Sustainable development
What is sustainable development ?
 The
central and most needed part of policy
development
 Sustainable development
is development that
meets the needs of the present without
compromising the ability of future generations
to meet their own needs
(World Commission on
Environment and Development, the Brundtland
Commission)

well-being per capita increases over time on a
sustained basis
the modern theory of sustainable
 development is based on notions of capital assets
as the means of generating well-being

Capital
Human-made capital
 Human capital (knowledge, skills)
 Natural or environmental capital
 Social capital


The condition for sustainability (or
potential sustainability) is that the sum of
these assets, i.e., total wealth, should increase
in per capita terms over time

Intergenerational rules of behavior follow
immediately, e.g., that each generation should
bequeath to the next generation a capital
endowment no less than the one it has now
Hicksian income

Hicks in 1939 set out the notion that
sustainable consumption involved
maximum consumption consistent with
maintaining capital assets intact

Hicksian income measure can then be
interpreted as “the interest on total
wealth.”
Ramsey Rule
The non sustainability comes about because of
positive utility discounting or because
particular
features of the depreciation of human-made
Capital
Cobb Douglas production function in
which a
Fair degree of substitutability between
human
Made and natural capital is assumed (in fact
the
elasticity of substitution is unity in this
model)

g is the growth rate of the efficiency of production
inputs (the growth rate of total factor
productivity), and it is interpreted here to
reflect technological change
Measuring Sustainable
Development

Resulting indicators of sustainability are simply
indicators of environmental and economic
change.

A sustainability indicator should have the
property of giving an approximation of
whether a given economy is sustainable or
not.

In the 1990s, environmental economists
developed indicators based on the capital
theory of sustainable development.

The GNP is a poor measure of well-being
because it implicitly assumes there is only one
capital asset—human-made (or reproducible)
capital.

The proper measure of well-being is net
national product (NNP) rather than GNP
because capital depreciation does not
contribute to well-being.

National product becomes interest on total
wealth.

NNP = GNP - dM - dN - dH – dS

In each case d refers to net depreciation and
subscripts M, N, H, and S refer to humanmade, natural, human, and social capital,
respectively. In turn GNP is made up of
consumption C and gross investment, I

Since I - dM = Inet, or net investment, the
revised measure of NNP becomes
NNP = C + Inet - dM - dN - dH – dS

dM is estimated in conventinal income
accounts, dN increase in environmental
assets, dH is human capital, dS indicates
depreciation of social capital.

For this measure of true or “green” NNP to
be estimated, each depreciation indicator
needs to be measured in monetary terms.

The correct unit valuation in each case is the
economic rent, i.e. price – marginal cost.

The first set of accounts to incorporate
environmental depreciation was first produced
in 1989 for Indonesia.

Net ‘true’ investment, i.e. investment –
depreciation on environmental asset.

Pearce and Atkinson established that the
correct measure on sustainability could be
expressed in terms of ‘genuine’ saving.
Saving – depreciation = genuine
savings

This concept was adapted by World Bank and
genuine savings indicators appear for over 100
countries

Economies with high ratios of savings to GNP
have positive genuine savings.

The measures have not been expressed in per
capita terms.