0.13 Natural capital: forestry

We continue our discussion of the most important causes of environmental degradation in emerging nations with a closer look at ignorance.

The role of ignorance

Natural Income accounting was introduced 70 years ago by Simon Kuznets. It is now used everywhere to provide a measure, imperfect as it may be, of economic welfare comparable across countries.

Use of Natural Income accounts and ongoing efforts to improve them has helped us understand much better how to measure growth and compare growth. But there is one area in Natural Income accounting that has received far too little attention. No country properly accounts for the externalities and social costs often involved in extraction and depletion of natural resources, including forests, minerals, oil and fisheries.

This is a measure of our ignorance about the effects of natural resource use. Natural Resource Accounting can help remedy this deficiency.

Resource accounting

The terms Gross National Product (GNP) or Gross Domestic Product (GDP), national income, depreciation and personal income are familiar to all economists. The ultimate test for many government policies has been their impact upon the rate of growth of these magnitudes. Again, the conceptual framework from which these broad macroeconomic measures spring is called national income accounting, used in the U.S. since 1942. The basic purpose intended for national income accounts is to provide analysts with some measure of performance of the economic system. For what the accounts attempt to measure, they do a reasonably good job of measuring, in spite of still sizable errors of omission as well as remaining conceptual issues: especially the impact of government investment.

The system of national accounts in use by virtually all countries suffers, however, from a much more fundamental flaw that has serious implications for prospects for sensible environmental policies: the system greatly distorts the role of natural resources in economic processes. This distortion has two principal dimensions. First, present systems of national income accounting fail to recognize natural resources as economic assets. Second, the protective services provided by these assets are not valued. However, the additional expenditures forced on society by the loss of these services are valued. Thus, systems of national income accounts are laden with harmful paradoxes. The depreciation of man-made capital equipment and infrastructure is recognized as a cost in the national income accounts. But the depletion of soils, minerals, hydrocarbons, and forests is not. As a result, there is a perilous asymmetry in the way we measure, and therefore the way we think about, the value of natural resources. This asymmetry gives rise to patently anomalous, and uneconomic, practices. Consider this, on the one hand, the treatment of government expenditures for cleaning up the catastrophic oil spill in 2010 in the B.P. oil spill in the Gulf of Mexico. These clean-up expenditures added to the nation’s gross national product. This is so even though the affected waters, sea life and tourism were severely harmed . On the other hand, a country could exhaust all of its forest resources and, in the process, silt up all its rivers and harbors, but measured national income would be reduced only when these resources vanished. To put the problem another way, consider a country that for several consecutive years experienced depreciation of its man-made capital stock in excess of new investments in physical capital. That country would soon suffer a decline in its measured National Income, because physical assets would wear out at a faster rate than they were being replaced. Policymakers would have a very clear signal that something was seriously wrong. But a country such as China, or Nigeria, or Venezuela drawing down on its natural resource base, by mining, drilling or logging, may enjoy high rates of GNP growth for long periods, even in the absence of any new investments in sustaining the stock of these natural assets. Under prevailing systems of natural income accounting, the economy’s health would appear quite robust during the draw-down. Therefore, the l iquidation of man-made assets shows up in the national income accounts as economic decline ; the liquidation of productive assets provided by nature shows up as economic growth .