Xiaoning Gong Chief, Economic Statistics and National Accounts Section

1. The System of National Accounts and System of Environmental-Economic Accounting for Sustainable Development Indicators Xiaoning Gong Chief, Economic Statistics and National Accounts Section African Centre for Statistics (ACS) United Nations Economic Commission for Africa (UNECA) at Workshop on Sustainable Development Indicators: Conceptual Framework, Data Collection, and Analysis Addis Ababa, Ethiopia, 11-13 December 2012

2. Presentation Outline What do we want to measure? Data collection, SDI compilation, and international statistical standards SNA & SEEA as international statistical standards for economic and environmental statistics

3. What do we want to measure?

4. Sustainable Development = Development & Sustainability Development: current well-being Economic resources Non-economic aspects of peoples’ life Sustainability: whether this can last over time Whether stocks of capital that matter for our lives (natural, physical, human, social) are passed on to future generations “Well-being”: the state of being happy, healthy, or prosperous [Merriam-Webster Dictionary]

5. Welfare Indicators and Macroeconomic Aggregates (SNA p. 13) Welfare (well-being) is a wide-ranging concept with many different facets: Captured by one or more of the key aggregates of the SNA. Captured by using the basic structure of the SNA and expanding it in certain directions: unpaid services and the effects of environmental damage. Outside the reach of a system not designed with the measurement of welfare as a prime consideration. It is unrealistic to expect a system of economic accounts to necessarily and automatically yield a wholly satisfactory measure of welfare (well-being).

6. Well-Being: GDP Is not Enough GDP is the most widely-used measure of economic activity: Measuring production and Determining the level of employment Prices may not exist for some goods and services (e.g. Gov’t and HH). Market prices may deviate from society’s underlying valuation (e.g. Environmental damage). Quality change

7. Well-Being: GDP + Net Domestic Product (NDP) = GDP – Consumption of fixed capital (i.e. depreciation) Depletion of natural resources (e.g. mining, timber) Degradation in quality of the natural environment Net national disposable income Government-provided services Household consumption and production

8. Well-Being: Income, Consumption & Wealth Wealth is an important indicator of the sustainability of actual consumption. To know what is happening to the economy, we need to ascertain changes in wealth. To construct the balance sheet of an economy, we need to have comprehensive accounts of its assets and its liabilities. Changes in wealth = net investments = gross investments – (depreciation + depletion).

9. Wealth and Balance Sheet (SNA, p. 257) Balance Sheet: includes all the financial and non-financial resources at the disposal of an institutional unit or sector. Net worth (balancing item): is defined as the value of all the assets owned by an institutional unit or sector less the value of all its outstanding liabilities. National wealth: For the economy as a whole, the balance sheet shows the sum of non-financial assets and net claims on the rest of the world.

10. Measure of Well Being: Summary Look at income and consumption rather than production. Consider income and consumption jointly with wealth. Emphasize the household perspective. Give more prominence to the distribution of income, consumption and wealth. Broaden income measures to non-market activities.

11. Sustainable Development: Concepts “Development:” An increase in well-being and social welfare across the members of a society between two points in time. “Sustainable development:” Increasing or, at least, non-declined well-being and social welfare along the path forever or at least over a very long time.

12. Well Being, Total Wealth, and SD Well-being = “total wealth” = sum of the values of a heterogeneous set of assets Total wealth = The present value of future consumption “Sustainable development” = non-declining per capita wealth over time. Net or “genuine” saving = adjusted for resource depletion, stock pollutant damages, and human capital accumulation = change in total wealth

13. Total Wealth: Five Types of Capital Financial Capital Produced Capital Natural Capital Human Capital Social Capital The “capital approach” for measuring sustainable development

14. Total Wealth: Financial Capital Financial capital is assets for which counterpart liabilities exist somewhere on the part of other institutional units, including currency, bank deposits, stocks, and bonds, derivatives, accounts receivable, pension funds, and insurance reserves. The value of financial capital is recorded in the balance sheet accounts of the national accounts.

15. Total Wealth: Produced Capital  Produced capital includes fixed assets that are used repeatedly or continuously in production processes for more than one year. Fixed assets can be tangible (e.g. machinery, buildings, roads, harbors, and airports) and intangible (e.g. computer software, recordings, manuscripts, as well as other original works of artistic value and specialized knowledge used in production). Inventories of raw materials, semi-finished and finished goods held for future sale are also included in produced capital, as are valuables such as precious stones, antiques, and paintings. The value of produced capital is recorded in the balance sheet accounts of the national accounts.

16. Total Wealth: Natural Capital Natural capital comprises three principal categories: natural resource stocks, land, and ecosystems that provide various essential goods and services necessary for the economy, society, and all living beings. Natural capital includes both non-renewable natural resources (e.g. land, coal, oil, gas, minerals, sand, gravel, etc.) and conditionally renewable resources (e.g. forests, fish, and waterfalls). Ecosystem services cover provisioning (e.g. minerals, timber, fish, and water), regulating (e.g. absorption of unwanted wastes from production and consumption and regulation of the global climate), and cultural services (or called amenity functions and are relevant to humans only).

17. Total Wealth: Human Capital Human capital does not have a single definitive and final definition yet but is generally considered as an educated and healthy workforce; such as “The stock of economically productive human capabilities” (WB 2006); “The knowledge, skills, competencies, and attributes embodied in individuals that facilitate the creation of personal, social, and economic well-being” (OECD 2001); and The education, on-the-job training, and health as components of human capital with consequences for earnings and economic productivity (Becker, 1993).

18. Total Wealth: Social Capital Social capital: Although there has been a considerable amount of research and attention devoted to social capital in recent years, there remains a lack of agreement around a precise definition of the concept. However, there is a growing consensus around the idea that it is the functioning social networks and their associated norms that generate benefits. “Network, together with shared norms, values, and understandings which facilitate cooperation within or among groups” (OECD 2001).

19. Advantages of Capital Approach for Measuring SD Rooted in the well-established development theory and helps to focus our attention on the long-term determinants of development. Helps to clarify the distinction between current income and capital consumption. By extending the traditional view of capital to include natural, human, and social capital, the notion of investment has been extended.

20. Measurement framework [OECD] Green growth Policies, measures, opportunities Taxes Subsidies, Regulations Investments Innovation Trade Education & training Economic activities (production, consumption, trade) 4 Production Multi-factor productivity Consumption Households Governments Investments Outputs Inputs Recycling,re-use,re-manufacturing, substitution IncomeGoods& services Residuals LabourCapital Resources 3 1 Amenities, health & safety aspects Pollutants waste Energy & raw materials water, land, biomass, air Natural asset base (capital stocks and environmental quality) 2 Service functions Sink functions Resource functions The socio-economic context and characteristics of growth Indicators monitoring environmental and resource productivity Indicators monitoring the natural asset base Indicators monitoring the environmental quality of life Indicators monitoring economic opportunities and policy responses 1 2 3 4

21. Measurement framework: Themes and Subthemes [OECD]

22. Rio+20 Outcome Document [UNDSD] • Measures beyond GDP • The current proposal on the table: • As a complement to GDP, to develop science-based and rigorous methods of measuring sustainable development, natural wealth and social well-being; having regard to the UN system of economic and environmental accounts

23. Indicators [UNDSD] • To monitor priorities areas, possibly • Food security and sustainable agriculture • Water access; water consumption • Shelter, Energy • Inequality • Sustainable consumption and production • Efficient use of resources • Assessing different dimensions e.g. for energy • Energy access (social) • Energy efficiency (economic) • Clean energy (environmental) • Harmonized with international standards, SEEA

24. Data collection, SDI compilation, and international statistical standards

25. Data Production & Statistical Standard

26. International Statistical Standard [1] • Macroeconomicframeworks (e.g. SNA, System of Price and Volume Indexes, BPM) • Agreed concepts, definitions, classifications • Inter-related tables or accounts for broad sets of statistics • For the whole economy • System approach to statistics

27. International Statistical Standard [2] • Cross-functional frameworks (e.g. ISIC, statistical units, sample frames) • Building blocks in support of the organization of the tables and accounts of macroeconomic frameworks • Conceptual frameworks for classifications, statistical units and sample frames that support the collection and reporting of economic activities of production, consumption and accumulation • For the whole economy

28. Criteria to Define International Statistical Standard • Statistical integration • Internal coherence of concepts, definitions, classifications and tables and accounts • External consistency among macroeconomic frameworks, cross-functional frameworks and intermediate output frameworks • Broad institutional process of consultation • National and international consultations of stakeholders • Relevance • Universal applicability of the compiled and disseminated data for use of policy planning, analysis and administration purposes

29. SNA & SEEA as an international statistical standard for economic and environmental statistics

30. What is the SNA? Internationally agreed standard set of recommendations on how to compile measures of economic activities in accordance with strict accounting conventions based on economic principles. Main objective is to provide a comprehensive conceptual and accounting framework that can be used to create a macroeconomic database suitable for analysis and evaluating economy.

31. The Central Role of National Accounts in Statistics Concepts and classifications of 2008 SNA are harmonized with others: Balance of Payments Manual International Comparison Program International Manuals for Consumer and Producer Price Indices System of Environmental-Economic Accounting ISIC r.4.0 CPC v.2.0

32. Conceptual Framework: SNA & SEEA [1] SNA is already the source for measures of financial and produced capital stocks and SEEA is the sources for measures of natural capital stocks. Much of the SEEA is directly relevant for measuring the natural capital indicators proposed by the capital approach, especially relevant are the natural resource asset accounts in both monetary and physical terms.

33. Conceptual Framework: SNA & SEEA [2] SEEA: records stocks of natural resources such as fish, forest, water, and minerals, as well as land and ecosystems. Many of the data required to compile estimates of human capital are available from the SNA. Thus, it seems likely that an SNA-based measurement framework for human capital could be conceived.

34. System of Environmental-Economic Accounts (SEEA) Provides internationally agreed concepts, definitions, classifications, accounting rules and standard tables for natural capital. First produced in 1993 and updated in 2003. Adopted as an international standard by the United Nations Statistical Commission in 2012. Follows an accounting structure similar to that of the System of National Accounts (SNA). Uses concepts, definitions and classifications consistent with the SNA.

35. SEEA: Ecosystem Ecosystem accounts not in the current volume but in the subsequent volume of SEEA, and attempting to include best methods and practices but is not considered an international standard. The concept of ecosystem services is well known in the scientific community, but there is little practical experience in measuring the concept among official statisticians.

36. Natural Capital: Concepts and Definitions Natural capital refers to all naturally occurring assets that have a direct or indirect impact on human well-being. Ex: fossil fuels, metals, minerals, oceans, air, and ecosystems. “Environmental assets are the naturally occurring living and non-living components of the Earth, together comprising the bio-physical environment that may provide benefits to humanity.” (SEEA 2012, paragraph 2.17).

37. SEEA: Types of Natural Capital

38. SEEA: Types of Natural Capital (Cont’d) Natural resources:Asset accounts record, for different types of natural resources, their opening stocks (at the beginning of a year), additions and subtractions (due to extractions, discoveries, re-valuations) and closing stocks (at the end of the year). Ecosystems: “areas containing a dynamic complex of biotic communities (for example, plants, animals and micro-organisms) and their non-living environment interacting as a functional unit to provide environmental structures, processes and functions.” (SEEA 2012, 2.21).

39. SEEA: Types of Natural Capital (Cont’d) Environmental conditions (such as climate, air quality etc.). The SEEA definition of natural capital explicitly refers to more “naturally occurring components”, but SEEA only covers land, natural resources and ecosystems SEEA restricts itself to the measurement of environmental assets within the economic territory of nation states (SEEA, 5.13)

40. SEEA: Types of Natural Capital (Cont’d) Environmental conditions (such as climate, air quality etc.). The SEEA definition of natural capital explicitly refers to more “naturally occurring components”, but SEEA only covers land, natural resources and ecosystems SEEA restricts itself to the measurement of environmental assets within the economic territory of nation states (SEEA, 5.13)

41. SEEA: Types of Natural Capital (Cont’d) The most commonly used concept of economic territory is the area under the effective economic control of a single government. The economic territory includes the land area, airspace, territorial waters, including jurisdiction over fishing rights and rights to fuels or minerals. In a maritime territory, the economic territory includes islands that belong to the territory. The economic territory also includes territorial enclaves in the rest of the world. These are clearly demarcated land areas (such as embassies, consulates, military bases, scientific stations, information or immigration offices, aid agencies, central bank representative offices with diplomatic immunity, etc.) located in other territories and used by governments that own or rent them for diplomatic, military, scientific, or other purposes with the formal agreement of governments of the territories where the land areas are physically located (SNA p.62) .

42. Ecosystem Services: Classifications The Common International Classification of Ecosystem Services (CICES): Provisioning services (considered “goods” in other classifications) Regulating services (processes that are essential to maintaining ecosystem function) Habitat services (those that maintain biodiversity) Cultural services (those that humans find essential to their well-being, such as aesthetic and religious experience Type of benefits to humans: Use benefits non-use benefits The Total Economic Value framework (TEV): a “well- structured way to consider all of the values that an ecosystem provides”.

43. Ecosystem: Provisioning Services Provisioning Services 1 Food (e.g. fish, game, fruit) 2 Water (e.g. for drinking, irrigation, cooling) 3 Raw Materials (e.g. fiber, timber, fuel wood, fodder, fertilizer) 4 Genetic resources (e.g. for crop-improvement and medicinal purposes) 5 Medicinal resources (e.g. biochemical products, models & test-organisms) 6 Ornamental resources (e.g. artisan work, decorative plants, pet animals, fashion)

44. Ecosystem: Regulating Services Regulating Services 7 Air quality regulation (e.g. capturing (fine) dust, chemicals, etc.) 8 Climate regulation (incl. Carbon sequestration, influence of vegetation on rainfall, etc.) 9 Moderation of extreme events (e.g. storm protection and flood prevention) 10 Regulation of water flows (e.g. natural drainage, irrigation and drought prevention) 11 Waste treatment (esp. water purification) 12 Erosion prevention 13 Maintenance of soil fertility (incl. soil formation) 14 Pollination 15 Biological control (e.g. seed dispersal, pest and disease control)

45. Ecosystem: Habitat & Cultural Services Habitat Services 16 Maintenance of life cycles of migratory species (incl. nursery service) 17 Maintenance of genetic diversity (esp. gene pool protection) Cultural Services 18 Aesthetic information 19 Opportunities for recreation & tourism 20 Inspiration for culture, art and design 21 Spiritual experience 22 Information for cognitive development

46. Ecosystems: Type of Benefits to Human

47. Ecosystems: Use Values Direct-use values Value of natural resources extracted Industrial processes Use of land for agriculture, recreation and tourism Indirect-use values: those associated with the secondary use of the functions provided by natural resources or the environment (i.e. those benefits not derived from direct consumption): Carbon sequestration Provision of oxygen, air Purification, and ultra-violet radiation absorption.

48. Ecosystems: Use Values (Cont’d) Option values: those associated with assuring the future availability of resources for one's own possible future use Maintaining natural resources as future sources of genetic material for drugs or hybrid agricultural crops

49. Ecosystems: Non-use Values Existence values: from knowledge of continued existence: Natural habitat Sympathy for a certain species Donations to environmental funds that preserve remote environments that most donors are likely never to visit Aesthetics Ecosystem Bequest values: the values associated with assuring that natural resources are passed on to future generations: Species Habitats Way of life

50. Ecosystem Services: Methods of Monetizing (1 of 2) Market Price Method: Estimates economic values for ecosystem products or services that are bought and sold in commercial markets. Productivity Method: Estimates economic values for ecosystem products or services that contribute to the production of commercially marketed goods. Hedonic Pricing Method: Estimates economic values for ecosystem or environmental services that directly affect market prices of some other good. Most commonly applied to variations in housing prices that reflect the value of local environmental attributes. Travel Cost Method: Estimates economic values associated with ecosystems or sites that are used for recreation. Assumes that the value of a site is reflected in how much people are willing to pay to travel to visit the site. Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods: Estimate economic values based on costs of avoided damages resulting from lost ecosystem services, costs of replacing ecosystem services, or costs of providing substitute services.