S ON saJuS sqdeiouo°W pue sa!pnis jutudolaAa alqeuimtsns AjjejuuoJ!Au0Jl 1bbI 1~'~C1 O\,LS qw- auplbiwaS l/VWSr XP9I I0 UO UPe U! sdalS jSuj sosustN JO 4}1fB@A @LP re k4!llqeupelsnS Environmentally Sustainable Development Publications ESD Proceedings Series 1 Culture and Developmenet in Africa: Proceedings of an Internationial Conference (Also in French) 2 Valuin1g the Environment: Proceedings of the First Ann1ual International Conference on1 Environmentally Sustainiable Development 3 Overcoming Global Hun1ger: Proceedinigs of a Conference on1 Actionis to Reduce Hunger Worldwide 4 Traditional Knowledge and Sustainable Devclopmnenit: Proceedings of a Conference 5 The Humani Face of the Urban Environment: A Report to the Development Communlity 6 The Human Face of the Urban Environment: Proceedings of the Second Annual World Bank Conference on Environmentally Sustainable Development 7 The Business of Sustainable Cities: Public-Private Partner.ships for Creative Technical and Institutional Solutions 8 Enabling Sustainable Community Development 9 Sustainable Financing Mechanisms for Coral Reef Coniservationi: Proceedings of a Workshop 10 Financing Environmentally Sustainable Development: Proceedings of the Third Annual World Bank Conference 11 Servicing Innovative Financing of Environmnentally Sustainable Development ESD Studies and Monographs Series (formerly Occasional Paper Series) 1 The Contribution of People's Participation: Evidencefrom 121 Rural Water Supply Projects 2 Making Development Sustainable: From Concepts to Action 3 Sociology, Anthropology, and Development: An Annotated Bibliography of World Bank Publications 1975-1993 4 The World Bank's Strategy for Reducing Poverty and Hunger: A Report to the Development Community 5 Sustainability and the Wealth of Nations: First Steps in an Ongoing Journey 6 Social Organization and Development Anthropology: The 1995 Malinowski Award Lecture 7 Confronting Crisis: A Summary of Household Responses to Poverty and Vulnerability in Four Poor Urban Communitites (Also in Spanish, forthcoming in French) Related ESD Publications Monitoring Environmental Progress: A Report on Work in Progress Nurturing Development: Aid and Cooperation in Today's Changing World Toward Sustainiable Management of Water Resources Water Supply, Sanitation, and Environmental Sustainability: The Financing Challenge The World Bank Participation Sourcebook Sustainability and the Wealth of Nations First Steps in an Ongoing Journey R ::g:'," Xggi '.:tiM :.:0U'::'§: :gg l,::,§g :S B § '§, S R §' S. Ki. .... ... .. ... ...:..........X,. . ........'....... Ismail Serageldin L \ Environmentally Sustainable Development Studies and Monographs Series No. 5 ESD The World Bank, Washington, D.C. (D 1996 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing July 1996 This report has been prepared by the staff of the World Bank. The judgments expressed do not necessarily reflect the views of the Board of Executive Directors or the governments they represent. Ismail Serageldin is vice president for Environmentally Sustainable Development at the World Bank. Library of Congress Cataloging-in-Publication Data Serageldin, Ismail, 1944- Sustainability and the wealth of nations: first steps in an ongoing journey / Ismail Serageldin. p. cm. - (Environmentally sustainable development studies and monographs series; no. 5) "Draft paper ... distributed at the World Bank's Third Annual International Conference on Environmentally Sustainable Development. "-Pref. Includes bibliographical references. ISBN 0-8213-3551-0 1. Sustainable development. 2. Wealth. I. World Bank. II. International Conference on Environmentally Sustainable Development (3rd: 1995: World Bank) III. Title. IV. Series. HC79.E5S423 1996 333.7-dc2O 95-51679 CIP Contents Preface v Introduction 1 On Defining Sustainability 2 A Triangular Framework 2 Sustainability as Opportunity 3 Four Kinds of Capital 4 Defining Levels of Sustainability 7 Levels of Sustainability 8 Application of the Concept: Measurement and Valuation Issues 8 Application of the Concept: Interaction Issues 10 Adjusting National Accounts 11 Shortcut Methods 12 First Results: Sustainability and the Wealth of Nations 15 Next Steps in an Ongoing Journey 16 Appendix: Background Data 18 Notes 19 iii iv Sustainability and the Wealth of Nations Tables 1. Monetary and nonmonetary valuation of natural capital 10 A.1. Composition of wealth, by region 18 Figures 1. ESD triangle 2 2. ESD triangle from an economic viewpoint 3 3. Sustainability as increasing per capita capital stock (four kinds of capital) 3 4. Valuation of environmental assets 9 5. Interaction between economic activity and the environment 11 6. Adjusting national accoLMts 12 7. Shrinking investment? Estimated impacts of adjustment for depreciation of human-made and natural capital in Mexico, 1985 12 8. Greening national accounts show little variation on per capita income variants, Latin America and the Caribbean, 1962-92 13 9. Similar adjustments on savings and investment, Latin America and the Caribbean, 1967-91 13 10. Composition of world wealth, by income group 15 11. Masked variations in genuine saving, Latin America and the Caribbean, 1967-91 16 12. Regional patterns of genuine saving, 1962-91 16 Preface his monograph presents current thinking at on Environmentally Sustainable Development in T the World Bank concerning sustainability October 1995 as a more accessible and focused and the wealth of nations. It references statement of the key ideas and findings in work appearing in the World Bank's Monitoring Monitoring Environmental Progress and "Global Environmental Progress: A Report on Work in Approach to Environmental Analyses." Finally, Progress, published in the fall of 1995, and in this monograph benefited from the inputs of John related technical papers, including "Global Dixon, John O'Connor, and Jan Bakkes. My Approach to Environmental Analyses." Thus pro- thanks to them and to Andrew Steer. Any short- found gratitude is due to the authors of that body comings are purely my own. of work, namely John O'Connor, Kirk Hamilton, Claudia Sadoff, David Cassells, Andrew Bond, Christiaan Grootaert, and John Kellenberg, under Ismail Serageldin the general direction of Andrew Steer and myself. Vice President An earlier draft of this monograph was distrib- Environmentally Sustainable Development uted at the Third Annual World Bank Conference The World Bank v I Sustainability and the Wealth of Nations .MTAl,wR'' . ; .C.::- ''' : .':',;,..:.K , ; ,,:: . 2 . : 9 , *; MS $ .- ': . .;. The following thoughts are advanced as reflec- and households. Because these "lower" levels tions about the kind of conceptual framework make so many of the key decisions, it seems par- that could unite the ongoing efforts of many peo- ticularly important to devise analytical tools that ple at the World Bank and elsewhere' to make the may promote dialogue among these different lev- concept of sustainability more operational.2 els of decisionmakers. However, I am keenly aware that many nonexperts on all levels feel that Introduction the discussion of indicators is beyond their grasp or, worse, irrelevant to their decisions. This paper The material presented here draws on many is designed for that audience. It is a personal, non- works. These are partly driven by some concep- technical account of how I see the pieces of the tual ideas sketched out by myself, Andrew Steer, puzzle coming together and of which pieces I and others, especially where the idea of sustain- think are still missing. ability as opportunity is concerned.3 On the To anticipate the nagging problem that more technical matters pertaining to indicators, thoughtful readers may have: clearly many of measurement, valuation, and the estimates of the questions raised in trying to estimate the wealth of nations, the material draws heav- national wealth will not be answered in the near ily on work in progress published by the World future. Some, such as trying to quantify social Bank in Monitoring Environmental Progress: A capital, seem inherently difficult to accept.6 Report on Work in Progress, a publication con- Many of the questions raise important concep- ceived by Andrew Steer and realized under his tual, methodological, and measurement issues direction. A team led by John O'Connor pre- and appear to imply incursions into the realm of pared the first edition, which was released as value judgments. part of the 1995 Third Annual World Bank To these concerns I would point out that Conference on Environmentally Sustainable human capital is now in the mainstream, based on Development.4 In turn, this document is only a generation of intellectual investment.7 We still part of a broader initiative by international agen- do not know the exchange rate of human and cies, academics, businesses, and nongovern- man-made capital,8 but we do not find it an mental organizations to improve indicators of impossible obstacle to argue that governments environmentally sustainable development.5 should increase their investments in education, I see exciting opportunities in this field for for example, as opposed to adding man-made decisionmaking not only at national and intema- infrastructure. Likewise, the imperfections of tional levels but also in communities, businesses, measurement should not prevent us from mak- 1 2 Sustainability and the Wealth of Nations ing a series of partial steps that improve our environmental, and social sustainability of a approximation of reality in our analyses. For specific proposal; and second, a more ambitious example, in trying to assess the contribution of effort at tackling the concept of sustainability. public administration to the national income, we The first approach, frequently referred to as the have set it, by convention, as equal to the cost of triangle, is well in place at the World Bank and is its inputs (for example, the wage bill). If we did increasingly recognized as valuable within and not recognize its limitations, this accounting outside the World Bank." It has been well pre- agreement would lead us to the absurd conclu- sented in our booklet, Making Development sions that we could double the product and the Sustainable: From Concepts to Action.12 productivity of workers without investing in The second approach, still being developed training or equipment simply by doubling their at this time, is the one this essay tries to eluci- wages. Nobody makes such arguments, and the date. I would refer to it as "sustainability as limitations do not prevent us from using the opportunity" or, in the more conventional lan- approximation in our national income accounts. guage of the economics profession, "expanding This is very much the logic behind these the capital stock." This was the title under which reflections, which should help us move in the it was prefigured in the epilogue to Concepts to direction of defining sustainability more rigor- Action. It has also been presented elsewhere.13 It ously and of gradually taking it more into is just starting to take shape through work account in every aspect of public policy without launched in a more collaborative international asking that we necessarily have impeccable fashion, work in which we have joined with answers to everything before we take the first many other concerned institutions in seeking to step. So please accept this willingness to pro- lay the groundwork for a meaningful, interna- ceed with imperfect answers to important ques- tionally agreed framework to deal with sustain- tions to see if the results are still likely to be ability questions. A word about each of those informative. two approaches is pertinent here. On Defining Sustainability A Triangular Framework There have been many definitions of sustainable As a first step we at the World Bank defined the development,9 but the generally accepted defin- idea of environmentally sustainable develop- ition of sustainability is that given by the ment (ESD) by a triangular framework. We Brundtland Commission: require any technical proposal that we will fund to be sustainable in economic, environmental, and Sustainable development is development social terms. This idea finds its expression in a tri- that meets the needs of the present without angle, which not by coincidence is also the logo compromising the ability of future genera- for the ESD vice presidency (figure 1). tions to meet their own needs.'0 Figure 1. ESD triangle This definition is philosophically attractive Economic but raises difficult operational questions. The * Sustainable growth Capital efficiency meaning of needs is fairly clear for the poor and * the starving, but what does it mean for a family that already has two cars, three televisions, and two VCRs? Yet it is precisely the second type of family that will consume more than 80 percent Social Ecological of the world's income this year. Equity S 4 ** Ecosystem integrity *Social mobility *Natural resources To develop an operational definition, the acrticipation Biodiversitv World Bank has approached it in two steps: first, * Empowerment * Carrying capacity an immediate approach that enabled us to set in Source: Ismail Serageldin and Andrew Steer, eds., Making Development Sustainable: From Concepts to Action (Washington, D.C.: World Bank, place a systematic way of testing the economic, 1994), 2. First Steps in an Ongoing Journey 3 A proposal has to be economically and finan- still poses problems. On the link between the eco- cially sustainable in terms of growth, capital nomic and social objectives lie some of the most maintenance, and efficient use of resources and controversial parts of current economic policy: investments. But it also has to be ecologically targeted interventions, income distribution, sustainable, and here we mean ecosystem employment generation, and subsidies. On the integrity, carrying capacity, and conservation of economic and ecological link lies some of the natural resources, including biodiversity. most recent, cutting-edge work being done on Ecological sustainability is the domain of the environmental assessment, valuation of natural biologist and the physical scientist. The units of resources, internalization of externalities, time measurement are different, the constructs are and discount rates, uncertainty and risk, and different, and the context and time scale are dif- national income accounts. ferent. However, equally important is the social Of the many aspects of economic measure- side, and here we mean equity, social mobility, ment that we are struggling with, I must empha- social cohesion, participation, empowerment, size national income accounts because they have cultural identity, and institutional develop- been at the center of many international discus- ment. The social dimension is the domain of the sions, with the World Bank actively exploring sociologist, the anthropologist, and the political ways of improving them. They are important, scientist. It is, to my mind, an essential part of but they are only one measurement of reality- the definition of sustainability, because the and a fairly faulty one. As they now stand, neglect of the social dimension leads to institu- national income accounts give no value to a for- tions that are incapable of responding to the est as an existing asset. If cut down, that forest needs of society. We see the consequences of should show up as a reduction in assets. that in tragedies from Rwanda to Somalia and Perversely, however, only if it does get cut down from Bosnia to Liberia. does it contribute to national income accounts- The World Bank is best known as an economic and positively at that! But we at the World Bank, institution; therefore, many of our staff bring an with colleagues elsewhere, have made a signifi- economic outlook to noneconomic issues (figure cant effort to try to introduce environmentally 2). Here it is important to highlight the limita- adjusted national income accounts.4 tions of such an approach and to give the noneco- nomic disciplines their due. If we look at the same Sustainability as Opportunity triangle, now with the eyes of the economist, we would reduce the economic objective to growth This interim approach based on the triangular and efficiency, the ecological objective to natural framework is being superseded by a much more resource management, and the social objective to attractive concept: sustainability as opportunitv. reduction of poverty (in terms of some number of From this concept sustainability would be people below a poverty line) and equity (in terms defined in the following way: of income distribution). Such a reductionist view Sustainability is to leave future generations Figure 2. ESD triangle from an economic viewpoint as many opportunities as we ourselves have had, if not more. Economic objective Growth/efficiency * How does one measure opportunity? In eco- * Income distribution * Environmental nomic terms one could use the concept of capi- * Employment assessment * Targeted assistance * Valuation tal. In economics and fmance one does not Internalizatioi deplete one's capital and consider it an income Social objective Ecol gical objective stream. In fact, it goes to the heart of the defini- Social objective X * Ecological objective tinoicmegvnbNblLarteSrJh Poverty/equity * Participation Natural resources ton of income given by Nobel Laureate Sir John *Consultation Hicks (1946) when he defined income as "the * Pluralism maximum value a person can consume during a Source: Serageldin and Steer, Making Developm7nent Sustainable, 2. week, and still expect to be as well off at the end 4 Sustainability and the Wealth of Nations of the week as et the beginning." Income based Figure 3. Sustainabillty as Increasing per capita capital stock on depletion of capital is not sustainable and (four kinds of capital) should not be accepted as income. But capital and the growth of capital are the means to pro- vide future generations with as many opportu- nities as, if not more than, we have had, capita: provided that we define it as per capita capital. This takes into account the need to meet the needs of a growing population that is likely to add some 3-5 billion people before the global population stabilizes. In finance the concept of the inviolability of Source Autor's illustaton capital has been recognized by the use of capital and current accounts and by special provisions the four kinds of capital is driven to zero. Let us for computing and factoring in depreciation in therefore look more closely at the four kinds of the operations of a firm. Methods vary, but well- capital. established conventions exist for dealing with these issues. Sound accounting practices require Four Kinds of Capital that we recognize and identify the methods used for calculating depreciation in presenting the We recognize that there are at least four kinds of financial statements of an enterprise. capital: man-made (the one usually considered in If sustainable development is about leaving financial and economic accounts), natural capital future generations more capital per capita than (as discussed in many works of environmental we have had, then the rate of genuine saving (a economics),'6 human capital (investments in edu- term that we will define more accurately later cation, health, and nutrition of individuals), and on) becomes a good measure of whether our aggre- social capital (the institutional and cultural basis gate activities are on a sustainable path. for a society to function). Because man-made cap- To get to the heart of the concept of sustain- ital has received a vast amount of study, let us ability, we must expand these understandings to give a brief word about the three other kinds. include more than man-made capital as conven- tionally defined and accepted in the economic Natural Capital literature, to include other forms of capital that are every bit as important to our individual and Natural capital is basically our natural endow- collective well-being.15 So let us first define the ment and is defined as the stock of environmen- different kinds of capital that must be taken into tally provided assets (such as soil, atmosphere, account for an intellectually satisfying view of forests, water, wetlands) that provide a flow of sustainability that also holds the promise of useful goods or services. The flow of useful operationability in the near future. goods and services from natural capital can be Sustainability as opportunity therefore trans- renewable or nonrenewable and marketed or lates into providing future generations with as nonmarketed. Sustainability means maintaining much capital per capita than we ourselves have environmental assets, or at least not depleting had, if not more. But here we are speaking of them beyond some limits (as is discussed below). four kinds of capital that are partially substitutes Any consumption that is based on the depletion and partially complements (figure 3). We accept of natural capital should not be counted as that the composition of the capital we leave the income. It must be accounted for as a reduction next generation will be different (in terms of its of natural capital. Unfortunately, most economic four constituent parts) than the capital we have analysis today does not make such adjustments used in our generation. Yet we must recognize and tends to treat consumption of natural capital the limits of substitution, because it is impossi- as income. Unless such adjustments are intro- ble to conceive of any type of activity if any of duced, there is continuing risk that such analyses First Steps in an Ongoing Journey 5 could promote patterns of economic activity that of this output performance, even if it will are inherently unsustainable. undoubtedly remain very considerable. In other Natural capital is distinguished from other words the role of natural capital as a comple- forms of capital, namely human capital (people, ment to cultivated natural capital must be rec- their education, their health and capacity levels), ognized and factored into the decisions that social capital (institutions, cultural cohesion, affect future investments. collective information, knowledge), and man- In an era when natural capital was consid- made capital (houses, roads, factories, ships). ered infinite relative to the scale of human use, it Natural capital is used in combination with was reasonable not to deduct natural capital other types of capital in any production process. consumption from gross receipts in calculating Until fairly recently natural capital was sel- income. That era is past. The question now dom accounted for, and the focus was on man- becomes, how does one account for natural cap- made capital. Investments were made in the ital? The difficulties in applying the concept limiting factor, such as sawmills and fishing arise mainly from operational problems of mea- boats, because their natural capital comple- surement and valuation.18 These problems arise ments, forests and fish, were abundant.'7 Today, in both natural capital and cultivated natural loss of forest cover and fish populations is show- capital and their interactions. ing the folly of ignoring the importance of nat- Recent work to assess the sustainability of ural capital in the design of long-term strategies. farming systems, the cultivated natural capital Even more important is the lack of attention to par excellence, shows that the efforts at valua- the contribution of environmental assets to the tion must include both stock and flow analyses sink function, the ability of the ecosystem to to be meaningful and that the conclusions to be absorb and recycle human-produced wastes. reached will differ if both stock and flow are From the ozone layer to global warming to the taken into account than if just one or the other is nearby garbage dump, this is rapidly showing looked at alone. up as a limiting factor to the expanded use of Some steps toward a better conceptual frame- many technologies. work have been taken, as evidenced by the recent Now that economic expansion has made revision of the United Nations System of National such significant claims on the environment, we Accounts (SNA). For example, the system's find that the limiting factor for much economic national balance sheet now includes a value for development has often become natural capital forests and subsoil assets, but not for water, much (including the capacity of ecosystems to recycle less biodiversity. And a number of national and human waste) rather than man-made capital. international experts have conducted case stud- Fish, rather than fishing boats, have become lim- ies, including efforts supported by the World iting. As natural forests and fish populations Bank.19 But until Monitoring Environmental become limiting, we begin to invest in planta- Progress there has not been a comprehensive tion forests and fish ponds. This introduces a (albeit crude) attempt to see how important nat- hybrid category that combines natural and man- ural capital is internationally. Later in this mono- made capital, a category we may call cultivated graph we will go into the way the first estimates natural capital. of wealth in natural capital were compiled. Cultivated natural capital is often a very worthwhile investment, but it does not entirely Human Capital avoid the problem of complementarity and the limiting role of natural capital. For example, In the past three decades very considerable agricultural expansion in the past half century progress has been made in recognizing the has been spectacular in terms of output, but we importance of human capital formation, mean- are only now beginning to recognize the extent ing that investment in people is now seen to be of the loss of some essential inputs of natural a very high-return investment, especially in capital, such as soil fertility, and should accord- developing countries. The mainstream para- ingly revise our estimate of the net contribution digm of development has been expanded to 6 Sustainability and the Wealth of Nations include investment in human resources as an imagine a functioning social order. The myriad essential ingredient of a development strategy. 20 institutions that we take for granted as the essen- Investments in health and education and tial premise of a functioning society must be nutrition are now increasingly recommended grounded in a common sense of belonging by parts of a national investment strategy.21 It is the members of that society. The institutions nevertheless still difficult methodologically to must reflect a sense of legitimacy in their medi- define the monetary value of such investments, ation of conflicts and competing claims. In short, even if ingenious proxies (such as the dis- if that social capital is not there the resulting fail- counted differential income stream) are used. ures make it impossible to talk of economic But even the most conservative measures of growth, environmental sustainability, or human such proxies lead to an overwhelming positive well-being. Examples are all too painfully pre- v alue to such investments. sent, from Somalia to Yugoslavia to Rwanda. Less clear are the links between such invest- But what constitutes this social capital? It is a nients and the shifting economic realities of an difficult question and a very different one from aging population profile in industrialized coun- investment in individual human capital. It is tries and the persistence of unemployment and based on inclusion, participation, and the pro- underemployment in many countries, both motion of an enabling environment. Yet it is industrialized and developing. The negative more. The most ambitious work to date on this and corrosive impacts of such phenomena on subject has been the efforts to deal empirically the social fabric and well-being of society as a with the link between good governance and whole, not just of individuals, is an area deserv- development. This requires efforts at definition ing mnore research and policy attention. The pol- and measurement, which face quite formidable icy prescriptions in World Bank studies on these methodological obstacles. But, happily, some topics mostly relate to economic management headway is being made. but increasingly recognize the importance of In a landmark study presented in Making .ocial cohesion when implementing measures to Democracy Work: Civic Traditions in Modern Italy, deal with these issues.22 Professor Robert D. Putnam of Harvard Uni- Attempting to include the value of human versity and colleagues have made a convincing resources in the measure of wealth is a bold case that the existence of civic community is not move. Until now the only effort we could find of only the precursor and guarantor of good gov- such an attempt is Norway's estimates of ernance but also the key to sustained socioeco- national wealth.23 The method used in Moni- nomic development.24 toring Environm12enital Progress, described below, is Strong civic community is defined as a pre- a variant on the Norwegian approach. Essen- ponderance of voluntary horizontal associations, tially, it defines the value of human resources as in contrast to hierarchiical vertical associations, .a Lesidual after allowing for the portion of the and the density of these voluntary horizontal country's (discounted) future income stream institutions throughout the society. A matrix of that is attributable to produced assets and nat- voluntary horizontal associations is found in ural capital. prosperous, rapidly developing northern Italy, while the less developed, less effective south of Soc'il Capital Italy is characterized by autocratic vertical institutions. Recognizing the importance of social cohesion But which is cause and which is effect? Does leads directly to social capital, the fourth form of the north of Italy have a dense network of hori- capital to be considered in this broad-based dis- zontal institutions (choral societies, soccer clubs, cussion of sustainability. Without a degree of parent-teacher associations) because it is rich common identification with the forms of gover- and can afford them? Or is it rich because it has nance and of cultural expression and social good, responsive government nurtured by long- behavior that make a society more than the sum standing citizen involvement in many such vol- of a collection of individuals, it is impossible to untary horizontal institutions? Putnam and his First Steps in an Ongoing Journey 7 colleagues went back to data from the nine- Juxtaposing a residual approach with teenth and the beginning of the twentieth cen- attempts at direct measurement of social capital turies, when the socioeconomic structures and should provide a useful cross-check on such a levels of development were similar in some tricky area of research. This process could also northern provinces and some southern suggest forms of social capital that exist outside provinces but the horizontal and vertical slants the usual income measures, in much the same of their civic associations were differentiated. way as a pristine forest is invisible to conven- They tested the hypotheses to explain the tional national income accountants. If so, one observed socioeconomic structures and civic would have to consider whether, and if so how, institutional structures of northern and southern one could include these supplemental "stocks" Italy in 1970, when the Italian government aban- of social capital in a national balance sheet, if only doned its 100-year-old centralized administra- to avoid the problem that has become apparent tion and created twenty identical regional with the commercialization of once-pristine governments, and to explain their disparate per- forests. They appear in the national accounts formance today, twenty years later. only when they are destroyed and then as a pos- The results of their research are indicative of itive value in some other category like furniture! a solid causal link between civic traditions and the effectiveness of government structures to Defining Levels of Sustainability promote sustained socioeconomic develop- ment. Prof. Putnam has since expanded his work Going back to the original premise of this paper, from the empirical work on Italy to broader it becomes possible to define sustainability in aspects of social capital as an essential ingredi- terms of the combination of these four kinds of ent for the social cohesion and effective, legiti- capital per capita that we leave to future gener- mate institutions that make an economy ations. We are able to set aside a foolish yet still function.25 It seems clear that a strong, dense, prevalent view among some groups that sus- horizontally structured civil society of voluntary tainability requires leaving to the next genera- associations is very likely to promote good gov- tion exactly the same amount and composition ernance and to nurture sustained socioeconomic of natural capital as we found ourselves, by performance. But is that an adequate measure of substituting a more promising concept of giv- social capital? That is not clear. There are several ing them the same, if not more, opportunities efforts to deal with this issue, notably by Rose,26 than we found ourselves. This means that the Klitgaard,27 and others.28 The questions remain, stock of capital that we leave them, defined to however, about how to define and value that include all four forms of capital, should be the capital, showing convincingly the process of same if not larger than what we ourselves accumulation and depletion, and how to mea- found. This immediately opens the door for sure both its investment level and its returns. substituting one form of capital for another.29 This area of research has just started. Arguably, it is indeed most worthwhile to Wealth estimates suggest one more approach reduce some natural capital (for example, to measuring social capital. Rather than taking reducing the amount of oil in the ground) to human capital as a residual, this form of wealth invest in increasing human capital (for exam- could perhaps be approximated by considering ple, by educating girls). The question then the main items that add to the value of the indi- becomes to what degree we can: vidual, notably education, health, and nutrition. * Measure each kind of capital If so, the same residual logic that was applied in * Define the production function in terms of Monitoring Environnmental Progress to measure degrees of substitutability and complemen- human resources could be applied to social capi- tarity between different kinds of capital and tal. Thus social capital would be measured by how these may change in a dynamic context deducting the value of produced assets, natural * Define an exchange rate for the different capital, and human resources from the discounted kinds of capital, accepting that it too may future income stream of today's population. well be dynamic 8 Sustainability and the Wealth of Nations * Define sustainability in terms of a context of type of capital, beyond which concerns about thresholds within which the more efficient substitutability could arise. Such critical levels (highest return) activities could be selected should be monitored to ensure that the patterns in such a way that individual investments of development do not promote a depletion of and entire strategies could be meaningfully one kind of capital, no matter what is being evaluated. accumulated in the other forms of capital. This Such a definition may ultimately be compre- still assumes that man-made and natural capital hensive and rigorous, but it will require an enor- are to a large extent substitutable, while recog- mous amount of work to achieve. A good way nizing that they are complementary too. The full to think about proceeding is by short steps. We functioning of the system requires at least a mix have already made great strides in incorporating of the different kinds of capital. Because we do human capital in conventional economic analy- not know exactly where the boundaries of these sis, and we are starting to incorporate various critical limits lie for each type of capital, it aspects of natural capital. That is an area in behooves the sensible person to err on the side which we should invest our efforts now, signifi- of caution in depleting resources (especially nat- cantly improving our understanding of the ural capital). interlinkages between these three kinds of capi- Strong sustainability requires maintaining the tal. Social capital will take longer to elaborate, different kinds of capital separately intact. Thus and in the meantime it can be left to the political for natural capital receipts from depleting oil processes in each country to arbitrate. should be invested in sustainable energy pro- This brings us to the definition of sustain- duction rather than in any asset. This assumes ability in terms of the maintenance or increase of that in most production functions natural and these four types of capital, separately and col- man-made capital are not really substitutes but lectively, and their relationship to the expanding complements. A saw-mill (man-made capital) is population (given that the world's population is worthless without the complementary natural increasing), while producing an income stream capital of a forest. The same logic would argue per individual that is at least the same, if not that if there are to be reductions in one kind of growing. educational investments, they should be offset by other kinds of education and not by invest- Levels of Sustainability ments in roads. Those who would demand that strong sus- Sustainability has several levels-weak, sensi- tainability never deplete anything are pushing ble, and strong-depending on how strictly we the idea to an absurd level. For nonrenewable elect to hew to the concept of maintenance or resources-absurdly-there could be no use at nondeclining capital.30 all; for renewables, only net annual growth rates Weak sustainability is maintaining total capi- could be harvested in the form of the over- tal intact without regard to its composition (nat- mature portion of the stock. ural, man-made, social, or human). This would imply that the different kinds of capital are sub- Application of the Concept: stitutes, at least within the boundaries of cur- Measurement and Valuation Issues rent levels of economic activity and resource endowment. To apply these concepts, we faced formidable Sensible sustainability requires that in addition issues of measurement of the physical reality to maintaining the total level of capital intact, and of the valuation of that physical reality, as some concern should be given to the composi- well as of the valuation of the human capital, not tion of that capital between natural, man-made, to mention social capital. Pragmatism and a human, and social. Thus oil may be depleted as determination to make better use of what is long as the receipts are invested in other capital already available were able to take us a long way. (for example, human capital). In addition, efforts Focusing primarily on the environmental side should be made to define critical levels of each (natural capital), we could identify two separate First Steps in an Ongoing Journey 9 problems: physical measurement and indicators required to come to grips with the complexity of and valuation. interactions among ecological, social, and eco- nomic processes. Much of the most relevant Physical Indicators information is location-specific. Despite major advances in geographic information systems, As a user of indicators, the World Bank's posi- this still raises issues of aggregation and tion is that more can and should be done with avail- "ground-truthing." able information despite obvious imperfections and caveats. Much of what we have done in this Valuation area has been reported in Monitoring Environ- mental Progress.31 Assuming that we have resolved all the ques- Nevertheless, there is an obvious lack of tions of what and how to measure the physical international agreement on a single framework realities of our world, translating that into nat- or specific definitions, and methodological ural capital requires valuation. Valuation, how- issues remain. Three areas for improved com- ever, is a very complicated exercise (figure 4). It munications emerge. There are questions about requires the estimation not only of the direct definitions (for example, what constitutes a for- benefits to humans (for example, productivity est, how to combine details about open forests benefits of good soils and health benefits of clean and plantations, and so on). There are issues of water) but also of the indirect benefits (for exam- methodology (for example, how to blend remote ple, watershed protection provided by wood- sensing and ground surveys of forests, sampling lands). Further, some natural assets, such as techniques, and so on). And there are practical biological diversity, have "option" values that considerations about the creation and main- we are not even aware of (for example, provid- tenance of the massive databases that will be ing new medicines in the future) and that are Figure 4. Valuation of environmental assets Total econoimic value - -: 1. - ..... . - - I: -- -.:.-.-.,.'- : . Use values - Nonuse values - Direct use values Indirect use values Option values - Existence values Other nonuse values [ ----------- (r------------ Output that can be Functional Future direct . Value from knowledge of consumed directly benefits and indirect - continued existence, based : . - . - use values - on, for example, moral -* - - . - . - . . | - -conviction I .~~~~~~~~~~~~~~~~~...... * Food - * Ecological * Biodiversity * Habitats ..... * Biomass - functions - * Conserved ::: . - * Endangered ... * Recreation . * Flood control habitats species * Health * Storm protection .... . - Decreasing "tangibility" of value to individuals Source: Serageldin and Steer, Making Development Sustainable, 3. 10 Sustainiability and the Wealtl of Nations particularly difficult to estimate. Finally, most of monetary indicator, so too a monetary indicator us believe that the natural world has an intrinsic would give no value to biodiversity that has no worth above and beyond its value to human commercial market price. The estimates there- beings; here the best we can do is estimate fore should be viewed as complements rather human perceptions of that value. than alternatives. A number of techniques including contin- gent valuation, replacement cost estimation, and Application of the Concept: the use of surrogate markets have been devel- Interaction Issues oped for estimating the value of nonmarketed environmental services. The World Bank has sig- Our knowledge about the relationship between nificantly strengthened its capacity to assist human activity and ecological process is still developing country policymakers in using these fragmentary. In addition, such relationships techniques. But much remains to be learned, in may be discontinuous; when under stress an terms of both methodologies and their empirical ecosystem may "crash" irreversibly in a manner application. and at a time that could not be predicted. This In addition, there are problems with valua- seriously complicates decisionmaking and tion to the extent that it puts a monetary value on makes conventional approaches to risk manage- a number of things that are fixed (for example, ment (assigning probabilities to possible out- land) and cannot be traded equally across the comes and adding an insurance premium to globe. This would imply a weighting of the capi- project costs) difficult to implement. However, tal assets of the markets of the rich against those the high degree of uncertainty is no reason for of the poor. In fact, this is true to the extent that inaction. The dynamics of poverty, demography, it captures one side of the reality we live in, the and economics often make the costs of inaction monetized world of transactions and exchanges. even higher than those resulting from action. Others have focused on the purely physical But uncertainty does demand rigorous environ- accounting of natural assets, relying on a partic- mental assessments, drawing on the best scien- ular set of criteria.32 It is instructive to compare tific knowledge available and including careful the results of the two approaches (table 1). sensitivity analysis. A key challenge will be to Even such crude estimates indicate that mea- narrow the range of uncertainty and to make the suring natural capital is a two-sided proposi- precautionary principle operationally useful. tion. The monetary value of comparable land in The links between economic growth and the developing and advanced countries must reflect environment are complex, and the World Bank the vast differences in per capita income, while is making efforts to understand and untangle the nonmonetary value must reflect the far these connections. Rather than assuming a greater importance of developing countries as black box that hides the connections between homes for biodiversity. And just as a monetary economic changes and environmental out- indicator must give value to things, notably sub- comes, policymakers must explicitly identify soil assets, that are given no weight in a non- connections between economic policy and the Table I. Monetary and nonmonetary valuation environment. This knowledge can create more of natural capital favorable environmental outcomes as well as (Percentage of global shore) permit rational assessment of the remaining tradeoffs between growth and environmentally Region Monetary Nonmonetory sound objectives. Sub-Saharan Africa 3.4 12.6 Some of these links are illustrated in figure 5. China and India 1.0 7.8 Rest of Asia 1.9 21.0 Environmental impacts are determined by the Latin Amenca and the Caribbean 8.7 28.6 scale and structure of the economy, as well as by Middle East and North Africa 1.4 3.5 the technology and efficiency with which Eastern Europe 7.0 13.8 High-income economies 67.8 21.5 resources are used. Some of the feedback loops Source: World Bank, Monitorng Enwironmentol Progress A Report on Work n Progress are positive; for example, increasing efficiency (Washington, D.C.: World Bank. 1995),23. in resource use both conserves natural First Steps in an Ongoing lourney 11 Figure 5. Interaction between economic activity and the environment Rising incomes increase willingness and ability to invest in environmental ~~~~~protection cao o Output structure changes / ~~ ~~as Efficiency promotes / ~~~income grows technological advances Scale of economy Output structure Input-output Environmental Enironmental (populaon xrncoeX of the h x impact per ...... per capita) economy industry unit of input Pollution control raises Incrased costs and reduces growth efficiency causes higher growth Environmental damage / -~ undermines long-term growth Source: Serageldin and Steer, Making Development Sustainable, 21. resources and produces fewer negative envi- to develop a new system of environmentally ronmental impacts per unit of output. Other adjusted national accounts. There are difficult links are negative, such as the growth-reducing technical issues yet to be resolved, but good impacts of major pollution control expendi- progress has been made in developing a system tures. The figure also illustrates the numerous of integrated environmental and economic points at which policy interventions can reduce accounts.33 The schematic structure of the links environmental impacts. This type of under- between the two sets of accounts is explained in standing is essential for a sensible evaluation of figure 6. There are several steps in the process. whether what is being done is the most appro- First we start with physical accounts, which are priate option possible. nonmonetary accounts measuring resource depletion and environmental effects. Then we Adjusting National Accounts compute the nonmonetary impacts. These are estimated impacts on nonmonetary indicators Valuation techniques are usually employed to for health, agricultural production, global inform decisions at the project and sectoral lev- warming, and ozone depletion. Then we pro- els, but they also need to influence decisions and ceed to monetary valuation, the environmental how we measure progress at the national level. impacts measured in monetary terms through Conventional national accounts may serve evaluation techniques. macroeconomists and central bankers well, but Application of such techniques in certain case they do a poor job of measuring sustainable studies has already raised substantial questions income or changes in a nation's productive about the economic performance underlying the capacity. That includes estimates of depreciation economic measures being used, for example, in of man-made capital but not that of natural cap- the case of domestic saving and investment in ital, which in some countries is more important. Mexico in 1985 (figure 7). All this is consonant For example, when a tropical forest is logged, no with the work of others who have been address- estimate is made for the loss of an irreplaceable ing these questions, notably Robert Repetto of the asset. When land cultivation increases the loss of World Resources Institute. More recent work topsoil, which subsequently accumulates in a reported on in Monitoring Environmental Progress reservoir, no allowance is made for the harmful confirms that this is not an isolated case and that effects on soil and water storage. the "greening" of national accounts is an impor- To address some of these deficiencies, the tant step that needs to be taken not only for the World Bank has been collaborating with the impact it has on the income measures but also for United Nations Statistical Office and with others the policy signals that it sends concerning saving 12 Sustainability and the Wealth of Nations Figure 6. Adjusting national accounts Environmental accounts .... . , --:-:-:::::-: - -. .... : :: ........... IisyScM 1c~~~~~~~uIvi Conventional Q0-0-0;g gg-:;:}ltona :! : re tary pwduc$i$ty 000 i i i Resource li :: Resource : i Resource j accounts ... deple..on [....lo depletion :X ': ... . .. ...... . . ... ; : . . - . - -; . . . W oEnvironmental . .. Environmental . . | Environmental | .. : degradabon - -| degradation : . degradation ; ~~~~~~~~~~~~~~~~~~~~~~~.. . _...5::: .- :.. -::::-....... ,..... . ...._ Dose-response Economnic n lfuncton valuaton oEDP = NDP minus resource depletion a s EDP2 = EDPl minus environmental degradationeton Source: Serageldin and Steer, Making Developmnent Sulstainable, 19. Figure 7. Shrinking investment? Estimated impacts and investment, which are discussed in greater o.f adjustment for depreciation of man-made detail below (figures 8 and 9).3M and natural capital in Mexico, 1985 (Percenitage of GDP) ShortcutMethods 25 r r GWSS (IOOS1CSi5O Th~~~~~~~~Do e- feapo siblt fte Econ-ceto m asrn 20 i: i :: 102 1 tE ! ; W: i : t :: : wealth and approaching sustainability through I ; [NPllZtrniat*n;t':' -;EE ' E :C0 : E: i EE' ;; i Bank. Using published data, the World Bank has 15 ,:l e ,7 X:X;!:tEi:::tfE-::::0lW.::;E. , :: f i actually calculated wealth (comprising man- 192nctoun trie,lrfle tingtestutonn prx l:: : - : : t J: : - - - .. .. . . ..... -.-.-... imately_:: 1990.0:tes:: For:tE::t: 90;: of; :-: :.:i. i 1 12 reflectm these cou ntrie the World 1E'!:!;EE_iV:"U ,X::000 | Bank has calculated genuine saving using time 0 resul~~~~~~~~~~~~~~1ad d ts wer .pesete at... the Aprl.195meein 10-0000011_gLlE1 ;.-i.-i.-i.-.i.-:.- .......... ......... .. ..... ...... :E. .-: : . i S:. V. 0 : ... .. ..ie daacvrn.wnt rmrer. ..... 1:: ~ ~ ~ ~ ~ ~ ~ .... ....: ::::-:::::: ....... .: .-:E::E- E .. ..................:'- .. : ... .:: ........ .- ... .... .. !::::::: :::.:: ..- :::.I 51fro . . . . .inttaide- naxrf : ..- :!;:: , -!:-:SaitS.. W .... ment. The methodological issues confronted were addressed in the 1995 published report a. This is not itended as an accurate representaon of the change in Monitoring Environmental Progress. the nation'a productive capacity, because it excludes important components of human capital accumulation and technological change. Source: Serageldin and Steer, Making Development Sustainable, 20, taken How Each Type of Capital Was Calculated from Jan van Tongeren and others, "sitegrating Environmental Accounting: A Case Study for Mexico," in Toward Improved Accounting for the Environment, ed. Emnst Lut, A United Naions Statistcal The calculations done by the World Bank and Of fice-World Bank Symposium (Washington, D.C.: World Bank, 1993), reotdi MntrngEvomnalP ges 22-24.reotdi MoioigEvrn etlPo es First Steps in an Ongoing Journey 13 Figure 8. Greening national accounts show little variation Figure 9. Similar adjustments on saving and inmestment, on per capita income variants, Latin America Latin America and the Caribbean, 1967-91 and the Caribbean, 1962-92 (Percentage of GDP) (Income per capita, US dollars) 25 Net foreign 3,000 borrowing Gross 20 - 2,500 / - - - - 15 Depreciaon i Xn . u 2,000 _/ ~~ GNp,svn 1,500 ,' '-- 1,000 -' ~~~~~~~~~~~~~~~~5 : 'Asset '., 0 GNPpc ~~~~~~~~~~Genuine 500 NNPpc -5savI NNP'pc Ne 0 'o b ;0 R, f5 - lo Note: Gross domestic saving = (gross domestc investment) - (net N N N N foreign borrowing). Net domestic saving = (gross domestic saving) - Note: GNPpc is gross national product per capita; NNPpc and NNP'pc (depreciation of produced assets). Genuine saving = (net domestic Nore: GnPpeistgross national product per capita;.NNPpc and NNPpc saving) - (value of asset sales + damage from carbon dioxide are net national product per capita. Source: Adapted by Arundhati Kunte and Jan Bakkes from World emissions). Bank, Monitoring Environmental Progress, 53-56. Source: World Bank, Monitonng Enzironmental Progress, 55. were by necessity approximations and estimates estate is worth more than an acre on the based on available data. The exercise demon- fringes of Bamako, Mali. A rough statistical strated that even without investing in generat- analysis suggested that the following are ing new data and even accepting the limitations acceptable orders of magnitude: of only partial valuation of only some of the Cropland 2.00 times per capita income per hectare assets, the results are quite striking and worth Forest 1.75 times per capita income per hectare reporting and pondering. Pasture 0.75 times per capita income per hectare We calculated the value of the three kinds of Other 0.25 times per capita income per hectare capital as follows: In addition, we made adjustments that 1. Produced assets (man-made capital) were val- reflected the quality of land. Thus extremely ued on the basis of a perpetual inventory arid (desert) land was set to zero, and pro- model, which is based on the World Bank's tected land and prime land (high soil fertility total factor productivity studies. The defla- and irrigated) were given a premium of 0.50 tor used was the U.S. gross fixed capital times per capita income per hectare. These deflator. adjustments were the closest we came to 2. Natural capital was based on calculating four introducing a value for biodiversity or scenic types of assets: land, water, forest, and sub- beauty, assuming that the protected category soil assets. would be a proxy for that. Note that shifts in Land was classified into four basic types: land uses would be captured by the changes cropland, forest, pasture, and other. Because in the quantities of the various types of land. the value of land depends on the local mar- In addition, as countries grow richer, the ket and because that market is related to the value of the land also increases.35 prevailing level of income in that country, Water was valued at lo per cubic meter of we estimated the value of land as a multiple fresh water available for human use. Given of the prevailing per capita net national the ratios of use now and those likely to pre- product (net national income adjusted for vail in the next few years, this is probably on extraction of timber and soil assets). This rec- the high side, but it was deemed an accept- ognizes that an acre of downtown Tokyo real able first approximation for this estimate. 14 Sustainability and the Wealth of Nations Forest, in addition to being reflected in the * The broader issues of prices and valuation. No sin- value of the land, was given an additional gle valuation scheme has much analytical value for the standing stock of timber set at content. A solution may lie in the economists' 50 percent of the prevailing international debate about how to convert local currency market price.36 gross national products (GNPs) to a common Subsoil assets, meaning stocks of fossil fuels unit of account. One school holds that and minerals, were valued at 50 percent of exchange rates are adequate, subject to some the prevailing international market prices for smoothing over time (intertemporally). The fossil fuels; minerals values were as reported other maintains that we need detailed inter- by the World Resources Institute. national price comparisons, called purchas- These values were then totaled to estimate ing power parities, or a smoothing over the value of natural capital for each of the 192 countries (interspatially). Both rest on the nations. proposition that the same thing would have 3. Human resources were valued as the potential the same price everywhere (apart from trans- of the current population to continue gener- port and distribution costs) were it not for ating its present national income, other market imperfections. They differ in their things being equal.37 The calculation was views about which imperfections are most based on a green measure of net national prevalent in today's world. It is clear that if we income, discounted at 4 percent a year over had chosen purchasing power parity rather the remaining life expectancy of the popula- than the exchange rate estimate, that would tion of the country. This sum was then have increased the wealth of the developing reduced for the parts that were already countries and reduced the gap between the accounted for by produced assets or by nat- industrialized countries and the developing ural capital; the residual constitutes the esti- countries. However, that is not very relevant mated value of human resources.38 This to our present conclusions, which relate to the clearly does not reflect variations in the con- relative share of different kinds of capital tribution of the elderly Nor does it take into within a single country, not across countries. account the potential future shifts that could * Alternative monetary valuations. The use of come from changes in the underlying condi- current instead of constant prices raises ques- tions that enable the transformation of labor tions of the impact of inflation on the value of into output (through changes in technology different kinds of wealth. First, we have to or policy or through changes in the social bear in mind that current prices are a special capital). It also does not factor in possible case of monetization, which in turn is a spe- changes in equity, social obstacles to the par- cial case of valuation. Given that point of ticipation of women, or any of a range of departure, the initial shortcut methods used other important issues. Nevertheless, since it need to be carefully reviewed for their poten- is a residual calculation, it could be said to tial effect on the wealth estimates. For exam- include some of these variables. However, ple, the manner in which large areas of because the capitalization is based on the remote or low-productivity land are valued remaining life expectancy of the population, is an important factor in explaining the we prefer to refer to it as human resources, wealth of some countries. rather than as either human or social capital. * Coverage of the natural capital estimates. Current natural capital estimates include Additional Issues only land, forests, subsoil assets, and water. This obviously leaves out some resources, This approximate methodology leaves a number such as fish, that are important to some coun- of technical points begging for further discus- tries. Moreover, future changes in both quan- sion. Some of the most important, constituting tity and values should be considered. an important agenda for further research, * Quality differences. Eventually, we will have include: to take into account ecosystem health rather First Steps in an Ongoing Journey 15 than stocks of trees and birds. Ignoring dif- * Analysis of stocks is needed in addition to ferences in the quality of assets probably analysis of flows, which is what income mea- introduces a bias toward too high a value for sures have focused on. No corporation remaining natural capital. would run its affairs on the basis of cash flow Defining social capital. Conceptual clarity and income statements without looking at must be created in the first place. If human balance sheets and net worth. Countries need resources are calculated as a residual, does to do the same. the calculation capture social capital as well? * The role of human resources. It is astonishing to How do we define and measure social capi- observe that with the exception of some raw tal? How do we bring in issues of equity, material exporting countries, the value of social cohesion, and participation? human resources as defined here in the coun- Finally, sustainable development studies are tries included in the calculations is equal to or concerned with policies and actions that exceeds both natural capital and produced improve our medium- and long-term prospects. assets combined. It gives credence to the view The precision with which they need to record that development is best achieved by invest- today's market prices is not the same as that ing in people. (The results are graphically needed for short-term concerns, because a summarized in figure 10.) Equally important broader set of policy options is available, includ- is that produced assets (man-made capital) ing many with diffuse effects, such as education. While the valuation of wealth must build on Figure I0. Composition of world wealth, data designed for short-term analyses, it cannot by income group be constrained by that kind of precision.39 (Percentage of total) Rather, it must ensure the relevance of what is Raw material exporters (4.6%) being assessed today, considering what may asred Ncapual concern future generations and the range of 20% 44% policies and actions available to decisionmakers today or in the near future. Human First Results: Sustainability resources and the Wealth of Nations Other developing countries (15.9%) Produced Natural The current work of the World Bank on these assets, a2p% issues is reported in Monitoring Environmental Progress. The World Bank has made it absolutely clear that these are preliminary research results and that it will not defend any individual country calculation without considerably more country- Human specific work. It is the overall patterns that emerge 56% from the calculations that are worthy of note, not High-income countries (79.6%) the individual country numbers or the relative Produced Natural position of individual countries (see appendix). a6 t capita The main conclusions are: * Sustainabililty as opportunity. Defining sus- tainability in these terms points to the impor- tance of capital and of looking at wealth, not just income. But it is important to recognize the different kinds of capital (produced assets, natural, human, and social capital), resources which are partially complements and par- 67% tially substitutes. Source: World Bank, Monitonng Environmental Progress, 63. 16 Sustainability and the Wealth of Nations represent only 16 percent to 20 percent of the ing as an indicator that a country's overall pat- wealth of most of the countries studied. Yet it tern of development is sustainable for that is on this portion of total wealth that most cur- country, I recognize that it may not be adequate rent economic policy focuses. because of supranational considerations and The importance of genuine saving. The results global issues. In considering whether we can show that adjusting the national accounts have confidence in the broad patterns emerging makes little difference for the trends in from this preliminary work, one observation is traditional income measures (see figure 8) interesting. Aggregating our results on a but that adjusting gross investment data pro- regional basis (figure 12), we find that Sub- vides important signals on saving and Saharan Africa has been dissaving since the late investment (see figure 9). It is important to 1970s, whereas East Asia has taken off in terms note that were we to remain content with the of genuine saving since the early 1980s. These gross investment as a fraction of GNP, that findings, which conform to general observa- could mask major variations in genuine tions, add credibility to the indicators and the saving. For example, as shown in figure 11, a calculations behind them. level of 18 percent of GNP for Latin America would translate into a positive saving of 7 Next Steps in an Ongoing Journey percent in 1969 and in a negative saving of 2 percent to 3 percent in 1982. This clearly Although this schematic presentation is indica- underlines the importance of going beyond tive of work in progress, it also highlights the the traditional aggregate level to look into the general direction for the months and the years composition of investment financing and the ahead. Next steps will include detailed case level of genuine saving. studies to assess the viability of the methodol- Just how important is the level of genuine ogy and the confidence limits of the shortcut saving as an indicator of sustainability? And methods used in the Monitoring Environmental just how reliable are these rough calculations? Progress exercise. In addition, testing the While I am attracted to the idea of genuine sav- approach on a number of country scenarios would show the extent to which this kind of analysis would in fact result in different policy Figure 11. Masked variations in genuine saving, inl.Bodrdseiainaddsuso Latin America and the Caribbean, 1967-91 g (Percentage of GDP) of these results would also enable a more mean- 25 - ingful dialogue on method and substance; the Net foreign borrowing Gross \ u~~~~~~~~nvestrnent 20 - Figure 12. Regional patterns of genuine saving, 1962-91 _ > . - -v (Percentage of GDP) 15 I1 1 Depreciaton ,.15 East Asia 12 - 9 - the caribbean 5 .'j\ \ ,' t Asset , 6 .F- ' ,' '--- SouthAsia O _ >,~~~~~~~~~sale 3_ saving ,,,,, I,, -3 -6 _ ' ,_'d -9 - Sub-Saharan Africa' Note: Identical figures of gross investment as a percentage of GDP could rnask real differences in genuine saving. Gross domestic saving -12 - = (gross domestic investment) - (net foreign borrowing). Net domestic -15 I I I I I I I I I I I I I II saving = (gross domestic saving) - (depreciation of produced assets). e, Mb Si {,9 K, : ,g, 4@ \ A; A partner in strengthening economies and expanding markets t \< 1,1s' / to improve the quality of life I [ />" for people everywhere, especially the poorest Headquarters 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. 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