Wealth, Welfare and Sustainability
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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.
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Chapter 4: Testing Genuine Saving

Kirk Hamilton and Giles Atkinson


INTRODUCTION Intuition suggests that saving today should have an effect on future economic performance, and indeed the large body of work on cross-country analysis of economic growth supports this (see, for example, Sala-i-Martin, 1997). As shown in Chapter 2, this intuition was made formal in Hamilton and Clemens (1999), where it was reported that current net or genuine saving is precisely equal to the change in the present value of future utility along the optimal development path for an economy. The work has been extended by Dasgupta and Mäler (2000) and Asheim and Weitzman (2001). This theory can provide a basic framework for testing, using historical data, whether current saving does in fact predict future changes in welfare. Recent papers by Ferreira and Vincent (2005) and Ferreira et al. (2003) have explored the question in detail. This chapter provides an alternative framework and empirical test. A key motivation for an alternative test lies in the restrictiveness of the assumptions underlying other frameworks. For example, the very general model of Weitzman (1976) requires (i) that the economy be on the optimal path which maximizes the present value of consumption and (ii) that the interest rate be constant. These are both strong assumptions. The model of Ferreira et al. (2003) presents other problems for estimation, as the following simple two-stock model demonstrates. Assume a Dasgupta–Heal type economy with a finite stock of resource S which is extracted at rate R, and where production depends on the capital stock and flow...

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