The GS is a national accounting aggregate, developed by the WB to measure the net change in assets that are important for development. It was designed to assess the links
between social and environmental changes and macroeconomic performance. It seeks to provide a clear and relatively simple indicator of whether a nation’s investment policies are sustainable. In fact, the GS has been estimated and published in the World Development Indicators (WDI) since 1999 (WB, 1999).64 Building on their previous work, the WB (1997) incorporated into the GS measure, the three major capital components that are required for sustainable economic development and used to determine a nation’s wealth. They are produced assets, NC and intangible capital, which comprises primarily HC, SC, governance and errors and omissions in estimating physical capital, and NC (WB, 2006a). Intangible capital will be referred to as HC, for reasons of consistency with other measures. Under the GS approach wealth is defined as the stock of capital that is the basis of wellbeing.
Recent WB studies showed that physical capital (or produced assets) was not the main, let alone the only, component of a country’s wealth. According to WB statistics, intangible capital accounted for 80 per cent of the composition of national wealth in high-income OECD countries in 2000, compared to 59 and 68 per cent for medium and low-income countries respectively. Interestingly, NC accounts for just 2 per cent of aggregate wealth for high-income nations (WB, 2006a). However, small shares of NC in industrialised economies, Soubbotina (2004) asserts, are deceptive and do not imply that NC is insignificant.65
Prior to the GS, standard measures of wealth accumulation tended to:
… ignore the depletion of, and damage to, natural resources such as forests and oil deposits, on the one hand, and investment in one of a nation’s most valuable asset – its people – on the other. (Soubbotina, 2004, pp. 87-88) [emphasis in original]
The GS aims to change all this by denoting the rate at which national wealth, viewed as a launching pad to increased prosperity, is being created or destroyed. Thus, any estimation of factors that result in a loss of NC, such as pollution damage or resource depletion, will decrease the genuine savings of a nation. Conversely, any increase in the
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Although it began in 1999, GS calculations have been calculated for all countries, where data has been available, from 1970 (Bolt, Matete and Clemens, 2002).
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value of HC, derived mainly from investments in education and basic health services, will add to a nation’s genuine savings (Everett and Wilks, 1999).
The GS departs from standard national accounting in several ways. In standard national accounting only the formation of a fixed produced capital can increase the value of the assets available to society, as it is regarded as investment. Likewise, only depreciation in the value of human-made capital can decrease that value (Bolt, Matete and Clemens, 2002). As mentioned earlier, the GS differs by adopting the view that HC and NC are critical to a nation’s progress. Consequently, four adjustments are made to standard national accounting calculations to reveal whether overall wealth is being created or consumed.
First, estimates of capital consumption of produced assets are deducted to obtain net national savings. Second, current expenditures on education are viewed as an investment in HC and are added to net domestic savings. This differs from the traditional approach of treating current education expenditure as consumption. Third, estimates of the depletion of a variety of natural resources, which are unsustainably managed, are deducted to reflect the decline in asset values. Fourth, pollution damages, which may include lost welfare in the form of human sickness and health, are also deducted (Bolt, Matete and Clemens, 2002). The calculation method of the GS is displayed below followed by Table 3.1, which lists the components of the GS.
Thus, GS is calculated as:
GNI CD R CSE D GNS GS =( − h + −
∑
n,i − )/where: GS = genuine savings rate GNS = gross national saving
= depreciation of produced capital h
D
CSE = current (non-fixed-capital) expenditure on education = rent from depletion of natural capitali
i n R ,
CD = damages from carbon dioxide emissions GNI = gross national income at market prices
Table 3.1 GS components
Components Add/Subtract Calculation
Gross national saving (GNS)
Initial figure Calculated as difference between GNI and public and private consumption.
Consumption of fixed capital
(Dh)
Subtract Replacement value of capital used up in the process of production.
Current education expenditure (CSE)
Add Current expenditures in education, including wages and salaries, but excluding capital investments in buildings and equipment.
Rent from the depletion of natural resources
(Rn,i)
Subtract
Resource rent is difference between world prices and average unit of extraction or harvest costs (including a ‘normal’ return on capital).
Damages from carbon dioxide emissions (CD)
Subtract Limited to including global damages from carbon dioxide emissions.
Sources: Bolt, Matete and Clemens (2002, pp. 5-6) and WB (2006a, pp. 36-37).
The GS provides a first-approximation numeric indicator that determines the degree to which a nation satisfies Hartwick’s rule (or Hartwick-Solow rule), also known as weak sustainability. A weak sustainability approach is premised on perfect substitutability between different types of capital, including physical, natural and HC (Pillarisetti, 2005). This numeric indicator gives a single clear positive or negative figure. Here, persistent negative rates indicate that total wealth is in decline and that the nation is deemed to be pursuing an unsustainable path, which will lead to lower levels of progress in the long run. The production of a single figure, the current study claims, is not only over-simplistic but makes it extremely difficult to deal with broader questions about the nature of a nation’s progress on the basis of a solitary indicator. A more accurate progress measure should include an assessment of the costs and benefits of certain activities within a country.
The GS’s estimation of NC has come under a lot of criticism, even from within the WB itself. Natural capital, like any other asset, contributes a flow of services to the economy. These services can be direct contributions to economic activity via inputs,
such as raw materials and energy, or goods and services for final consumption (Kunte, Hamilton, Dixon and Clemens, 1998). The term direct contribution to economic activity significantly constrains the nature of the NC dimension; this focus necessarily restricts the GS focus to include only market-valued non-renewable and renewable NC in its measure.
This has the effect of reinforcing the GDP notion that resources are viewed only as inputs to production. Not surprisingly, many other NC resources that impact on a nation’s progress are excluded. For instance, there is no accounting for the impact of soil degradation and the depletion of fisheries and subsoil water. In addition, factors such as biodiversity and the ozone layer, which comprise NC resources critical in providing life-supporting functions, and for which substitutes do not exist, are also omitted (Everett and Wilks, 1999).
Hamilton (2001) responds to these criticisms by denoting that, although these omitted factors can be handled in principle, in practice it requires knowledge of marginal damage curves and national thresholds that are currently lacking. This implies however, that to explicitly incorporate any other type of assessment for the omitted variables would be inappropriate for this measure.
For those NC resources that are identified, the GS applies the concept of economic rent as a means of determining its value. Here, economic rent is:
… the return on a commodity in excess of the minimum required to bring forth its services. Rental value is therefore the difference between market price and cost of production/extraction. (Kunte et al., 1998, p. 4)
The manner in which the GS applies resource rents, which has many Sub-Saharan countries, North Africa, Middle East, as well as some countries from other regions failing to pass the test of weak sustainability, is contentious. This outcome led Neumayer (2000) to recalculate the resource rents using the popular alternative El Serafy method,66 for 14 countries in Sub-Saharan Africa, North Africa and the Middle East regions using a 4 per cent per annum discount rate. Neumayer concluded that:
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The El Serafy method does not depend on efficient resource pricing. It utilises a reserve data of resources instead. However this data is less reliable.
Sub-Saharan Africa does not exhibit persistent negative rates of genuine saving anymore and the region of North Africa and Middle East turns out to be a strong genuine saver… either they do not fail to pass the test of weak sustainability anymore or their unsustainability can be explained with negative extended net saving rate alone, i.e., without taking recourse to resource depletion. (Neumayer, 2000, p. 272)
Neumayer’s results demonstrate the sensitivity of the GS measure, where the determination of an ‘appropriate’ resource rent seems to heavily influence the net outcome of a nation. This is important given that policy outcomes are derived from their conclusions.
The weak sustainability approach employed by the GS values all the different capital stocks in monetary terms, and allows for their substitutability with physical capital. The WB decision to employ a weak sustainability approach is about sustaining income flows, and not necessarily about sustaining the environment (Martinez-Alier, 1995). Pillarisetti (2005) adds that basing the GS on weak sustainability makes the measure conceptually defective as recent scientific evidence shows that such an assumption is untenable. Hence, the assumption of substitutability and the view of the environment as an input to production, means that the GS approach lends itself to a greater likelihood for natural resources to deplete rapidly. This is evidenced in cases where the income gained in the immediate usage or other savings outweighs estimated future income.67 All this results in the GS understating the true impact NC has on a nation’s progress. For instance, the WB admit that their NC valuation exhibits some shortcomings and would benefit by incorporating a wider range of environmental services, and values other than monetary, which were noticeably absent (Kunte et al., 1998).
This has led some from within the WB to suggest that the best way to track sustainability would be to select biophysical indicators, to act as a complement to the GS (Hamilton, 2001). Although still not ideal, the treatment of NC is more inclusive than the GDP’s measure. This is also the case for HC.
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For example, according to a study by Pearce and Atkinson (1993, p. 106), the Japanese economy is the most sustainable given a weak sustainability approach. The reason is that Japan’s high savings rate more than compensates for the depreciation of human-made and natural capital.
Unlike standard national accounting, which considers HC to be a ‘return to education’, the GS offers a more inclusive assessment. It comprises education, raw labour and SC which is measured through returns to education and raw labour, with SC assessed by determining the value-added component of institutions and other social structures. Similar to all attempts at measuring progress, the GS recognises that estimating HC is a very difficult and contentious area (Kunte et al., 1998).
The focus on current education expenditure is a departure from standard national accounting, which only includes fixed capital education expenditure on HC in the accounts. Traditionally, this makes up less than 10 per cent of all education expenditure, since current expenditure, comprising money spent on teachers’ salaries, books, etc. is viewed as consumption.
Given the extent of natural wealth that is due to HC, the GS approach regards HC as a valuable asset, where expenditures on its formation are seen as an investment (Hamilton, 1994). The GS should, in theory, be adjusted by the change in value of HC to reflect this investment but there is not, as yet, consensus on how to carry out this valuation. As a first approximation, rates of GS can be adjusted upwards according to rates of current spending on education (Bolt, Matete and Clemens, 2002).
Interestingly, since countries with stronger economies generally tend also to invest more in education, and education investment is regarded as savings, the treatment of HC by the WB will favour countries with strong economies (Pillarisetti, 2005). In fact, the high rates of education investment in high-income OECD countries and the East Asia/Pacific region sharpened the contrast between the GS effort in these areas compared to the rest of the world (Hamilton and Clemens, 1999).
If the WB insists on only using investment as the major component for measuring HC, an assessment of the impact that expenditure has must be incorporated, such as the service outcomes HC delivers to a nation, which is currently ignored. Other estimate exclusions involve HC leakages (brain drain) and the extent to which the nation’s citizens are sharing knowledge.
While Soubbotina (2004) admits that, due to difficulties evaluating HC, the calculation of GS rates for different countries is extremely challenging, the potential importance of using correct indicators for informing and guiding policymaking, makes the effort worthwhile.
As stated earlier, all GS calculations begin with the GDP of each nation. From here, certain values are either added or subtracted to obtain the GS numeric indicator. Given that the GS is heavily GDP centric, GS findings will tend to justify increasing real GDP as the central measure of progress (Qu, 1999).
Not surprisingly therefore, it is high-income OECD countries that emerge with consistently strong positive GS results, while the Middle Eastern/North African countries, which are resource dependent, emerge with consistently negative results (Soubbotina, 2004).68 In fact, when the GS results were estimated for 1994, of the 15 regions examined, the North American region had a total wealth figure of 326, and was judged the most sustainable region, followed by Pacific OECD on 302 and then Western Europe on 237. A further drop then occurs to the next region, the Middle East on 150.69
The implication of these results on the environment can scarcely be overstated. There is a growing consensus that the western world is a big contributor to climate degradation.70 Yet these results, suggesting that the west is the most sustainable region implies that other regions should follow in its footsteps. Given this, the ramifications to the environment could be disastrous.
Finally, apart from the intrinsic bias in the measure, the GS also fails to properly account for the inequalities that exist within a society. For example, no effort is made to include a measure of distribution such as the Gini coefficient.
68
As mentioned earlier, the discrepancy between these results and Neumayer’s (who recalculated GS using the El Serafy method) shows the sensitivity of the measure.
69
In Kunte et al. (1998, p. 2) the figures are in US$ per capita (‘000), using PPP exchange rates and a 4 per cent discount rate.
70
The need for this group to modify its practices is already under way. The IPCC have introduced target emission rates that aim to reduce the ecological impact of major industrialised nations.
Despite the list of criticisms highlighted in the above review, the GS, by explicitly accounting for the different components of wealth, have at least brought to the fore the concept of an expanded measure of wealth that includes HC and NC. Unfortunately though, the GS falls into the same trap as the GDP by preferring quantification and aggregation at the exclusion of a multidisciplinary approach. By aligning itself to the market, the GS national wealth calculations devalue all that is excluded, whether it is household duties, HC or the environment (both physical and natural). The end result is that the GS is a measure that continues to neglect important factors critical to progress, thus justifying the continuation of unsustainable practices.
Hence, economy-environment frameworks adopting a market-centred measure lose their rigour once they are forced to measure areas where market measures are not appropriate. This results in outcomes that overwhelmingly favour (and thus prioritise) the economy over the environment. Consequently, as value-added rises, resources and the environment become less important despite their contribution to human wellbeing remaining the same (Prescott-Allen, 2001).
This failure to reflect human welfare is another major criticism of economy- environment progress measurements, since it has the capacity to send misleading signals about national progress. This shortcoming brought rise to alternative progress measures attempting to incorporate this aspect. The next section will review the two main measures in this field: the genuine progress indicator (GPI) and the human development index (HDI).
3.6 Human-Economy Interaction Conceptual Framework
The measures in this section explicitly incorporate human welfare into national progress measures. The two major revisions in this area will assess the GPI and the HDI.