Estimate of Natural Capital Wealth for Vietnam Patricia Silva, University of Copenhagen Workshop on “Vietnam’s Natural Resources Wealth” Hanoi, 29 July, 2008

Outline 1. Sustainability and Growth 2. Measuring Wealth: Theory and Evidence 3. Natural Capital Wealth Estimates for Vietnam 4. Policy Applications and Conclusion

1. Sustainability and Growth

Traditional vs. Sustainable Growth Concepts  A traditional view of GDP Increasing output measured by gross national product  A sustainable view of GDP Output should be adjusted for other important elements:  Depreciation of natural capital (subtract)  Damages caused by pollution (subtract)  Defensive expenditures (subtract) The result is the maximum sustainable consumption  Sustainable growth is growth that does not affect future growth

Sustainable Growth and Welfare  A development path is sustainable if social welfare does not decline along the path Future generation are allowed a level of welfare at least as high as current generations’  Social welfare is determined by the level of capital Produced capital Natural capital Human, social, and institutional capital  Non-decreasing welfare requires non-decreasing capital

Key Elements of Sustainable Growth  Invest in produced capital  Invest in human capital: health and education programs  Manage natural capital Allow sustainability of renewable resources Invest rents from exhaustible resources  Manage pollution through regulations and incentives

Key Elements of Sustainable Growth  Sustainability = non declining wealth  Natural capital is an important share of wealth in developing countries  Sustainability requires that depletion of natural capital be balanced by investment in other forms of capital

2. Measuring Wealth: Theory and Evidence

Why Measure Wealth?  A useful conceptual framework: development as a process of managing a portfolio of assets  A useful measure of sustainability  A means to integrate environment and natural resources issues into financial and economic planning

Wealth Estimation Method  Total wealth – corresponds to the present value of future consumption  Produced capital – includes structures, equipment, machinery and urban land. It is obtained from historical investment data  Natural capital – the value of the stock of natural capital is the present value of net rents from natural resources estimated using international prices and local costs  Intangible capital – includes human capital, quality of institutions and governance. It is estimated as a residual

Wealth Estimation Methods  Capital value can be estimated in two ways: 1. The sum of additions (investment) and subtractions (depreciation) over time made to an initial stock 2. The present value of future earnings over the capital stock  Method 2 is particularly appropriate to estimate natural capital, where: Earnings = Rents = Price – Marginal Cost

Wealth across Income Levels  Intangible capital is the largest share of wealth  Natural capital share declines with income  In low income countries, natural capital is more important than produced capital Source: World Bank (2006) Where is the Wealth of Nations? World Bank: Washington DC

Importance of Land Resources Value of Natural Capital, 2000 ($ per capita) GroupNatural capital (total) Subsoil assets Timber resources NTFRPACroplandPasture- land Low- income countries 1, % % 109 6% 48 2% 111 6% 1,143 59% % Middle- income countries 3, % 1,089 31% 169 5% 120 3% 129 4% 1,583 45% % High- income OECD countries 9, % 3,825 40% 747 8% 183 2% 1,215 13% 2,008 21% 1,552 16% Note: NTFR: Non timber forest resources. PA: Protected areas. Oil states excluded. Dollar values at market exchange rates. Source: World Bank, 2006

Composition of Wealth Across East Asia and the Pacific Source: World Bank (2006) Where is the Wealth of Nations? World Bank: Washington DC

3. Natural Wealth Estimates for Vietnam

Vietnam’s Natural Capital— An Overview of Results

Energy and Mineral Wealth  3 energy sources (oil, gas, hard coal) and 7 minerals (chrome, copper, iron ore, lead, nickel, phosphate rock, tin and zinc)  Growth rate of rent is assumed to be constant (nearly 3% growth)  The exhaustion time is estimated to be on average 25 years (which likely to be an underestimate of the exhaustion time for some resources, such as coal)

Energy and Mineral Wealth, (cont’d)  Energy resources account for nearly all mineral wealth—particularly oil (80%)  Uncertainty of estimates Cost of extraction often not available Reserves unknown, new discoveries OilNatural GasCoal $958$115$117 $600-1,773$261$309

Agriculture Land Wealth  Country level data on land values not available and affected by price distortions  Agriculture land wealth is based on the present discounted value of land rents  Land rents International price of crops minus local cost of production Crop yields are assumed to grow at a constant annual rate of 1.94% for the period and stabilize thereafter

Agriculture Land Wealth (cont’d)  Representative crops: 2 cereals (maize, rice) 4 fruits (bananas, oranges, pineapple, mango) 2 vegetable crops (peppers, sweet potato) 2 beverage crops (coffee, tea) Other (rubber, cassava)  Data: Vietnamese statistics on total output production and area cultivated for each type of crop International export price of crop (FAO) Rental rate—estimated from local production cost for some crops, while others come from sector studies in literature  Wealth = $1, 134 per capita

Agriculture Estimates Crop Land Area (1000 ha) Output (1000 tons) Revenue (1000 $) Rental Rate Land Rent ( $/ha) Paddy Rice7,41135,3656,482, Maize961 3, , Coffee , Rubber , Cassava4006, , Sweet Potatoes2051, , ,129 Tea , ,832 Bananas1051, , Orange , ,081 Peppers , Pineapple , ,776

Pasture Land Wealth  Same methodology as agriculture crop land  Representative products: Beef, buffalo meat, pig meat, chicken, and fresh milk Growth rate of 2.95% a year is assumed  Wealth = $486 per capita

Vietnam’s Forest Resources Designated function Area (1000 hectares) Primary function Forest Production Protection of soil and water Conservation of biodiversity Total forest Source: Global Forest Resource Assessment 2005, FAO: Rome

Vietnam’s Timber Production Volume (1000 cubic meters over bark) Forest Industrial roundwood Fuelwood Total Value (1000 US$) Forest Industrial roundwood Fuelwood Total

Timber Wealth - Assumptions  Necessary to distinguish between forest available and not available for wood supply  Assumed that 50% of natural productive forest area and 100% of plantation forest area is available for wood supply  Time to exhaustion Estimated as forest volume divided by the difference between production and increment At current extraction rates, forest resources exhausted in about 20 years in Vietnam

Timber Wealth Estimates- Data and Assumptions Plantation forest area (100% available for wood supply) 2.21 million ha Natural production forest area (50% available) 2.55 million ha Volume of forest per hectare66 m 3 /ha Estimated wood supply230 million m 3 Timber removal25.5 million m 3 Average annual increment (4 m 3 /ha/yr) 14.2 million m 3 Net depletion11.3 million m 3 Time to exhaustion20 years Stumpage price (wt avg industrial and fuelwood) US$3.48

Timber Wealth Estimates-Results 1. Base scenario$15 2. Slower forest depletion (40 years to exhaustion)$16 3. Increase share roundwood to 50%$43 4. Double productivity to 8 m 3 /ha/yr$23 5. Double productivity and roundwood share 50%$67 6. Increase forest area by 3 million hectares$28 7. Same as 6 + double productivity$35 8. Same as 7 + roundwood 50%$ Maximum sustainable yield$ MSY with additional 3 million ha of forest$ Same as 10 + double productivity$ Same as 11 + roundwood share 50%$111

Non-Timber Forest Wealth  Assumed that only 50% of protective forest area is accessible for NTFB  Based on Dixon and Lampietti (1995), returns per hectare per year from NTFP: Developing countries: $145 Developed countries: $190

Protected Areas Wealth  Nearly 2 million ha forest area for conservation of biodiversity  Benefits ranging from recreational values to existence  No comprehensive measure of WTP for protected areas exist  Fall-back is a quasi opportunity cost: Lower of per-hectare return to pasture land and cropland

NTFP and PA Wealth  NTFP wealth - $87  PA wealth - $196  2 million ha  agriculture land value (capitalized value of land rents between ~ $8,000 to 10,000/ha) Protection forest area available for NTFP extraction Wealth per capita 25%$44 75%$131

4. Policy Applications and Conclusions

Natural Resource Revenue Management (Norway) Significant amounts of rents generated by oil industry but with high fluctuations Forests generate substantial rents – but rents accrue to producers (which are also subsidized) Oil and gas – Resource rents and taxes ( ) Forestry – Resource rents and taxes ( )

Some Conclusions  In low income countries, natural capital is about 25% of wealth—or twice the share of produced capital – managing natural resources matters Natural resources are a basis of subsistence Natural resources – especially commercial ones – are a source of development finance But, for growth to be sustainable rents should be invested in some other form of capital  The value of natural capital per capita (at world prices) actually rises with income – maintaining or increasing the value of natural capital is a realistic policy goal

Some Conclusions (2)  Agricultural land accounts a large share of natural capital in Vietnam (+50%) – maintaining soil quality and boosting its productivity is a priority  Potential exists to further increase wealth generated from forest resources — increasing forest area as well as managing productive forest more efficiently are important