The World Bank Approach

In the early 1990s a major effort was undertaken by the Environmentally Sustainable Development (ESD) unit of the World Bank to assess quantitatively the wealth of nations, taking into account monetary valuations of natural and human capital as well as man-made capital, for 192 countries for the year 1990. Man-made capital per capita was estimated by a perpetual inventory method (accumulated net investment in real terms less depreciation). A summary of this work is given in ESD (1995).

Natural capital per capita was estimated indirectly in terms of four types of assets: land, water, forest and subsoil assets. Land was subdivided into cropland, forest, pasture and other. Each was valued as a multiple of per-capita GDP, with some adjustment for 'protection', and quality. The appropriate multiple (of per capita income) was determined roughly by a statistical analysis and assumed to be the same for all countries, namely 3.0 for fertile irrigated cropland, 2.0 for other cropland, 1.75 for forest land, 0.75 for pasture and 0 for 'other' (for example, deserts, mountains). The value of standing timber was added to the value of forest land, at 50 percent of the international price for cut timber. Subsoil assets (coal, oil, minerals) were also based on then-current estimates of known or probable reserves and valued at 50 percent of the international price for the same minerals after extraction. Fresh water was valued at 1 (US) cent per gallon, for all countries - a (rough) geometric mean between the value for human use and the value for irrigation. (Industrial value, for example for cooling, was not considered.)

The value of human resources was calculated as a residual, after accounting for GDP (actually net national product, or NNP) in terms of contributions by man-made capital and labor, using a standard production function. Exchange rates were adjusted for purchasing power parity (PPP). Quantitative results for the year 1990 were presented for all 192 countries, and 'genuine savings' (adjusted for depreciation, sale of assets, depletion of natural resources and environmental degradation) were calculated for the period 1962-91 for 90 countries. Apparently, the results exhibited high correlation with educational attainment, but with enough variability to suggest that other factors are also involved.

Serageldin and Steer (1994) emphasized the preliminary nature of the results and repeatedly made the point that detailed results for any individual country could not be 'defended' without further work, although interesting patterns might be observed. The most 'stunning' result noted was that human capital for most countries exceeds the sum of both natural capital and man-made capital. In fact, produced (man-made) capital typically amounts to only 16-20 percent of the total, yet dominates economic policy.

The second important overall result was that savings calculated as a fraction of GDP can mask dis-saving by resource depletion and environmental degradation. In fact, it appears that Latin America as a whole experienced net dis-saving in 1980-84 and again after 1988 to the end of the period of analysis.

Serageldin and Steer were careful to note that the approximations made in the study were somewhat arbitrary, and might be modified significantly with further research. For instance, the value of land clearly depends on accessibility to markets, hence cities, whence population density or urbanization are likely to be important factors. The valuation of fresh water in the study was quite arbitrary and should be reconsidered, again in relation to population density, urbanization and industrialization, as well as possibly other factors. The valuation of subsoil resources in terms of known and probable reserves and current international prices is obviously very dubious, given the volatility of resource prices and the considerable uncertainty of reserve estimates. Undoubtedly, if the same calculations were carried out again today, the value of natural capital would appear to be much higher than it was in 1990, despite depletion since then.

Apart from these points, we would argue that the estimation of human capital, as a residual, should be reconsidered and revised to reflect the influence of energy (exergy) consumption and technological efficiency as drivers of GDP. If GDP can be explained largely in terms of labor, produced capital, exergy inputs and exergy conversion efficiency, it would follow that other components of human capital (including social institutions) must be of correspondingly less importance than the reported calculations suggest. In short, it does seem clear that much might be learned by revisiting and revising the research reported in Monitoring Environmental Progress (ESD 1995).

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