Asaf Tzachor: Capital approach to sustainability

The Capital Approach

Capital Stocks Critical Assets Strategic BenefitsSustainable

Development

The Capital Approach for Sustainabilityand a Bequest for Next Generations

June 7-8, 2016Helsinki, Finland

“The future will only contain what we put into it now”

Graffiti, Sorbonne University, French civil unrest, May 1968



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Sustainable Development



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Sustainability and Development are celebrated, popular, concepts in contemporary socioeconomic discourse, and in Public Policy (from Brundtland Commission and Our Common Future to SDGs).

Yet, the notion of Sustainable Development – a marriage of the two socially-constructed concepts – is typified by ambiguity (Robinson, 2004; Lehtonen, 2004).

The UNECE notes that “sustainable development can mean all things to all people... (it has) a cloud of ambiguity hanging over (it)” (UNECE, 2015).



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A cloud of ambiguity hanging over


Due to this ambiguity, the ability to measure the sustainability of development has remained limited. Limited measurement capacity of sustainable development makes the task of management for sustainable development a difficult one.

It hinders governments from managing socioeconomic development in such a way as to maintain wellbeing over time (Adams, 2006).

UNECE: “… to maintain wellbeing over time… it is imperative to protect (society’s) resource base and the environment. Socioeconomic wellbeing cannot be improved with measures that destroy (the resource base)” (2015).



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A cloud of ambiguity hanging over


“Assuming we have been able to assess what is the current level of wellbeing, the question is whether the continuation of present trends does or does not allow it to be maintained…(for) the wellbeing of future generations compared to ours will depend on what resources we pass on to them…

“Future wellbeing will depend upon the magnitude of the stocks of exhaustible resources that we leave to the next generations…

- Report by the Commission on the Measurement of Economic Performance and Social Progress by Joseph Stiglitz, Amartya Sen, Jean-Paul Fitoussi (2009)



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The purpose of government and future generations

Sustainable Development“The capacity of future generations to have standards of well-being at least equal to ours depends upon our passing them sufficient amounts of all the assets that matter for well-being.”

- Report by the Commission on the Measurement of Economic Performance and Social Progress by Joseph Stiglitz, Amartya Sen, Jean-Paul Fitoussi (2009)



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The purpose of government and future generations


One unified theoretical approach



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The premise that any government has a portfolio of critical assets at its disposal –lies at the heart of the capital approach.

OECD’s How’s Life? (2013): sustaining wellbeing outcomes over time require the careful management, measurement and preservation of four types of capital stock for future generations: (a) economic capital, (b) natural capital, (c) human capital, and (d) social capital.

These four capital stocks cover an index of tangible and intangible assets.

Together, they are affected by government decisions taken today, which contribute to the creation of wealth and accumulation of capital.



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Governing a broad resource base; a portfolio of assets


This is an important, yet under-recognized, role of government is to manage this portfolio. Time and again, this role has been overshadowed by governments’ emphasis on managing GDP growth.

Managing the broad national resource base has never been an explicit policy focus. Perhaps in the past a focus on GDP growth was justified: wellbeing and progress could be expected to increase in tandem with GDP.

This is no longer true, particularly as the world bumps up against capital constraints: debt, depleting resources, climate change.



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Governments need to begin measuring comprehensive wealth and setting policies specifically to ensure its increase. With proper policies, the capital portfolio can be managed to maximize its flows of goods and services (i.e. well-being).

For example, natural resource policies must be designed so that resource rents are captured by governments for reinvestment in other assets, instead of being squandered or plundered.

Norway presents the best example of how to do it right: the Government Pension Fund (the Oil Fund).



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Natural Capital Human Capital Economic Capital Social Capital

Government as StewardAdjusts flows of investment and consumption

Monitors stock depletion Develops asset substitutions



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Substitutions and investments






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Substitutions and investmentsDepletion






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Substitutions and investmentsDepletion

Feedback



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Capital Stocks



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Economic capital consists of both produced capital assets, such as roads or machinery; and of financial capital assets, for instance bonds and reserve funds.

Natural capital, includes extractive natural resources that are exploited for use in economic production processes, such as hydrocarbons and metals. It also includes non-market assets, such as air and seas.

Human capital includes labor, knowledge, skills, health and attributes embodied in individuals that, together, create personal, social and economic development.

The term capital, in this context, emphasizes the fact that the skills, talents, education and health of individuals impact on their wellbeing in the present and can be “accumulated” and impact on their wellbeing in the future (Becker, 1964; Becker, 1993).



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A broad understanding of capital

Social capital, the least explored of the four terms, encompasses a variety of factors related to the capacity of people to collaborate in a community, including social norms and trust.

Social capital has been defined by the OECD (2001, p.119) as: “The network of shared norms, values and understanding that facilitate cooperation within and between groups”.

Putnam (1995; 2000), who brought the term to the political center stage, describes trust as the necessary “lubricant” for a functioning society.

High levels of general trust strengthen common values and norms. It reduces transaction costs and results in a lesser need for regulation and government intervention in markets (Aghion, Algan, Cahuc and Shleifer, 2009).



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A broad understanding of capital

Think of a capital stock as a bathtub.

Think of a flow of investment (in-flow) or consumption (out-flow) as a faucet and pipe assembly, respectively, that fills or drains the stock.

“The stock-flow structure is the simplest dynamical system in the world… it is based on the principle of accumulation…”

The government controls both valves.



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The bathtub representation

Critical Assets



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Economic Capital

Fixed assets per capita: the monetary value of fixed assets owned by the government, firms and households, and used in production processes, per capita. Assets are the basis for consumption and material wellbeing over time.

Total value of patents (proxy for outcome of public investment in R&D): the monetary value of patents owned by the government, public institutions, firms and households.

Net foreign financial assets (national debt).



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Natural Capital

Change of land use: annual change in the area of open spaces and the inventory of open spaces. Open spaces provide a wealth of “goods and services” which contribute to aesthetic inspiration, inspiration to art, heritage and cultural values, recreation and tourism.

Inventory (physical units) and value (market price) of mineral stocks: materials that contribute to a variety of production processes in the economy, including construction materials.

Stock and value of water reserves (can be desalinated).

Stock and value of energy resources (can be substituted).



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Human Capital

Healthy life expectancy: average number of years that citizens are expected to live in a health (lower than “life expectancy”). It deducts years of chronic disease and/or injury. No matter what the undertaking is (working, parenting, engaging in leisure activities), healthy people give and gain more utility.

Labor force participation rate: size of the labor force available to engage in activities that generate income.

Adult skills, a product of the OECD Programme for the International Assessment of Adult Competencies (PIAAC) measuring literacy, numeracy and problem solving in technology-rich environments (age 15 and above).

Percentage of people with post-secondary education among individuals aged 30.



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Social Capital

General trust: the percentage of the population that believes people can generally be trusted and that there is no special need “to be very careful in dealing with people” in daily life.

Perceived corruption: the percentage of population that believes that the society is exposed to corruption or that have the impression that corruption has impacted on their own lives (it is sufficient that people perceive that corruption exists to hamper wellbeing).

Turnout for parliamentary elections.

Rate of volunteering.



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Strategic Benefits



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Employing a well-anchored theoretical approach, which operationalizes the concept of “sustainable development”;

Thinking broadly about investment and consumption policies, about national resources, and about the state of capital stocks;

Focusing on the determinants of development, in a myopic environment: complementing ordinary, near-term, present-biased thinking;

Applying the approach, decision makers can focus on the state of non-market critical assets that contribute to sustainable wellbeing (air, trust, corruption);



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The advantages of using the framework: broad thinking

Discussing the bequest the government leaves for future generations, shifting the discussion from “how much is left” to “what is left” for future generations;

“If we cast the problem as ‘how much’, this always implies that some amount of a resource should be used and some left…

“We use 25% of a rainforest and leave the rest, for example. But then the next time we make a decision we start all over again and use 25% of what’s left, and so on, until it is all gone…

“By focusing on bequests of specific rights, opportunities and assets for future generations, we can get away from the straightjacket of marginal tradeoffs of neoclassical theory”.



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The advantages of using the framework: bequest

Finally, the framework assists policy makers evaluate and discuss how megatrends might impact on sustainable development (sustainable well-being):



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The advantages of using the framework: foresight

Social Capital

General trustPerceived corruptionTurnout for electionsRate of volunteering

Trend 1: New technologies

Virtualization and data digitizationArtificial intelligence

The instrumentation of everythingNano-materials

Biotechnology and pharmacologyEnergy technologyDigital platforms

Block chain technology




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Economic Capital

Fixed assets per capitaTotal value of patents

national debt

Trend 3: Sustainability crisis now

The one-planet lifestyle (Earth Overshoot)Climate change

ConflictsDifficult living conditions

The circular economyMaterial life cycle




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Human Capital

Healthy life expectancyAdult skills: literacy, numeracy,

problem solving in technological environmentsPost-secondary education

Trend 1: New technologies

Virtualization and data digitizationArtificial intelligence

The instrumentation of everythingNano-materials

Biotechnology and pharmacologyEnergy technologyDigital platforms

Block chain technology

Sustainable DevelopmentTzachor, Asaf (2015): Report on the Measurement of Sustainability, State of Israel, the Ministry of Environmental Protection, Jerusalem, available at: http://www.sviva.gov.il/infoservices/reservoirinfo/doclib2/publications/p0801-p0900/p0808.pdf

For more information



Development

The Capital Approach for the Next Generations

Asaf [email protected], [email protected]://il.linkedin.com/in/asaf-tzachor-0266945



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Asaf Tzachor: Capital approach to sustainability

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