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.