National Accounts and Measures of Sustainability Rui Mota Tel Ext Tiago Domingos October 2011

National Accounts Identity C I X M

Main Aggregates Gross Domestic Product Gross Domestic Product (GDP) + Net primary income flows to ROW = Gross National Income (GNI) + Current net transfers from ROW = Gross National Disposable Income - Final consumption (Private and Government) = Gross Saving (S) Net Domestic Product (NDP) = Net National Income (NNI) = Net National Disposable Income = Net Saving (NS) Subtract CFC

Main Aggregates National (Residence) - Primary income flows to ROW Product / Income + Primary income flows from ROW Domestic (Territory) Net + Consumption Fixed Capital (CFC) Aggregate X - Consumption of Fixed Capital (CFC) Gross X – Domestic produc, Income, Saving, Disposable income,...

GNI = GDP + Y’ RM. Where Y’ RM = Net income payable to non-resident units for production factors. Domestic Product vs. National Income Source: AMECO database

Gross Product vs. Net Product [Million euros 2000] Source: AMECO database

GDP growth rate Source: AMECO database

Gross Product per hours worked [euros 2000] Source: AMECO database

Net Saving in Portugal [Mrd euros 2000] Source: AMECO database Net savings are negative when consumption is higher than net disposable income

National Disposable Income [Mrd euros 2000] Source: AMECO database

“Development that meets the needs of the present without compromising the ability of future generations to meet their own need.” –Intra- and inter-generational equity –Anthropocentric Sustainability of what? –non-declining aggregate output or consumption, –non-declining utility, –non-declining aggregate resources (productive base), –non-increasing pollution, … Weak vs. Strong Sustainability –Limits to substitution, –Is the combined value of all assets remain constant, that is, it is possible to substitute one form of capital for another, so natural capital can be depleted or the environment degraded as long as there are compensating investments in other types of capital? –Critical levels of natural capital. Sustainable Development

International Efforts World Bank’s Adjusted Net Savings (Genuine Savings) Rate of savings after taking into account investment in human capital, depletion of natural resources and damage caused by pollution. Time series ( …) for 140 countries. ( ) European Comission ( ) Indices to measure progress integrated into the decision-making and public debate? “We cannot face the challenges of the future with the tools of the past. It's time to go beyond GDP.” Durão Barroso Extending European National Accounts to environmental and social issues. OECD work on alternative measures of welfare ( ) Extending GDP to include leisure time and inequality. Changes in country rankings Stiglitz Commission ( ) Identify the limits of GDP as an indicator of economic performance and social progress. SEEA 2003, United Nations ( ) Satellite system of the SNA including economic and environmental information in a single framework to measure the contribution of the environment to the economy and vice-versa.

World Bank’s Genuine Savings

Resource Curse: Countries dependent on natural resources tend to depict unsustainable development (negative GS). World Bank’s Genuine Savings

m-dimensional consumption bundle, including everything that influences well-being. –Includes all market and non-market commodities, e.g, produced at home, environmental services, … n-dimensional capital vector: –Includes man-made capital, natural resources, human capital (education and knowledge) and foreign capital. Time is included as a capital, to depict technological progress in production. Attainable production possibilities The model s.t. Green Accounting Theory

Green Net National Income Genuine Savings Changes in Green Net National Product measure changes in welfare. Genuine Savings measure changes in welfare. Define sustainable development as: - non-decreasing utility. Then, a one-sided sustainability test is (Pezzey, 2004) un-sustainable development. Green Accounting Theory

Include –stocks of commercial forests, –welfare costs of air emissions, The capital stocks are : –Domestic man-made capital, –Net foreign capital held privately or by the government, –Stock of commercial natural resources –Human capital Production Small Open Economy

Households’ utility function depends on material consumption rate and (negatively) on the flow of emissions The vector of emissions depends on production and abatement expenditure. Maximize welfare subject to the dynamics of the forms of capital considered. Green Net National Income: Genuine Saving: The value technological progress (TFP): Small Open Economy

Starting from conventional SNA aggregates: –Deduct the damage from flow pollution emissions, –Deduct (add) the value of rents from resource depletion (or not), GNNI and GS in Portugal

Impacts considered: –Exposure to PM 2.5 and ozone –Health damages of PM2.5 (both acute and chronic effects) and ozone, O3 (only acute). Both long-term (chronic) and short-term (acute). Both mortality (i.e. deaths) and morbidity (i.e. illness) Marginal cost of emission per emitted pollutant [€2000/ton]: [€2000/t] Best Low High SO NH NO x VOC PM2, GNNI and GS in Portugal – Air Emissions

The damages from air emissions are around 8% of Portuguese GNI: - [4, 11]% GNI

The depreciation of commercial forests in Portugal is on average 10% of the contribution of forestry to national product (around 4%). GNNI and GS in Portugal – Forests

Without the value of time – Decreasing tendency throughout the period and negative GS after With the value of time – Decreasing tendency until 2001, but GS are always positive. Genuine Savings

In 1993, SO2 costs of emissions, which represent around 30% of total emission costs, decreased substantially. Increases welfare but does not counteract the loss of production. Sustainability Message

The depletion of water resources. The depletion of biodiversity. Depletion of stocks of fish. Inclusion of the value of ecosystem services. Soil quality. Distributional issues (intragenerational concerns). Looking at an extended but incomplete range of assets may produce a result further from the truth Results need to be treated with caution as tests for sustainable development and guides to policy.... What’s Missing?