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Savings Rules and Sustainable Development

Savings Rules and Sustainable Development. Kirk Hamilton Environment Department The World Bank. Main points. Defining sustainability Savings and sustainability Empirical evidence on wealth and saving Policy rules and policy actions. Sustainability and saving.

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Savings Rules and Sustainable Development

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  1. Savings Rules and Sustainable Development Kirk Hamilton Environment Department The World Bank

  2. Main points • Defining sustainability • Savings and sustainability • Empirical evidence on wealth and saving • Policy rules and policy actions

  3. Sustainability and saving • Definition: a development path is sustainable if utility does not decline along the path • Link to ‘genuine’ saving G (Hamilton and Clemens (1999)):

  4. Sustainability and saving (2) • If G < 0 then utility must be lower at some point in the future – the path is unsustainable • If G > 0 then social welfare is increasing

  5. Broader motivation • Why focus on asset accounting? • To measure sustainability • To talk about environment and natural resources in the language of the finance minister • A new conceptual framework: development as a process of managing a portfolio of assets

  6. Ghana – decomposition of genuine saving (2000)

  7. Genuine or ‘adjusted net’ saving Sub-Saharan Africa - Adjusted Net Saving reveals a different story from traditional measures of saving

  8. The richer are getting richer and the poor are getting poorer China Honduras Sri Lanka Change in wealth per capita vs income per capita, 1999

  9. Accumulation of wealth per person is negatively correlated with population growth China Malaysia Honduras Jordan Accounting for population growth (1999)

  10. Policy rules • Growth in consumption in a competitive economy (Hamilton and Hartwick 2005):

  11. Policy rules (2) • Maintain G = 0 for all time (the Hartwick rule)  constant consumption • G > 0 and for all time  rising consumption

  12. Policy rules (3) • For Dasgupta-Heal economy, Hamilton and Withagen (2005) show that yields unbounded consumption, as does (Hamilton et al. 2005)

  13. What if countries had followed the Hartwick rule? Estimates of produced assets per capita Accumulation 1970-2000

  14. Testing genuine saving (1) • The ‘resource curse’ • Atkinson and Hamilton (2003) • Countries with high resource dependence (rents as share of GDP) and negative genuine saving experienced sharply lower GDP growth 1970 - 2000

  15. Testing genuine saving (2) • Hamilton and Hartwick (2005): • Econometric test:

  16. Testing genuine saving (3) 1980

  17. Policy actions • What if G < 0 (i.e. total wealth decreases)? • Strengthen fiscal and monetary policy • Invest more in human capital • Natural resources: are there policies that encourage overexploitation? • Environment: are there policies in place that encourage excess pollution? • Positive genuine saving need not imply a positive change in wealth per capita • We need to account for population growth

  18. Conclusions: strengths and weaknesses • Genuine saving measures the prospects for social welfare • Decomposition of saving provides links to policy • Not just the quantity of saving - the quality of investment is immensely important • Need to extend coverage • Soils, subsoil water, local air and water pollution, fish • Valuation difficulties – e.g. biodiversity

  19. Conclusions: theory • Fundamental link between saving and sustainability: • On the optimal path negative saving signals unsustainability; positive saving signals increasing social welfare • On competitive paths we have the saving rule: Utility is increasing if saving is positive and growing at a rate less than the interest rate

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