Economic Depreciation of Natural Resources in Asia
-
Upload
edysutiarso -
Category
Documents
-
view
220 -
download
0
Transcript of Economic Depreciation of Natural Resources in Asia
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
1/32
Harvard Institute for
International DevelopmentHARVARD UNIVERSITY
Development Discussion Papers
Economic Depreciation of Natural Resources in Asia
and Imp lications for Net Savings
and Long-Run Consum ption
Jeffrey Vincent and Beatriz Castaneda
Development Discussion Pap er No. 614
December 1997
Copyright 1997 Jeffrey Vincent, Beatriz Castaneda,
and Presiden t and Fellows of Harvard College
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
2/32
ECONOMIC DEPRECIATION OF NATURAL RESOURCES IN ASIAAND IMPLICATIONS FOR NET SAVINGS AND LONG-RUN CONSUMPTION
Jeffrey Vincent and Beatriz Castaneda
AbstractRents from extractive natural resources (minerals and roundwood) were equivalent to a
fifth or more of gross domestic savings in at least one year during 1970-92 in nearly all countriesin a sample of fourteen from Asia. This was the case even in China and India, which are not
usually thought of as being resource-rich. On a per capita basis, rents were larger in mostcountries in 1992 than in 1970; relative to GDP, they rose in most South Asian countries,
including India. This evidence of a significant, and in some cases increasing, contribution byresource rents does not necessarily imply that economic development in Asia risks being
undermined by resource depletion. Only a portion of resource rents represents the economicdepreciation of resource stocks, and this is the amount that must be offset by investments in
reproducible capital in order to sustain economic activity. Estimates of resource depreciation
were much smaller than gross domestic savings in all countries, even when the estimatesincluded the degradation of agricultural soils. This finding does not provide grounds forcomplacency, however, as depletion is causing the ratio of depreciation to rents to rise.
Key words: agricultural soils, Asia, national income accounts, minerals, natural resources, netproduct, net savings, timber
Jeffrey R. Vincent is a Fellow of the Institute at the Harvard Institute for International
Development (HIID) and the director of HIIDs Environmental Economics and Policy Projectin the Newly Independent States. His research interests include forest economics, national
accounts and the environment, and environmental policy issues in transition economies.
Beatriz Castaneda, a native of Chile, is a recent graduate of the Master's degree program inecological economics at the University of Maryland. She served as a research assistant at HIID
on the Asian Development Bank's "Emerging Asia" project.
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
3/32
ECONOMIC DEPRECIATION OF NATURAL RESOURCES IN ASIAAND IMPLICATIONS FOR NET SAVINGS AND LONG-RUN CONSUMPTION
Introduction
The theoretical links between natural resource depletion, savings and investment, and
long-run consumption are well established, at least in the context of simple economic growth
models. In a model without technical change, Hartwick (1977) demonstrated that sustaining a
countrys current consumption level requires investments in reproducible (physical and human)
capital equivalent to the economic depreciation of natural resources.1
Economic depreciation is
just the reduction in the value of an asset that occurs as a consequence of utilization of that asset.
For natural resources, it is the change in the discounted sum of resource rents from current and
future production. Hartwick (1977 and later work) demonstrated that, for natural resources,
economic depreciation is equivalent to the Hotelling portion of total resource rent: marginal
rent (price minus marginal cost) times the quantity extracted in the case of a nonrenewable
resource,2
and marginal rent times the difference between quantity extracted and resource growth
in the case of a renewable resource.3
Achieving a rising consumption level requires saving and
investing more than Hotelling rent, in order to expand (not merely maintain) the economys total
capital stock.
A theoretically equivalent result is that long-run consumption possibilities are indicated
by net product: gross product minus economic depreciation (Weitzman 1976). Net product
indicates the economy's true or Hicksian income: the maximum amount that can be consumed
without precluding future consumption levels from being at least as high.4
This follows from the
fact that net product is the economic return on the total capital stock (Solow 1986). Constancy of
the former thus implies constancy of the latter. If consumption exceeds net product, then the
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
4/32
2
total capital stock must necessarily fall, as part of what is being consumed is the capital stock
itself, not just its return. Hence, short-run trends in gross product, which includes capital
consumption (economic depreciation), do not necessarily mirror long-run trends in consumption
possibilities, given by net product.
These theoretical results imply that the impacts of natural resource depletion on a
countrys long-run consumption possibilities can be predicted by either: (i) checking whether a
comprehensive measure of net savings, defined as gross savings minus economic depreciation of
all forms of capital (including natural resources), is positive or negative; or (ii) checking whether
the trend in a comprehensive measure of net product, defined as gross product minus economic
depreciation of all forms of capital (again, including natural resources), is upward or downward.
This paper addresses these issues in the context of developing countries in Asia. Due to
the lack of readily available monetary estimates of physical and human capital stocks, the
analysis reported in the paper falls short of developing comprehensive measures of either net
savings or net product. Instead, it develops a partial measure of net savings, given by the
difference between gross domestic savings and Hotelling rents for the two most important
categories of commercial extractive resources, minerals and roundwood. It also develops crude
estimates of the economic depreciation of agricultural soils due to soil degradation. It focuses on
net savings instead of net product, because the former provides a more direct link to changes in
the total capital stock. Moreover, as discussed below, the former has also been the focus of
highly publicized efforts by the World Bank to estimate genuine savings (World Bank 1997).
Because they are partial, the estimates of net savings generated by the analysis are not
sufficient for answering the bottom-line sustainability question: whether consumption levels can
or cannot be sustained in Asia. They are not comprehensivethey ignore natural resources like
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
5/32
3
fisheries, environmental capital (air and water quality), human capital, and the depreciation of
physical capital (though we will cite evidence suggesting that this omission does not overturn the
findings)and they do not account for technical change. Nevertheless, they are useful for
predicting whether the depletion of key natural resources is, on its own, likely to undermine
future consumption possibilities in the region.
Previous studies
This is not the first study to investigate the economic impacts of resource depletion in
Asia. The first, and probably best known, study was conducted in Indonesia by the World
Resources Institute (WRI; Repetto et al. 1989). That study calculated economic depreciation
allowances for petroleum, timber, and agricultural soils during 1971-84. It found that the
aggregate depreciation allowance was equivalent to about a quarter of GDP on average, with the
allowances for petroleum and timber being much larger than the one for soils. Partial net
investment, calculated by subtracting the depreciation allowance from gross investment, was
much smaller than gross investment during most of the period. It was positive in all but two
years, however, and it was strongly positive when aggregated over the entire period. This is an
encouraging finding from the standpoint of sustainability, especially when one considers that the
study overestimated the economic depreciation allowances by equating them to total rent instead
of just the Hotelling portion. Reworking WRI's numbers, Vincent et al. (1997) estimated that
Hotelling rents for petroleum were on average only 30-77 percent of the total rents reported by
WRI.
A more recent study was conducted by the United Nations and the World Bank in Papua
New Guinea (Bartelmus et al. 1993). That study found that the net increase in physical capital
during 1985-90 exceeded the economic depreciation of minerals in every year. Like the WRI
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
6/32
4
study, however, it overestimated the depreciation allowances by equating them to total resource
rents. Expanding the scope of the analysis to include other natural resources and the depreciation
of physical capital, Pearce and Atkinson (1993) reported slightly negative net savings for Papua
New Guinea in the early 1990s. They reported a similarly pessimistic finding for Indonesia and
net savings equaling zero in the Philippines. These results led them to classify Indonesia and
Papua New Guinea as unsustainable economies and the Philippines as marginally
sustainable. As in the case of the WRI and U.N./World Bank studies, however, Pearce and
Atkinson overestimated the resource depreciation allowances, so prospects for sustainability in
the three countries are better than the study's findings suggest.
The World Banks (1997) analysis of genuine savings also overestimated resource
depreciation by equating it to total resource rent. Despite this, it reached more optimistic
conclusions for developing countries in Asia than did Pearce and Atkinson. Table 2.1 in the
World Bank report showed positive rates of net savings (adjusted for depreciation of both
physical and natural capital) for both South Asia and East Asia & the Pacific during the 1970s,
1980s, and 1990-93. Expressed as a percentage of GNP, net savings rates were 2-3 times higher
in East Asia & the Pacific than in South Asia.
In a study of Malaysia, Vincent (1997) found that Hotelling rents for minerals and timber
both rose sharply during the 1970-90 period. At the national level, net investment (gross fixed
capital formation minus depreciation allowances for physical capital, minerals, and timber) was
positive in all years but one, and positive when summed over time. At the subnational level,
however, net investment was negative in recent years in the more resource-dependent states of
Sabah and Sarawak. Consumption appears to be sustainable on average at the national level in
Malaysia, but not in all parts of the country.
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
7/32
5
The analysis reported in this note adds several Asian countries to the list of those studied
previously. In addition to Indonesia, Malaysia, and Papua New Guinea, it includes Bangladesh,
China, Hong Kong, India, Republic of Korea, Myanmar, Pakistan, the Philippines, Singapore, Sri
Lanka, and Thailand. More important, it presents estimates of resource depreciation allowances
based on Hotelling rents, not total rents, and thus provides a sounder basis for evaluating the
long-run impacts of resource depletion on consumption possibilities in Asia than the cross-
country studies by Pearce and Atkinson (1993) and the World Bank (1997). In the following
sections, we first provide more detail on the methods we employed, and then we discuss our
results and principal conclusions.
Methods
The analysis covered the period 1970-92, as data were too patchy in earlier and later
years to perform the necessary calculations. Minerals in the analysis included two fossil fuels,
coal and petroleum, and five metals, copper, iron ore, lead, manganese, and tin. Several other
minerals were included initially, but they were dropped once it became evident that they would
have an insignificant impact on the results. Roundwood included both industrial roundwood
(logs and pulpwood) and fuelwood. The economic depreciation of agricultural soils included on-
site productivity impacts only.
Overview
The estimation of total rents and Hotelling rents formed the core of the analysis for
minerals and roundwood. The estimation of both types of rents involved numerous simplifying
assumptions. As a consequence, the resulting estimates, and calculations based upon them,
should be regarded as very approximate. To the extent that biases associated with the
assumptions can be determined, nearly all point in the direction of overstating total rents and
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
8/32
6
Hotelling rents. These biases are discussed more below. Economic depreciation estimates for
agricultural soils were calculated using an approach quite different than the one used for minerals
and roundwood. The overview comments in the next three paragraphs pertain solely to the
estimates for minerals and roundwood. The approach used for agricultural soils is described in a
separate section below.
For minerals and roundwood, the first step was to estimate total rents. This was done by
multiplying estimates of quantities extracted times estimates of resource prices, and then
multiplying the resulting revenue estimates times an estimate of the share of total rents. Price
estimates were unit values for internationally traded resource-based commodities. Use of these
values surely biased the rent estimates upward, as only better quality commodities tend to be
traded. The resource-rent share was set equal to 0.65 for petroleum, 0.2 for other minerals, and
0.6 for roundwood. These shares are based on detailed data that the first author compiled as part
of a previous research project in Malaysia (Vincent 1997). Data in Repetto et al. (1989) suggest
that the parameter for petroleum may be somewhat low in the case of Indonesia, while the
parameter for roundwood is very close to Indonesian values. We have no direct evidence on the
accuracy of these parameters in other countries. The application of the 0.6 share to fuelwood as
well as to industrial roundwood exacerbated the upward bias in the rent estimates for
roundwood, as much fuelwood in the region is produced in a situation of open access, in which
rents are expected to be wholly or partially dissipated.
The second step was to insert the total rent estimates into a formula that converted them
to Hotelling rent estimates. Vincent (1997), generalizing results in El Serafy (1989) and
Hartwick and Hageman (1993), demonstrated that in a standard model of optimal resource
depletion, Hotelling rent for a nonrenewable resource equals:
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
9/32
7
Hotelling rent = Total rent * (1+)/[1+(1+i)T],
where is the elasticity of the marginal cost curve, i is the discount rate, and Tis the number of
years until resource exhaustion. Examination of this formula indicates that the ratio of Hotelling
rent to total rent rises as Tfalls (i.e., as exhaustion approaches). Hotelling rent is only a small
portion of total rent at the beginning of resource exploitation, but at the moment of exhaustion it
accounts for all of the total rent. Hence, the relative amount that countries must save to offset the
economic depreciation of natural resources rises over time. It rises nearly exponentially, given
the inclusion of the discounting factor in the denominator of the formula.
To apply this formula, we set = 1 (linear marginal cost curves), a neutral estimate of
the elasticity. To our knowledge, reliable econometric estimates of country- and resource-
specific elasticities are not available for resource extraction. We set i = 10 percent. This is the
discount rate commonly used by development banks, and it is the base rate used in many
analyses of Asian resource issues, including for example the case studies in Dixon and
Hufschmidt (1986). Repetto et al. (1989) used this rate in their study of Indonesia, and Vincent
(1997) reported estimated discount rates slightly above and below this rate for Malaysia. For T,
we followed the suggestion of El Serafy (1989), who proposed crudely estimating Tfor
nonrenewable resources by dividing the current resource stock (St) by the current quantity
extracted (Ht):
T = St/Ht. (nonrenewable resources)
This is a workable approach, but it understates T, and therefore biases the Hotelling rent
estimates upward, as quantity extracted should decline over time under an optimal extraction
program. This approach can be extended to renewable resources by equating Tto the current
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
10/32
8
stock divided by the difference between quantity extracted and growth (Gt):
T = St/ (HtGt). (renewable resources)
If extraction equals growth (sustainable yield), then Tgoes to infinity, as it should: the resource
is never exhausted.
The third and final step was to gauge the economic significance of total and Hotelling
rents by comparing them to GDP (at market prices) and gross domestic savings. Data on these
variables, in local currency and at current values, were drawn from the on-line World Bank
World Tables (the STARS database). The GDP deflator and the dollar exchange rate, also
from the World Tables, were used to convert these variables and the rent estimates to constant
1987 dollars. Comparisons were also made to GNP and gross national savings, but this did not
change the results appreciably (except for some years in certain South Asian countries, where
domestic and national savings have diverged greatly, particularly when national savings is
defined as including external transfers).
Minerals
Data on annual quantities extracted were drawn primarily from the UNCTAD Yearbook
of Commodity Statistics for metals and statistical publications of the International Energy
Agency for fossil fuels. Data series in these sources contained many gaps, however, which we
filled in by referring to several other sources (e.g., U.S. Bureau of Mines publications and, to a
limited extent, country documents) and, as a last resort, by interpolation and extrapolation.
Compiling complete data series was surprisingly difficult. No on-line source of minerals data
exists, although UNCTAD, the U.S. Bureau of Mines, and the World Bank reportedly intend to
develop (separately) publicly available, computerized databases.
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
11/32
9
In most cases, price was set equal to export unit value, based on data from the sources
given in the previous paragraph. When such data were not available, price was set equal to
international price series given in the IMF Yearbook of International Financial Statistics.
Mineral stocks were set equal to economic reserves: recoverable minerals whose
quantities have been measured or indicated and that can be economically extracted. Estimates
were drawn from the World Resource Institute publication, World Resources 1996-97, which
provides a convenient summary of estimates prepared by the U.S. Bureau of Mines. Most of the
estimates were for the early 1990s. They were extrapolated to earlier years by adding the
quantities extracted in intervening years (e.g., mineral stock in 1970 equaled the estimated stock
in 1992 plus the sum of quantities extracted during 1970-91).
Economic reserves are a narrower definition of stocks than the reserve base, which also
includes minerals that are marginally economic (as the Bureau of Mines defines this phrase)
and some that are subeconomic. Given the ongoing development of mining technology, the use
of reserves as the measure of stocks for calculating Tin the Hotelling rent formula probably
understates Tand biases the Hotelling rent estimates upward.
Roundwood
Diskettes from FAO provided a computerized source of annual data on production,
imports (quantity and value), and exports (quantity and value) of total roundwood and industrial
roundwood. Quantity extracted was set equal to production of total roundwood. Price was set
equal to the production-weighted average of the prices of industrial roundwood (the weighted
average of import and export unit values) and fuelwood (assumed to equal half the price of
industrial roundwood, based on price data reported in FAO forestry papers).
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
12/32
10
The major difficulty with the roundwood analysis was the limited and inconsistent data
on roundwood stocks. FAO has conducted two forest resource assessments, one in 1980 and the
other in 1990. The latter was global in scope, while the former covered just tropical countries.
Consequently, not all countries in Asia were included in both assessments. In particular, China
and the Republic of Korea were not included in the 1980 assessment. Even for countries
included in both assessments, problems arose because, in all cases but two (Pakistan and
Thailand), the 1980 estimates of roundwood stocks could not be reconciled with the 1990
estimates. The 1980 estimates were often much smaller than the 1990 estimates, which is
implausible in countries experiencing rapid deforestation (which was true of most of Asia in the
1980s) and high rates of roundwood harvest in remaining forests.
We tried several methods to construct more plausible estimates for 1980, including
building country-specific models of the annual balance between harvest and growth (area of
forest times annual growth, in cubic meters per hectare per year). In the end, we opted for the
simplest method. We set the 1980 stock equal to the product of the 1980 forest area (the 1990
area plus the area deforested during 1980-89, according to the 1990 assessment) and the 1990
stock density (in cubic meters per hectare). This method probably underestimated the 1980
stock, as more densely stocked forests tend to be the first harvested and the first to be cleared for
agriculture (because they tend to be on the most fertile soil). We would expect this to bias the
Hotelling rent estimates downward, if actual stocks did indeed decline more rapidly than our
estimates indicated.
The final step was to calculate a depletion coefficient, , by dividing the difference
between the two stock estimates (S1980, S1990) by the sum of roundwood production (Ht) during
1980-89:
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
13/32
11
1989 = (S1980S1990) /Ht.
t=1980
This coefficient indicates the net impact of the harvest of 1 cubic meter of roundwood on the
stock. A coefficient equal to 0 would indicate that harvest exactly equaled growth, so there was
no depletion. A coefficient greater than 1 might indicate that unrecorded harvesting occurred or
that harvesting caused additional damage to the residual timber stand. The variable Tin the
Hotelling rent formula was set equal to the estimated stock divided by the product of roundwood
harvest and the depletion coefficient:
T= St / (Ht).
This procedure not only accounts implicitly for factors other than harvest that affected
roundwood stocks, but it also ensures that data on roundwood stocks, which were expressed in
cubic meters of stemwood in trees with a diameter at breast height of at least 10 cm, were
consistent with data on roundwood production. That is, it implicitly converts production data
into the same units as the data on roundwood stocks. In the case of industrial roundwood,
production comes mainly from trees with diameters significantly greater than 10 cm; in the case
of fuelwood, production can come from branches as well as stemwood.
Agricultural soils
The economic depreciation of agricultural soils equals the change in the discounted sum
of agricultural rents that occurs as a result of soil degradation. If land markets are perfectly
efficient and all other factors that affect current or future agricultural rents are unchanging, then
economic depreciation simply equals the change in land values between one period and the next.
In practice, and particularly in developing countries, land markets are too distorted and too
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
14/32
12
many other factors change to infer economic depreciation values directly from changes in land
prices.
There are, however, several other approaches that can be applied to estimate the
economic depreciation of agricultural soils. Good illustrations of these approaches are contained
in a study of Costa Rica by Repetto et al. (1991) and a study of Sri Lanka by Samarakoon and
Abeygunawardena (1995). The most straightforward approach, which is the one we used, is the
productivity-change method. One sets the depletion value of a unit of soil equal to the
capitalized value of the future agricultural revenue that is forgone due to the loss of that unit.
Specifically, we multiplied: (i) value-added in the agriculture sector times (ii) the percentage of
agricultural land that is degraded times (iii) the ratio of the capitalized value of forgone future
agricultural revenue to current value-added.
For each country, we drew estimates of item (i) from the World Tables, and estimates of
item (ii) from Table 6.3 in Brandon and Ramankutty (1993). The latter estimates were
developed originally by ESCAP and pertain to the early 1990s. For our purposes, there were
three problems with the ESCAP estimates. First, they exclude Malaysia, Papua New Guinea,
and the East Asian "tigers." We set degradation values for these countries equal to zero, given
the dominance of low-erosive, perennial tree crops in the first country and the relatively small
areas in agriculture in the others. Second, they refer to all vegetated land (not just agricultural
land), degraded due to all causes, not just agricultural land degraded by human activity. We
assumed that the percentage of agricultural land degraded by human activity would equal the
percentage of degraded vegetated land. This is a strong assumption, but as Brandon and
Ramankutty comment (p. 117), "consistent estimates of only that amount of land that has been
degraded by human activity are not available across Asia." The ESCAP estimates ranged from
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
15/32
13
low values of 3 percent, 7 percent, and 11 percent in Myanmar, Bangladesh, and Sri Lanka to
high values of 30 percent, 34 percent, and 50 percent for China, Thailand, and India, with other
countries falling in between.
Third, the ESCAP estimates do not indicate the severity of degradation. Obviously, the
degree of degradation strongly affects item (iii). Estimates of the severity of soil degradation are
available for Asia as a continent, though not for individual countries, from two sources: a UNEP-
sponsored study summarized in WRI (1992, pp. 111-118), which reported estimates for 1990,
and a USDA-sponsored study summarized in Brown et al. (1990), which reported estimates for
the late 1970s. As the former study was based on a much more thorough data collection effort,
we used its estimates. It classified 39 percent of the land degraded by human activities in Asia as
"lightly" degraded, 45 percent as "moderately" degraded, 15 percent as "severely" degraded, and
0 percent as "extremely" degraded. These estimates are broadly similar to those for comparable
categories in the USDA study, 56 percent "slightly" degraded, 28 percent "moderately"
degraded, and 16 percent "severely" degraded. It is not clear whether UNEP's higher figure in
the "moderately" degraded category indicates an increase in degradation between the late 1970s
and 1990 or simply reflects different data sources or different definitions of degradation. For this
reason, we restricted our estimates of the economic depreciation of agricultural soils to the early
1990s, specifically 1992. We used 1992 instead of 1990 because the former is the end-of-period
year for the minerals and roundwood analyses.
We translated UNEP's estimates of the severity of physical degradation into economic
impacts by using values reported in Repetto et al. (1989) for Indonesia. That study estimated
that the economic depreciation of agricultural soils as a percentage of the value of current
agricultural output ranged from a low of 8.9-13.2 percent to a high of 100.3 percent, depending
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
16/32
14
on the type of crop and region in Java, with a mean value of 40.1 percent. Using these values as
guidelines, we assumed that the economic depreciation of lightly degraded agricultural soils
was equivalent to 10 percent of current value-added, moderately degraded soils to 40 percent,
and severely degraded soils to 100 percent. Combining the figures from UNEP and Repetto et
al., we set the value of item (iii) equal to 36.9 percent: 39 percent times 10 percent, plus 45
percent times 40 percent, plus 15 percent times 100 percent.
As indicated, the analysis focused on on-site impacts. In many cases, off-site impacts
such as sedimentation of reservoirs might be economically more important. Due to inadequate
data, we were forced to ignore off-site impacts. Rough estimates reported in Repetto et al.
(1989) indicate that off-site impacts were approximately an order of magnitude lower than on-
site impacts in Indonesia. Off-site impacts were also found to be much smaller in the Repetto et
al. (1991) study of Costa Rica. The Dixon and Hufschmidt (1986) volume contains some case
studies on the valuation of off-site impacts in specific Asian watersheds, but this information was
not sufficient for extrapolating to the national level.
Results
Tables I-VI present the principal results of the analysis. In Tables I-V, estimates of total
rents and Hotelling rents have been aggregated across all mineral and roundwood resources. Of
course, the relative importance of specific resources varies across countries. In Table VI,
economic depreciation allowances for agricultural soils have been added to those for minerals
and roundwood. Results are shown at three points in time, the beginning, midpoint, and end of
the 1970-92 period, except in Table VI, where, as explained above, estimates were made only for
1992. Countries are divided into the subgroups used in a recent report by the Asian
Development Bank (1997).
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
17/32
15
Tables I-III provide information on the economic significance of total mineral and
roundwood rents. Table I shows total rents per capita. Values tended to be higher at the end of
the period than at the beginning in most countries. This mainly reflects increases in production,
as prices of most resource commodities either fell in real terms during the period or remained
more or less constant. Per capita total rents fell in the Republic of Korea, the Philippines, and
Myanmar due to declining production of the most important resources (roundwood in all three,
and coal in the Republic of Korea, copper in the Philippines, and petroleum in Myanmar). Aside
from these cases, however, the absolute economic significance of natural resources was generally
greater at the end of the period than at the beginning.
Not surprisingly, per capita total rents tended to be largest for countries in Southeast
Asia, which are commonly regarded as resource-rich. The values for Malaysia were particularly
high. Values were also large for the neighboring countries of Myanmar (at least in 1970 and
1981) and Papua New Guinea. Among the East Asian tigers,5not surprisingly the Republic of
Korea had larger values than the city-states of Hong Kong and Singapore, which do not produce
any of the natural resources included in the analysis. Per capita rents in the Republic of Korea,
which is not usually thought of as resource-rich, were in fact slightly larger than in Indonesia in
1970 and comparable to or larger than in Thailand in 1970 and 1981. What is perhaps most
surprising are the relatively large values for China and India, which exceeded those for both the
Philippines and Thailand in 1992. Again, the "large" countries are not usually thought of as
resource-rich, but both are significant producers of roundwood and fossil fuels (primarily for
domestic consumption), and China is a major producer of several metals.
Table II places the economic significance of total mineral and roundwood rents in
relative terms, dividing the estimates of per capita total rents in Table I by estimates of per capita
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
18/32
16
GDP. The resulting values are less variable within country groupings than in Table I. The
Republic of Korea now looks like the other tigers in that the relative contribution of resource
rents to GDP is insignificant, and Malaysia and Papua New Guinea no longer appear
substantially more resource-rich than Indonesia. India and China still appear surprisingly
comparable to the Southeast Asian countries, however. In fact, their values were not too much
smaller than Indonesias and Malaysias in 1992.
Outside of South Asia, most countries with large or moderately large per capita rents in
Table I had lower rent/GDP ratios in 1992 than in 1981. In the cases of China, Indonesia, and
Malaysia, this reflects the rapid growth of other sectors of the economy more than declining per
capita rents (see Table I). Within South Asia (including India), however, most countries showed
rising rent/GDP ratios (Myanmar is an exception, due to the sharp drop in per capita rents). In
this sense, most of South Asia appears to have moved in an opposite direction from the rest of
Asia, toward relatively more resource-based economies. South Asian values in 1992 were still in
single digits, however, and well below the peak values in Southeast Asia in 1981.
Table III compares total mineral and roundwood rents to gross domestic savings. Total
rents were equivalent to a fifth or more of savings in at least one year during the period in all
countries except the tigers. The large values for Southeast Asia and neighboring countries are
no surprise, but the large or moderately large values for South Asia are, especially for
Bangladesh. The values are large in South Asia because most South Asian countries have
exceedingly low savings rates. So, even though total rents are small in absolute terms in those
countries and small relative to GDP, they provide a significant source of potential savings.
As discussed in the introduction, offsetting the economic depreciation of natural
resources requires saving and investing an amount equivalent not to total rent, but rather to
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
19/32
17
Hotelling rent. Table IV shows the ratio of Hotelling rent to total rent for minerals and
roundwood. As predicted by theory, the ratio rose in most countries, at least at a rate that was
steeper during 1981-92 than 1970-81. In 1992, the ratio was a fifth to a quarter in Southeast Asia
and India; it was even higher Bangladesh and Pakistan. In the latter two countries, the 1992 ratio
was many times higher than in 1981. These trends suggest that the need for savings to offset
resource depletion will be more critical in the future than it has been in the past. Most of Asia,
but especially countries in Southeast Asia and South Asia (followed by China), appears to be
entering a period when the economic depreciation of natural resources is likely to escalate
rapidly.
Table V shows our partial estimates of net domestic savings, calculated by subtracting
Hotelling rents for minerals and roundwood from gross domestic savings, relative to gross
domestic savings. For most countries and most years, the ratio was 0.9 or higher, indicating that
savings have been much more than adequate to offset resource depletion. Net savings have
differed little from gross savings. The lowest ratios are for Bangladesh, but even there the 1992
value was above 0.8. Countries with declining trends, which might signal movement in the
direction of eventual inadequate savings (one must exercise some caution, as the ratios also
reflect the vicissitudes of annual production levels), include Malaysia, the Philippines, India,
China, Bangladesh, and Pakistan. These are, not coincidentally, the countries with the largest
relative increases in the Hotelling rent/total rent ratios during 1970-92.
The final table, Table VI, is identical to Table V except that the estimate of net domestic
savings reflects the economic depreciation of agricultural soils as well as minerals and
roundwood. In all countries except Indonesia, Malaysia, and Papua New Guinea, soil
degradation had as large or larger an impact on net domestic savings in 1992 as the depletion of
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
20/32
18
minerals and roundwood: the difference between the values in Table VI and those in Table V is,
in most cases, as large or larger than one minus the values in Table V. The minimal impacts in
Indonesia and Malaysia are consistent with the findings of Repetto et al. (1989) for Indonesia
and observations by Vincent (1997) about Malaysia, where most agricultural land is in flat or
gently undulating areas and is under perennial tree-crop cover (rubber, oil palm, coconut, cocoa,
etc.). Soil degradation had the greatest relative impact in South Asia, where it pushed net
domestic savings to less than 70 percent of gross domestic savings in Bangladesh and India and
to less than 85 percent in Pakistan. The lower net domestic savings rates for South Asia
compared to East and Southeast Asia mirror the findings of the World Bank (1997).
The most important cause of depreciation of natural capital in most of Asia in the early
1990s therefore appears to have been soil degradation. This situation will probably change in the
future, however, as the Hotelling rent share for minerals and roundwood rises (Table IV).
Already, soil degradation is relatively less important (though not necessarily unimportant in
absolute terms) in major commodity producers like Indonesia, Malaysia, and Papua New Guinea.
Conclusions
The economic significance of total rents from extractive natural resources has varied
across countries and time in Asia, although more in absolute (per capita) terms than relative to
GDP. In most countries, per capita total rents were larger in 1992 than in 1970. In 1992,
however, total rents exceeded 10 percent of GDP in only one country, Papua New Guinea, with
the percentage having fallen since 1981 in several resource-rich countries due to the rapid growth
of other economic sectors. Total rents were relatively more significant compared to gross
domestic savings, being equivalent to a fifth or more of savings in at least one year during the
period in all countries except the tigers.
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
21/32
19
All countries apparently saved enough to offset the economic depreciation of extractive
natural resources, as Hotelling rents were much smaller than gross domestic savings in all years.
This conclusion is consistent with the optimistic results of the analyses by Repetto et al. (1989)
for Indonesia, Bartelmus et al. (1993) for Papua New Guinea, Vincent (1997) for Malaysia, and
World Bank (1997) for the East Asia and South Asia regions. It suggests that the pessimistic
findings by Pearce and Atkinson (1993) for Indonesia, Papua New Guinea, and the Philippines
were due to that study's overestimation of economic depreciation allowances. It is strengthened
if one takes into consideration the various assumptions that bias the Hotelling rent estimates in
this paper upward. It holds even when the economic depreciation of agricultural soils is added to
Hotelling rents for minerals and roundwood.
Of course, the estimates in Tables V and VI are partial in that they ignore, among other
things, the depreciation of physical capital. Available evidence indicates that net savings rates
would remain positive even if the depreciation of physical capital were deducted from them.
Estimates of the ratio of depreciation of physical capital to gross savings range from 0.25 in
Indonesia (Pearce and Atkinson 1993), to about 0.5 in India (World Bank 1997, Box 2.1) and
Malaysia (Vincent 1997), to 0.6 in Papua New Guinea and 0.73 in the Philippines (Pearce and
Atkinson 1993). These estimates are smaller in all cases than the corresponding ratios in Tables
V and VI.
The analysis yielded three findings that may be somewhat surprising. First, per capita
total rents have been moderate to large in China and India. These countries may not be as
resource-rich by this measure as Indonesia, Malaysia, Myanmar, and Papua New Guinea, but
they are as or more resource-rich than all other countries analyzed. Second, the total rent/GDP
ratio rose in most South Asian countries (including India) during 1970-92. In contrast, it fell
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
22/32
20
during 1981-92 in all Southeast Asian countries, China, and the Republic of Korea (it equalled
zero in Hong Kong and Singapore in all years). The fast-growing economies of East and
Southeast Asia have moved in an opposite structural direction than the more slowly growing
economies of South Asia. The total rent/GDP ratio in most South Asian countries was still small
in absolute terms in 1992, however. Third, the total rent/gross domestic savings ratio was
moderate to large in the large countries and South Asia during much of the periodin some
cases, even larger than in resource-rich Southeast Asiaindicating that resource rents were a
relatively significant source of potential savings.
The most important finding is probably the rising share of Hotelling rents in total rents
(Table IV). The relative magnitude of economic depreciation of natural resources is rising in
most countries, sharply so in several cases. For this reason, the similarity of partial net domestic
savings to gross domestic savings in Table V is not grounds for complacency. Asia will need to
save and invest (productively, one might add) more of the rents generated by resource extraction
in the future than it has had to in the past. The near-exponential escalation of the Hotelling rent
share might suggest one reason why most resource-rich developing countries have had a dismal
development experience (Sachs and Warner 1995): consuming (directly or indirectly) most of the
total rent in the initial stages of resource exploitation is consistent with sustainability, but it
might set a pattern that is difficult to break when the time comes to start saving a rapidly rising
share of the rents. Most of Asia appears to be at that point today. Countries that already have
high savings rates will need to maintain them, while countries with low savings rates will need to
raise them.
We close with a reminder about the very approximate nature of the rent estimates for
minerals and roundwood and the economic depreciation estimates for agricultural soils. With
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
23/32
21
better access to information available within the countries, one could construct much more
accurate estimates. The study of Malaysia by Vincent (1997) provides an example of how to do
so for minerals and roundwood, and the studies of Indonesia and Costa Rica by Repetto et al.
(1989, 1991) provide examples for agricultural soils. One might also be able to extend the
analysis to include other natural resources, such as fisheries (here, the Costa Rican study
provides a useful example) and groundwater. In most of Asia, however, the economic
depreciation of these two resources is likely to be much smaller in absolute terms than the
economic depreciation of minerals, roundwood, and agricultural soils.
Finally, one might be able to extend the analysis to include some aspects of the economic
depreciation of environmental capital (air and water quality, amenities, etc.). This is particularly
difficult in practice but important to attempt, as by many measures the environmental capital
stock is more degraded in Asia than in the rest of the world (Asian Development Bank 1997).
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
24/32
22
Notes
1. The required investment level is even higher if the stock of reproducible capital alsodepreciates.
2. Note that total rent equals the product of quantity extracted times average, not marginal, rent.3. These results assume that the extraction profile for the resource is optimal, the discount rate
and the price of the extracted resource are constant over time, the marginal cost curve for
extraction is stationary, and, in the case of a renewable resource, that there is no time lag
between regeneration and maturity.
4. Specifically, Weitzman (1976) demonstrated that net product equals the stationary equivalentof the future consumption stream.
5. Data were not available for the fourth tiger, Taiwan, which is not a member of the U.N.system.
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
25/32
23
References
Asian Development Bank (1997),Emerging Asia: Changes and Challenges. Manila.
Bartelmus, P., E. Lutz, and S. Schweinfest (1993), Integrated environmental and economic
accounting: a case study for Papua New Guinea, in E. Lutz, ed., Toward Improved
Accounting for the Environment. Washington, D.C.: The World Bank.
Brandon, C., and R. Ramankutty (1993), Toward an environmental strategy for Asia.
Discussion Paper No. 224. Washington, D.C.: The World Bank.
Brown, L.R., et al. (1990), State of the World. New York: W.W. Norton & Company.
Dixon, J.A., and M.M. Hufschmidt, eds. (1986),Economic Valuation Techniques for the
Environment. Baltimore: Johns Hopkins University Press.
El Serafy, S. (1989), The proper calculation of income from depleting natural resources, in Y.J.
Ahmad, S. El Serafy, and E. Lutz, eds.,Environmental Accounting for Sustainable
Development. Washington, D.C.: The World Bank.
Hartwick, J.M. (1977), Intergenerational equity and the investing of rents from exhaustible
resources.American Economic Review67(5), 972-974.
Hartwick, J.M., and A. Hageman (1993), Economic depreciation of mineral stocks and the
contribution of El Serafy, in E. Lutz, ed., Toward Improved Accounting for the
Environment. Washington, D.C.: The World Bank.
Pearce, D.W., and G.D. Atkinson (1993), Capital theory and the measurement of sustainable
development: an indicator of weak sustainability.Ecological Economics8, 103-108.
Repetto, R., W. Magrath, M. Wells, C. Beer, and F. Rossini (1989), Wasting Assets: Natural
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
26/32
24
Resources in the National Income Accounts. Washington, D.C.: World Resources
Institute.
Repetto, R., W. Cruz, et al. (1991),Accounts Overdue: Natural Resource Depletion in Costa
Rica. Washington, D.C.: World Resources Institute.
Sachs, J.D., and A.M. Warner (1995), Natural resource abundance and economic growth.
Development Discussion Paper No. 517a. Cambridge, Massachusetts: Harvard Institute
for International Development.
Samarakoon, S.M.M., and P. Abeygunawardena (1995), An economic assessment of on-site
effects of soil erosion in potato lands in Nuwara Eliya District of Sri Lanka. Journal of
Sustainable Agriculture6(2/3), 81-92.
Solow, R.M. (1986), On the intergenerational allocation of exhaustible resources. Scandinavian
Journal of Economics88(2), 141-156.
Vincent, J.R. (1997), Resource depletion and economic sustainability in Malaysia.
Environment and Development Economics2(1), 19-37.
Vincent, J.R., T. Panayotou, and J.M. Hartwick (1997), Resource depletion and sustainability in
small open economies.Journal of Environmental Economics and Management, 33(3),
274-286.
Weitzman, M.L. (1976), On the welfare significance of national product in a dynamic
economy. Quarterly Journal of Economics90, 156-162.
World Bank (1997),Expanding the Measure of Wealth. Washington, D.C.
WRI (World Resources Institute) (1992), World Resources 1992-93. New York: Oxford
University Press.
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
27/32
25
Table I. Per capita total rents (1987 US$).
1970 1981 1992
Southeast Asia
Indonesia 17 67 58
Malaysia 71 250 258
Philippines 29 27 14
Thailand 20 12 21
Pacific Islands
Papua New Guinea 79 80 111
Large Countries
China 4 23 25
India 10 15 28
South Asia
Bangladesh 1 3 5
Myanmar 85 95 10
Pakistan 4 8 8
Sri Lanka 3 8 12
East Asia
Hong Kong 0 0 0
Republic of Korea 18 17 6
Singapore 0 0 0
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
28/32
26
Table II. Ratio of total resource rent to GDP.
1970 1981 1992
Southeast Asia
Indonesia 0.08 0.18 0.10
Malaysia 0.07 0.14 0.10
Philippines 0.06 0.04 0.02
Thailand 0.04 0.02 0.01
Pacific Islands
Papua New Guinea 0.09 0.09 0.12
Large Countries
China 0.04 0.17 0.08
India 0.04 0.06 0.07
South Asia
Bangladesh 0.01 0.02 0.03
Myanmar 0.41 0.35 0.04
Pakistan 0.02 0.03 0.02
Sri Lanka 0.01 0.02 0.03
East Asia
Hong Kong 0 0 0
Republic of Korea 0.02 0.01 0
Singapore 0 0 0
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
29/32
27
Table III. Ratio of total resource rent to gross domestic savings.
1970 1981 1992
Southeast Asia
Indonesia 0.55 0.53 0.31
Malaysia 0.27 0.50 0.28
Philippines 0.26 0.16 0.14
Thailand 0.19 0.07 0.04
Pacific Islands
Papua New Guinea 1.46 1.38 0.59
Large Countries
China 0.14 0.59 0.20
India 0.25 0.25 0.33
South Asia
Bangladesh 0.10 0.61 0.42
Myanmar 3.86 2.10 0.31
Pakistan 0.22 0.34 0.13
Sri Lanka 0.07 0.20 0.17
East Asia
Hong Kong 0 0 0
Republic of Korea 0.12 0.03 0
Singapore 0 0 0
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
30/32
28
Table IV. Ratio of Hotelling rent to total rent.
1970 1981 1992
Southeast Asia
Indonesia 0.01 0.20 0.25
Malaysia 0.03 0.01 0.21
Philippines 0.02 0.08 0.26
Thailand 0.01 0.13 0.26
Pacific Islands
Papua New Guinea 0 0 0.01
Large Countries
China 0 0.01 0.09
India 0.01 0.05 0.26
South Asia
Bangladesh 0.01 0.10 0.39
Myanmar 0 0.07 0.04
Pakistan 0 0.07 0.55
Sri Lanka 0 0 0.01
East Asia
Hong Kong - - -
Republic of Korea 0 0.06 0.05
Singapore - - -
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
31/32
29
Table V. Ratio of partial net domestic savings (excluding depreciation of agriculturalsoils) to gross domestic savings.
1970 1981 1992
Southeast Asia
Indonesia 1.00 0.89 0.92
Malaysia 0.99 0.99 0.94
Philippines 1.00 0.99 0.96
Thailand 1.00 0.99 0.99
Pacific Islands
Papua New Guinea 1.00 0.99 0.99
Large Countries
China 1.00 0.99 0.98
India 1.00 0.99 0.92
South Asia
Bangladesh 1.00 0.94 0.84
Myanmar 0.99 0.85 0.99
Pakistan 1.00 0.98 0.93
Sri Lanka 1.00 1.00 1.00
East Asia
Hong Kong 1.00 1.00 1.00
Republic of Korea 1.00 1.00 1.00
Singapore 1.00 1.00 1.00
-
7/30/2019 Economic Depreciation of Natural Resources in Asia
32/32
30
Table VI. Ratio of partial net domestic savings (including depreciation of agriculturalsoils) to gross domestic savings.
1992
Southeast Asia
Indonesia 0.87
Malaysia 0.94
Philippines 0.95
Thailand 0.99
Pacific Islands
Papua New Guinea 0.99
Large Countries
China 0.92
India 0.68
South Asia
Bangladesh 0.69
Myanmar 0.93
Pakistan 0.84
Sri Lanka 0.94
East Asia
Hong Kong 1.00
Republic of Korea 1.00
Singapore 1.00