Measuring Social Welfare and Sustainability

1
Measuring Social Welfare and Sustainability

• Giovanni Ruta
• gruta_at_worldbank.org

2
Contents

• Economists insights on measuring social welfare
  and sustainability
• Wealth estimates in practice Methods
• Wealth estimates in practice Results
• Links to SNA

3
Economists insights

• On social welfare, sustainability and measurement

4
Samuelson, 1961

• Assume two identical countries A and B
• Todays income/consumption are a partial measure
  of well-being
• In order to compare social welfare between two
  countries we need to look both at present and
  future consumption

5
Fisher, 1906

• Motivated by the need for measuring comprehensive
  wealth
• Wealth is equal to the present value of future
  consumption
• Three type of assets
• Immovable wealth (land, fixed structures)
• Movable assets or commodities
• Human beings

6
From wealth to sustainability

• If wealth is the correct measure of social
  welfare then
• changes in wealth tell us about sustainability
• References
• Pearce and Atkinson, 1993
• Hamilton and Clemens, 1999
• Dasgupta and Maler, 2000

7
Wealth estimates in practice

• Methods

8
What is wealth?

• Total wealth corresponds to the present value
  of future consumption
• Produced capital includes structures,
  equipment, machinery and urban land. It is
  obtained from historical investment data
• Natural capital is the present value of net
  rents from natural resources estimated using
  international prices and local costs
• Intangible capital includes human capital,
  quality of institutions and governance. It is
  estimated as a residual

9
Wealth estimation in four steps
10
(No Transcript)
11
Comprehensive wealth estimation methods

• Capital can be seen as
• The sum of additions (investment) and
  subtractions (depreciation) over time made to an
  initial stock
• The present value of future earnings over the
  capital stock
• Method 1 is useful for produced capital
• Method 2 is particularly appropriate to estimate
  natural capital, where
• Earnings Rents Price Marginal Cost

12
Wealth estimates in practice

• Results

13
Where is the wealth of Kenya?
2000 US per capita
14
Wealth estimates by region and income group,
2000 per capita
15
Result 1 Shares

• Intangible capital is the largest share of wealth
• Natural capital share declines with income
• In the poorest countries, natural capital is more
  important than produced capital

16
Result 2 land resources management is critical
in the poorest countries
17
Result 3 the value of natural capital per capita
rises with income
Development does not automatically lead to
depletion of environment
18
Genuine saving
Depretiation of fixed capital
Education expenditure
Nat Res depletion
Pollution damages
19
Saving and investment

• A core aspect of development it allows countries
  to escape low-level subsistence
• The true level of saving is obtained after
  accounting for
• Investment in human capital
• Depletion of natural resources
• Pollution damages

20
Genuine saving rates by region (1/2)
21
Genuine saving rates by region (2/2)
22
Links to SNA
23
SNA and WoN Differences

• Use of accounting identity between sum of assets
  and PV of consumption
• This identity is missing in SNA
• Assumptions CRS, efficient asset pricing
• Ref Hamilton and Hartwick, 2005
• Extension of the asset boundary of SNA to include
  intangible capital
• This provides a measure of our ignorance

24
Genuine saving and SNA

• Genuine saving builds on SNAs net saving by
• Re-classifying education expenditures
• Deduction of
• non-renewable natural resource depletion
• renewable natural resource net depletion
• Deduction of pollution damages
• CO2
• PM

25
SNA and WoN Comparison
26
Final remarks
27
Why measure wealth?

• A useful model Development as portfolio
  management
• What is the composition of the portfolio?
• How efficiently is each element of the portfolio
  being managed?

28
Elements of the portfolio

• Produced capital
• Natural resources (minerals, forests, land)
• Human capital
• Institutions / governance

29
Intangible capital how much do we know?
Factors explaining variation in intangible capital
30
Natural resources and development

• In the poorest countries, natural resources are a
  basis of subsistence
• Natural resources especially commercial ones
  are a source of development finance
• But, for growth to be sustainable rents should be
  invested in some other form of capital (Hartwick
  Rule)

31
The key to sustainability policy

• Relevant policy questions that follow the
  analysis of genuine saving
• Do macroeconomic policy foster high gross
  national saving rates?
• Is investment in human capital adequate?
• Do resource sector policies encourage efficient
  natural resource extraction and harvest?
• Is there adequate rent capture?
• Does environmental policy approach efficient
  levels?