Measuring sustainability

Adjusted net savings

The focus of more recent efforts to link economic and environmental concerns has been on determining changes in wealth (adjusted net savings) as an indicator of sustainability. Change in wealth, appropriately defined to include a comprehensive and complete set of assets, is a good measure of prospects for well-being as it indicates a country's ability to sustain a consumption stream-which is what matters for sustainability-not just the consumption flow at a particular time as measured in GDP or green equivalent. In principle, only if wealth (measured in shadow prices and excluding capital gains) increases over time-that is, only if adjusted net savings is positive-will intergenerational well-being rise.

Ideally, measures of adjusted net savings would take into account human capital, natural assets, knowledge, and social assets. ⁵ But measurement difficulties and the lack of available data preclude this. Estimates of net savings currently account for some key elements of environmental stocks-energy depletion, mineral depletion, net forest depletion, and CO₂ emissions. ⁶ They also include education spending, as a proxy for human asset accumulation, but they do not yet include changes in the stock of (codified) knowledge or social assets (see table 2.1). ⁷ It is clear that adjusted net savings is an improvement over traditional savings measures; however, efforts to refine it further will need to continue.

In practice, also, additional adjustments may need to be made to deal with specific issues. First, when a country's population is growing, it is on a sustainable path on a per capita basis only if the percentage change in wealth (adjusted net savings as a share of total wealth) exceeds the population growth rate. ⁸ If the change in wealth is lower than the population growth rate, the country is "de-capitalizing" or running down its assets on a per capita basis. This would imply that it is on an unsustainable path to an eventual decline in welfare per capita. Second, if production processes are subject to thresholds (nonconstant returns to scale), then again an adjustment to net savings needs to be made, if measured net savings are to correctly indicate sustainability.

The adjusted net savings measure is a useful "headline" indicator for the economy. Like all national accounts or monetary-based indicators, it employs an integrating framework that permits weighting and aggregating disparate elements of the economy and the environment. In principle an aggregate indicator such as adjusted net savings allows for comparisons across groups of countries-by region or by income. Figure 2.1 presents a comparison by GDP per capita, and shows that adjusted net savings are negative in some countries-that is, they are de-capitalizing.