Methodological considerations in the measurement of ...

2 downloads 0 Views 1MB Size Report
There seems to be a consensus that the sole utilization of Gross Domestic ... now – inclusive wealth measures the determinants of well-being – the capital stocks ...
Methodological Considerations in the Measurement of Inclusive Wealth1 Pablo Munoz2 United Nations University - Vice Rectorate in Europe April 2015

Abstract The paper presents an overview on inclusive wealth as a measure of welfare, as well as some key findings from the Inclusive Wealth Report 2014. In addition, the text elaborates on some methodological considerations for the compilation of wealth accounts. This is the case particularly with respect to: i) challenges in capturing the multiple contributions of capital assets to human well-being; ii) possible double counting due to the overlapping of asset boundaries; and iii) aspects related to the modeling of the wealth of ecosystem assets.

I. Introduction There seems to be a consensus that the sole utilization of Gross Domestic Product (GDP) falls short in responding to the need of understanding and evaluating economic progress and human wellbeing; in particular due to the multi-dimensionality of the latter concept (McGillivray and Clarke 2006). Suggestions, instead, refer to using a broader set of metrics (Stiglitz 2009). In the context of understanding economic performance from a different angle than GDP, there is an important body of theory demonstrating that the social (shadow) value of an economy’s assets – or wealth - can contribute to such debate, providing indication on intertemporal well-being. Since capital assets should be understood as the sources of wellbeing, tracking changes in the value of a nation’s stocks offer information on how a nation’s current activities and policies will ultimately impact a nation’s future opportunity to generate well-being. This concept of opportunity is central to inclusive wealth. Rather than measure the constituents of well-being – the specific outcomes and circumstances that make up quality of life for us now – inclusive wealth measures the determinants of well-being – the capital stocks upon which nations rely to bring about those outcomes. This is a key pillar of intergenerational

1

Commissioner’s note: This discussion paper was commissioned following the Defra-ONS Seminar, Valuation for Natural Capital Accounting, held in London in November 2013, to contribute to the issues discussed from an inclusive wealth accounting perpsective. This paper was completed in 2015 in order to incorporate relevant findings from the 2014 Integrated Wealth Report. It is therefore not referred to in the published proceedings of the Seminar, and has not been subject to formal discussion and review. 2 email: [email protected]

1

sustainability, and should be included in any assessment of a nation’s economic performance. Wealth accounting also bridges important gaps largely evidenced in other metrics of societal progress, in particular by factoring in environmental changes. GDP, for example, tends to largely ignore biophysical changes caused by production activities in the environmental system. Those changes affect human well-being as they are a direct (e.g. air, landscapes, recreation, etc) or indirect (through the production system) source of people’s benefits. Some capital assets measured in Inclusive Wealth (IW) have been extensively accounted for within the System of National Accounts (SNA), as is the case of produced capital. While other crucial capital assets to people’s well-being, such as natural or human capital, have so far been poorly represented and measured by indicators of sustainable development and wellbeing. The accounting and management of capital assets are important in order to understanding inter-temporal flows of benefits. It is, however, challenging in several cases to: i) obtain data on the complete set of assets available in an economy; ii) measure the full contribution of a particular asset to human well-being, due to the variety of benefits that may result from a specific capital stock; iii) value several of the assets contributions to well-being. This paper has a particular focus on these challenges faced when implementing IW, as well as other practical considerations and limitations that should be taken into account.

II. Overview of wealth accounting One concern while assessing economic performance relates to capturing the ability of an economy to sustain the supply of goods and services 3 – and the associated welfare level – not only during a specific period in time, but also in the future. As shown throughout several theoretical works (e.g. Dasgupta 2009; Arrow et al. 2012; Hulten 1992; Heal and Kriström 2005), the discounted present value of all future consumption possibilities equals, under certain conditions, to a measure of wealth. This is the case when wealth is defined as the social (shadow) value of all capital assets in an economy. Subsequently, changes in wealth measurement allow for the analysis of changes in the capital base, and their implications for present and future welfare. In wealth accounting, the 3

Final goods and services should be understood, in principle, in a comprehensive way, i.e. referring not only to the conventional consumption as measured by the SNA, but also including various other outputs produced outside the sole market sphere. This can be the case, for example, in the various ecosystem services not recorded within conventional accounting.

2

changes in inter-temporal welfare (and the corresponding baskets of commodities) depend upon the net changes in the value of the economy’s capital assets, even if the economy does not follow an optimal path (Dasgupta 2009)4. Note that the wealth framework is a supply driven accounting system in which the wealth index can be interpreted as a supply constraint of inter-temporal goods and services, and the changes in wealth therefore increase/decrease the future consumption possibilities. In this way, flows and stocks are considered within this wealth accounting model. The idea of linking future consumption and the current value of the available assets in an economy implies that «present decisions» involving countries’ asset portfolio management have consequences for the future consumption opportunities of a population. In wealth accounting, capital assets are the inter-temporal means of production, as well as a direct source of human well-being used for fulfilling people’s consumption needs (see Figure 1). Since wealth accounting is concerned with the sustaining of welfare over time, it makes the approach a relevant framework to utilize in studying issues related to sustainability. Capital assets are accounted for in an inclusive way by extending the contribution of produced capital to natural, human and social capital. This set of assets contributes directly and indirectly to human well-being through the production process, as shown in Figure 1. Since the productive base also takes natural capital into account, the wealth index factors in the depreciation (or appreciation) of this capital form due to, for instance, economic growth. This allows understanding trade-offs between some key macroeconomic variables, such as inclusive investment, consumption and the environment. In addition, it is possible to investigate if current economic growth patterns can be sustained in the long run or not; that would in principle depend on whether changes in wealth are negative or positive. Figure 1: A three-capital model of wealth creation

4

As Dasgupta (2009) mentions, the main object of analysis should be the welfare function, and not the Hamiltonian (i.e. setting the welfare function within a dynamic optimization framework) as usually done.

3

Note: This figure is a simplification of the wealth accounting model presented in Ekins 2012.

III. Inclusive Wealth Report Project In response to the need of developing alternative indicators to current measures of economic performance, in particular to the Gross Domestic Product (GDP), the Inclusive Wealth Report (IWR) Project proposes Wealth Accounting as a complementary indicator of economic progress and human well-being. The first IWR5 2012 (UNU-IHDP and UNEP 2012) was launched at the United Nations Conference on Sustainable Development (RIO+20). The report investigates the change in wealth for 20 countries over a period of 19 years. As natural capital was the major focus in this first Inclusive Wealth Report, we selected countries in which nature plays an important role for their economies, for example: (i) oil in Ecuador, Nigeria, Norway, Saudi Arabia, and Venezuela; (ii) minerals in Chile; and (iii) forests in Brazil. We also sought to include major economies from each continent, including nations such as the US, China, Germany, Australia, and South Africa. While the IWR 2012 focused on natural capital, the IWR 2014 (UNU-IHDP and UNEP 2014) was primarily devoted to human capital, in addition to the other capital forms – manufactured and natural capital. Some of the important improvements within the IWR 2014, with respect the IWR 2012, are: i) the country coverage expansion of the Inclusive Wealth Index ( ) towards additional nations. The IWR 2012 covered 20 countries, representing 72% of the world’s GDP and 56% of the global population. In the IWR 2014, the report featured wealth estimates for 140 nations, which represents 99% of the world’s GDP and 95% of the global population; ii) While the IWR 2012 conceived estimates of the Inclusive Wealth Index for the period 1990-2008, the time span of the IWR 2014 accounts for further wealth, expanded from the year 2008 to the year 2010, thus comprising a total of twenty-one years; iii) Improvements in the natural capital accounts, particularly the benefits for human well-being resulting from forest ecosystem services; iv) enhancements in the proxy variable used to represent the contribution of other missing items, i.e. advancements in the estimates of the Total Factor Productivity measurement. Under the IWR project, biannual reports are expected to be produced in order to monitor the progress of countries from an inclusive wealth perspective.

5

The IWR 2012 is available at: www.inclusivewealthindex.org

4

III.a. Measuring progress: A comparison of inclusive wealth, GDP, and HDI There are a number of indicators to evaluate nations’ economic performance and progress. Two of the most commonly used metrics are gross domestic product (GDP) and the Human Development Index (HDI). GDP measures the market monetary value of all final goods and services produced in a given economy over a period of time (generally one calendar year). HDI measures a nation’s performance as it pertains to a selection of outcomes seen as critical to human well-being, such as life expectancy and educational attainment, in addition to income. In this section, we provide an overview of country trends as measured by GDP and HDI alongside inclusive wealth. In doing so, we can identify how these measures of progress converge or diverge in assessing nations’ performance. Map 1 presents these measures in terms of the average percentage growth rates in per capita, GDP per capita, and HDI over the period6 of 1990 to 2010. Results show that growth rates are in general more moderate than those of GDP and HDI. In most cases, this can be explained by the additional factor included in the IWI, natural capital. As most countries experienced declines in natural capital, total growth is decelerated as compared to GDP and HDI. Moreover, empirical evidence shows positive average growth in per capita inclusive wealth in 85 of the 140 countries evaluated (approximately 60 percent); while in the case of the HDI 135 out of 140 countries (96 percent) show positive progress. In terms of GDP, 124 of 140 countries (89 percent) show an overall increase in GDP growth over the past 21 years. As the three measurements capture mostly different aspects of a system, the evaluation obtained about a country’s performance is not always consistent in terms of progress or regress. Indeed, 42 out of 140 countries reveal, for example, a negative trend in average growth rate, but positive growth rates in GDP and HDI. Other key findings of the IWR 2014 are: 



Human capital is the foremost contributor to growth rates of inclusive wealth in 101 out of 140 countries. In 27 countries, produced capital was the primary contributor. On average, human capital contributed to 55 percent of overall gains in inclusive wealth, while produced capital contributed to 32 percent and natural capital to 13 percent. Population growth and the depreciation of natural capital constitute the main driving forces of declining wealth per capita within the majority of countries. Population rates increased in 127 of 140 countries, while natural capital declined in 116 out of 140 countries. Although both factors each negatively affect growth in wealth, changes in population were responsible for greater declines.

Due to missing data, Afghanistan, Cambodia, Czech Republic, and Estonia are compared for the period of 2000 to 2010, and Iraq, Nigeria, and United Arab Emirates for 2005 to 2010. 6

5





Produced capital, the capital type most measured, represents only about 18 percent of the total wealth of nations. The remaining capital types constitute 82% of wealth: 54% of human capital and 28% of natural capital. After adjusting for carbon damage, oil capital gains, and total factor productivity, the number of overall progressing countries drops from 85 to 62 (out of 140). Results show that all three factors negatively affected inclusive wealth in most of the countries; of the three, total factor productivity adjustments had the greatest negative effect.

Map 1: Average annual growth rates of 1990-2010 a)

per capita, GDP per capita, and HDI, period

per capita

b) GDP per capita

c) HDI

6

IV. Some consideration to the measuring of Inclusive wealth IV. a. Capturing asset’s contribution to (multiple) economic outputs While accounting and management of capital assets are important to understanding intertemporal flows of benefit, in several cases it is challenging to obtain data on the complete set of assets available in an economy (Figure 2 reports the assets measured in the IWR), as well as the measurement of the full contribution of a particular asset to human well-being due to the variety of benefits that may result from a specific capital stock. For example, human capital can be defined as “the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being” (OECD 2001a, p.18). It seems to be challenging, however, to determine how to measure such stocks in the population. One proposal consists of looking at the sum of people’s future income streams as a payment for the contributions of human capital to a country’s production. This is usually referred to as an income-based approach (Jorgenson and Fraumeni, 1989). In this approach wages, education and working experience, among others, are some of the key inputs contributing to the provision of a service, and ultimately to the formation of human capital. However, the sum of the marginal payments for such labor (or wages) solely reflects the market compensation for human capital. There are other benefits resulting from investments into human capital, referring to non-market activities, health, subjective well-being, informed citizens, willingness to cooperate, etc. (Liu and Fraumeni 2014, Boarini, et. al., 2012). Figure 2: Capital assets measured in the Inclusive Wealth Report project.

7

Similarly, the contributions of health capital to human well-being could be measured not only in terms of increases in longevity as in the IWR 2012, but also in terms of increase in workers’ productivity due to improvements in health or due to the direct benefits to people of an improvement in health (e.g. the pain reduction due to a medical treatment) (Arrow et al. 2014). In the case of manufactured capital, the SNA captures investments in produced capital by the market value of the capital goods and services acquired in a time period. In some cases, however, capital goods that serve infrastructural needs (e.g. buildings, roads, etc.) – and are thus recorded in the SNA –may create further benefits that are not accounted for, as it could be of recreational or historic value. The opposite could also be the case; large infrastructures may cause negative impacts on people’s lives, e.g. landscape changes. Regarding natural capital, increasing literature on ecosystem services offers useful classifications for organizing natural capital services flowing into the economy and directly or their beneficiaries. Such classifications highlight at large the multiple services provided by natural assets (e.g. forest), which are commonly grouped into provisioning (e.g. timber), regulating (e.g. water flow regulation) and cultural services (e.g. recreation). Whilst provisioning services are largely measured within the conventional market activities recorded in the SNA, many regulating and cultural services tend to be outside the traditional boundaries of measurement. The measurement of the full set of services supplied over time gives a comprehensive picture of the importance of natural assets and their multiple functionalities for the economy and human well-being. It is therefore important to have a clear picture of what assets and which contributions of an asset are being measured.

IV.b. Asset boundaries When measuring countries’ inclusive wealth, the accounting exercise suggests taking into account all those assets that contribute to human well-being over time. These assets are usually grouped in produced, human, natural and social capital. While wealth accounting focuses on the measurement of assets for human well-being, there are other accounting frameworks, such as the SNA or the System of EnvironmentalEconomic Accounting (SEEA), that are also concerned with the understanding of assets with the purpose of measuring economic performance, as well as the interaction between the economy and the environment, respectively. These two frameworks recognize, however, that these accounting systems are important for other applications, as for example the analysis of productivity or well-being.

8

Although these three accounting frameworks (IW, SNA, and SEEA) differ in terms of the scope of measurement in the assets considered, they also share common interests, in the sense that they seek to record in some cases the same assets available in the economy. The SNA for instance offers guidance for measuring three groups of assets: i)

ii)

iii)

Produced assets, comprising fixed assets (e.g. building and machines), inventories (e.g. stores of wheat for future use), and valuables (e.g artworks and precious metals); Non-produced assets, consisting of other assets that come into existence in way other than through processes of production. There are three main categories: (i) natural resources, (ii) leases, licenses and purchased goodwill, and (iii) marketing assets. Financial assets, including all financial claims, shares or other equity in corporations, plus gold bullion held by monetary authorities as a reserve asset.

Source: SNA 2008/SEEA 2012 Regarding the boundaries used by the SNA for these assets, the framework suggests restraining the analysis to those capital assets where the “entities must be owned by some unit, or units, and from which economic benefits are derived by their owner(s) by holding or using them over a period of time” (SNA, 2008; pp.7). Moreover, fixed assets - the main subcategory within produced assets- are those “goods and services supplied to the economy by means of production… that are used in production for more than one year” (SNA, 2008; pp.198). This additionally leads one to explore the ‘production’ boundaries used by the SNA, which are fundamental within this framework, as fixed assets are produced goods and services within the SNA delineations. In this regard, the SNA states that: “production is understood to be a physical process, carried out under the responsibility, control and management of an institutional unit, in which labour and assets are used to transform inputs of goods and services into outputs of other goods and services (SNA, 2008; pp.6)”. Taking a closer look at the definition of production by the SNA matters, as a share of the goods and services produced every accounting period represent the changes in gross fixed capital formation (or gross investment); Such investments are the main input for recording the changes in the produced capital category together with the depreciation rates of these assets. Nowadays, it is possible to find time series of gross investment in produced capital for more than forty years (See, for example, United Nations Statistics Division, 2013 or Feenstra et al., 2013). Given that there is a relatively long tradition and practice in collecting countries’ gross investment, it seems reasonable to make use of such accounts as a starting point in the measurement of inclusive wealth. The definition of production by the SNA, and its importance for measuring gross investment and modeling produced capital, has a consideration that one should bear in mind when 9

accounting for natural capital. This refers to the fact that cultivated biological assets such as plantations or farming aquatic resources are accounted for as production, since: i) labour intervenes during the growing process of these resources; ii) assets are owned by some unit; and iii) economic benefits are obtained by their owner. Furthermore, the changes in growing stock over time are part of the gross capital formation, and therefore represent increases in produced capital. Another consideration to keep in mind refers to the fact that the non-produced capital accounts of the SNA only measure those environmental assets that have an economic value. The natural items in this subcategory are specifically land and natural resources, comprising the latter group of: subsoil resources (minerals and fossil fuels), naturally regenerated forest resources, water, aquatic resources (e.g. fisheries), soil and other biological resources (SNA 2008; SEEA 2012). Thus, the SNA requests that assets must have an economic value and it should be possible to establish ownership rights on the resources in order to be incorporated within the accounts (SNA 2008 and SEEA 2012). This implies that any other source of common wealth which contributes to the economy and human well-being is excluded by convention within the SNA framework, as it falls out of the accounting boundaries (see Box 1 for some examples). Box 1: Examples of produced and non-produced resources in the System of National Accounts. 

 



The natural growth of stocks of fish in the high seas not subject to international quotas is not counted as production: the process is not managed by any institutional unit and the fish do not belong to any institutional unit. The growth of fish in fish farms is treated as a process of production in much the same way that rearing livestock is a process of production. The natural growth of wild, uncultivated forests or wild fruits or berries is not counted as production. However, the deliberate felling of trees in wild forests, and the gathering of wild fruit or berries, and also firewood, counts as production. In the case of air and oceans, it is not possible to establish ownership.

 Rainfall and the flow of water down natural watercourses are not processes of production, whereas storing water in reservoirs or dams and the piping, or carrying, of water from one location to another all constitute production.

(SNA, 2008; pp.6)

10

On the other hand, the SEEA Central Framework (SEEA 2012) extends the variety of ‘environmental assets’ that should be accounted for in a nation’s balance sheet, being the main categories proposed below: 1 Mineral and energy resources 1.1 Oil resources 1.2 Natural gas resources 1.3 Coal and peat resources 1.4 Non-metallic mineral resources (excluding coal and peat resources) 1.5 Metallic mineral resources 2 Land 3 Soil resources 4 Timber resources 4.1 Cultivated timber resources 4.2 Natural timber resources 5 Aquatic resources 5.1 Cultivated aquatic resources 5.2 Natural aquatic resources 6 Other biological resources (excluding timber resources and aquatic resources) 7 Water resources 7.1 Surface water 7.2 Groundwater 7.3 Soil water

Source: (SEEA, 2012) SEEA 2012 primarily points out that the extension in the measuring of environmental assets, with respect to SNA, lies in the inclusion of all assets that may provide benefits toward humanity; and not only those that have a economic value based on the SNA principles. As shown in Figure 3, there are common areas of asset accounting in the economic and environmental domain that should be considered to avoid asset double counting. Figure 3: Relationship between environmental and economic assets

Source: (SEEA, 2012) It is worth mentioning that the SEEA Experimental Ecosystem Accounting (SEEA-EEA) offers a complementary perspective to environmental assets for recording nature’s contribution to 11

economic activity and well-being, which are called ecosystem assets. They are defined as spatial areas comprising of a combination of biotic components, abiotic components, and other characteristics that function together (SEEA-EEA). It is important to note that SEEA-EEA goes beyond the individual assets listed in Table 1 by understanding the possible interactions among them as a part of an ecosystem. SEEA-EEA recognizes a broader set of services derived from ecosystem assets than the one used by SEEA. As there are common areas of accounting between SEEA-EEA and SNA, such as the case of agricultural land, possible double counting should be carefully evaluated. The overlap between produced capital and human capital seems to be less controversial. The SNA rules recognize that ‘Human input is the major input in most production processes, and the value of that input is to a large extent dependent on the knowledge that humans bring to the production process’. However, human capital is not treated by the SNA as an asset. In this regard, the SNA states that ‘It is difficult to envisage “ownership rights” in connection with people, and even if this problem could be sidestepped, there still remains the difficulties in the valuation of human capital’. While the measuring of human capital in the SNA is out of scope, there are some items that relate to this asset as it is an educational expenditure which is recorded within the SNA. Such expenditure constitutes an ‘input’ in the formation of the ‘output’ measure - human capital (Jorgenson 2010). In any case, educational expenditure is not part of the gross investment in the SNA, but consumption. Therefore, in principle, it does not represent double counting in the idea of using gross investment as an input in the produced capital models, and as investment in produced capital excludes the expenditure in human capital. The remaining capital forms which could be considered in a measure of inclusive wealth as social capital include aspects of health capital within human capital, some public ecosystem services, which fall outside of the SNA and SEEA, but indeed should be part of an inclusive metric of wealth. Therefore, it is essential to take into account the asset boundaries used by the SNA when using data on gross investment resulting from the SNA for the measuring of produced capital in the context of inclusive wealth. This is so as to account for those assets not yet measured, as well as the avoiding of double counting in the natural capital accounts.

IV.c. Valuation Challenges in Natural Capital Accounting The importance of Ecosystem Services (ES) for human well-being is sometimes neglected in decision-making processes. The evaluation of policy options is often done under incomplete information of the true benefits and cost resulting from nature to people, as well as ignoring the costs of the whole set of factors used in production. Economic initiatives (e.g. TEEB) call for mainstreaming such ecological services using economic tools, and factoring in these 12

contributions, as these ecosystem services are currently outside of formal (and even informal) markets. There is, indeed, an increasing recognition on the relevance of recording the contribution of physical flows of goods and services that take place outside the market sphere in metrics of economic welfare (see for example Nordhaus 2006). Moreover, the study of ecosystem services from an asset perspective implies analyzing the expected ecosystem service flows over time of a specific asset, where the capacity of the asset to generate a bundle of ES can be understood as a function of the condition and the extent of the ecosystem (SEEA-EEA, 2014). Assessing these inter-temporal benefits requires some assumptions regarding the use of the respective ecosystem asset in the subsequent periods of evaluation. As pointed out by SEEA-EEA, two common future patterns of use are generally identified: (i) the ecosystem asset is under a sustainable yield or (ii) the unit of analysis is over-used; this is usually the case when the extraction rates are higher than the regeneration rates, i.e. there is a net depletion. If assumption (i) is made, even though in reality the ecosystem flows are declining due to over-use, it follows that the model leads, ceteris paribus, to underestimate the total wealth. This is because one would expect that the value rises as the flows become scarcer in the future. Such a decline in ecosystem services may be even become exacerbated due to the scale changes and non-linearities in the ecosystem services, which bring about a significant loss in the flows of services supplied. Valuing such inter-temporal ecosystem service flows by their contribution to economic welfare leads to the value of the ecosystem asset at a specific point in time7. In wealth accounting, this contribution is articulated by the notion of shadow prices (see Section 2), that measure the marginal contribution of an asset to economic welfare. Empirical applications, however, are in some cases used in market prices as proxy variables; this may distort an ES contribution in the presence of market failures. For example, prices may not be reflecting the full asset contribution in the presence of externalities not accounted for. Furthermore, shadow prices are even more challenging in wealth accounting as they measure an asset’s contribution to ‘inter-temporal’ economic welfare, which means that the price must capture and reflect the contribution of an asset not only to the present, but also to future generations. In the IWR 2014, we valued (weighted) the changes in the forest ecosystem assets by those values reported by Ecosystem Service Valuation Database (ESVD) (Van der Ploeg and de Groot 2010) as a proxy of the shadow prices. From this database, we obtained 265 values from different works that were conducted over the past two decades for the following biomes of our interest: Tropical Forest, Temperate and Boreal Forests. With the insights of the ESVD, it was estimated that the value of the services provided by a forest hectare is about US$ 2990 and US$ 2091 per hectare per year for tropical, temperate and boreal 7

Another way to estimate the asset value is based on replacement cost method, which consist in estimating the costs of producing equivalent ecological services (e.g. water purification treatment) with an alternative technology. (Bockstael et al. 2000 for further details).

13

forests, respectively. These shadow prices not only capture benefits such as food, but also includes regulating and recreation services8. Additionally, Table 1 breaks down these figures by the contribution done by the different types of ES. The projected benefits at a point in time (assuming a sustainable use of the asset) are further capitalized and discounted overtime, so as to arrive at the net present value of the ecosystem asset per unit of analysis (hectares in this case). Finally, the latter value is multiplied by the changes in the forest area accessed by humans in order to obtain benefits. Table 1: Average annual value per hectare in USD of 2005 on the basis of 262 values.

Select service

1 2 3 4 5 6

Provisioning services Food Water Genetic Medical Raw materials Ornamental

7 8 9 10 11 12 13 14 15

Regulating services Air quality Climate Extreme events Water flows Waste Erosion Soil fertility Pollination BioControl

Temperate and Tropical Forest Boreal Forests Unit= USD/yr/ha Unit= USD/yr/ha

23 146 2 ...

...

868

223

0 2 40 1 37 418 20

33 14 343 342 129 54 13

...

...

Habitat services 16 Nursery 17 Genepool

506 ...

18 19 20 21 22

Cultural services Aesthetic Recreation Inspiration Spiritual Cognitive Total

107 137 451 475

17 396 ...

27 0 ...

257 ...

0 2,091

2,990

Source: Van der Ploeg and de Groot, 2010. 8

Timber resources are excluded from these figures as they are measured with a different methodology (See IWR 2014 Methodological Annex).

14

Measuring the wealth of ecosystem assets concerns itself, at least, with the understanding of the present and future benefits of ES for human well-being. Modeling the temporal dynamic of the ES contributions to people create some additional challenges, since there are several variables affecting the supply (e.g. changes in biophysical processes) and demand (e.g. population, income, wealth, preferences, value of substitute and complementary ES, technology, etc) of the importance of an ecosystem services for human well-being. For instance, a decline in ES may be explained by the scarcity in the natural inputs of the underlying ecosystem processes. The pressure on natural inputs may have aroused from the fact that those inputs not only serve as a factor of production in the biological process to produce an specific ES, but also as an ecosystem service to final users. Water flow, for example, is a natural resource that serves multiple users, being an input to biological process and a service to final consumers. Rapid changes in the demand due to population growth, changes in lifestyle, etc., may thus cause scarcity of water resources, and changes in the corresponding values of the whole set of ES relying directly or indirectly (e.g. a biological process) on a water basin. In general, the modeling of the wealth of ecosystem assets brings about some uncertainties in the analysis. The SEEA-EEA groups these uncertainties in four categories: (i) uncertainty related to physical measurement of ecosystem services and ecosystem capital; (ii) uncertainty in the valuation of ecosystem services and assets; (iii) uncertainty related to the dynamics of ecosystems and changes in flows of ecosystem services; and (iv) uncertainty regarding future prices and values of ecosystem services.

V. Final remarks Assets are import means that sustain well-being over time, and, therefore, the relevance of maintaining a resource (asset) base upon which an economy can rely on to produce goods and services, as well as supply direct benefits to people. In an inclusive measure of wealth, in principle, there is no reason for excluding any object (tangible or intangible) that is able to deliver benefits for human well-being over time. This leads the accounting efforts to consider a wide range of assets that go beyond those that are accounted for in the SNA, SEEA and SEEA-EEA. This is because assets such as human capital, social capital or common natural resources (e.g. fisheries in open ocean areas) that are excluded in the latter frameworks, should be considered in inclusive wealth. While inclusive wealth may be considered a more comprehensive framework than SNA, SEEA and SEEA-EEA, it is largely convenient to start compiling those items with a long accounting tradition in the measuring of inclusive wealth, as it is produced capital and some of natural capital items are already recorded in the SNA, SEEA and SEEA-EEA. This suggests that the 15

inclusive wealth measure should adopt the conventional sets of accounting principles and empirical records established and measured respectively in the SNA, since they have already been intensively developed and estimated by national statistical offices. Furthermore, it suggests that conventional sets should be extended to further capital assets that also contribute to economic output and human well-being. Special attention should, however, be given to potential double counting, as the SNA considers some environmental assets which can be also accounted for under the natural capital accounts. Moreover, some asset benefits are captured by estimating the future flows of benefits to people; opposed to those cases where it is possible to have asset inventories of the total items available (e.g. barrels of oil). The case of the former approach is particularly relevant to estimating the wealth of ecosystem assets, where one should bear in mind the uncertainties and assumptions involved in the modeling. In general, we should interpret the empirical findings as rough trends of the changes in inclusive wealth that seek to illuminate the relevance and need for the approach to understanding progress in long-term economic development.

Acknowledgments I am extremely grateful for the very valuable comments and suggestions from Peter Bartelmus and Gang Liu as well as colleagues from DEFRA, Michele Pittini and Colin Smith.

References Arrow, K.J., Dasgupta, P., Goulder, L.H., Mumford, K.J. and Oleson, K., 2012. Sustainability and the measurement of wealth. Environment and Development Economics, 17, 317-353. Arrow, K.J., Dasgupta, and Mumford, K.J., 2014. Health capital. In UNU-IHDP and UNEP (Eds). Inclusive Wealth Report 2014: Measuring Progress Toward Sustainability. Cambridge: Cambridge University Press. Boarini, R., Mira d’Erc ole, M. and Liu, G., 2012. Approaches to Measuring the Stock of Human Capital: A Review of Country Practices. (OECD Statistics Working Papers, No. 2012/04). OECD Publishing. doi: 10.1787/5k8zlm5bc3ns-en Bockstael, N. E., A. M. Freeman, R. Kopp, P. Portney and K. Smith, 2000. "On measuring economic values for nature." Environmental Science and Technology 34. pp 1384-1389. Dasgupta, P., 2009. The welfare economic theory of green national accounts. Environmental and Resource Economics, 42, 3-38.

16

Ekins, P., 2012. Safeguarding the Future of the Wealth of Nature: Sustainability, Substitutability, Measurement, Thresholds and Aggregation Issues in Natural Capital Accounting for Human Well-Being. In UNU-IHDP and UNEP (Eds). Inclusive Wealth Report 2012: Measuring Progress Toward Sustainability. Cambridge: Cambridge University Press. Feenstra, R., Inklaar, R. and Timmer, M., 2013. The Next Generation of the Penn World Table" available for download at www.ggdc.net/pwt Heal, G.M., Kristrom, B., Mäler, K.G. and Vincent, J., 2005. National income and the environment. Handbook of Environmental Economics, Vol 2., Amsterdam: Elsevier. Hulten, C. R., 1992. Accounting for the wealth of nations: The net versus gross output controversy and its ramifications. Scandinavian Journal of Economics, 94, 9-24. Jorgenson, D., 2010. Human Capital and the National Accounts. Survey Of Current Business. Liu, G., and Fraumeni, B., 2014. Human capital measurement: a bird’s eye view. In UNU-IHDP and UNEP (Eds). Inclusive Wealth Report 2014: Measuring Progress Toward Sustainability. Cambridge: Cambridge University Press. McGillivray, M., Clarke, M., 2006. Understanding Human Well-being. United Nations University, Tokyo-New York-Paris. Nordhaus, W.D., 2006. Principles of National Accounting for Nonmarket accounts. A New Architecture for the U.S. National Accounts: NBER Studies in Income and Wealth 66. OECD. (2001). The Well-being of Nations: The Role of Human and Social capital. Paris: OECD Publishing. Jorgenson, D.W. and Fraumeni, B.M., 1989.The Accumulation of Human and Non-Human Capital, 1948-1984. In R.E. Lipsey and H.S. Tice (Eds.). The Measurement of Savings,Investment, and Wealth. Chicago: The University of Chicago Press. SEEA, 2012. System of Environmental-Economic Accounting. Central Framework. United Nations, European Commission, Food and Agriculture Organization, International Monetary Fund, Organisation For Economic Co-Operation and Development, and World Bank. (2012). New York: United Nations. SEEA-EEA, 2014. System of Environmental-Economic Accounting. Experimental Ecosystem Accounting. United Nations, European Commission, Food and Agriculture Organization, Organisation For Economic Co-Operation And Development and World Bank. New York: United Nations. SNA, 2008. New York: Commission of the European Communities-Eurostat, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, World Bank.

17

Stiglitz, J., Sen, A. and Fitoussi, J., 2009. Report by the Commission on the Measurement of Economic Performance and Social Progress. Paris: Commission on the Measurement of Economic Performance and Social Progress. United Nations Statistics Division, 2013. Nationals Accounts Main Aggregates Database. Available: http://unstats.un.org/unsd/snaama/Introduction.asp, accessed in 2013. UNU-IHDP and UNEP, 2012. Inclusive Wealth Report 2012: Measuring Progress Toward Sustainability. Cambridge: Cambridge University Press. UNU-IHDP and UNEP, 2014. Inclusive Wealth Report 2014: Measuring Progress Toward Sustainability. Cambridge: Cambridge University Press. Van der Ploeg, S. and De Groot, R., 2010. The TEEB Valuation Database – a searchable database of 1310 estimates of monetary values of ecosystem services. Wageningen: Foundation for Sustainable Development.

18