Sustainable development

What is sustainable development ?  The central and most needed part of policy development  Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (World Commission on Environment and Development, the Brundtland Commission)

well-being per capita increases over time on a sustained basis the modern theory of sustainable development is based on notions of capital assets as the means of generating well-being

Capital Human-made capital Human capital (knowledge, skills) Natural or environmental capital Social capital

The condition for sustainability (or potential sustainability) is that the sum of these assets, i.e., total wealth, should increase in per capita terms over time Intergenerational rules of behavior follow immediately, e.g., that each generation should bequeath to the next generation a capital endowment no less than the one it has now

Hicksian income Hicks in 1939 set out the notion that sustainable consumption involved maximum consumption consistent with maintaining capital assets intact Hicksian income measure can then be interpreted as “the interest on total wealth.”

Ramsey Rule

The non sustainability comes about because of positive utility discounting or because particular features of the depreciation of human-made Capital

Cobb Douglas production function in which a Fair degree of substitutability between human Made and natural capital is assumed (in fact the elasticity of substitution is unity in this model)

g is the growth rate of the efficiency of production inputs (the growth rate of total factor productivity), and it is interpreted here to reflect technological change

Measuring Sustainable Development

Resulting indicators of sustainability are simply indicators of environmental and economic change. A sustainability indicator should have the property of giving an approximation of whether a given economy is sustainable or not.

In the 1990s, environmental economists developed indicators based on the capital theory of sustainable development. The GNP is a poor measure of well-being because it implicitly assumes there is only one capital asset—human-made (or reproducible) capital.

The proper measure of well-being is net national product (NNP) rather than GNP because capital depreciation does not contribute to well-being. National product becomes interest on total wealth.

NNP = GNP - dM - dN - dH – dS In each case d refers to net depreciation and subscripts M, N, H, and S refer to human- made, natural, human, and social capital, respectively. In turn GNP is made up of consumption C and gross investment, I

Since I - dM = Inet, or net investment, the revised measure of NNP becomes NNP = C + Inet - dM - dN - dH – dS dM is estimated in conventinal income accounts, dN increase in environmental assets, dH is human capital, dS indicates depreciation of social capital.

For this measure of true or “green” NNP to be estimated, each depreciation indicator needs to be measured in monetary terms. The correct unit valuation in each case is the economic rent, i.e. price – marginal cost.

The first set of accounts to incorporate environmental depreciation was first produced in 1989 for Indonesia. Net ‘true’ investment, i.e. investment – depreciation on environmental asset.

Pearce and Atkinson established that the correct measure on sustainability could be expressed in terms of ‘genuine’ saving. Saving – depreciation = genuine savings This concept was adapted by World Bank and genuine savings indicators appear for over 100 countries

Economies with high ratios of savings to GNP have positive genuine savings. The measures have not been expressed in per capita terms.