Kirk Hamilton

Green adjustments to GDP

Abstract A review of the green national accounts literature shows that there is little agreement on whether to adjust gross or net product, or on the sign of some of the adjustments proposed. A series of models is presented, following Weitzman, to examine the treatment in the national accounts of living resources, heterogeneous resource deposits, resource discoveries, environmental services, carbon emissions and defensive expenditures by households. A key conclusion is that expanding the accounts to include non-market environmental services results in a measure of welfare rather than product (although net national product is the starting point), and that the level of environmental services is an integral component of this welfare measure. These results are compared with the standard national accounts. Greener measures of wealth per capita and savings rates will have more policy relevance in gauging progress towards sustainable development than adjustments to national product.

Measuring sustainable development: progress on indicators *

The search for sustainability indicators should be guided by a theory of sustainable development (SD). In this paper we investigate two such theoretical frameworks and the indicators that they suggest. Indicators associated with weak sustainability are characterized by aggregative indicators such as green national income. We conclude, however, that a more promising offshoot of green accounting is measures of genuine savings (i.e. savings adjusted for loss of assets). To achieve SD, genuine savings rates must not be persistently negative. Strong sustainability indicators accord a more central role to the conservation of critical natural assets within the broader goal of prudently managing a nations portfolio of assets over time. We discuss two approaches—carrying capacity and resilience—and conclude that, while measures of resilience are potentially attractive, more research is required regarding the resilience–SD link. However, an important conclusion that we can make is that, even in an economy operating under a strong sustainability regime, genuine savings are still key indicators of SD and are complementary to measures of changes in stocks of critical natural assets.

Savings growth and the path of utility

We derive an expression relating the change in instantaneous utility to the growth of net (genuine) saving in an economy with multiple stocks and externalities that maximizes welfare in the utilitarian sense. This result is then shown to hold for decentralized competitive efficient economies as well, to yield an extension of the Hartwick rule: instantaneous utility is non-declining along a development path if genuine saving is decreasing. By way of example the rule is applied as a constant genuine saving rate rule in a simple Dasgupta-Heal-Solow-Stiglitz economy. The rule yields a path with unbounded consumption and higher wealth than on the standard Hartwick constant consumption path.

Wealth, Welfare and Sustainability

This important book presents fresh thinking and new results on the measurement of sustainable development. Economic theory suggests that there should be a link between future wellbeing and current wealth. This book explores this linkage under a variety of headings: population growth, technological change, deforestation and natural resource trade. While the relevant theory is presented briefly, the chief emphasis is on empirical measurement of the change in real wealth: this measure of net or ‘genuine’ saving is a key indicator of sustainable development. The methodological and empirical work is bolstered by tests of the predictive power of genuine saving in explaining future consumption and economic growth. Just as importantly, the authors show that many resource-abundant countries would be considerably wealthier today had they managed to save and invest the profits from natural resource exploitation in the past.

Air pollution and green accounts

A simple model treating air emissions as cumulative pollutants is used to derive measures of ‘green net national product’. The model implies that pollution emissions are properly valued at their marginal social costs in the measurement of green NNP. The level of genuine savings, net savings less the value of resource depletion and pollution emissions, is shown to provide a useful indicator of sustainable development. Recent figures on the social costs of fuel cycles are used to derive genuine savings measures for the UK and other European nations. Several countries had negative genuine savings during the 1980s.

Sustainable development, the Hartwick rule and optimal growth

Defining sustainable development as non-declining utility, the consistency of this concept with the Hartwick rule and optimal growth is explored when resources are exhaustible. A simple proof that a generalized Hartwick rule is necessary and sufficient for constant consumption is derived. The existence of a maximal constant consumption path is shown to depend critically on the elasticity of substitution; if this is less than 1, consumption declines; if it is greater than 1 then consumption is not maximal; if it is equal to 1 (the Cobb-Douglas case) then existence is proved. Consumption can increase along an optimal path if the pure rate of time preference is 0; if it is non-zero then consumption declines.

International trade and the ‘ecological balance of payments’

The role that international trade plays in measuring sustainable development has come under recent scrutiny. We examine international resource flows using an input–output framework that is akin to ‘ecological balance of payments’ analysis. This framework allows us to use to calculate the derived demand for resources in the country of final use. The empirical section of this paper applies this model to data on global trade and natural resource depletion in 1980, 1985 and 1990. Our results provide a quantitative assessment of the significance of direct and indirect imports of resources required by Japan, the United States and the European Union. These results can also be disaggregated to permit an examination of trade relations vis-a-vis individual resource exporting countries. It is interesting to note that a number of these resource exporters appear to be unsustainable at least on the basis of the criterion that the savings rate net of asset consumption (i.e. genuine savings) should not be negative. These findings, in turn, could form the basis of policies to assist exporters in adopting prudent resource and public investment policies.

Sustaining Economic Welfare: Estimating Changes in Total and Per Capita Wealth

Genuine saving measures the real change in0 total wealth, factoring in the depreciation of produced assets, depletion of natural resources, pollution damages, and expenditures on education. This paper presents a theoretical framework for measuring changes in wealth in total and per capita terms, establishes the link between savings measures and prospects for social welfare, and provides summary empirical estimates of the savings measures. China excepted, the majority of countries below median income are distinguished by apparent declines in total wealth per capita.

Resource Windfalls, Macroeconomic Stability and Growth: The Role of Political Institutions

We use a new dataset on non-resource GDP to examine the performance of commodity-exporting countries in terms of macroeconomic stability and economic growth in a panel of up to 129 countries during the period 1970-2007. Our main findings are threefold. First, we find that overall government spending in commodity-exporting countries has been procyclical. Second, we find that resource windfalls initially crowd out non-resource GDP which then increases as a result of the fiscal expansion. Third, we find that in the long run resource windfalls have negative effects on non-resource sector GDP growth. Yet, the effects turn out to be statistically insignificant when controlling for government spending. Both the effects of resource windfalls on macroeconomic stability and economic growth are moderated by the quality of political institutions.

The measurement of sustainable development

Economists have made substantial progress both in offering a coherent definition of sustainable development (Solow, 1986, 1992; Pezzey, 1989; Pearce et al., 1994) and its measurement (Pearce and Atkinson, 1993; World Bank, 1997). These studies define sustainable development in terms of some indicator of sustained human wellbeing, and then establish conditions for the achievement of that sustained wellbeing in terms of capital stocks. van den Bergh (1996) provides an overview of various approaches to sustainable development.