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Sustaining Welfare for Future Generations: A Review Note on the Capital Approach to the Measurement of Sustainable Development

Author

Listed:
  • Thorvald Moe

    (Center for International Climate and Environmental Research (CICERO), Oslo, Norway
    Statistics Norway, Oslo, Norway)

  • Knut Halvor Alfsen

    (Center for International Climate and Environmental Research (CICERO), Oslo, Norway
    Statistics Norway, Oslo, Norway)

  • Mads Greaker

    (Center for International Climate and Environmental Research (CICERO), Oslo, Norway
    Statistics Norway, Oslo, Norway)

Abstract

Measuring sustainable development based on analytical models of growth and development and modern methods of growth accounting is an economic approach—often called the capital approach – to establishing sustainable development indicators (SDIs). Ecological approaches may be combined with the capital approach, but there are also other approaches to establishing sustainable development indicators—for example the so-called integrated approach. A recent survey of the various approaches is provided in UNECE, OECD and Eurostat [1]. This review note is not intended to be another survey of the various approaches. Rather the objective of this paper is twofold: to present an update on an economic approach to measuring sustainable development—the capital approach—and how this approach may be combined with the ecological approach; to show how this approach is actually used as a basis for longer-term policies to enhance sustainable development in Norway—a country that relies heavily on non-renewable natural resources. We give a brief review of recent literature and set out a model of development based on produced, human, natural and social capital, and the level of technology. Natural capital is divided into two parts—natural capital produced and sold in markets (oil and gas)—and non-market natural capital such as clean air and biodiversity. Weak sustainable development is defined as non-declining welfare per capita if the total stock of a nation's capital is maintained. Strong sustainable development is if none of the capital stocks, notably non-market natural capital, is reduced below critical or irreversible levels. Within such a framework, and based on Norwegian experience and statistical work, monetary indexes of national wealth and its individual components including real capital, human capital and market natural capital are presented. Limits to this framework and to these calculations are then discussed, and we argue that such monetary indexes should be sustainable development indicators (SDIs) of non-market natural capital, and physical SDIs, health capital and social capital. Thus we agree with the Stiglitz-Sen-Fitoussi Commission [2] that monetary indexes of capital should be combined with physical SDIs of capital that have no market prices. We then illustrate the policy relevance of this framework, and how it is actually being used in long term policy making in Norway—a country that relies heavily on non-renewable resources like oil and gas. A key sustainability rule for Norwegian policies is to maintain the total future capital stocks per capita in real terms as the country draws down its stocks of non-renewable natural capital —applying a fiscal guideline akin to the Hartwick rule.

Suggested Citation

  • Thorvald Moe & Knut Halvor Alfsen & Mads Greaker, 2013. "Sustaining Welfare for Future Generations: A Review Note on the Capital Approach to the Measurement of Sustainable Development," Challenges in Sustainability, Librello publishing house, vol. 1(1), pages 16-26.
  • Handle: RePEc:lib:000cis:v:1:y:2013:i:1:p:16-26
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    References listed on IDEAS

    as
    1. World Bank, 2011. "The Changing Wealth of Nations : Measuring Sustainable Development in the New Millennium," World Bank Publications, The World Bank, number 2252.
    2. Marco Mira d'Ercole & Andrea Salvini, 2003. "Towards Sustainable Development: The Role of Social Protection," OECD Social, Employment and Migration Working Papers 12, OECD Publishing.
    3. David Pearce & Giles Atkinson, 1998. "The concept of sustainable development: An evaluation of its usefulness ten years after Brundtland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(III), pages 251-269, September.
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    Cited by:

    1. repec:lib:000cis:v:5:y:2017:i:2:p:1-10 is not listed on IDEAS
    2. Collins, Ross D. & Selin, Noelle E. & de Weck, Olivier L. & Clark, William C., 2017. "Using inclusive wealth for policy evaluation: Application to electricity infrastructure planning in oil-exporting countries," Ecological Economics, Elsevier, vol. 133(C), pages 23-34.
    3. Charles F. Mason & Rémi Morin Chassé, 2018. "The Transition to Renewable Energy," CESifo Working Paper Series 6889, CESifo Group Munich.

    More about this item

    Keywords

    capital approach; indicators; national wealth; sustainable development;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics
    • Y3 - Miscellaneous Categories - - Book Reviews
    • Z1 - Other Special Topics - - Cultural Economics

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