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GDP ignores the depreciation of capital assets. It is certainly
possible for a country™s productive base to grow while its GDP
increases (this will be con¬rmed when we come to study Table 2),
which is no doubt a path of economic development we all would like
to follow; but it is also possible for a country™s productive base to
shrink during a period when GDP grows (this also will be
con¬rmed when we come to study Table 2). The problem is that no
one would notice the shrinking if everyone™s eyes were riveted on
GDP. If the productive base continues to shrink, economic growth
will sooner or later stop and reverse sign. The standard of living will
then decline, but no one would have suspected that a fall was in
store. So, growth in GDP per head can encourage us to think that all
is well, when it isn™t. Similarly, it is possible for a country™s Human
Development Index (HDI; Chapter 1) to increase even while its
productive base shrinks (Table 2). This means that HDI too can
mislead.

Market prices as signals of resource scarcity
You could counter that a ¬xation on GDP or HDI shouldn™t prevent
anyone from looking up prices. You could even argue that if natural
resources really were becoming more scarce, their prices would
have risen, and that would have signalled that all is not well. But if

127
prices are to reveal scarcities, markets must function well (Chapter
4). For many natural resources, markets not only don™t function
well, they don™t even exist (we called them ˜missing markets™
earlier). In some cases, they don™t exist because relevant economic
interactions take place over large distances, making the costs of
negotiation too high (for example, the effects of upland
deforestation on downstream farming and ¬shing activities); in
other cases, they don™t exist because the interactions are separated
by large temporal distances (for example, the effect of carbon
emission on climate in the distant future, in a world where forward
markets don™t exist because future generations are not present
today to negotiate with us). Then there are cases (the atmosphere,
aquifers, the open seas) where the migratory nature of the resource
keeps markets from existing “ they are open access resources
(Chapter 2); while in others, ill-speci¬ed or unprotected property
rights prevent markets from being formed (mangroves and coral
reefs), or make them function wrongly even when they do form
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(those who are displaced by deforestation aren™t compensated).
Earlier, we called the side-effects of human activities that are
undertaken without mutual agreement, ˜externalities™. Our dealings
with Nature are full of externalities. The examples suggest that the
externalities involving the environment are mostly negative,
implying that the private costs of using natural resources are less
than their social costs. Being underpriced, the environment is over-
exploited. In such a situation, the economy could enjoy growth in
real GDP and improvements in HDI for a long spell even while its
productive base shrinks. As proposals for estimating the social
scarcity prices of natural resources remain contentious, economic
accountants ignore them and governments remain wary of taxing
their use.

The environment: is it a luxury or necessity?
It isn™t uncommon to regard the environment as a luxury good, as
in the thought expressed in a prominent newspaper that ˜economic
growth is good for the environment because countries need to put
poverty behind them in order to care™. But in Desta™s world the

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environment is an essential factor of production. When wetlands,
inland and coastal ¬sheries, woodlands, forests, ponds, and grazing
¬elds are damaged (owing to agricultural encroachment, nitrogen
overload, urban extensions, the construction of large dams,
resource usurpation by the state, or whatever), it is the rural poor
who suffer most. Frequently, there are no alternative sources of
livelihood for them. In contrast, for rich eco-tourists or importers
of primary products, there is something else, often somewhere
else; which means that there are alternatives. Degradation of
ecosystems is like the depreciation of roads, buildings, and
machinery “ but with two big differences: (i) it is frequently
irreversible (or at best the system takes a long time to recover), and
(ii) ecosystems can collapse abruptly, without much prior warning.
Imagine what would happen to a city™s inhabitants if the




Sustainable economic development
infrastructure connecting it to the outside world was to break
down without notice. Vanishing water holes, deteriorating grazing
¬elds, barren slopes, and wasting mangroves are spatially con¬ned
instances of corresponding breakdowns among the rural poor in
Desta™s world. The analysis in Chapter 2 can now be invoked to
explain how an abrupt ecological collapse “ such as the one that
has been experienced in recent years in the Horn of Africa and the
Darfur region of Sudan “ can trigger a rapid socio-economic
decline.


Sustainable development: theory and evidence
Economic development is sustainable if, relative to its population, a
society™s productive base doesn™t shrink. How can one tell whether
economic development has been sustainable? We have noted that
neither GDP nor HDI will tell us. So what index would do the job?
A society™s productive base is its institutions and capital assets. As
we are interested in estimating the change in an economy™s
productive base over a period of time, we need to know how to
combine the changes that take place in its capital stocks and in its
institutions. Let us keep institutions aside for the moment and
concentrate on capital assets.

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Intuitively, it is clear that we have to do more than just keep a score
of capital assets (so many additional pieces of machinery and
equipment; so many more miles of roads; so many fewer square
miles of forest cover; and so forth). An economy™s productive base
declines if the decumulation of assets is not compensated by the
accumulation of other assets. Contrarywise, the productive base
expands if the decumulation of assets is (more than) compensated
by the accumulation of other assets. The ability of an asset to
compensate for the decline in some other asset depends on
technological knowledge (for example, double glazing can
substitute for central heating up to a point, but only up to a point)
and on the quantities of assets the economy happens to have in
stock (for example, the protection trees provide against soil erosion
depends on the existing grass cover). Clearly, though, capital assets
differ in their ability to compensate for one another. Those abilities
are the values we would wish to impute to assets. We need to have
estimates of those abilities. This is where an asset™s social
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productivity becomes an item of interest. By an asset™s social
productivity, we mean the net increase in social well-being that
would be enjoyed if an additional unit of that asset were made
available to the economy, other things being equal. Putting it
another way, the social productivity of an asset is the capitalized
value of the ¬‚ow of services an extra unit of it would provide society.
An asset™s value is simply its quantity multiplied by its social
productivity.

As we are trying to make operational sense of the concept of
sustainable development, we must include in the term ˜social well-
being™ not only the well-being of those who are present, but also of
those who will be here in the future. There are ethical theories that
go beyond a purely anthropocentric view of Nature, by insisting that
certain aspects of Nature have intrinsic value. The concept of social
well-being I am appealing to here includes intrinsic values in its net
if required. However, an ethical theory on its own won™t be enough
to determine the social productivities of capital assets, because
there would be nothing for the theory to act upon. We need

130
descriptions of states of affairs too. To add a unit of a capital asset to
an economy is to perturb that economy. In order to estimate the
contribution of that additional unit to social well-being, we need a
description of the state of affairs both before and after the addition
has been made. In short, measuring the social productivities of
capital assets involves both evaluation and description.

Imagine now that you have adopted a conception of social well-
being (by adding the well-beings of all persons) and that you have
an economic scenario of the future in mind (business as usual). In
principle you can now estimate the social productivity of every
capital asset. You can do that by estimating the contribution to
social well-being (that™s the evaluative part of the exercise) an
additional unit of each capital asset would make, other things being




Sustainable economic development
equal (that™s the descriptive part of the exercise). Economists call
social productivities of capital assets their shadow prices, to
distinguish them from prices that are observed in the market.
Although shadow prices pertain to commodities generally, not only
to capital assets, we focus on capital assets here.

Shadow prices re¬‚ect the social scarcities of capital assets. In the
world as we know it, estimating shadow prices is a formidable
problem. There are ethical values we hold that are probably
impossible to commensurate when they come up against other
values that we also hold. This doesn™t mean ethical values don™t
impose bounds on shadow prices; they do. Which is why the
language of shadow prices is essential if we wish to avoid making
sombre pronouncements about sustainable development that
amount to saying nothing. Most methods that are currently
deployed to estimate the shadow prices of ecosystem services are
crude, but deploying them is a lot better than doing nothing to value
them.

The value of an economy™s stock of capital assets, measured in terms
of their shadow prices, is its inclusive wealth. The term ˜inclusive™
serves to remind us not only that natural capital has been included

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on the list of assets, but also that externalities have been taken into
account in valuing the assets. Inclusive wealth is the sum of the
values of all capital assets. It is a number “ expressed, say, in
international dollars.

We can summarize by saying that an economy™s inclusive wealth
plus institutions constitute its productive base. If we now wish to
determine whether a country™s economic development has been
sustainable over a period of time, we have to estimate the changes
that took place over that period in its inclusive wealth and its
institutions “ relative to population of course. In Chapter 1 we noted
that changes in knowledge and institutions over time are re¬‚ected
in changes in total factor productivity. So we break up the
procedure for estimating changes in an economy™s productive base
relative to population during any period of time into ¬ve stages.

First, estimate the value of changes in the amounts and
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compositions of manufactured capital, human capital, and natural
capital “ which we will call inclusive investment. (If inclusive
investment is found to be positive, we may conclude that
manufactured capital, human capital, and natural capital, taken
together, grew over the period.) Second, estimate the change in total
factor productivity. Third, transform the two ¬gures in a way that
enables us to calculate the effects of the two sets of changes on the
productive base. Fourth, combine the two resulting estimates into a
single number that can be taken to re¬‚ect the change that took
place in the economy™s productive base. Fifth, make a correction for
demographic changes to arrive at an estimate for the change that
took place in the economy™s productive base relative to population.

I have so worded the ¬ve steps that they apply to a study of the past.
But, of course, the ¬ve steps can be applied with equal validity to
forecasts of the future. The procedure outlined here is essential for
anyone who wants to know whether the economic pathways we are
currently pursuing can be expected to lead to sustainable
development.

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Has economic development in recent decades
been sustainable?

Recently, economists at the World Bank have estimated inclusive
investment in different countries during the past few decades. They
have done that by adding net investment in human capital to
existing country-wide estimates of investment in manufactured
capital, and then subtracting disinvestments in natural capital from
that sum. (That™s step 1 above.) The economists used of¬cial
estimates of net national saving as proxies for net investment in
manufactured capital. For estimates of investment in human
capital, they used expenditure on education as a proxy. To quantify
disinvestments in natural capital, they considered net changes in
the stocks of commercial forests, oil and minerals, and the quality of




Sustainable economic development
the atmosphere in terms of its carbon dioxide content. Oil and
minerals were valued at their market prices minus extraction costs.
The shadow price of global carbon emission into the atmosphere is
the damage caused by bringing about climate change. That damage
was taken to be $20 per tonne, which is in all probability a serious
underestimate. Forests were valued in terms of their market price
minus logging costs. Contributions of forests to ecosystem functions
were ignored.

The World Bank™s list of natural resources is incomplete. It
doesn™t include water resources, ¬sheries, air and water
pollutants, soil, and ecosystems. Their notion of human capital is
inadequate because health does not enter the calculus. And their
estimates of shadow prices are very approximate. Nevertheless,
one has to start somewhere, and theirs is a ¬rst pass at what is an
enormously messy enterprise. What I want to do now is to study
¬gures published recently by a group of ecologists and
economists, who adapted the World Bank estimates of inclusive
investment and then went on to determine whether economic
development in some of the major countries and regions in
Desta™s and Becky™s worlds has been sustainable in recent
decades. Table 2 is a re¬nement of that publication. It remains a

133
Table 2. The progress of nations
crude beginning to the study of sustainable development, but it™s
a start.

The places in question are sub-Saharan Africa, Bangladesh, India,
Nepal, and Pakistan (all poor countries); China (a middle-income
country); and the UK and US (both rich countries). The period
under study is 1970“2000. The ¬rst column of numbers in Table 2
consists of re¬nements of the World Bank™s estimates of average
inclusive investment as a proportion of GDP, expressed as
percentages (step 1). The second column gives the average annual
population growth rate. The third column gives estimates of annual
growth rates of total factor productivity, which we are interpreting
here as the annual percentage rate of change in a combined index of
knowledge and institutions (that™s step 2). I have used the ¬gures in




Sustainable economic development
the ¬rst three columns to arrive at estimates of the annual
percentage rate of change in the productive base per capita (that
involves a combination of steps 3“5). They are given in the fourth
column.

Before summarizing the ¬ndings, it will be useful to get a feel for
what the numbers in the table are telling us. Consider Pakistan.
During 1970“2000 inclusive, investment as a proportion of GDP
was 8.8% annually. Total factor productivity increased at an annual
rate of 0.4%. As both ¬gures are positive, we can conclude that
Pakistan™s productive base was larger in 2000 than it had been
in 1970. But take a look at Pakistan™s population, which grew at a
high 2.7% rate annually. The fourth column shows that Pakistan™s
productive base per capita declined in consequence, at an annual
rate of 0.7%, implying that in 2000 it was about 80% of what it
was in 1970.

In contrast, consider the US. Inclusive investment as a share of
GDP there was 8.9% a year, which is only a tiny bit larger than
Pakistan™s ¬gure. Growth in total factor productivity (an annual
0.2%) was even lower than Pakistan™s. But population grew only at
1.1% a year, meaning that the productive base per capita of the US

135
grew at an average annual rate of 1%. Economic development in the
US was sustainable during 1970“2000, while in Pakistan it was
unsustainable.

Interestingly, if you had judged their economic performances in
terms of growth in GDP per capita, you would have obtained a
different picture. As the ¬fth column of Table 2 shows, Pakistan
grew at a respectable 2.2% rate a year, while the US grew at only
1.1% a year. If you now look at the sixth column, you will ¬nd that
the United Nations™ Human Development Index (HDI) for Pakistan
improved during the period. Movements in HDI tell us nothing
about sustainable development.

The striking message of Table 2, however, is that during 1970“2000
economic development in all the poor countries on our list was
either unsustainable or barely sustainable. To be sure, sub-Saharan
Africa offers no surprise. Its inclusive investment was negative,
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implying that the region disinvested in manufactured, human, and
natural capital, taken together, at 2.1% of GDP. Population grew at
2.7% a year and total factor productivity barely advanced (annual
growth rate: 0.1%). Even without performing any calculation, we
should suspect that the productive base per capita in sub-Saharan
Africa declined. The table con¬rms that it did, at 2.9% annually. If
you now look at the ¬fth column of numbers, you will discover that
GDP per capita in sub-Saharan Africa remained pretty much
constant. But the region™s HDI showed an improvement “
con¬rming once again that studying movements in HDI enables us
to say nothing about sustainable development.

Pakistan is the worst performer in the Indian subcontinent, but the
remaining countries in the region just barely made it when judged
in terms of sustainable development. Inclusive investment in each
country (Bangladesh, India, and Nepal) was positive, as was growth
in total factor productivity. The two together imply that the
productive base expanded in each country. But population growth
was so high, that the productive base per capita just about grew “ at

136
annual percentage rates 0.1, 0.4, and 0.6 respectively. Even these
¬gures are most likely to be overestimates. The list of items the
World Bank™s economists used in order to estimate inclusive
investment didn™t include soil erosion and urban pollution, both of
which are thought by experts to be problematic in the Indian
subcontinent. Moreover, the human desire to reduce risk,
mentioned earlier, implies that downside risks of natural capital
degradation ought to be given a higher weight than a corresponding
chance that things will turn out to be better than expected. So, if we
allow for risk aversion, estimates of inclusive investment would be
lowered. One cannot help suspecting that economic development in
the Indian subcontinent was unsustainable during 1970“2000. But
you wouldn™t know that from ¬gures for GDP per capita and HDI
there. The former grew in each country in the region and the latter




Sustainable economic development
improved.

Inclusive investment in China was 22.7% of GDP, a very large ¬gure
in the sample of countries in Table 2. Growth in total factor
productivity was a high 3.6% annually. Population grew at a
relatively low 1.4% annual rate. We shouldn™t be surprised that
China™s productive base per capita expanded “ as it happens, at
7.8% annually. Per capita GDP also grew at an annual rate of 7.8%,
and HDI improved. In China, GDP per capita, HDI, and the
productive base per head moved parallel to one another.

There is little to comment on the UK and US. Both are rich, mature

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