Vladimir G Treml Economics 140, 240, 266 Spring 1997 NY Times September 19, 1995 The Wealth of Nations: A 'Greener' Approach Turns List Upside Down By PETER PASSELL A new system for measuring national wealth that puts a value on natural and mineral resources has been developed by the World Bank. The system is intended to foster a new perspective of development economics by making explicit the costs of environmental degradation and by debiting the national wealth account as mineral resources are depleted. Such an accounting system, part of the bank's efforts to broaden the perspective of development economics, offers the first comprehensive estimates of national wealth for 192 countries, with some surprising changes in the usual ranking of the wealth of n ations. Australia, at $835,000 per person, comes out on top, with Canada second ($704,000), Japan fifth ($565,000) and the United States 12th ($421,000). Ethiopia brings up the rear with a national wealth of $1,400 per capita. The bank's ambitious new report, released on Sunday, puts numbers on the costs of environmental degradation for the first time, thereby identifying dozens of countries like Kenya, Libya, Nigeria and Venezuela that are, in effect, eating their seed corn - countries where the accumulation of capital has been offset by the depletion of raw materials and fertile land. And the report provides potent ammunition for those who argue that sustainable development turns on factors that often get short shrift from economists. The study, "Monitoring Economic Progress," is already being hailed as a model that could help to refocus development strategies. "What we normally measure as capital is a small part of what it takes to sustain human welfare," explained Robert M. Solow,an economist at the Massachusetts Institute of Technology who won the Nobel Prize in 1987. Robert Repetto, an economist at the World Resources Institute in Washington who has pioneered techniques in environmental or "green" accounting, was equally enthusiastic. "This is a valuable thing to do," he said, "even if it can only be done relatively crudely." Economic development policies have generally been geared toward increasing physical capital - bricks, concrete, machines. While it was implicitly understood that education, health, social organization and the environment also matter, the payback from su ch investments are much harder to measure and hence have often been undervalued, by economists, said Ismail Serageldin, a vice president of the World Bank. The bank, which has faced heavy criticism during the last decade for its tunnel-vision embrace of dams and power plants, has responded by modifying its lending policies. More money is now going into intangible investments like education and wildemess pr eservation, and relatively less into pouring concrete and clearing forests. And the bank's born-again-green management is now trying to broaden its perspective of development economics still further. After the 1992 environmental summit in Rio de Janeiro, it financed a special project to supplement standard national economic accounts with estimates of heretofore unmeasured assets like natural and mineral resources. The major goal has been to assess the sustainability of development by what Mr. Solow called the test of "old-fashioned New England values": whether a country's total wealth is growing. By definition, wealth must increase if a country consumes less than it produces - in other words, if it saves. However, since much of an economy's productive assets are not included in traditional accounting, standard estimates of savings can mislead. Take the case of Norway, which increased its stock of physical capital by about 10 percent annually in the late 1980's, a seemingly robust rate. But roughly four-fifths of that investment was offset by depletion of Norway's reserves of oil and gas, sugg esting that Norway's total wealth was barely growing. The bank saw its task as generating more comprehensive estimates of wealth that could be compared across time. Its starting point was existing estimates of physical or "produced" capital. Bank economists then added estimates of "natural" capital, a combination of land (divided into categories of use, including protected natural habitat), fossil-fuel deposits, other mineral wealth and clean water. Last but hardly least, the researchers included a catchall category for wealth embodied in human skills, health and social organization. To assay this least tangible form of wealth, they calculated the value of future output left over after payments for natural and produced capital, much the way an investment banker measures the value of a corporation by capitalizing the value of expected future revenue left over after expenses. Measuring national wealth with the addition of these novel yardsticks led to counterintuitive results. Consider Portugal, which at $141,000 per person ranks a relatively high 41st out of 192 economies in terms of wealth. The value of all physical capit al in the economy, derived by averaging earlier estimates, was put at $153 billion. Portugal has an estimated $102 billion worth of natural capital, roughly two-thirds of which consists of farmland. But both are dwarfed by the bank's estimate of human a nd social capital: $1.176 trillion. The relative importance of human and social capital in Portugal is apparently closer to the norm than one might expect. Of the estimated United States wealth of $421,900 per person, physical capital is just 16 percent of the total, natural capital just 25 percent. All told, physical and natural capital each represent just one-sixth of the world's $390 trillion in wealth as estimated by the bank. In economies with large and diverse sources of wealth, the fact that the depletion of minerals offsets most or all of physical investment may not be a problem. These countries, suggested Theo Panayoutou of the Harvard Institute for International Develop ment, are shuffling their "portfolios" like an individual investor who decides to sell stocks to buy bonds. Nonetheless, inattention to the component of natural wealth that is associated with the environment may ultimately limit the potential of otherwise healthy development. As countries grow richer their citizens typically place increasing value on green ca pital, Mr. Panayoutou noted. And while some forms of environmental depletion are reversible - it is possible to clean up rivers and urban air - wilderness and biodiversity may be lost forever. The bank's comprehensive-wealth accounting reveals a clearer danger to low-income countries like Nigeria, Ethiopia and Kenya, where the depletion of the environment and sale of natural assets dwarf additions to physical capital. Indeed, it captures the continuing economic catastrophe of sub-Saharan Africa, which the bank calculates has lost wealth in every year since the mid-1970's. Some economists wonder whether the green accountants' reach exceeded their grasp. In some cases, the need for nearly arbitrary assumptions is obvious. For example, in calculating the value of different sorts of land across nations and continents, the b ank weights pasture at three-eighths the value of cropland and adds a 50 percent bonus for protected wilderness. Would other methods of calculating wealth radically change the results? It is not clear. "The devil is in the details," concluded Mr. Panayoutou of Harvard. In other cases the bank's assumption may be plausible, but could still prove far off the mark. The value of mineral wealth, for example, is apparently based on current extraction costs and current market prices, an assumption that has proved wrong in th e past. "In spite of predictions of doom, natural resources have not grown scarcer since the 1960's," noted Robert Hahn, an economist at the American Enterprise Institute. The Haves and the Have-Nots Wealth of selected countries in 1990, in order of per capita wealth. Wealth Composition of wealth Per capita $1,000s Land Mineral Capital Human & Social Australia $835.0 64% 8% 7% 21% Canada 704.0 64 5 9 22 Japan 565.0 1 - 18 81 U.S. 421.0 22 3 16 59 Germany 399.0 3 1 17 79 Singapore 306.0 - - 15 85 Saudi Arabia 184.0 26 28 18 28 Russia 98.0 34 36 15 15 Mexico 74.0 11 5 11 73 China 6.6 3 5 15 77 India 4.3 2 9 25 64 Vietnam 2.6 2 9 15 74 Ethiopia 1.4 12 27 21 40 WORLD $86.0 15% 16% 16% 64% Source: World Bank