Accounting for the Environment: Experiences from Southern Africa R M HASSAN Centre for Environmental Economics and Policy Analysis in Africa (CEEPA), University of Pretoria Ecological and Environmental Economics Program (EEEP), ICTP, Trieste, Italy September 23, 2003

What is the Problem? ● Current information and measures of economic performance ► The system of national accounts (SNA) GDP – GNI – Employment → Widely used * Strategic targets for growth and development * Evaluation of economic performance and progress

What is wrong with the SNA? Includes produced outputs that are traded in the market and hence excludes: –Products directly harvested from open access resources by communities for own consumption escaping trade and market exchange (Fuel wood, wild food, etc.) –Indirect use benefits and ecological services (watershed protection, carbon sink, nutrient cycling, bio-habitat functions, etc.), which do not pass through the market and their values are usually attributed to the wrong economic activities (recipient sectors) –Other values (cultural, aesthetic, etc.) Domestic production (work at home)

Major shortcoming: Sustainability Exclude depletion/depreciation of natural (N) and human (H) capital as part of total national wealth (W) –GDP includes income from extracted resources (minerals, fish, timber) but not the corresponding value of these assets lost to the economy (reduced future stocks) Social welfare loss due to depletion of natural capital Measures of performance wrong and very misleading –High income and consumption (LARGE GDP) financed through liquidation of natural assets is desirable –NDP = GDP -  K better but excludes  N and  H –On a descending course in long-term social welfare and sustainability if GDP > NDP

Curse of the resource rich Resource-rich countries have performed worse economically than resource-poor countries over the past 30 years

Correcting measures of performance Sustainable income (NDP) & consumption (C) NDP = C +  W (Unsustainable path if C > NDP) >> D eclining wealth (  W < 0 ) - Saving bank account So,  C ≥ 0 does not guarantee sustainability  NDP ≥ 0 non-declining NDP better BUT –NDP includes only  K (W = K = produced assets) Broadening the definition of capital (total wealth) –W = K + N + H –Weak sustainability - intact W (  W ≥ 0, i.e. some components may decline but net change should not be -ve Substitution between K, N and H –Strong sustainability (at least some of N intact) Ecological thresholds – Complementarities

Greening the SNA Correcting measures of current income (current accounts) –Accounting for flow environmental benefits Missing values of environmental G&S (non-traded) Green GDP (environmentally adjusted) Correcting measures of change in wealth (asset accounts) –Expanding the definition of capital Include natural capital (e.g. minerals and biological assets – forest, fish, wildlife, etc.) Include other capital (human, etc.) – weak sustainability paradigm – substitution between different forms of capital

Indicators of sustainability: genuine savings Gross vs. genuine saving rates for eastern and southern Africa, 1997

Genuine saving and mineral depletion, 2000

Policy instruments for prudent use of N Managing the resource rent (RR) –RR defined: Contribution of endowments to value Value of scarcity (e.g. rare talents) Residual after other costs including wage and normal profit –Capture – Recovery: Who should get the rent? Extraction rates depend on how much rent is generated and how much has been recovered by GOV (!) –How to use the rent? Current consumption vs. reinvestment: Financing sustainable development to compensate the future for depletion of exhaustible resources

Experiences from SA: Extraction of minerals Botswana (diamond extraction on steady increase: 25% extracted) SA (extraction slowed down remaining with 80% f gold and 90% of coal reserves)

Recovery of minerals’ rent Bots (76%), Namibia (50%), SA (45%)

Spending minerals’ rent: Botswana SBI = non-investment spending / non-mineral revenue SBI > 1 indicates unsustainable consumption (non-inv. exp. > non-min. rev., i.e. liquidation of minerals finances current consumption)

Spending minerals’ rent: SA The Capital Component (CC) of the RR –El Serafy’s user cost approach –Follows the Solow-Hartwick Rule that requires a component of the rent to be reinvested to maintain stock of assets intact The CC of minerals rent for the period was compared to capital formation in the mining industry (total mining investments) of SA The results indicated that the mining sector in SA invested more than twice the CC of minerals rent >> The CC has been fully reinvested in alternative forms of capital (Blignaut and Hassan, 2002)

Components of Wealth