Wealth, Welfare and Sustainability

Wealth, Welfare and Sustainability

Advances in Measuring Sustainable Development

Kirk Hamilton and Giles Atkinson

This important book presents fresh thinking and new results on the measurement of sustainable development. Economic theory suggests that there should be a link between future wellbeing and current wealth. This book explores this linkage under a variety of headings: population growth, technological change, deforestation and natural resource trade. While the relevant theory is presented briefly, the chief emphasis is on empirical measurement of the change in real wealth: this measure of net or ‘genuine’ saving is a key indicator of sustainable development. The methodological and empirical work is bolstered by tests of the predictive power of genuine saving in explaining future consumption and economic growth. Just as importantly, the authors show that many resource-abundant countries would be considerably wealthier today had they managed to save and invest the profits from natural resource exploitation in the past.

Chapter 6: A Hartwick Rule Counterfactual

Kirk Hamilton and Giles Atkinson

Subjects: economics and finance, environmental economics, valuation, environment, environmental economics, valuation


INTRODUCTION1 As presented in Chapter 5, there is by now a substantial empirical literature documenting the ‘resource curse’ or ‘paradox of plenty’. Resource-rich countries should enjoy an advantage in the development process, and yet these countries experienced lower GDP growth rates post-1970 than less well endowed countries. A number of plausible explanations for this phenomenon have been suggested: inflated currencies may impede the development of the non-oil export sector (‘Dutch disease’); easy money in the form of resource rents may reduce incentives to implement needed economic reforms; and volatile resource prices may complicate macroeconomic management, exacerbating political conflicts over the sharing and management of resource revenues. In the most extreme examples, levels of welfare in resource-rich countries are lower today than they were in 1970 – development has not been sustained by Pezzey’s (1989) definition. The Hartwick Rule (Hartwick, 1977) offers what Solow (1986) termed a ‘rule of thumb’ for sustainability in exhaustible resource economies – a maximal constant level of consumption can be sustained if the value of investment equals the value of rents on extracted resources at each point in time. For countries dependent on such wasting assets this rule offers a prescription for sustainable development,2 a prescription that Botswana in particular has followed with its diamond wealth (Lange and Wright, 2004). Drawing on a 30-year time series of resource rent data underlying the World Development Indicators (World Bank, 2004), in this chapter we construct a ‘Hartwick Rule counterfactual’: how rich would countries be in the year...

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