad income groups and for looking at a country’s wealth over time—its volume and composition— but are less useful for making comparisons between individual countries.

6 In principle, the rents could be invested in human capital or renewable natural capital, but it is easiest to demonstrate the Hartwick counterfactual by assuming that all rents go into produced capital.

7 This has clearly changed since the rapid increase in food prices in recent years.

8 The release of the Stern review on the economics of climate change (Stern 2006), the fourth assessment report of the Intergovernmental Panel on Climate Change (IPCC 2007), and World Development Report 2010 on development and climate change (World Bank 2010b) has significantly raised the profile of climate change as a development issue.

9 The resource curse is attributed to several factors, some related to macroeconomic management and some to political economy and governance. For a review of the resource curse literature, see Frankel (2010) and Humphreys, Sachs, and Stiglitz (2007).

10 See appendix A for description of the data and methods.

11 An estimate of urban land is included under produced capital.

12 Even accurate information about fish catch and its value is not readily available (World Bank 2010a).

13 Water is either abstracted without charge by the user or provided at a cost that does not represent value.

14 Issues regarding the valuation of water for wealth accounting are discussed in the United Nations final draft handbook on water accounting (UNSD 2006).

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 25

15 Even land classified as agricultural may be simultaneously used for recreation. The additional aesthetic and recreational values are not reflected in the value of agricultural land, which is based on the value of agricultural production. This missing value may be particularly important in some developed countries.

References The Anglo-Saxon Chronicle. 2005. Trans. James Ingram. Ed. James H. Ford. El Paso: El Paso Norte Press.

Arrow, K., P. Dasgupta, and K-G. Mäler. 2003. “Evaluating Projects and Assessing Sustainable

Development in Imperfect Economies.” Environmental and Resource Economics 26 (4):

647–85.

Asheim, Geir B., and Martin L. Weitzman. 2001. “Does NNP Growth Indicate Welfare Improvement?” Economics Letters 73 (2): 233–39.

Dasgupta, P., and K.-G. Mäler. 2000. “Net National Product, Wealth, and Social Well-Being.” Environment and Development Economics 5: 69–93.

———, eds. 2004. The Economics of Non-Convex Ecosystems. Dordrecht, Netherlands: Kluwer Academic Publishers.

European Commission, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, and World Bank. 2009. System of National Accounts 2008. New York: United Nations.

FAO (Food and Agricultural Organization). 2009. The State of World Fisheries and Aquaculture

2008. Rome: FAO Fisheries and Aquaculture Department.

Ferreira, S., K. Hamilton, and J. Vincent. 2008. “Comprehensive Wealth and Future

Consumption: Accounting for Population Growth.” World Bank Economic Review 22:

233–48.

Ferreira, S., and J. Vincent. 2005. “Genuine Savings: Leading Indicator of Sustainable Development?” Economic Development and Cultural Change 53: 737–54.

Frankel, Jeffrey A. 2010. “The Natural Resource Curse: A Survey.” NBER Working Paper 15836, National Bureau of Economic Research, Cambridge, MA. http://www.nber.org/ papers/w15836.

Hamilton, K., and M. Clemens. 1999. “Genuine Savings Rates in Developing Countries.” World Bank Economic Review 13 (2): 333–56.

Hamilton, K., and E. Ley. 2010. “Measuring National Income and Growth in Resource-Rich, Income-Poor Countries.” Economic Premise 28. http://siteresources.worldbank.org/ INTPREMNET/Resources/EP28.pdf.

Hartwick, John M. 1977. “Intergenerational Equity and the Investing of Rents from Exhaustible Resources.” American Economic Review 66: 972–74.

Humphreys, Macartan, Jeffrey Sachs, and Joseph Stiglitz, eds. 2007. Escaping the Resource Curse. New York: Columbia University Press.

IPCC (Intergovernmental Panel on Climate Change). 2007. IPCC Fourth Assessment Report:

Climate Change 2007. Geneva: IPCC.

Li, Haizheng, Barbara M. Fraumeni, Zhiqiang Liu, and Xiaojun Wang. 2009. “Human Capital in China.” NBER Working Paper 15500, National Bureau of Economic Research, Cambridge, MA.

Milazzo, M. 1998. “Subsidies in World Fisheries: A Re-examination.” World Bank Technical Paper 406, World Bank, Washington, DC.

26 THE CHANGING WEALTH OF NATIONS

Millennium Ecosystem Assessment. 2003. Ecosystems and Human Well-being: A Framework for Assessment. Washington, DC: Island Press.

Solow, R. 1986. “On the Intergenerational Allocation of Natural Resources.” Scandinavian Journal of Economics 88 (1): 141–49.

Stern, Nicholas. 2006. The Economics of Climate Change: The Stern Review. Prepared for the U.K. Government. New York: Cambridge University Press.

Stiglitz, Joseph E., Amartya Sen, and Jean-Paul Fitoussi. 2009. Report by the Commission on the Measurement of Economic Performance and Social Progress. Paris: Commission on the Measurement of Economic Performance and Social Progress.

United Nations, European Commission, International Monetary Fund, Organisation for Economic Co-operation and Development, and World Bank. 2003. Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003. New York: United Nations. http://unstats.un.org/unsd/envaccounting/seea.asp.

UNSD (United Nations Statistics Division). 2006. “System of Environmental-Economic Accounting for Water.” Final draft.

World Bank. 2006. Where Is the Wealth of Nations? Measuring Capital for the 21st Century. Washington, DC: World Bank. http://unstats.un.org/unsd/envaccounting/ SEEAWDraft Manual.pdf.

———. 2010a. The Hidden Harvests: The Global Contribution of Capture Fisheries. Washington, DC: World Bank.

———. 2010b. World Development Report 2010: Development and Climate Change.

Washington, DC: World Bank.

———. 2010c. “Lao PDR Development Report: Natural Resource Management for Sustainable Development.” World Bank, Washington, DC.

World Bank and FAO (Food and Agriculture Organization). 2009. The Sunken Billions: The Economic Justification for Fisheries Reform. Washington, DC: World Bank.

CHAPTER 2

Wealth and Changes in Wealth, 1995–2005

THIS CHAPTER TELLS THE STORY OF WEALTH AND HOW IT



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