Download Measuring sustainable growth

Measuring sustainable growth
8th AFD/EUDN conference
December 1, 2010
Michel Aglietta
University Paris Nanterre, CEPII and
Groupama-AM
Outline
• Sustainable growth and social welfare
– The pitfalls in linking social welfare and national account aggregates
– A weak but feasible measure of sustainability: genuine saving
– Unsustainable dynamics
• Methods and problems in measuring total real wealth
– Intangible capital
– Natural capital
• Facing radical uncertainty
– Choosing the discount rate: an ethical problem
– Systemic environmental risk: rationalizing the principle of precaution
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Sustainable growth and social welfare
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National accounting: from income to wealth accounts
•
Flow accounts for the purpose of managing aggregate demand:
– GDP and accounting identities in production, income and expenditures
– Historical and International comparability (price changes in space and time)
•
Stock accounts for the purpose of sustaining potential growth:
– Measuring all types of real wealth entail huge problems with depreciation
(depletion of non-renewable), identification and measuring of intangibles
•
Linking flows (from standardized national accounts) and stocks (from
experimental wealth accounts) requires 2 bridging accounts for:
– Other types in asset volumes
– Asset reevaluation
•
Reconciling net saving and change in the value of wealth:
Net saving= ∆(net real value of wealth) - net receipts in capital transfers
– other net changes in asset volumes – real gains (or + real losses) in
holding wealth
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Wealth accounting and social welfare:
a strong concept of sustainability
Total real wealth
Social welfare
•
Produced tangible capital: equipment
/ structures / urban land
•
Private consumption
•
Intangible capital: human capital /
institutional infrastructures / social
capital / net foreign financial assets
•
Public services imputed to household
and consumed in the same period
•
Natural capital: subsoil assets /
timber resources / non-timber forest
resources / protected areas / crop +
pasture land
•
Services of environment downgraded
by: pollution / depletion of nonrenewable assets/ damages to
biodiversity
Capital inputs
Social welfare function
Strong sustainability
Present discounted value of inter
temporal social welfare nondecreasing
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From strong to weak sustainability
•
No way to link national income and consumption to social welfare:
– Interpersonal utilities cannot be aggregated without ethical assumptions
– Market prices are not reliable proxy for marginal utility
– Externalities in public and environmental services
•
Weak sustainability:
– Variations in final outcome of economic activity adjusted for imputation of
public and environmental services can be made a function of variation of all
types of wealth
– It follows that a growth path is sustainable if the variation of total net real
wealth is non-negative
•
•
The criterion of social adjusted saving or genuine saving:
∆(net total real wealth)= genuine saving= economic net saving of the
nation (gross saving-fixed capital depreciation) + change in value of
human capital +change in value of social capital –depletion of mineral
and energy fossil resources – net reduction in forests – damages due to
pollution in ~CO2
Sustainability implies: genuine saving ≥0 at any time
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Sustainability compared
• World Bank experimental measuring: huge deficiencies in measure with
the present state of the art in the accounting of environmental damages
and in measuring intangibles → economic saving weighs too much
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Unsustainable dynamics
•
Economic: fixed reproducible capital is not accumulating fast enough in
adapting and mitigating the damages in the environment to offset the
depletion of natural resources and the rise in greenhouse gases
concentration.
•
Social: human capital, R&D and other intangibles do not accumulate
enough to invest in innovative technologies, in order to substitute to
diminishing natural capital and declining rate of investment in fixed
capital.
•
Ecological: both fixed capital and consumption increase too fast,
fostering too high a GDP growth rate, so that natural resources are
depleted and pollution rises too fast until an unknown threshold is
reached beyond which an ecological collapse becomes possible.
•
Those perverse dynamics highlight that sustainability policy is a
flexible long-term generalized strategic portfolio allocation
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Methods and problems in measuring
total wealth
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Measuring intangible capital
•
In business, the accounting treatment of capital is highly restrictive (fixed
capital at historical depreciated value) → Most of the productive capacity
of firms as going concerns is hidden in intrinsic goodwill (dark pool) that
is only guessed in financial markets with M&As, while investment
expenditures in intangibles are registered as operating costs.
•
In national accounting, fixed capital is measured at reproduction costs,
but reluctance to capitalize intangible expenditures . They are treated as
intermediary expenses → they do not pertain to GDP
•
With IT revolution those conservative views are difficult to uphold:
– Solow paradox of productivity: in services productivity depends on the ability
of price indexes to measure quality changes (hedonic prices are highly
conventional)
– Broad estimates in the US have shown that inclusion of software, R&D and
human capital doubles the rate of investment and changes the way one
looks at GDP and labor productivity
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What should be counted as intangible capital?
•
Impediments in estimating intangibles:
– They are non-verifiable and non-visible (ex knowledge) → pb with
depreciation. Some are non-rival and have non-appropriable return (ex
some intellectual property) → pb with marginal product
– They are often in-house (ex governance rules) → they cannot be quantified
on the basis of market transactions
•
Vagueness and dependence on prejudices in categorizing intangibles
Business intangible investment
Developmental intangible investment
Computerized info
Human capital
Innovative property:
Social capital :
-R&D based on scientific knowledge
-degree of trust in society
-Non-scientific commercial R&D
-ability to work for common purposes
Investment in organizational capabilities :
Governance:
-strategic planning
-judicial system
-redesigning existing products
-property rights
-investment in brand names
-legitimacy of governments
Investment in firm-specific human
capabilities (management and professional)
Other assets: NFA + omissions in
evaluating other forms of capital
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A general principle to unify the measurement of
intangible capital
•
As a link to welfare theory, a general definition of investment is the
following:
– Any use of a resource that reduces current consumption to increase future
consumption → all type of capital are valued symmetrically whatever the
differences in production and difficulties in implementing practically.
•
Categories of intangibles closer to tangibles: estimate by perpetual
inventory:
– (capital stock)t =(real invest)t +(1-depreciation rate)(capital stock)t-1
– (User cost of intangible)=[competitive net rate of return on capital+
depreciation rate of intangible-capital gain or loss)](investment price deflator)
•
Valuing human capital:
– Total human capital= (human capital per worker)(number of workers)
– Human capital per worker= capitalizing the real value of each year of
education expenditures on the number of years
– Marginal productivity of human capital= real wage= (total real wage
bill)/(stock of human capital)
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Intangible capital and growth
•
Capitalizing intangibles increases labor productivity markedly / standard
national accounts where intangibles are treated as intermediary
products:
– GDP identity is expanded to include newly-produced intangibles on the
production side, investment in intangibles on the demand side and the flow
of services from the stock of intangibles on the income side
– The contribution of capital in labor productivity growth is much higher.
Conversely total factor productivity and labor share are reduced
– The Solow paradox is resolved in the IT revolution
•
Firm-specific intangible capital has more impact than scientific
knowledge: organizational capabilities (management and governance),
firm-specific human capabilities (individual and collective learning-bydoing), non-scientific commercial R&D (product redesign, brand names
and quality standards)
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Measuring natural capital: general principle
• A lot of natural resources have no monetary value: air, water, wild flora
and fauna, wild fish in oceans, continental waters, etc…
• Two main problems:
– Depletion on marketable natural resources that are non-renewable (energy
and minerals) or renewable (forests and fish)
– Degradation of non-market natural wealth caused by economic activity:
pollution and damages to life diversity
• Depletion in the stock of non-renewable resources, excess taking of
renewable resources and pollution generate losses in the value of natural
assets that reduce genuine saving
• Resources are valued on their intrinsic scarcity value= positive monetary
rent
– For non-renewable resources the rent is pure scarcity value
– For renewable resources a rent appears if: amount used up> natural growth
– The scarcity value is measured by the economic cost of the reconstitution of
the asset at the level just prior the excess taking
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Rents and value transfers in non renewable assets
• Two stages in the valuation process:
– Calculating rent = net receipt of the exploitation of the resource for the total period of
extraction. It is an absolute rent (≠ differential rents due to differences of productivity in
extraction) because no factor of production has generated fossil resources
– Rent= extraction value at base price- intermediary input- wage compensation - net taxes
on production – fixed capital depreciation- normal return on fixed capital
– Present value of the stock of resources= present value of discounted yearly rents on the
period of extraction
• Agricultural rent is determined the same way as subsoil resources:
– Value of crop land = present discounted value of land rents
– Value of pasture land= opportunity cost of preserving land for grazing
• Rent is a curse for the development of capitalism:
– Overvaluation of the currency in the producing country
– Increase in the real price of the resource for users → decline in real wealth → <0 real
wealth effect on consumption
– Power of rentiers hampers the rise of a class of entrepreneurs and dissipates the rental
value
– Volatility in the price of the resource inhibits invest in exploration and technological
improvement in extraction and transformation
• Sustainable growth policy consists in reinvesting the rent in order to
substitute intangible capital to natural capital
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Measuring damages to the environment
• Damages should be properly measured and deduced from wealth
accumulation. For the time being thy are grossly underpriced.
• The most catastrophic damage is rainy forest degradation because:
– They capture and store carbon dioxide as carbon pits
– They house > 1/2 animal species and plants on earth
– They regulate water cycles, mitigating floods and droughts
• Global warming and deforestation interact in self-reinforcing feedbacks that
might reach “tipping points” where forests become ecologically unviable.
• Valuing forest is a prerequisite for the needed changes in national policies:
– Setting a value of non-use (price on trees not to cut them off) = opportunity cost of
cutting trees and selling them
– The opportunity cost should embody all environmental services that are provided
– A partial immediate solution to stop deforestation: pricing the carbon emission released
in the atmosphere by the destruction of the carbon pit
– The tropical forest would be protected if the price of carbon is set so that the cost of the
marginal increase in emissions by exploiters of the forest is high enough
– In Africa carbon credits are needed to finance micro-projects for local population
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Facing radical uncertainty
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Economics of climate change
• How to price carbon?
– CO2 global externality entailing global warming whatever the locus of emission
– Marginal social damage of carbon=weighted sum of future marginal damages
due to emission of 1 more extra unit ≈CO2 at t = ↑function of the amount of
emissions
– Marginal cost of abatement=cost to diminish emissions by 1 more unit ≈CO2 =↓
function of the amount of emissions
– Equilibrium social value of carbon: marginal damage= marginal cost of
abatement. It is the basis to price a carbon tax
• Where uncertainty enters the picture:
– Cost/benefit analysis is rife with uncertainties because the marginal damage
and the cost of abatement functions are unknown
– To account for uncertainty one method is scenario simulation (Stern Review)
– Another one is defining an option value for the irreversibility of climate change
(precautionary principle) in order to structure a sequential decision process that
will make good of new information available over time
– Social value of carbon, alternative scenarios and option value of
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irreversibility depend crucially on the discount rate
Discount rate, sustainable growth and climate change
• In scenario simulation one has to choose between very different paths
under radical uncertainty because sustainable growth is intertwined with
climate change → the social discount rate is itself dependent on the path
chosen among the widely different consumption growth paths and it
varies over time
• On sustainable growth path : economic discount rate = rate of fall of
marginal utility= rate of pure time preference+ (elasticity of marginal
utility of consumption/consumption)(growth rate):
– The rate of time preference is ethical and should be chosen ≈0 (perennial
society)
– Under the uncertainty society faces as a whole, the elasticity of marginal
utility is not the result of a model of individual behavior. It is itself ethical and
depends crucially on the distribution of income
• Imperfect substitution between consumption and environmental services:
– Long-term protection of the environment must be a separate goal depending
on investments in mitigating and adapting to climate change
– The returns of those investments must be estimated according to an
ecological discount rate that is lower than the economic discount rate
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Rationalizing the principle of precaution
• The chain of interactions between global warming target and the policies
to reach it are highly uncertain (non-linear feedbacks):
– Between policies and the flow of emissions in GHGs
– Between stock of GHGs and temperature rise: climate sensitivity with tipping
points
– Between global temperature rise and regional temperatures rise
• The probability of high temperature in the distribution of probability of
temperatures might be elevated with some models (thick tails) conditional
on climate sensitivity → delaying action might be very costly
• Dismal theorem:
– Systemic risk is involved with damages spreading over all asset classes all over
the world → catastrophic collapse in real wealth
– Unlimited downside risk exposure with no market mechanism to guide any
rational individual conduct
• Proper policies depend on collective action based on strong ethics
that cares on the welfare of future generations. Collective decisions
critically sensitive to the social discount rate.
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