Achieving Sustainable Development 

"There is something fundamentally wrong in treating the earth
as if it was a business in liquidation."

-- Economist Herman Daly 

We wish to learn:

  • What is sustainable development and how is it defined? 
  • How can the global economy be redirected toward environmental sustainability? 
  • What are the four kinds of capital? What are some examples and how can they be measured? 
  • How do developed and developing countries compare in terms of their wealth composition? 
  • How does GNP measure up as an indicator of progress and human well-being? 
  • What are some suggestions for "greening" the national accounts? 
Jump to: [Measuring Wealth] [Sustainable Development] [National Income Accounts] [Genuine Savings] [Suggested Readings]
01/04/2006

Format for printing

 

1.  Measuring Wealth

In traditional economic systems, capital, or wealth, is based on human-produced assets -- goods and services that are assigned monetary value and can be consumed. Historically, economic development has sought to maximize monetary capital, while ignoring non-monetary assets, such as human health and well-being, social networks, clean air and water, and biological diversity. As a result, economic development has often occurred to the detriment of human and natural resources, which are clearly valuable to human society, but are usually not included in economic accounting systems. 

In order to achieve sustainability, the traditional definition of capital must be expanded to include natural and social, as well as economic resources. Four kinds of capital have been identified: 

Human-Made Capital
Human-made capital is what we traditional consider capital: produced assets that are easily assigned monetary value and sold in world markets. Some examples include appliances, furniture, automobiles, buildings, dams and other elements of the built environment. 

Natural Capital
In addition to traditional natural resources, such as timber, water, and energy and mineral reserves, natural capital includes natural assets that are not easily valued monetarily, such as biodiversity, endangered species, and ecological services (e.g. air and water filtration) performed by intact ecosystems. The Natural Capital Research Group has defined natural capital as "the subset of all components of nature that can be linked directly or indirectly with human welfare and are valuable, vulnerable, scarce, fragile, or irreplaceable enough to justify investments in monitoring..." 

Human Capital
Human capital generally refers to the health, well-being, and productivity potential of a society. Types of human capital include mental and physical health, proper housing and santiation, education, and work skills. These elements not only contribute to a happy, healthy society, but improve the opportunities for economic development through a productive workforce. 
Figure 1.
Social Capital
Social capital, like human capital, is related to human well-being, but on a societal rather than individual level. It consists of the social networks that support an efficient, cohesive society, and facilitate social and intellectual interactions among its members. As defined by the Civic Practices Network, "social capital refers to those stocks of social trust, norms and networks that people can draw upon to solve common problems." Examples of social capital include neighborhood associations, civic organizations, and cooperatives. Political stability, democracy, government efficiency, and social equity are also considered part of social capital. 

Globally, we see quite a disparity among regions in the types and amounts of capital (wealth) they possess. As indicated in Figure 1, North America, Pacific OECD countries, and Europe have the highest per capita wealth (including human resources and natural capital, as well as produced assets). Note, however, that the greatest portion of total capital in the high-income countries is attributable to human resources (Figure 2). Most developing nations, on the other hand, are not only short on produced as sets, but they have meager human resources as well, reflecting poor education, training, health, etc. 

Clearly, produced assets are much greater in developed than in developing nations. It may come as a surprise, however, that as a percentage of total wealth, produced assets comprise a fairly constant 20 percent, regardless of development status (Figure 2).


Figure 2.


2.   Sustainable Development

Although the term sustainable development was used as early as 1972 at the United Nations Conference on the Human Environment in Stockholm, Sweden, it was not until 1987, with a U.N. report entitled "Our Common Future," that the term was fully defined and translated into policy options. The so-called Brundtland Report (named after the Norwegian Prime Minister who chaired the U.N. Commission authoring the report), defined sustainable development as development that meets the "needs of the present without compromising the ability of future generations to meet their own needs."

The World Bank has also defined sustainability in terms of opportunities for future generations, using a triangular framework to illustrate the idea of Environmentally Sustainable Development (ESD). The new framework includes economic, social and ecological objectives, expanding each of these objectives from the traditional economists' perspective (Figure 1). Under the ESD framework, equity is a new economic objective, and social objectives are expanded to include things like empowerment, participation, social mobility, and cultural identity. Ecological objectives are shifted from resource management to ecosystem integrity and biodiversity. 

Broadly put, the goal of sustainable development is to further each of these objectives (economic, social and ecological) simultaneously over the long term, so that they may be enjoyed by future generations. 

Measuring Sustainability

By definition, the concept of sustainability means that capital must be preserved for future generations. Economists have defined three levels of sustainability, in terms of the four types of capital defined above: 

Weak Sustainability preserves total capital, but not necessarily each of the four kinds of capital. I.e., the different types of capital are viewed as substitutable for one another. 

Sensible Sustainability preserves total capital, as well as some minimum level of each type of capital. I.e., the different types of capital are only partially substitutable -- a combination of different types of capital is required to maintain a functioning system. 

Strong Sustainability requires that each type of capital be preserved independently. I.e., the different types of capital can complement, but not substitute one another. 

If we can indeed define sustainability this way, then the primary challenges are how to measure each kind of capital, how to define an exchange rate between them, and how to evaluate development projects in terms of sustainability. 

Since the Brundtland Commission's report first called upon countries to adopt a goal of sustainable development in 1987, the topic has received considerable international attention.

In 1992, at the UNCED (United Nations Conference on Environment and Development) "Earth Summit" meeting in Rio De Janeiro, prescriptions for achieving sustainable development were agreed upon in "Agenda 21", which recognized that the "integration of environment and development concerns and greater attention to them will lead to the fulfillment of basic needs, improved living standards for all, better protected and managed ecosystems and a safer, more prosperous future." The U.N. Commission on Sustainable Development (CSD) was created to ensure effective follow-up and implementation of Earth Summit agreements. 

Many principles of sustainable development have since been defined-by governments, business, and non-governmental organizations (NGOs) alike. Sharing the common themes of environment, economy and community, they are still quite varied. The International Institute for Sustainable Development maintains a searchable list of sustainable development principles. 

While it is difficult to gauge the progress of these institutions in actually achieving sustainable development, a few marked changes have occurred. For one, the World Bank, the single largest funder of development projects worldwide, now claims to consider sustainability objectives in funding new projects. 
 
 

3.  National Income Accounts

Throughout the developed world, Gross Domestic Product (GDP) and Gross National Product (GNP) are the standard indicators of national wealth. Developed in the 1930s by Simon Kuznets, a U.S. economist given the task of developing a uniform set of national accounts, the GNP and GDP have been widely adopted and institutionalized. Today the GDP is used as a measure of a nation's well-being. Per capita GDP and GNP are often used to measure the economic well-being of an average person. 

A nation's GDP is the value of all final goods and services produced within its borders; while GNP also includes net income from abroad. Simply put, GDP is a gross measure of market activity. Any time money changes hands, the GDP goes up, regardless of whether that transaction is desirable for society. As observed by Cobb, et al. (1995), "The nation's central measure of well being works like a calculating machine that adds but cannot subtract." Automobile accidents, terminal illness, toxic spills, crime and divorces all contribute to market activity. But do these activities benefit society? Should they be included in a measure of national well-being? What about their costs to society? 

Even "beneficial" economic activities have negative side-effects. Building construction, oil exploration, farming, manufacturing--all of these GNP-boosters have social and environmental costs that go untabulated. Pollution (e.g. from factory emissions or agricultural runoff), natural resource depletion (e.g. mining groundwater), and the loss of biodiversity (e.g. from urbanization or deforestation) are some of the unaccounted-for environmental costs of economic activity. Social costs include quality-of-life and aesthetic concerns, as well as health and family unity. (Think about the social costs of things like strip malls, freeways, and oil refineries-or even video games and Hollywood movies.) 

These environmental and social costs of economic activities (externalities, to an economist) are not subtracted out of the GDP, as one might expect. In fact, the failure to account for externalities is one of the major criticisms of the GDP, which is widely recognized as flawed and incomplete. 

Furthermore, there are other major omissions in the GDP, as any economist will admit. While counting every monetary transaction, good or bad, the GDP fails to include nonmarket activity, such as household and other unpaid work, volunteer activities and underground economies--crucial economic functions that go untallied in the national spreadsheets. Also omitted are leisure time and recreation, which are important non-economic indicators of human well-being. 

Several adjustments to the national income accounts, as well as completely new indicators of well-being, have been suggested. 

Net National Product, or NNP, is one alternative indicator. Simply put, NNP is gross national product (GNP) corrected for the value of changes in the country's entire capital base. The use of NNP (vs. GNP) represents a first step in incorporating costs, as well as benefits, into the national income accounts. It can be defined as follows:

NNP = GNP - Depreciation of Capital (sometimes referred to as a Capital Consumption Allowance) 

Economists have also developed other indicators based on the GDP/GNP, such as Disposable Personal Income (DIP), which reflects what individuals can actually spend or save, and Purchasing Power Parity (PPP), which goes a step further by adjusting for local currencies, so that it reflects what an individual can actually purchase locally. 

The problem with NNP and these other alternative indicators, as economists usually calculate them, is that they do not include the depreciation of natural resources. However, a "Green NNP" has been suggested, and can be calculated as follows: 

Green NNP = GNP - Depreciation of Produced Assets - Depletion of Natural Resources

Another version of this idea is Genuine Savings, which has also been proposed as an alternative indicator of national well-being. 
 
 

4.  Genuine Savings

The concept of genuine savings is based on a measure of wealth that is expanded to include human and natural, as well as economic, wealth. It measures the net annual increase or decrease in a nation's reservoir of wealth (as it ha s been redefined). According to previous definitions, development is considered to be sustainable if and only if the stock of capital (wealth) remains constant or rises over time. Thus, the rate of genuine saving can be used to measure sustainability, in that if genuine savings is positive, we are leaving more for future generations; a negative rate of genuine savings indicates unsustainability. 


Figure 3.

The calculation of genuine savings involves the itemization of a nation's stock of wealth, and an accounting of changes to that stock (essentially a big ledger of wealth "accounts"). We define genuine savings as follows: 

Genuine Savings = Production - Consumption - Depreciation of Produced Assets - Depletion of Natural Assets

Preliminary calculations suggest that this measure of genuine savings tends to depress the savings rates of resource-rich developing countries, meaning that current patterns of economic activity are actually decreasing national wealth (Figure 3). Similarly, depressed rates of genuine savings for resource-rich countries represent unseized opportunities -- resources are being depleted, rather than transformed into assets. As shown in Figure 4, most of Africa has been experiencing negative rates of genuine savings through the 1980s, meaning that the continent is developing unsustainably. Other regions also experienced a large drop in genuine savings in the 1980s, as many development projects were financed by liquidating the natural resources of many developing countries.


Figure 4.

5.  Suggested Readings

  • Ahmad, Y.J., S. El-Serafy, and E. Lutz. Environmental Accounting for Sustainable Development. Washington, D.C.: World Bank, 1989. 
  • Brundtland, G. H., et al. Our Common Future: Report of the World Commission on Environment and Development. Oxford: Oxford University Press, 1987. 
  • CIESIN. Consortium for International Earth Science Information Network. 
  • Cobb, C., T. Halstead, and J. Rowe. If the GDP is Up, Why is America Down? Atlantic Monthly, October 1995. 
  • Daly, H. E., and J. B. Cobb, Jr. For the Common Good: Redirecting the Economy toward Community, the Environment and a Sustainable Future. Boston: Beacon Press, 1989. 
  • Daly, H.E. and K.N. Townsend. Valuing the Earth: Economics, Ecology, Ethics. Boston: MIT Press, 1993. 
  • Markandya, A. and C. Costanza. Environmental Accounting. A Review of the Current Debate. Environmental Economics Series Paper No. 8. United Nations Environmental Programme. Environment and Economics Unit, 1993. 
  • Monitoring Environmental Progress: A Report on Work in Progress. Washington, D.C.: World Bank, 1995. 
  • Repetto, R. et al. Wasting Assets: Natural Resources in the National Income Accounts. Washington, D.C.: World Resources Institute, 1989. 
  • Rodenberg, E., D. Tunstall and F. van Bolhuis. Environmental Indicators for Global Cooperation. Working Paper Number 11. Washington, D.C.: Global Environmental Facility, 1995. 

    • World Resources 1996-1997. A Guide to the Global Environment. Chapter 7: Basic Economic Indicators. Washington, D.C.: World Resources Institute, 1997. 


All materials © 2001 by the University of Michigan.