Time to begin greening Asia's national income accounts

Time to begin greening Asia's national income accounts

By Mukul G Asher and Avijit Gupta

Reconciling economic growth with environmental objectives
should be a major issue of concern in Asia.

SINGAPORE: While Asia's rapid growth during the last three
decades has been impressive, its record on environmental
management has been modest. Asia is expected to experience severe
environmental challenges due to rapid and unplanned urbanization
and industrialization, deforestation, and rising per capita
energy-intensive consumption. In some regions, there is also
likely to be pressure of population on limited local resources.

Reconciling growth with environment, as implied in the concept
of sustainable development, should, therefore, be high among
Asia's priorities.

To make progress in attaining sustainable development,
ensuring that the needs of the present are met without
compromising the ability of future generations to meet their own
needs, appropriate statistical indicators are essential. These
indicators should enable estimation of sustainable income and its
major components, such as savings, investment and consumption.
Moreover, depreciation needs to be estimated to differentiate
between gross and net values.

In practical terms, sustainable income provides an indication
of the amount which people of a country can consume without
impoverishing themselves. A major approach to estimating
sustainable income involves greening of conventional national
income accounts by adjusting them for the value of the
environmental degradation and resource depletion.

The absence of adjustment for environment masks the problem
which is the belief in continuing indefinitely exponential growth
in conventional Gross Domestic Product (GDP). It appears that
much of the economic policies in most parts of Asia are
implicitly (in some countries explicitly) governed by this
belief. But the sheer necessity of addressing air and water
quality, sanitation, solid waste management, deforestation, soil
degradation, preservation of biodiversity and implications of
associating better life with ever increasing consumption of goods
and services are likely to force a change in this belief, though
its extent may vary among countries.

There is a prisoner's dilemma type situation here. If each
country, even while accepting the finite limits of earth's
capacity, behaves as if it is too small to have such limits on
its own growth, then each country will behave sub-optimally, and
all countries will be worse-off. International co-operation and
co-ordination are, therefore, essential.

The United Nations, in collaboration with the World Bank, has
been developing a system of Integrated Environmental and Economic
Accounts to measure sustainable income. Their proposals involve
two major adjustments to conventional national income accounts.

* First, environmental conditions often worsen with economic
growth. For example, growth may lead to increased pollution
which, in turn, may adversely affect health status. To correct
this, current costs of an adverse impact of environment on health
conditions need to be taken into account. Pollution abatement
costs, which under conventional national income accounts increase
GDP, also need to be adjusted. These, along with other aspects of
environmental degradation, such as soil erosion, and water
pollution, also need to be carefully estimated.

* Second, productive capacity of the economy depends on
natural capital, that is, environment as well as conventional
human-made capital such as machines, human capital in the form of
skills and knowledge, and social capital in terms of network of
social institutions, relations and beliefs and attitudes.
Conventional national income accounts take into account only
human-made capital. Even here, in many Asian countries,
depreciation estimates are not provided. So GDP rather than net
domestic product (NDP) and gross rather than net savings and
investment figures are used.

Natural capital

It is clearly inappropriate to exclude natural capital in
measuring national income, particularly from the sustainability
point of view. Estimating natural resource depletion (or
environmental cost) requires first the physical measurement of
all the environmental assets at the beginning and at the end of
the period, and then monetary valuation of the changes in each of
the relevant assets.

These two adjustments require an enormous amount of
information, resources and technical expertise. Moreover, there
are many conceptual and methodological problems to be resolved.
The valuation problems are particularly difficult. For example,
the "willingness to pay" approach is often used by economists to
measure the value of environmental services. But it is not clear
that individual preferences which form the basis for "willingness
to pay" are necessarily consistent with the requirements of
sustainability.

These technical difficulties and differences of opinion among
experts should not, however, be used as an excuse for inaction.
Valuation is also essential to emphasis the point that
environmental assets should not be given either a zero or an
infinite price.

Japan, several European countries (such as the Netherlands,
Denmark, Sweden and Norway), and the United States are actively
pursuing construction of environmental accounts. Constructing
physical balance sheets of environmental assets, and monitoring
physical changes in such areas as air and water pollution is a
first step. And even if monetary valuation is deferred,
information concerning physical aspects will have enormous
benefits in policy-making and awareness.

It is, however, important to recognize that sufficient
resources and expertise (along with political will) will be
needed to make progress in this area. The task will take several
years. This is all the more reason to begin at the earliest
possible stage and to begin to develop necessary human resources
and skills. Initially, such accounts may be confined to key
sectors. They may be linked to such tools as input-output tables
or the Social Accounting Matrix for purposes of policy analysis
and evaluation.

It may be useful to begin by setting up a few key
environmental indicators and publishing them on a regular basis
along with the conventional national income accounts. These could
be used to heighten public awareness of environmental issues.

It is, however, essential to ensure that environmental issues
are not used to unduly obstruct desirable projects and that
environment goals do bear close resemblance to a country's
capabilities and per capita income.

The task of mapping, estimating and monitoring physical and
monetary environment statistics is even more formidable at the
regional level (such as for ASEAN, or the South Asian Association
for Regional Cooperation), as uniformity is essential for
comparability. Both these regional groupings, along with such
agencies as the United Nations Economic and Social Commission for
Asia and the Pacific (UN-Escap) could play an important role in
initiating such regional studies. These organizations could
consider developing an environmentally adjusted economic
performance index (HDI) initiated by the United Nations
Development Program (UNDP).

There have been some studies which have attempted to estimate
sustainable income for individual countries for a particular
year. A study most often cited is that of the 1985 estimates for
Mexico. It found that sustainable Net Domestic Product (NDP) was
86.7 percent of the conventional NDP, with resource depletion
equivalent to 5.7 percent of NDP and environment degradation
equivalent to 7.6 percent of NDP. More importantly, greening of
the accounts turned positive gross domestic investment of around
22 percent of GDP into a negative figure. This does not
necessarily mean that Mexico's productive capacity declined
as human capital and technological progress could offset the
negative investment.

This suggests that different types of capital may substitute
for each other and that technology could substitute for natural
capital. But the nature and the extent of these substitutions
need to be better understood and quantified.

In conclusion, Asia has reached a stage where reconciliation
of growth and environment, through pursual of sustainable
development, should receive a much higher priority. Given the
enormous complexity involved in designing and implementing
policies for sustainable development, a consistent, recurring
database provided by the greening of the national income accounts
is vital. Without this base, the resulting policies are not only
likely to impinge on efficiency and equity, but they may also put
Asia's accustomed rapid growth at risk.

Dr. Mukul G. Asher is Associate Professor of Economics and
Public Policy, and Dr. Avijit Gupta is Associate Professor of
Geography, at the National University of Singapore.