Wolfgang-Peter Zingel
South Asia Institute of Heidelberg University - Department of International and Development Economics

Greening the accounts: Overview and Techniques

Revised draft (Sep 1997) of a paper, presented at a seminar on "Sustainable Development - Greening of National Accounts", jointly organized by the Goethe Institut, the German Cultural Institute, and The Lanka International Forum on Environment and Sustainable Development (LIFE), Colombo, 13th & 14th December 1996.

An abridged version was printed in : Mohan Munasinghe, Stefan Dreyer, Pradeep Kurukulasuriya (eds.): Greening the national income accounts - relevance for South Asia. Colombo: Lanka International Forum in Environment and Sustainable Development and German Cultural Institute. 1999. pp. 11-37.
 

"There are three kinds of economists: those who can count and those who can`t". A leading journal used this old joke as a starter in a recent article ["The unmeasurable lightness of being". The Economist. Nov. 23, 1996. pp. 85-86], to point to the fact the "economic statistics can cause governments to lose elections or wipe billions off share prices. Unfortunately many of the numbers are wrong.[...] traditional measures are becoming increasingly dodgy." [Ibid.].

Working as an economist at the South Asia Institute of Heidelberg University, Germany, I have been trying to study, to understand and to interpret South Asia`s economic performance on the basis of official statistics, empirical studies and personal experience. They often did not tally easily; the economists' competence to describe the state of an economy with the help of statistics is increasingly being questioned.

The Goethe Institute Colombo has taken up this very timely topic for this year's conference, after we had, last year, discussed inter alia the shortcomings of national accounts, which have discredited indicators like the per capita income (GNP) to an extent, that, for many, that economic growth no longer is an agreeable goal.

Many of us, while studying economics, were surprised, if not confused, when learning what is adding value and what not, especially when it comes to the natural environment: overexploiting and poisoning of the soil and the water, emitting pollutants into the air do not (directly) affect the gross domestic product (GDP); mining or deforestation add value rather than do renaturation or afforestation. Attitudes are changing, however, and the necessity to include environmental aspects into the national accounts is generally accepted now.

Ecological concerns have been associated from the very beginning with the colour of green: when the ecological movement started getting organized as a political party they called themselves the "Green Party" - green became the colour of ecology. As far as I know, this movement began in Central Europe, in Germany in particular. Our political parties always had their varnas: red for socialists, black for the conservatives (Catholic, formerly centrists), brown for fascist, yellow for liberals, grey - of lately - for the senior citizens (they have their own party), and green for the ecologists (green is commonly not associated with Islam in Central Europe). Since the Green Party in Germany - and elsewhere - shares some social concerns with the Social Democrats, "green", to some extent, has become to be associated with what the Americans would call "liberal" politics. The collapse of the Soviet Empire has made it somehow easier to discuss "green" concerns without being associated with Communism.

"Greening the accounts", thus, means to include changes in the natural environment into the national accounts. With legislation becoming stricter with regard to the utilization of natural resources by depletion, degenerating and by deteriorating, "green" concerns are also reflected by business accounts: Wherever prices are changed, taxes are being levied, subsidies paid, quantities restricted, and risks are growing, there will be entries in the books, accordingly. But this will be not my task; I shall concentrate on the macro-economic aspects.

I have been asked to give an "Introduction to green accounting (GA) - overview and techniques". This is a vast field, which I shall not be able to cover in a short contribution like the present. I shall thus try to discuss what we should expect from measuring economic development, if the national accounts became "greener".

Why green accounts?

Why green accounts? Is this just another rather unhelpful concept to be forced down on countries which once comprised the Third World? The answer could be the classical academic: "It depends". It depends on what national accounts are compiled for and for whom. It used to be a measurement of economic progress, constructed by economists and statisticians for economists and statisticians in the hope, that they might also provide a useful tool for policy makers. It was surprisingly quickly welcomed by policy makers during the period of "development policy", i.e. from the 1950s onwards, in a way, that critique soon arose; in the 1960s, already , "economic growth", measured in terms of positive changes of the gross/net national/domestic product, became being blamed as an end in itself.

The main concern at that time was not ecology: in the 1960s and 1970s, people were disturbed by the fact, that single aggregate figures could "grow" in the face of simultaneously "growing" social and regional disparities, resulting in social and political unrest and even in civil war. Pakistan became a textbook case of the devastating effect of a neglect of regional disparities while following a growth oriented development strategy. The case has been well documented and analysed, but still there is no accepted composite measurement of integrating regional disparities into national accounts.

From the late 1960s onwards, ecology has become a major concern worldwide, after the Club of Rome had shown, how unchecked growth could lead to an ecological disaster which would be self-defeating in the long run. Since then, there is a discussion, of whether to integrate negative effects into the national accounts, ecologically, or to deal with them separately by way of satellite accounts.

Ecological problems are universal only in principle. Some of them are trans-national or even global, others are rather national or local. And they may differ from country to country. Carbon dioxide, for example, is emitted mainly by road vehicles, power plants and factories and is, of course, a problem of the big cities in the industrialized countries; but it has become a problem in Sri Lanka, already, and culminated in almost unimaginable proportions in the metropoles of the subcontinent: New Delhi, for example, at times is an unliveable place with pollution much worse than in any Western city. Global warming is said to be one of the outcomes with catastrophal consequences for low lying countries like the Maldives and Bangladesh. Overfishing has become a problem in the Indian Ocean as it has in other major waters; deforestation, especially of primary forests of tropical hard woods, is not so much a problem in Sri Lanka but it certainly is in Indonesia and in Malaysia; deforestation of the Himalayan forests and floods in India and Bangladesh are major ecological problems of these countries. Soil degradation and soil erosion is a another major problem in most of the countries of the tropics and sub-tropics.

Any relevance for Sri Lanka?

Not all of these problems will be of immediate consequence for Sri Lanka, but looking to other countries, especially to those in the neighbourhood, is helpful to see as to where developments might lead to. Beyond being a founder member of the South Asian Association for Regional Cooperation (SAARC) and of the SAPTA, i.e. the South Asian Preferential Trade Area, Sri Lanka shares a number of economic, social, political, historical and cultural features with the other South Asian countries, although we all know, that Sri Lanka is considered to be slightly better off than the others and that it stands out when it comes to social achievements, especially regarding education and health.

Sri Lanka could, of course, also be bracketed with other economies, other groupings, for example the island countries, the countries of the Indian Ocean, the countries with similar standards of living, similar human development, similar economic problems or - with regard to the topic of this seminar - a similar system of national accounts.

As far as the last possibility is concerned, South Asia, and that implies India, Pakistan and Bangladesh in particular, might present a well-suited reference group. After all, the four countries have similar, if not the same statistical traditions, administrative and educational setup and legal systems. This, of course, does not exclude comparisons with other countries. I shall come back to this, later.

What capital? What depreciation?

Repetto et al., in their seminal study on Indonesia have warned against "the false dichotomy between the economy and the 'environment' [...] It confuses the depletion of valuable assets with the generation of income." [1989 : 3]. They showed how Indonesia's growth rates of GDP would be less impressive after making provisions for depreciation of natural resources, e.g. timber, petroleum and soil, in the national accounts. Does this mean, that the government of Indonesia would have followed a different, more ecology oriented policy, if it had known, that economic growth - measured in that different way - would be less? That might not have been the case, as we easily can imagine [cf. Nelissen et al. 1997 : 419].

Why not compare the economic well-being of an economy with that of a stock company? The management - if not to speak of the shareholders - would expect to be well informed by way of the accounts of the firm. If assets are run down, they are expected to be written down, accordingly. By this way the management does receive the necessary information.

If we return to natural resources, or just nature: do they, does it constitute any capital; in what kind of balance are these assets listed? The answer is, that there is nothing like a balance of the national economy, to be opened at the beginning of the year and to be closed at the end of it. Accordingly, the depreciation in the national accounts is calculated very differently from that of business accounts. In the absence of national capital figures, depreciations have to be estimated indirectly, usually as a percentage of flows, not stocks.

As far as capital and investment is concerned, David Ricardo, almost two centuries ago, lined out his rather modern distinction of the "original and indestructible powers of land" and the "use of capital":
"If, of two adjoining farms of the same extent, and of the same natural fertility, one had all the conveniences of farming buildings, and, besides, were properly drained and manured, and advantageously divided by hedges, fences, and walls, while the other had none of these advantages, more renumeration would naturally be paid for the use of one than for the use of the other; yet in both cases this renumeration will be called rent. But it is evident that a portion only of the money actually to be paid for the improved farm would be given for the original and indestructible powers of the soil; the other portion would be paid for the use of the capital which had been employed in ameliorating the quality of the land, and in erecting such buildings as were necessary to secure and preserve the produce." [David Ricardo: The principles of political economy and taxation. Chapter two: "On rent". 1817. London: Dent. 1984 (repr.). p. 33].

What would change?

Accounts are by no means an end in itself. They allow an assessment of past performances and of expected developments; they allow a comparison of scenarios, i.e. what may be expected under different, given, conditions. They allow us to quantify benchmarks, targets and achievements, and - afterwards - to see what went wrong and why. There is, however, at least up to now, not a single measurement, to include all possible aspects, a measurement which would allow us to tell a government which way to follow and - looking backward - exactly when they went off the track.

Could we, thus, expect a better policy, if the actors had a better knowledge of past developments, today's situations and the likely consequences of alternative actions? If we rule out irrational behaviour, we still have to consider, that people have different sets of values and goals; even if they do have the same knowledge, they will come to different conclusions. Their actions also depend on perceptions of the other actors' values and goals. This may explain, why a number of "green" positions have at first been rejected by the established political parties and the representatives of business, labour and administration in Germany (and elsewhere), and why all of them made the same positions their own after only few years. The report of the Club of Rome, which was published just 25 years ago and which may be regarded as the most important among the first documents of ecological economics, was itself the outcome of such a development, when eminent industrialists (Peccei), engineers (Forrester), economists (Meadows) natural scientists (Pestel) and the research funding establishment (Volkswagen Foundation) joined hands to start a project, which was little more than playing with a dynamic simulation model on the interdependencies of population growth, economic development, utilization of natural resources and pollution of the natural environment. The conference in Stockholm (1972) was the first gathering to discuss these problems on the highest international level; the conference in Rio (1992) is striking evidence of increasing international concern.

This development is only partly reflected in the development of the indicators of development. The System of National Accounts (SNA), for a quarter of a century, followed the rules laid down by the United Nations in 1968; they were revised and published in 1993 in a joint document by the Commission of the European Communities (now European Union, EU), the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN) and the World Bank [SNA 1993]. The report is a folio size, 711 pages small printed tome, which rightly could be called the constitution of contemporary national accounts. Since this report might not be readily available everywhere for some time to come, and since wording of this almost legal document is decisive, I shall quote extensively (like in a legal text, references to the main body will be by paragraphs, not by pages).

"The System is a comprehensive, consistent and flexible set of macroeconomic accounts intended to meet the needs of government and private sector analysts, policy makers and decision takers. It is designed for use in countries with market economies, whatever their stage of economic development, and also in countries in transition to market economies. The System has been welcomed and unanimously approved by the Statistical Commission of the United Nations." [SNA 1993 : Foreword].

The "environment's interaction with the economy" is listed as having become "a major and growing concern." Accordingly, the SNA "has opened towards environmental accounting in defining the asset boundary, in the classification of assets, and in other ways." [SNA 1993 : xxxiii]. Among the points listed as "features to highlight the role the SNA has come to play", also appears that the "1993 SNA reinforces the central role of national accounts in statistics". This is a discreet way to refer to the increasing number of satellite accounts and indexes competing today with the national accounts as meaningful measurements of "development", which, of course, itself is a much disputed term. That the UNDP, today, is ranking economies according to the "Human Development Index" (which however includes the per capita income derived from the national accounts) and not, like the World Bank, by per capita income, may be the best known example; others would be the "misery index" or the "new economic well-being index" [Brittan 1996]. "Analytical power was a prime focus in the SNA's opening towards the environment, and developmental work is proceeding in recognition of the usefulness of having integrated economic and environmental accounting." [SNA 1993 : xxxiv].

That means, that only initial steps are made: at least one of the three topics listed "among those mentioned most often in the 1993 Statistical Commission" touches upon environment: i.e. the informal-formal distinction (the other two being the cost of capital and consumer subsidies), and one of the three "additional topics included in the 1993 SNA [that] will require further research" is environmental accounting. This section (of chapter XXI of the 1993 SNA) "on environmental satellite accounts notes that it is presenting the state of the art, as of 1993, on the integration of economic and environmental accounting. However, the state of the art does not permit the introduction of environmentally adjusted aggregates in the central framework. The section is intended as guide to countries wishing to design satellite accounts responsive to policy and analysis focussed on environmentally sound and sustainable growth and development. It argues that cooperative research and methodological work by national accountants and environmentalists continue, a sentiment widely expressed in the reviews conducted in various forums." [SNA 1993 : xliii].

So far, environmental accounting is dealt with only in the chapter (XXI) on "Satellite analysis and accounts" as a sub-chapter titled "Satellite system for integrated environmental and economic accounting" [SNA 1993 : 21.122sqq.]; the major aspects are (1) the scope of environmental accounting, (2) alternative approaches to environmental accounting, (3) general framework of environmental accounts and the SNA, and (4) details on environmental amendments to SNA framework, concepts and classifications.

The System of Environmental economic Accounts (SEEA)

In the System of Environmental Economic Accounts (SEEA), a basic distinction is being made between "economic activities" and "environment"; assets are "produced" or "occur" as "non-produced natural assets"; all of the "produced assets" constitute "economic assets" and, thus, they provide "economic activities"; this applies, however, only partly to the "non-produced natural assets"; the "other non-produced natural assets" are part of the "environment". This - slightly irritating - distinction has to make do, in order to be able to compare the SEEA with the SNA of 1993. A look at table 21.6 [SNA 1993 : 21.139] may help.

The shaded area in the upper left corner is what we know from any introduction into economics:
- (domestic) production and imports sum up to (total) supply,
- intermediate consumption, exports, final consumption, and (gross) investment sum up to total uses,
- all fixed capital produced augments the (produced) assets,
- the net domestic product is comprised by final consumption, net investment and export surplus.

If we go by economic activities,
- total production minus intermediate consumption minus consumption of fixed capital formation is the net national product,
- exports minus imports is the trade balance,
- all final consumption goods will be consumed,
- initial stocks plus gross investment minus the consumption of fixed capital is the net investment; this has further to be adjusted for holding gains and losses and other changes in the volume of assets to finally arrive at the closing stock of assets,
- the opening stock of non-produced natural assets only has to be adjusted for holding gains and losses and other changes in the volume of assets to finally arrive at the closing stock of non-produced natural assets.

The economic activities concerning economic assets may need some further discussion, firstly, as far as "assets" are concerned. Table 6.1 shows a column of "economic assets" under the general heading of "economic activities" without corresponding "environmental assets" under "environment"; we have to assume, that "environment", "environmental assets" and "non produced natural assets" have to be understood synonymously.

There is no question, that factory buildings, machinery and transport equipment constitute "produced assets", although the inclusion of assets produced for consumption has been repeatedly questioned; this especially holds true for housing, which serves a basic need; housing services are used for immediate consumption; failing to acknowledge the importance of investment in housing for economic development has been a major weakness of many socialist governments. The internationally accepted definition not only accepts all dwellings "including houseboats, barges, mobile homes and caravans as principal residences of households" and as such as fixed assets [SNA 1993 : 10.70], but even historic monuments [SNA 1993 : 10.71]. In agriculture, "cultivated assets" consist of livestock and trees "that are used repeatedly or continuously over periods of time of more than one year to produce other goods and services" [SNA 1993 : 10.83].

The distinction between the "produced" and "non-produced" assets, or what the report calls "asset boundary" is made as follows: "Assets [...] are entities that must be owned by some unit, or units, and from which economic benefits are derived by their owner(s) by holding or using them over a period of time. [...] fixed assets, such as machinery, equipment and structures which have themselves been produced as outputs in the past, are clearly covered by this definition. However, the ownership criterion is important for determining which naturally occurring - i.e., non produced - assets are included in the System. Naturally occurring assets such as land, mineral deposits, fuel reserves, uncultivated forests or other vegetation and wild animals are included in the balance sheets provided that institutional units are exercising effective ownership rights over them - that is, are actually in a position to be able to benefit from them. Assets need not be privately owned and could be owned by government units exercising ownership rights on behalf of entire communities. Thus, many environmental assets are included within the System. Assets that are not included are those such as the atmosphere or open seas, over which no ownership rights can be exercised, or mineral or fuel deposits, that have not been discovered or that are unworkable - i.e., incapable of bringing any benefits to their owners, given the technology and relative prices existing at the time." [SNA 1993 : 1.26].

As we see from the table, the SNA 1993 has only entries for the "non-produced natural assets" for holding gains and losses and for "other" changes in the volume of assets; besides the opening and closing stocks; they do not enter the net domestic product, since they have no entries for economic uses, consumption of fixed capital. An orchard or a commercial forest, planted to produce timber, therefore, would be "produced assets", a wild forest a "non-produced natural asset". A fire destroying the commercial forest should be reflected in the "consumption of fixed capital" and thus reduce the net domestic product; a fire destroying a wild forest would be of no (immediate) consequence for the NDP.

Since the difference between opening and closing stocks of non-produced natural assets are identical with the combined effect of holding gains/losses and "other" changes in volume of assets, there is no need to take stock at the beginning and at the end under review, as long as we can determine the production/gains directly; felling trees in a wild forest would be an example.

The major addition of the SEEA is the use of non- produced natural assets (row vi), i.e. of non-produced economic natural assets and of "other" non-produced (environmental) natural assets, and the "other" accumulation of non-produced natural assets, i.e investment; as a result, we arrive at an environmentally adjusted domestic product (EDP, viii/1). The "use of non-produced natural assets" includes "non-produced assets" irrespective of being "economic assets" or part of the environment.

Nature, as we have seen, only partly comes under "economic assets", natural assets, such as land, mineral resources and forests, are "included in the SNA asset boundary insofar as they are under the effective control of institutional units." [SNA 1993 : 21.126]

Evaluation of the SNA 1993 and the SEEA

From the ecological point of view, the SNA 1993 leaves much to be desired, although the present state of national accounts in many - if not in most - countries has by far not exhausted the possibilities of the SNA 1993, even not of the previous one. The ownership clause leaves, indeed, much room for innovative and creative accounting. Take for example land and vegetation in South Asia. Most of South Asia's land has been under cultivation or at least more or less systematic use since generations. Property rights have been, however, disputed at least for all the land, that has not been permanently under crop. How common the commons, for example, have been and still are is often a matter of discussion if not open feud. Since the countries of South Asia have been under foreign rule for such a long time, European and other, claims of ownership rights often were based on imported and enforced legal systems; the rights of and to forests in India, where the so-called tribal population settles, has gained international attention in connection with large dam projects like that on the Narmada River [Zingel 1995].

Following these lines, the distinction between "produced" and "non-produced" becomes slightly artificial, especially if we think of windfall gains, which also rather "occur" than being "produced".

Since routines actually followed fall much behind the possibilities that the SNA 1993 and earlier SNAs provide, I shall look at present practice in South Asia first.

Present practice I: India

India had an intense discussion on revisions of the national accounts, the outcome of which is described in the new "National Accounts Statistics: Sources and Methods", published by the Central Statistical Office of the Department of Statistics, Ministry of Planning, Government of India. The volume contains a short chapter under the title of "Gross Versus Net Value Added" [NA 1989 : 29]:

"The discussion thus far has been centred on the economic activity of the nation before any charges for CFC [consumption of fixed capital] or depreciation are deducted. The aggregates include as part of the value of current output, the value of capital services consumed in the production of output. It is desirable to have accounts which show the output net of capital consumption allowances. Thus the national income should be measured either as on a gross basis or on a net basis. The difference between the two is that in the gross estimates no deduction is made for CFC which takes place in the process of production, whereas in the net measure such allowances are made. Capital is one of the primary factors used in production and this results in the CFC and hence, a reduction in the economic life of the capital. In other words, the capital depreciates as a result of its use in the process of production. The CFC measures the replacement value of the capital stock which has been used up in the production process during the year."

A whole chapter is dedicated to "Capital stock and consumption of fixed capital stock" [NA 1989 : 250sqq.]. "The Working Group of Savings, set up by the Government of India in May, 1981 under the Chairmanship of Prof. K. N. Raj, also examined critically the estimate of CFC used in NAS [National Accounts Statistics]. The Working Group in its report submitted to the Government of India in 1982, recommended adoption of PIM [Perpetual Inventory Method] to prepare the estimates of CFC for all the sectors." The report is extensively quoted in the "Sources and Methods" [1989 : 250sq.]:

"Another area in which improvements in estimation can and should be made relates to the provisions for depreciations (i.e. capital consumption). [...] the existing practices and the underlying criteria vary from sector to sector. There are such extremes as no provision at all being made for depreciation in the case of physical assets used for government administration; in others, the provision is made on the basis of what income tax laws permit, as in the case of private sector companies, public corporations and companies, and even some departmental undertakings. It is important that the criteria and methods adopted are put on a more rational and uniform basis. In this regard, the methodology now adopted for estimating capital consumption in 'agriculture' appears in principle very logical and appropriate. Estimates of capital stock for each of the years are first built up on the basis of the perpetual inventory method with the help of independent data on the average age-structure of assets (separately for different types of assets), the rate of consumption of fixed capital is then arrived at as a proportion of the value of stock in each case. This method needs to be extended to all other sectors. It would require building up of a comprehensive life-table of physical assets in each sector and sub-sector, based on detailed and painstaking analysis of the average life of each major group of physical assets. But such exercises alone can provide reasonably realistic estimates of the consumption of fixed capital and make the distinction drawn between gross and net capital formation more meaningful and dependable."

Present practice II: Pakistan and Bangladesh

Estimating the depreciation in the various sectors of the Pakistan economy follows a rough and simple method [Pakistan statistical yearbook 1992/93 : 700-710]:

- agriculture: "In the absence of any reliable information on depreciation, a flat rate of 5 percent of the gross value added is applied in all the subsectors of agriculture to arrive at net value added."
- mining: "A deduction of 5 percent is made on account of depreciation."
- large scale manufacturing: "In the absence of any reliable data on depreciation, a falt [sic!] rate of 10 percent of gross value added is applied to arrive at net value added."
- small scale manufacturing: "A deduction of 5 percent is made on account of depreciation."
- construction: "A deduction of 2.5 percent for depreciation is made to work out the net value added."
- electricity etc.: "Depreciation is worked out on the basis of provisions thereof in the budgets of Water and Power Development Authority and profit & loss accounts of gas and electricity companies."
- transport: "In mechanized road transport depreciation is estimated on the basis of life expectancies of buses, trucks, taxi cabs and auto-rickshaws whereas in the non-mechanized road transport sub-sector 10 percent is deducted as depreciation. In order to get net value added in other sub-sectors of transport, storage and communication sector depreciation is deducted as reported by the data supplying source agencies."
- trade: "A deduction of 2 percent is made for depreciation to obtain the net value added."
- finance and insurance: "Depreciation is deducted to arrive at net value added."
- ownership of dwellings: "A deduction of 23.4 percent is made to account for depreciation to arrive at net value added."
- public administration and defence: "An upward adjustment of 5 percent is made for depreciation to convert the net value added into gross value added."
- community, social and personal services: "An allowance of 5 percent is made to account for depreciation."

These rates of value added used as proxies to depreciation have not been changed for decades.

Bangladesh, until 1971 the western "wing" of Pakistan, continued the statistical traditions of united Pakistan: "Gross Domestic Product (GDP) has been defined as the sum of value added originating in each of the eleven industrial sectors of the economy of Bangladesh. In terms of product flow, these values are equal to total gross output minus purchases of intermediate goods from other industries to produce that output. Value added thus defined represents the payments, i.e. wages, interest, profit and other distributive shares accruing to each of these industries. In compilation of these estimates, United Nations guidelines on concepts, classification and methodology are meticulously followed as far as practicable in conditions in Bangladesh. The compilation of GDP/GNP/NNP estimates are beset with a variety of problems of getting basic data to be used as building blocks in the estimates. [...]." [Statistical year book of Bangladesh 14.1993 : 706-707].

The Bangladesh Bureau of Statistics publishes a rich body of data, including very detailed national accounts statistics, but almost exclusively on a gross level. There is, however, only one mentioning of net national/domestic product (explicitly) and depreciation (indirectly); in the "Notes on data and their sources" of the "Statistical Yearbook of Bangladesh 1993": "The industry-wise depreciation from the Pakistan National Income Commission's report is used to estimate Net National product (NNP)," [p. 708], referring to the 1965 report of the Commission. More detailed is the "Twenty years of national accounts of Bangladesh (1972-73 to 1991-92)", which contains figures for depreciation and net product for the twenty years under review, but only on a national aggregate level. It is striking, that this rather recent volume (1993) discusses methodology extensively, but does not even mention in the introduction or the "Concepts and General Notes" net product and depreciation, except simple definitions:
- "Net Domestic products (NDP): If depreciation of fixed capital is subtracted from GDP, the resulting measure is called Net Domestic Product (NDP)"
- "Net National product (NNP): If allowances are made for depreciation on fixed capital, the resulting measure is called Net National Product. In other words, the NNP is identically equal to National Income.
Thus, NNP = NDP + Net factor incomes from abroad."
- "Consumption of fixed capital: Consumption of fixed capital may be defined in general terms as that part of the gross product which is required to replace fixed capital used up in the process of production during the period of account."
- "Stocks: Fixed assets are physical productive assets yielding a stream of service beyond the period of account in which they are purchased. Assets for use in future production, which can be used only once, and goods awaiting sale in shops and factories constitute stocks."

There are at least tables on gross fixed capital formation in the public and private sectors [pp. 220sqq.], which show the following pattern (1991-92): more than one half of gross fixed capital formation in the public sectors, i.e. central government, local government and autonomous bodies is building construction, the second group, almost as important, is "plantation, machinery equipments"; which mostly means machinery and transport equipment and little investment in plantation; the third - insignificant - group is breeding stocks. Gross fixed capital formation in private sector gain construction comprises almost two thirds, mostly buildings but also land improvement and plantation (13 per cent of private total), the other third includes machinery and transport equipments. [p. 223].

Gross fixed capital formation "comprises gross value of investment in land and land improvement, buildings and constructions; plan and machinery and transport equipments. It includes the gross addition in fixed assets, however, investment expenditure on the acquisition of existing fixed assets which corresponds to transfer of ownership of assets is not included."

The transfer cost of land "which includes stamp duties, legal fees and agents' commission are included in CFCF. Expenditure on stamp duties (based on transaction price of land property), legal fees and real estate agent's commission are computed based on the number of transfer cases registered with the land office by the average transaction value of the property and the average rate of charge." [p. 25].

Present practice III: Bhutan, Maldives, Nepal, and Sri Lanka

Bhutan: In the absence of any description of the methodology followed I had a look at the figures for consumption of fixed capital formation given in the UN "National accounts statistics". They follow very closely those of gross fixed capital formation at a rate of around 18.5 per cent for the years 1980 to 1982 and then start to increase to over 50 per cent from 1989 onwards (1991: 63,3 per cent). This is explained as follows: "The sharp increase in 1987 for 'Consumption of fixed capital' is due to the operation of the Chukha Hydel Project." [UN/SNA 1992 : 182]. Since consumption of fixed capital stays in the range of 9.1 per cent to 9.3 per cent of gross domestic product from 1987 onwards (the time series goes up to 1992), it most probably is not determined (directly) by past investment. It would be surprising, anyway, if a long lasting project like a hydel project is being depreciated to a large extent before the construction is finished.

Maldives: There are no figures available on the consumption of fixed capital or any other related figures in the United Nations "National accounts statistics". [UN/NAS 1992 : 1214-1215]

Nepal: Totals for consumption of fixed capital are given in the UN statistics, but no hint how it is determined. The CFC is not directly correlated with GDP or gross fixed capital formation,

Sri Lanka: The Department of Census and Statistics of the Ministry of Finance and Planning publish the authoritative National Accounts, e.g. "quick estimates" for the year under review and "final estimates" for the year before: gross fixed capital formation is given, however, only by type and purchaser, but not by sector [e.g. NA 1995 : 67-70], and national totals of consumption of fixed capital [ibid. : 71]. The statisticians follow a rather pragmatic approach:: "Item 'Consumption of fixed capital' includes depreciation of all private corporations as well as depreciation of fixed assets in other private unincorporated units". [UN/NAS 1992 : 1754]. "Includes" means here, however, inter alia: what is actually being done is nothing else but assuming that consumption of fixed capital equals 20 per cent of national gross fixed capital formation, private and public, of a given year, as can be seen from the following calculations:

Table 1: Sri Lanka: consumption of fixed capital and gross fixed capital formation, Mio. Rs.
 
Year 1980 1985 1990 1991 1992 1993 1994
CFC 4,449 7,530 12,963 17,293 19,326 24,156 29,194
GFCF 22,243 37,651 64,817 86,463 96,632 120,778 145,972
per cent 20 20 20 20 20 20 20
Explanation: CFC: consumption of fixed capital - GFCF: gross fixed capital formation.
Source: 1980-1990: United Nations: National accounts statistics: main aggregates and detailed tables, 1992. p. 1754. - 1991-1994: National accounts of Sri Lanka 1995, p. 71.

The other agency publishing national account figures is the Central Bank of Sri Lanka; they bring out their Annual Report soon after the end of the year under review (e.g. April 30, 1997 for 1996), but publish neither consumption of fixed capital nor net product figures. There are, however, ambitious plans: "In order to progress towards the preparation of Green Accounts in Sri Lanka, strengthening the collection of data on natural resources and environmental degradation is a pre-requisite, for which contributions from a number of public and private institutions are required" [Central Bank 1997 : 25].

Practical value of "green accounts" for planners and policy makers

What would be the practical value of "greener" national accounts for planners and policy makers? Would any ecological disaster have been prevented if planners and policy makers would have been enlightened by "greener" accounts? The first counter-question would be to ask, whether decisions considered wrong afterwards usually have been made (only) because of lack of information. Obviously some decisions could have been made wiser also without according entries in a "green" account.

Making provisions for loss of primary forests under "non produced natural assets" and arriving, thus, at a lower economically adjusted domestic product, cannot prevent ecologically (and economically) unwise behaviour, but it would deprive planners and policy makers of the proof for a correct, i.e. economically successful, policy by means of an "unbiased" criterion like a national accounts indicator. As long as planners and policy makers think and argue in terms of growth rates of domestic/national product, it would be more convincing to prove that ecologically damaging actions have a negative effect on the domestic/national product as well and that there is, accordingly, no trade-off between ecology and economy.

As long as provisions for consumption of capital are being made in the crudest way, national accounts cannot serve such purpose; at present, statistical offices of the SAARC countries still have to implement the SNA 1993.

Valuation and aggregation

I have not touched upon problems of valuation and aggregation, which are dealt with quite extensively in the literature [e.g. Smith 1996]. As far as there are no (negative) prices provided by the market, proxies can be used like the cost of avoidance or the willingness to pay.

A serious problem is, that actual stocks of natural capital are not known at any given moment; quantities and prices, thus, can change dramatically: After the first oil crisis we could observe the phenomenon, that - because of new finds - known reserves of oil rose despite ongoing depletion; oil became less scarce and not more, prices fell accordingly. Values of natural capital may also change as a consequence of technical progress; medicinal plants may serve as an example. Stocks of assets, thus, may increase because of better information, not of investment.

More disturbing is the fact, that the SNA 1993 has started taking care of natural capital (if only to some extent), but not of human capital. For South Asia in general and for Sri Lanka in particular, this makes a great difference. Use of natural capital is substantial in Nepal (forest), India and Pakistan (soil, water, mining); Sri Lanka's shows a much better performance in general education; human capital stock, thus, should rise here faster. Rates of investment (and savings) would be comparatively higher in Sri Lanka, if expenditure on education would be regareded as investment.

Per capita income figures have been misused for all kinds of purposes; one has been to prove the effectiveness of economic, social and political systems. Running down natural assets is not of that importance in South Asia as in South East Asia: forest reserves no longer allow large scale exports and mining is only of greater importance in some regions. Soils do, however, suffer from overexploiting due to irrigation, as too little water is brought on too much land: wide spread salinity, especially in India and Pakistan is one of the major damages.

Another aspect, and even more important for South Asia, is interregional comparisons and vertical and horizontal transfers of funds. Central governments in South Asia are constantly blamed for overutilizing natural resources at the cost of the local population. In case of a major irrigation project, where the location of the dam and the reservoir fall into region (as part of a country) A and the benefits of irrigation can be realised in state B, then, at present, the positive effects will be shown in state B and none of the negative effects (loss of arable land, dislocation of people) in state A; if we include the loss of environment in A in the regional product of A, we might consider compensation to achieve acceptability in all regions.

The following is taken from: System of National Accounts 1993

6. "Gross" and "net" recording

6.201. The consumption of fixed capital is one of the most important elements in the System. In most cases, when a distinction is drawn between "gross" and "net" recording, "gross" means without deducting consumption of fixed capital while recording "net" means after deducting consumption of fixed capital. In particular, all the major balancing items in the accounts from value added through saving may be recorded gross or net: i.e., before or after deducting consumption of fixed capital. It should also be noted that consumption of fixed capital is typically quite large compared with most of the net balancing items. It may account for 10 per cent of total GDP.

6.202. It is clear from the previous sections that the consumption of fixed capital is one of the most difficult items in the accounts to measure and estimate. The depreciation figures recorded in business accounts, or allowed for tax purposes, may be very difficult to adjust to bring them into line with consumption of fixed capital as understood in economic theory and defined in the System, while it may not be possible to estimate consumption of fixed capital using the perpetual inventory method if long time series of gross fixed capital formation are not available in some detail. Moreover, consumption of fixed capital does not represent the aggregate value of a set of transactions. It is an imputed value whose economic significance is different from entries in the accounts based on market transactions.

6.203. For these reasons, the major balancing items in national accounts have always tended to be recorded both gross and net of consumption of fixed capital. This tradition is continued in the System where provision is also made for balancing items from value added to saving to be recorded both ways. In general, the gross figure is obviously the easier to estimate and may, therefore, be more reliable, but the net figure is usually the one that is conceptually more appropriate and relevant for analytical purposes.

Consumption of fixed capital

10.118. Consumption of fixed capital constitutes a negative change in the value of fixed assets used for production. It covers both tangible fixed assets and intangible fixed assets, such as mineral exploration costs and software. Consumption of fixed capital must be measured with the reference to a given set of prices, i.e., the average prices of the period. It may then be defined as the decline, between the beginning and the end of the accounting period, in the value of the fixed assets owned by an enterprise, as a result of their physical deterioration and normal rates of obsolescence and accidental damage. The value of the fixed asset depends upon the benefits that can be expected from using it in production over the remainder of its service life. This value is given by the present discounted value, calculated at the average prices of the period, of the stream of rentals for that the owner of a fixed set could expect if it were rented to producers over the remainder of its service life. Consumption of fixed capital is then measured by the proportionate decline in this value between the beginning and the end of the accounting period.

10.119. Consumption of fixed capital thus measures the decline in the usefulness of a fixed asset for purposes of production. It is a measure that depends on the productive potential of an asset over its normal service life. The value of a fixed asset at any point in time inevitably involves expectations about the future, but this is true of virtually all assets including financial assets and valuables. It is possible to derive reasonable estimates of the consumption of fixed capital on the basis of the average service lives of assets and simple assumptions about the rates of decline of their efficiency in production over time. Despite elements of uncertainty, producers and users of fixed assets have to take views about their values in practice, and markets in which new and existing fixed assets are actively traded provide information that should be taken into account in calculating consumption of fixed capital. Consumption of fixed capital has also to be calculated in respect of major improvements to non-produced assets and costs of ownership transfer associated with non-produced assets as these add to the value of such assets and are a component of gross fixed capital formation. The concept and measurement of the consumption of fixed capital has been explained in chapter VI, and it is not necessary to go into further detail at this point."

Select bibliography

Thomas Aronsson, Per-Olov Johansson, Karl-Gustaf Löfgren: Welfare measurement, sustainability and green national accounting: a growth theoretical approach. Cheltenham: Edward Elgar. 1997.

Premachandra Athukorala, Sisira Jayasuriya: Macroeconomic policies, crises, and growth in Sri Lanka, 1969-90. World Bank comparative studies. Washington, D.C.: The World Bank. 1994.

Leonardo Bartolini: Purchasing power parity measures of competitiveness. In: Finance and development. September 1995. pp. 46-49.

Samuel Brittan: Of happiness and GDP. In: Financial Times. Aug 29, 1996, p. 8.

Raymond Colitt: Accounting for the birds, bees and trees. In: Financial times. Sep 7, 1994. p. 12.

Central Bank of Sri Lanka: Annual report 1996. Colombo. 1997.

Herman E. Daly: On Nicholas Georgescu-Roegen's contributions to economics: an obituary essay. In: Ecological economics. 13(1995). pp. 149-154.

Dietrich Dickertmann: Die umweltökonomische Gesamtrechnung - Grundlage für eine rationale Umweltpolitik. In: Spektrum der Wissenschaft. Mai 1996. pp. 113-115.

Robin Gregory, Paul Slovic: A constructive approach to environmental valuation: commentary. In: Ecological economics 21(1997). pp. 175-181.

Egon Hölder et al.: Wege zu einer umweltökonomischen Gesamtrechnung. Ein Diskussionsbeitrag des Statistischen Bundesamtes. Band 16 der Schriftenreihe Forum der Bundesstatistik. Stuttgart: Metzler-Poeschel. 1991.

Mohan Munasinghe, Walter Shearer: Defining and measuring sustainability: the biogeophysical foundations. Distributed for the United Nations University by The World Bank, Washington, D.C. 1995.

Ignazio Musu, Domenico Siniscalco (eds.): National accounts and the environment. Economics, energy and environment 6. Dordrecht: Kluwer. 1996.

National accounts statistics: main aggregates and detailed tables, 1992. New York: United Nations. 1994.

National accounts statistics 1994. New Delhi: Central Statistical Organisation, Department of Statistics, Ministry of Planning, Government of India.

National accounts statistics: sources and methods 1989. New Delhi: Central Statistical Organisation, Department of Statistics, Ministry of Planning, Government of India. 1989.

Nico Nelissen, Jan van der Straaten, Leon Klinkers (eds.): Classics in environmental studies: an overview of classic texts in environmental studies. Utrecht: International Books. 1997.

Pakistan statistical yearbook 1992 & 93. Islamabad: Federal Bureau of Statistics, Economic Affairs and Statistics Division, Government of Pakistan. 1993.

Robert Repetto, William Marath, Michael Wells et al.: Wasting assets: natural resources in the national income accounts. Washington, D.C.: World Resources Institute. 1989.

David Ricardo: The principles of political economy and taxation. Introduction by Donald Winch. London: Dent. 1984 (1911).

Salah El Serafy: Green accounting and economic policy. In: Ecological economics. 21(1997). pp. 217-229.

Ismail Serageldin, Andrew Steer (eds.): Valuing the environment. Proceedings of the first annual international conference on environmentally sustainable development held at The World Bank, Washington, D.C., September 30 - October 1, 1993. Environmentally sustainable development proceedings series no. 2. Washington, D.C.: The World Bank. 1994.

V. Kerry Smith: Estimating economic values for nature: methods for non-market valuation. Cheltenham: Edward Elgar. 1996.

System of national accounts 1993. Prepared [...] Commission of the European Communities, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations, World Bank. Brussels etc. 1993.

H. Thamarajakshi: Some aspects of environmental accounting. In: Economic and political weekly. Nov 21, 1992. Pp. 2533-2534.

United Nations: Integrated environmental and economic accounting (an interim report). New York. 1992.

Wolfgang-Peter Zingel: Bodenrecht in Indien. In: Entwicklung und ländlicher Raum. Frankfurt: DLG. 29(1995)6. pp. 7-10.

Table 21.6: Basic structure of the SEEA
 
Economic activities
Environment
Economic assets
Production Rest of world Final consumption Produced assets Non-produced natural assets Other non-produced natural assets
1 2 3 4 5 6
Opening stock of assets i
K0p.ec
K0np.ec
Supply ii
P
M
Economic uses iii
Ci
X
C
Ig
Consumption of fixed capital iv
CFC
-CFC
Net domestic product v
NDP
X-M
C
I
Use of non-produced natural assets vi
Usenp
 
-Usenp.ec
-Usenp.env
Other accumulation of non-produced natural assets vii
Inp.ec
Inp.env
Environ-mentally adjusted aggregates in monetary environmental accounting viii
EDP
X-M
C
Ap.ec
Anp.ec
-Anp.env
Holding gains/losses ix
 Revp.ec
Revnp.ec
Other changes in volume of assets x
 Volp.ec
Volnp.ec
Closing stock of assets xi
 K1p.ec
K1np.ec
Source: SNA 1993: Table 6.21

Notation of Table 6.21 of SAN 1993

0 begin of period

1 end of period

A aggregates in monetary environmental accounting

C (final) consumption

Ci intermediate consumption

CFC consumption of fixed capital (depreciation)

EDP environmentally adjusted domestic product

I net investment

K stocks of assets

K0 initial stocks

K1 final stocks

M imports

NDP net domestic product (national income, if at factor cost)

P (domestic) production

Rev holding gains/losses (changes of stock)

Use use of natural assets

Vol other changes in volume of assets

X exports

X-M export surplus, balance of trade

subscript:

np.ec non-produced economic natural assets

np.env non-produced (non-economic) environmental natural assets

p.ec produced economic natural assets

Summary

National accounts do not reflect sufficiently the present state of an economy, they are not sufficient to assess past performance or to show likely future trends. They are also not adequate to show the impact of alternative policy actions.

Because some of the national accounts figures have become lead variables for policy action, they have come under severe criticism. Alternatives like the Human Development Index (HDI) are increasingly being used instead of, e.g., the GNP per capita.

Economic growth, measured by national accounts aggregates, also has become a disputed economic/social/political goal. A trade off is often assumed between ecology and economy.

This development is partly the result of weaknesses of the system of national accounts and partly of accounting practices. In 1993 the major international agencies (EU, OECD, UN, IMF, WB) agreed on a new national accounts system, which takes care of some of the shortcomings; they discussed others to be removed in the future.

As fas as ecology is concerned, the approach centres on treating nature as a (fixed) asset. Adjustments for changes are to be entered in the national accounts under "consumption of fixed capital" . Assets may be "produced" or "nonproduced"; all "produced" and only some "non-produced" assets fall under the present system of national accounts. A temporary solution to take care of the other "non produced" assets is a satellite account (SEEA), which includes also some other "non-produced" assets.

Under the present system, consumption of fixed capital is deducted from the gross domestic product and - thus - diminish the net domestic product. As such, the net domestic product (or net national product) should be regarded as the more meaningful aggregate.

The actual handling of national accounts does not exhaust these possibilities in a number of countries. The consumption of fixed capital is estimated - often only on the national level - in the crudest possible way as a percentage of value added or gross investment. The more appropriate way would be to determine the national/sectoral capital stock and its changes over time. Quite a number of ecological effects could be thus taken care of and would be "felt" in the national accounts.

As long as consumption of fixed capital is measured in such a simplified way, net investment - usually a residual figure - is also affected; rates of investment, marginal capital output ratios and capital productivity could become more meaningful indexes if firstly the SNA 1993 recommendations would be followed and secondly the system be further improved. On the longer run, however, national accounts need further revisions. Building human capital, for example, is still treated as consumption, and there are no provisions in the SNA 1993 to change that. Whereas consumption of natural capital would not greatly affect Sri Lanka's NNP, treating education as building of human capital would lead to a (statistically) greater capital stock and a higher NNP.



[Comments] - [Homepage of Wolfgang-Peter Zingel]