Endnotes

1. Utility or well-being has always been an inherently unmeasurable concept. Despite the limitations, measures of self-reported happiness or overall satisfaction with life have sometimes been used as a proxy. See Oswald (1997)

2. The importance of social participation to human well-being is reflected, for instance, in the negative correlation between people's self-reported happiness and unemployment, controlling for income (Blanchflower and Oswald 2000). Consistent with the happiness data, suicidal behavior is also more prevalent among the unemployed ( Oswald, 1997). The importance of the environment is reflected, for example, in the results of a survey of over 35,000 people in the G-20 countries, in which about one in four citizens spontaneously mentions environmental issues as a major concern facing his or her country. Although the focus of the environmental concern varies, in part by the country's level of development (in Asia, for example, people are more concerned about the effect of pollution on human health, whereas elsewhere people in the G-20 seem equally concerned about the effect of pollution on human health and the loss of natural resources), the percentage of people citing water pollution, air pollution, and loss of natural areas and species was high-ranging from 63 percent (for species loss) to 71 percent (for water pollution). See: Environics International. (see International Environmental Monitor Survey Oct-Dec 2001 on line at www.environicsinternational.com).

3. Dasgupta (2001a) has shown that along any arbitrary consumption path, the aggregate present value (discounted integral) of utility increases during a short interval of time if and only if wealth (estimated at shadow prices defined along the consumption path) increases during the interval, at constant shadow prices. See also Hamilton (2000)

4. Adjusted net savings are also referred to as genuine savings in the literature.

5. Whether social assets should be included in a measure of net wealth and savings is still an issue of debate. See note 14.

6. The adjustment for CO₂ emissions reflects the damage to global assets associated with economic activity in a given country. If we assume certain property rights, in particular that each country has the right not to be damaged by CO₂ emissions from its neighbors, then the estimate of global damage represents the sum of a) the damage a country's CO₂ emissions does to its own assets over time and b) the notional damage payments owing to all other countries affected by these emissions.

7. The effects of improved life expectancy, which have a direct bearing on human assets, are also not included.

8. After accounting for population growth Dasgupta (2001b) finds that changes in wealth (adjusted net savings per capita) are negative in the Indian subcontinent and Africa but positive in China.

9. Some NGOs have begun experimenting with Internet-based information provision as a way of stimulating debate about public policy; increasing the transparency of the actions of private corporations, public agencies, and legislators; and facilitating feedback from civil society to elected officials.

10. Assets can be classified in many different ways depending on the analytic purposes at hand, and the list presented in this chapter is by no means an exhaustive one. For instance, cultural assets can also be important in affecting human well-being. It may also be appropriate, depending on the nature of the analysis, to draw finer distinctions within the categories mentioned here-for instance, between physical and financial assets within human-made assets.

11. The waste from other species is usually more easily biodegradable in natural processes.

12. Trust is usually accumulated through repeated interactions.

13. Interpersonal networks can be thought of as assets, but networks that fail to give rise to mutual beliefs that sustain good outcomes are not socially productive.

14. Although there is still a great deal of debate concerning social capital (centering on what constitutes social capital, whether the word capital should be used in this context at all, and on how to analyze and measure the effects of social capital), there is a growing body of evidence that shared values, informal ties, and interpersonal networks can have an important impact on outcomes-notwithstanding some of the difficulties in measuring social capital. See Grootaert and van Bastelaer (2001) for different definitions of what constitutes social capital; Solow (2000) and Bowles and Gintis (1999) for examples of objections to the use of the term "capital"; and Stone (2001) on measurement problems in empirical work. In the social capital literature, institutions and organizations are included under the concept of structural social capital, while another set of elements (trust, shared values, norms) are included as cognitive social capital. This Report reserves the term social capital for interpersonal networks and the trust and shared values they generate, but excludes norms, which function as informal rules. Instead, as in the institutional economics literature, we separate the term "institutions" from social capital and use institutions for the mechanisms or rules of the game (both formal and informal) that determine how individuals and groups interact, coordinate, and allocate resources. (Although as chapter 3 shows, social capital narrowly defined as cognitive social capital and institutions broadly defined to include embedded organizations share critical asset-like characteristics that underpin a society's ability to put other assets to good use.) This report also includes embedded organizations as institutions (but not organizations as agencies).

15. Natural assets can also have "intrinsic" values. Ecosystems preceded the evolution of humans and can function without humans, but humans cannot survive without ecosystems. However, in that humans are increasingly acquiring the knowledge and technology to preserve or destroy ecosystems, the report focuses on instrumental values.

16. In the more narrow economic definition, two inputs in the production function are gross complements if their cross-price elasticity of demand (the extent to which the demand for one input rises when the price of the other input increases) is positive. Where markets do not exist, the price elasticity of demand cannot be determined, even though technically the assets are complementary. We use this broader concept throughout.

17. The examples given in the text are at a micro level. A more macro-level example is one by Knack and Keefer (1997), which considers the role of social capital using measures of trust and civic norms and shows a positive association with growth.

18. Both social capital and informal and formal institutions can lower transaction costs and increase efficiency. In facilitating innovation, they can also increase productivity growth. Hence good social capital and institutions are crucial to economic growth.

19. Krishna and Uphoff (1999)

20. Reid and Salmen (2000)

21. Galor and Zeira (1993).

22. Uzzi (1997)

23. Yli-Renko (1999).

24. See Suvanto (2000) for a discussion of how social capital enhances innovation and accelerates product development in firms.

25. Zaheer, McEvily, and Perrone (1998).

26. A measure that captures both the shortening of life and the amount of time lived in varying degrees of dysfunction because of illness is the disability adjusted life year (DALY). Estimates (Murray and Lopez 1996) suggest that environmental "bads" account for a significant proportion-ranging from 10-20 percent of total DALYs-of the total burden of disease across developing country regions.

27. Clark (1898).

28. Even in the most advanced industrial countries, however, physical assets account for only a small proportion of total assets; human, social, and environmental assets account for the bulk.

29. World Bank (2000f).

30. World Bank (2000f).

31. World Bank (2000f).

32. Meaning that there is evidence of embodied technical progress.

33. In addition to collecting water, watersheds perform two other big roles: cleaning water and stabilizing its flow. Stabilization is valuable because rainfall is generally very uneven. The watershed automatically compensates for the mismatch between the supply of rainfall and the flow downstream because the soil in the watershed is absorbent and releases water gradually. Trees play a central role in this system by holding the soil in place (important for water stabilization and cleansing, because the soil acts as a filter), and by interacting with the fungi and micro-organisms in the soil to break down pollutants and purify water. While there may be substitutes for the cleansing function of watersheds, there are few substitutes for their flow control function, even in industrial communities (Heal 2000).

34. In 1993 more than 600,000 metric tons of shrimp were harvested from 960,000 hectares of ponds worldwide. About 80 percent of the total production came from Asia, and the rest from Latin America. The availability of shrimp larvae-as commercial hatcheries were established through the Asia Pacific region during the 1970s and 1980s-the marketing of formulated feeds, and active support of the government, set the stage for the industry's takeoff in the 1980s (Primavera 1994) .

35. Farming systems fall into four broad categories-traditional, extensive, semi-intensive, and intensive-characterized by increased stocking rates and requiring corresponding feed and water management inputs.

36. Primavera (1994) .

37. Note that the economic losses associated with the mangrove destruction that often accompanies shrimp farming is not considered here.

38. When the industry is highly developed, specialization includes producers of farm equipment, algal feeds, formulated feeds, spanners, and services. Hence, it can involve many jobs and large amounts of capital equipment. For example, the Ecuadorian shrimp industry in 1990 had a total capitalization of $1.66 million and employed around 100,000 people. Similarly, in Thailand around 114,000 people were employed in 19,000 shrimp farms in 1991, and in India shrimp processing plans employed some 500,000 people (Primavera 1994) .

39. See Dasgupta (2000) .

40. Because ecosystems are integrated systems, parceling an ecosystem into different parts that are then privatized can create problems since each individual owner may allocate his land to a different use without regard to the needs of the ecosystem as a whole, resulting in a loss of biodiversity and ultimately the resilience of the ecosystem itself.

41. See Dorsey (1998) .

42. Reduction in the ozone layer results in an increase in the ultraviolet radiation reaching the earth's surface. Exposure to more solar ultraviolet radiation can lead to a very large increase in skin cancer rates and deaths.

43. The exercise does not look at the effects of environmental assets. Physical capital is proxied by investment as a share of GDP. Social assets are measured by the lack of racial and nationality tensions. Political terrorism is measured using International Country Risk Guide (ICRG) indexes. The distribution of human capital is proxied by average years of schooling. The distribution of education, measured by the Gini coefficient, is taken from Thomas, Wang, and Fan (2001). Why does the distribution of education matter? In countries with a very skewed distribution of education, education may not match the level of dispersion of ability. If the dispersion of education is lower than the dispersion of ability in society, then widening the dispersion of education can increase per capita income.

44. The minimum threshold level of the (principal component) of the International Country Risk Guide (ICRG) index of racial and nationality tensions and political terrorism was -0.23.

45. This focus on assets is not to detract from the importance of total factor productivity (TFP) growth in sustaining growth. In cross-country regressions much of the differences in growth performance across countries are accounted for by differences in TFP growth. It should be noted, however, that some of the observed differences could actually reflect mismeasurement and omitted variables rather than true differences in TFP growth, and part of TFP growth itself could ultimately be due to asset accumulation. Indeed a main vehicle for TFP growth is new technology introduced through imported capital and new intermediate goods (embodied technical progress). It should also be noted that, in looking at the determinants of growth over time within a country (rather than at differences in growth performances across countries), asset accumulation is found to account for the bulk of GDP growth.

46. For example, Collier (1999) finds that during civil wars GDP per capita declines at 2 percent a year owing partly to a direct reduction in production and partly to a gradual loss of capital stock through destruction, dissaving, and the portfolio substitution of capital abroad.

47. Once such low levels of social assets are reached, there can be a downward spiral in which violence promotes the emergence of perverse social assets-those based on crime and violence, which benefit a few members of the group but harm the community at large (Moser and McIlwaine 2001 ).

48. As mentioned earlier (see note 2), surveys indicate that people value the environment. Research also shows that people's health is positively affected by exposure to, and interaction with, the natural world. For instance, in an article in the American Journal of Health Promotion, Dr. Frumkin (2001) examined a series of studies looking at human health and animals, plants, landscapes, and wilderness. Within each of these domains he found a wide body of evidence linking the domain with human health. For example, one study found that pet owners had significantly lower blood pressure and cholesterol levels and fewer minor health problems than people who did not own pets. Honeyman (1990) has found that people who are shown urban scenes with vegetation recover from stress more quickly than people who are shown urban scenes without vegetation. In fact, there is a theory-expanded by Wilson and Kellert (1994)-which asserts that human evolutionary history has made a human connection with nature a necessity, not a luxury.

49. The poor can be affected by adverse environmental outcomes in three broad ways: natural resource degradation can affect their livelihoods; environmental degradation can affect their health; and ecological fragility and the likelihood of disasters can affect the poor more than others because of their greater vulnerability (effects of climate change on poor nations). See Department for International Development and others (2002). See also Cavendish (1999) who documents empirically how environmental resources make a significant contribution to average rural incomes in Zimbabwe.

50. The agricultural sector in Madagascar suffered from discriminatory policies in the past (with negative rates of protection for rice, for example, of up to 43 percent, and with only irrigated wheat and sugar enjoying protection). While the reforms of the mid-1990s (devaluation of the exchange rate, reduction in import barriers, liberalization of markets, privatization of most state enterprises) contributed to a more balanced incentive structure, productivity continues to be hampered by a lack of fertilizer, inadequate road infrastructure, and segregated markets (Paternostro, Razafindravonona, and Stifel 2001 ). See also box 8.3.

51. Cole, Rayner, and Bates (1997).

52. Easterly (1999).

53. See Borghesi (1999) and Shalizi and Kraus (2001).

54. See Dasgupta and others (2002). The theoretical literature has identified several factors that could give rise to a Kuznets curve relationship: if structural changes inherent in the development process lead to cleaner industries (Syrquin 1989); if abatement technologies exhibit increasing returns to scale (Andreoni and Levinson 1998); if development is accompanied by demand for a better environment to which policies and institutions respond (Grossman 1995); and if the stock of environmental assets declines over time while demand rises.

55. Based on Sebastian, Lvovsky, and de Koning (1999), Murray and Lopez (1996), Smith (1998), and World Bank estimates, 9 percent of DALYs in developing countries are accounted for by water supply and sanitation and urban air pollution. Indoor air pollution accounts for an additional 2 percent of DALYs. While not an externality, indoor air pollution justifies public funding from a poverty reduction perspective.

56. And the costs of delay in addressing pollution problems can sometimes be very high. The experience of industrial countries with pollution remediation to reduce harmful health effects is illustrative. For the cases of Itai-itai disease (from cadmium poisoning), the Yokkaichi asthma (from sulfur emissions), and the Minamata disease (mercury poisoning) in Japan, the costs of cleanup and compensation to victims are estimated at 1.4 to 102 times the costs of prevention. More important, the costs of prevention were affordable at the time, given Japan's per capita income and fiscal resources. The problems were lack of knowledge of the consequences of neglect, and different priorities. Moreover, there can be costs associated with "lock-in": delays in implementing changes in incentives to address pollution problems can lead to investments and technological lock-ins that cumulatively increase the costs of reversing the environment-unfriendly policies later on.

57. For instance, a study on China-notable for its analysis of both the costs and the benefits of addressing air pollution based on firm-level data-shows that a "statistical life" can be saved by removing 100 tons of sulfur dioxide annually from Beijing's atmosphere. Estimates of abatement costs for large plants were $3 a ton, when 10 percent of the emissions are controlled. So abating 100 tons-at a cost of $300-would save one life. (The abatement costs for small plants were considerably higher, but large plants are a much larger source of air pollution in Beijing.) (World Bank 2000d).

58. However, costs of abatement can be disproportionately greater for small- and medium-size firms. It may still be the case, however, that policy and regulatory levels are not high enough to affect economic growth, because industry within individual countries may be resisting greater regulation for fear of becoming uncompetitive-with the result that pollution levels are also suboptimal.

59. Dasgupta and others (2002).

60. The U.S. Superfund, for example, shows how high the costs of cleaning up severely polluted areas after the fact can be: the program has allocated more than $100 billion. Part of the problem is that the consequences of the pollution were not known at the time-many of the sites were polluted long ago.

61. See Pagiola and Rothenberg (2002) which provides a good compilation of case studies analyzing different market-based approaches to forest conservation.

62. Heal (2000).

63. Classic examples of fish population collapse where overfishing may have played a role include the sardine stocks of California and Japan in the late 1940s and the anchovy stocks of Peru and Chile in 1972. More recent examples of overfishing include the collapse of the Canadian cod fishery and several New England groundfish stocks. Groundfish are marine fish that live and feed on or near the bottom of the ocean. Their now-reduced numbers include edible species that New Englanders have relied on for generations. The most important are haddock, cod, and yellowtail flounder (Botsford, Castilla, and Peterson 1997).

64. Coase (1960).

65. Myers and Kent (2001).

66. The term energy subsidies can refer to transfers to consumers through underpricing or transfers to producers through overpricing.

67. Some 85 percent of total primary energy supply is from fossil fuels and 7 percent from nuclear energy.

68. Fossil fuels cause many environmental problems apart from the better-known ones of oil spills and mining tailings. They cause pollution (sulfur dioxide, nitrogen oxide particulates, and carbon dioxide). They harm health and affect production both directly and through acid rain (which in turn damages forests and water bodies). They are also the largest contributor to global warming.

69. Myers and Kent (2001).

70. OECD (2001c).

71. R&D for renewables is also subsidized, but the net subsidy (in terms of the relative price effect) is biased toward fossil fuels, and the total budget drain is higher than if fossil fuels were not subsidized at all.

72. Data Resources Inc. (1997) estimates that there would be a loss of 104,000 mining jobs in Europe and Japan (OECD 2001c).

73. Eskeland and Devarajan (1996).

74. There are two reasons why a small additional amount of consumption to be made available at some future year could be socially less valuable than that same additional amount made available today (why the consumption rate of interest could be positive). One is impatience, and the possibility of no tomorrow. Another is the expectation that consumption will be greater in the future than it is today, which means that the benefit from additional future consumption will be less. Thus the consumption rate of interest is equal to the pure rate of time preference (reflecting the first consideration) plus the product of the percentage increase in marginal well-being consequent on a percentage increase in consumption (called the elasticity of marginal well-being) and the percentage rate of change of consumption (reflecting the second consideration) (Dasgupta (2001a)).

75. Since the consumption rate of interest is made up of two components (see note 74), there is no reason to believe that rates should remain constant over time.

76. Newell and Pizer (2001). Example: Suppose the current consumption rate of interest is 4 percent, and you know that over the next 100 years the rate could either rise to 7 percent or fall to 1 percent. And suppose your project were to yield a benefit of $100 a hundred years from now. The lower rate path would value the $100 dollars at $20.28 today; the higher at only $0.20 today. If you recognize the uncertainty in future interest rates, and place equal weight on these two outcomes, the expected value of $100 in 2102 would be $10.24. Now suppose we evaluated the expected value one year into the future, in 2103. Based on the lower rate of 1 percent in 2102, the same $20.28 is worth $20.08 ($20.28/1.01 = $20.08), and the $0.20 is worth $0.19. Averaging these, the expected value of $100 delivered in the year 2103 would be $10.13. This is very close to the value of the lower rate of 1 percent $20.28 multiplied by the probability of that outcome, 50 percent ($10.14). In this way, the change in value between periods comes to depend solely on the lower rate. Why? Intuitively, discounting benefits 100 years hence depends only on the lower rate because the higher rate discounts future benefits to such an extent that it adds very little to the expected value. See also Weitzman (1998).

77. As discussed in the following chapter, both informal and formal mechanisms shape the incentive structure facing individuals and hence affect environmental outcomes.

78. The broad range of economic instruments includes taxes and charges, tradable quotas, tradable emission permits, environmental subsidies, deposit-refund systems, performance bonds, noncompliance fees, resource pricing, and resource royalties (OECD 1988; 01c).

79. German Advisory Council on Global Change (2002a).

80. Fossil fuel combustion is the largest source of human-caused greenhouse gas emissions-so there are both present and future costs to society.

81. World Bank (2000d), and http://www.worldbank.org/nipr/.

82. OECD (2001c).

83. World Bank (2000c).

84. OECD (1999, 2001c).

85. Acharya and Dixon, background paper for WDR 2003.