Development Discussion Papers

Economic Depreciation of Natural Resources in Asia and Implications for Net Savings and Long-Run Consumption Jeffrey Vincent and Beatriz Castaneda
Development Discussion Paper No. 614 December 1997

Copyright 1997 Jeffrey Vincent, Beatriz Castaneda, and President and Fellows of Harvard College

Harvard Institute for International Development

HARVARD UNIVERSITY

ECONOMIC DEPRECIATION OF NATURAL RESOURCES IN ASIA AND IMPLICATIONS FOR NET SAVINGS AND LONG-RUN CONSUMPTION Jeffrey Vincent and Beatriz Castaneda Abstract Rents from extractive natural resources (minerals and roundwood) were equivalent to a fifth or more of gross domestic savings in at least one year during 1970-92 in nearly all countries in a sample of fourteen from Asia. This was the case even in China and India, which are not usually thought of as being resource-rich. On a per capita basis, rents were larger in most countries in 1992 than in 1970; relative to GDP, they rose in most South Asian countries, including India. This evidence of a significant, and in some cases increasing, contribution by resource rents does not necessarily imply that economic development in Asia risks being undermined by resource depletion. Only a portion of resource rents represents the economic depreciation of resource stocks, and this is the amount that must be offset by investments in reproducible capital in order to sustain economic activity. Estimates of resource depreciation were much smaller than gross domestic savings in all countries, even when the estimates included the degradation of agricultural soils. This finding does not provide grounds for complacency, however, as depletion is causing the ratio of depreciation to rents to rise. Key words: agricultural soils, Asia, national income accounts, minerals, natural resources, net product, net savings, timber

Jeffrey R. Vincent is a Fellow of the Institute at the Harvard Institute for International Development (HIID) and the director of HIIDs Environmental Economics and Policy Project in the Newly Independent States. His research interests include forest economics, national accounts and the environment, and environmental policy issues in transition economies. Beatriz Castaneda, a native of Chile, is a recent graduate of the Master's degree program in ecological economics at the University of Maryland. She served as a research assistant at HIID on the Asian Development Bank's "Emerging Asia" project.

ECONOMIC DEPRECIATION OF NATURAL RESOURCES IN ASIA AND IMPLICATIONS FOR NET SAVINGS AND LONG-RUN CONSUMPTION

Introduction The theoretical links between natural resource depletion, savings and investment, and long-run consumption are well established, at least in the context of simple economic growth models. In a model without technical change, Hartwick (1977) demonstrated that sustaining a countrys current consumption level requires investments in reproducible (physical and human) capital equivalent to the economic depreciation of natural resources.1 Economic depreciation is just the reduction in the value of an asset that occurs as a consequence of utilization of that asset. For natural resources, it is the change in the discounted sum of resource rents from current and future production. Hartwick (1977 and later work) demonstrated that, for natural resources, economic depreciation is equivalent to the Hotelling portion of total resource rent: marginal rent (price minus marginal cost) times the quantity extracted in the case of a nonrenewable resource,2 and marginal rent times the difference between quantity extracted and resource growth in the case of a renewable resource.3 Achieving a rising consumption level requires saving and investing more than Hotelling rent, in order to expand (not merely maintain) the economys total capital stock. A theoretically equivalent result is that long-run consumption possibilities are indicated by net product: gross product minus economic depreciation (Weitzman 1976). Net product indicates the economy's true or Hicksian income: the maximum amount that can be consumed without precluding future consumption levels from being at least as high.4 This follows from the fact that net product is the economic return on the total capital stock (Solow 1986). Constancy of the former thus implies constancy of the latter. If consumption exceeds net product, then the

2 total capital stock must necessarily fall, as part of what is being consumed is the capital stock itself, not just its return. Hence, short-run trends in gross product, which includes capital consumption (economic depreciation), do not necessarily mirror long-run trends in consumption possibilities, given by net product. These theoretical results imply that the impacts of natural resource depletion on a countrys long-run consumption possibilities can be predicted by either: (i) checking whether a comprehensive measure of net savings, defined as gross savings minus economic depreciation of all forms of capital (including natural resources), is positive or negative; or (ii) checking whether the trend in a comprehensive measure of net product, defined as gross product minus economic depreciation of all forms of capital (again, including natural resources), is upward or downward. This paper addresses these issues in the context of developing countries in Asia. Due to the lack of readily available monetary estimates of physical and human capital stocks, the analysis reported in the paper falls short of developing comprehensive measures of either net savings or net product. Instead, it develops a partial measure of net savings, given by the difference between gross domestic savings and Hotelling rents for the two most important categories of commercial extractive resources, minerals and roundwood. It also develops crude estimates of the economic depreciation of agricultural soils due to soil degradation. It focuses on net savings instead of net product, because the former provides a more direct link to changes in the total capital stock. Moreover, as discussed below, the former has also been the focus of highly publicized efforts by the World Bank to estimate genuine savings (World Bank 1997). Because they are partial, the estimates of net savings generated by the analysis are not sufficient for answering the bottom-line sustainability question: whether consumption levels can or cannot be sustained in Asia. They are not comprehensivethey ignore natural resources like

3 fisheries, environmental capital (air and water quality), human capital, and the depreciation of physical capital (though we will cite evidence suggesting that this omission does not overturn the findings)and they do not account for technical change. Nevertheless, they are useful for predicting whether the depletion of key natural resources is, on its own, likely to undermine future consumption possibilities in the region. Previous studies This is not the first study to investigate the economic impacts of resource depletion in Asia. The first, and probably best known, study was conducted in Indonesia by the World Resources Institute (WRI; Repetto et al. 1989). That study calculated economic depreciation allowances for petroleum, timber, and agricultural soils during 1971-84. It found that the aggregate depreciation allowance was equivalent to about a quarter of GDP on average, with the allowances for petroleum and timber being much larger than the one for soils. Partial net investment, calculated by subtracting the depreciation allowance from gross investment, was much smaller than gross investment during most of the period. It was positive in all but two years, however, and it was strongly positive when aggregated over the entire period. This is an encouraging finding from the standpoint of sustainability, especially when one considers that the study overestimated the economic depreciation allowances by equating them to total rent instead of just the Hotelling portion. Reworking WRI's numbers, Vincent et al. (1997) estimated that Hotelling rents for petroleum were on average only 30-77 percent of the total rents reported by WRI. A more recent study was conducted by the United Nations and the World Bank in Papua New Guinea (Bartelmus et al. 1993). That study found that the net increase in physical capital during 1985-90 exceeded the economic depreciation of minerals in every year. Like the WRI

4 study, however, it overestimated the depreciation allowances by equating them to total resource rents. Expanding the scope of the analysis to include other natural resources and the depreciation of physical capital, Pearce and Atkinson (1993) reported slightly negative net savings for Papua New Guinea in the early 1990s. They reported a similarly pessimistic finding for Indonesia and net savings equaling zero in the Philippines. These results led them to classify Indonesia and Papua New Guinea as unsustainable economies and the Philippines as marginally sustainable. As in the case of the WRI and U.N./World Bank studies, however, Pearce and Atkinson overestimated the resource depreciation allowances, so prospects for sustainability in the three countries are better than the study's findings suggest. The World Banks (1997) analysis of genuine savings also overestimated resource depreciation by equating it to total resource rent. Despite this, it reached more optimistic conclusions for developing countries in Asia than did Pearce and Atkinson. Table 2.1 in the World Bank report showed positive rates of net savings (adjusted for depreciation of both physical and natural capital) for both South Asia and East Asia & the Pacific during the 1970s, 1980s, and 1990-93. Expressed as a percentage of GNP, net savings rates were 2-3 times higher in East Asia & the Pacific than in South Asia. In a study of Malaysia, Vincent (1997) found that Hotelling rents for minerals and timber both rose sharply during the 1970-90 period. At the national level, net investment (gross fixed capital formation minus depreciation allowances for physical capital, minerals, and timber) was positive in all years but one, and positive when summed over time. At the subnational level, however, net investment was negative in recent years in the more resource-dependent states of Sabah and Sarawak. Consumption appears to be sustainable on average at the national level in Malaysia, but not in all parts of the country.

5 The analysis reported in this note adds several Asian countries to the list of those studied previously. In addition to Indonesia, Malaysia, and Papua New Guinea, it includes Bangladesh, China, Hong Kong, India, Republic of Korea, Myanmar, Pakistan, the Philippines, Singapore, Sri Lanka, and Thailand. More important, it presents estimates of resource depreciation allowances based on Hotelling rents, not total rents, and thus provides a sounder basis for evaluating the long-run impacts of resource depletion on consumption possibilities in Asia than the crosscountry studies by Pearce and Atkinson (1993) and the World Bank (1997). In the following sections, we first provide more detail on the methods we employed, and then we discuss our results and principal conclusions. Methods The analysis covered the period 1970-92, as data were too patchy in earlier and later years to perform the necessary calculations. Minerals in the analysis included two fossil fuels, coal and petroleum, and five metals, copper, iron ore, lead, manganese, and tin. Several other minerals were included initially, but they were dropped once it became evident that they would have an insignificant impact on the results. Roundwood included both industrial roundwood (logs and pulpwood) and fuelwood. The economic depreciation of agricultural soils included onsite productivity impacts only. Overview The estimation of total rents and Hotelling rents formed the core of the analysis for minerals and roundwood. The estimation of both types of rents involved numerous simplifying assumptions. As a consequence, the resulting estimates, and calculations based upon them, should be regarded as very approximate. To the extent that biases associated with the assumptions can be determined, nearly all point in the direction of overstating total rents and

6 Hotelling rents. These biases are discussed more below. Economic depreciation estimates for agricultural soils were calculated using an approach quite different than the one used for minerals and roundwood. The overview comments in the next three paragraphs pertain solely to the estimates for minerals and roundwood. The approach used for agricultural soils is described in a separate section below. For minerals and roundwood, the first step was to estimate total rents. This was done by multiplying estimates of quantities extracted times estimates of resource prices, and then multiplying the resulting revenue estimates times an estimate of the share of total rents. Price estimates were unit values for internationally traded resource-based commodities. Use of these values surely biased the rent estimates upward, as only better quality commodities tend to be traded. The resource-rent share was set equal to 0.65 for petroleum, 0.2 for other minerals, and 0.6 for roundwood. These shares are based on detailed data that the first author compiled as part of a previous research project in Malaysia (Vincent 1997). Data in Repetto et al. (1989) suggest that the parameter for petroleum may be somewhat low in the case of Indonesia, while the parameter for roundwood is very close to Indonesian values. We have no direct evidence on the accuracy of these parameters in other countries. The application of the 0.6 share to fuelwood as well as to industrial roundwood exacerbated the upward bias in the rent estimates for roundwood, as much fuelwood in the region is produced in a situation of open access, in which rents are expected to be wholly or partially dissipated. The second step was to insert the total rent estimates into a formula that converted them to Hotelling rent estimates. Vincent (1997), generalizing results in El Serafy (1989) and Hartwick and Hageman (1993), demonstrated that in a standard model of optimal resource depletion, Hotelling rent for a nonrenewable resource equals:

7 Hotelling rent = Total rent * (1+)/[1+(1+i)T], where is the elasticity of the marginal cost curve, i is the discount rate, and T is the number of years until resource exhaustion. Examination of this formula indicates that the ratio of Hotelling rent to total rent rises as T falls (i.e., as exhaustion approaches). Hotelling rent is only a small portion of total rent at the beginning of resource exploitation, but at the moment of exhaustion it accounts for all of the total rent. Hence, the relative amount that countries must save to offset the economic depreciation of natural resources rises over time. It rises nearly exponentially, given the inclusion of the discounting factor in the denominator of the formula. To apply this formula, we set = 1 (linear marginal cost curves), a neutral estimate of the elasticity. To our knowledge, reliable econometric estimates of country- and resourcespecific elasticities are not available for resource extraction. We set i = 10 percent. This is the discount rate commonly used by development banks, and it is the base rate used in many analyses of Asian resource issues, including for example the case studies in Dixon and Hufschmidt (1986). Repetto et al. (1989) used this rate in their study of Indonesia, and Vincent (1997) reported estimated discount rates slightly above and below this rate for Malaysia. For T, we followed the suggestion of El Serafy (1989), who proposed crudely estimating T for nonrenewable resources by dividing the current resource stock (St) by the current quantity extracted (Ht): T = St / Ht. (nonrenewable resources)

This is a workable approach, but it understates T, and therefore biases the Hotelling rent estimates upward, as quantity extracted should decline over time under an optimal extraction program. This approach can be extended to renewable resources by equating T to the current

8 stock divided by the difference between quantity extracted and growth (Gt): T = St / (Ht Gt). (renewable resources)

If extraction equals growth (sustainable yield), then T goes to infinity, as it should: the resource is never exhausted. The third and final step was to gauge the economic significance of total and Hotelling rents by comparing them to GDP (at market prices) and gross domestic savings. Data on these variables, in local currency and at current values, were drawn from the on-line World Bank World Tables (the STARS database). The GDP deflator and the dollar exchange rate, also from the World Tables, were used to convert these variables and the rent estimates to constant 1987 dollars. Comparisons were also made to GNP and gross national savings, but this did not change the results appreciably (except for some years in certain South Asian countries, where domestic and national savings have diverged greatly, particularly when national savings is defined as including external transfers). Minerals Data on annual quantities extracted were drawn primarily from the UNCTAD Yearbook of Commodity Statistics for metals and statistical publications of the International Energy Agency for fossil fuels. Data series in these sources contained many gaps, however, which we filled in by referring to several other sources (e.g., U.S. Bureau of Mines publications and, to a limited extent, country documents) and, as a last resort, by interpolation and extrapolation. Compiling complete data series was surprisingly difficult. No on-line source of minerals data exists, although UNCTAD, the U.S. Bureau of Mines, and the World Bank reportedly intend to develop (separately) publicly available, computerized databases.

9 In most cases, price was set equal to export unit value, based on data from the sources given in the previous paragraph. When such data were not available, price was set equal to international price series given in the IMF Yearbook of International Financial Statistics. Mineral stocks were set equal to economic reserves: recoverable minerals whose quantities have been measured or indicated and that can be economically extracted. Estimates were drawn from the World Resource Institute publication, World Resources 1996-97, which provides a convenient summary of estimates prepared by the U.S. Bureau of Mines. Most of the estimates were for the early 1990s. They were extrapolated to earlier years by adding the quantities extracted in intervening years (e.g., mineral stock in 1970 equaled the estimated stock in 1992 plus the sum of quantities extracted during 1970-91). Economic reserves are a narrower definition of stocks than the reserve base, which also includes minerals that are marginally economic (as the Bureau of Mines defines this phrase) and some that are subeconomic. Given the ongoing development of mining technology, the use of reserves as the measure of stocks for calculating T in the Hotelling rent formula probably understates T and biases the Hotelling rent estimates upward. Roundwood Diskettes from FAO provided a computerized source of annual data on production, imports (quantity and value), and exports (quantity and value) of total roundwood and industrial roundwood. Quantity extracted was set equal to production of total roundwood. Price was set equal to the production-weighted average of the prices of industrial roundwood (the weighted average of import and export unit values) and fuelwood (assumed to equal half the price of industrial roundwood, based on price data reported in FAO forestry papers).

10 The major difficulty with the roundwood analysis was the limited and inconsistent data on roundwood stocks. FAO has conducted two forest resource assessments, one in 1980 and the other in 1990. The latter was global in scope, while the former covered just tropical countries. Consequently, not all countries in Asia were included in both assessments. In particular, China and the Republic of Korea were not included in the 1980 assessment. Even for countries included in both assessments, problems arose because, in all cases but two (Pakistan and Thailand), the 1980 estimates of roundwood stocks could not be reconciled with the 1990 estimates. The 1980 estimates were often much smaller than the 1990 estimates, which is implausible in countries experiencing rapid deforestation (which was true of most of Asia in the 1980s) and high rates of roundwood harvest in remaining forests. We tried several methods to construct more plausible estimates for 1980, including building country-specific models of the annual balance between harvest and growth (area of forest times annual growth, in cubic meters per hectare per year). In the end, we opted for the simplest method. We set the 1980 stock equal to the product of the 1980 forest area (the 1990 area plus the area deforested during 1980-89, according to the 1990 assessment) and the 1990 stock density (in cubic meters per hectare). This method probably underestimated the 1980 stock, as more densely stocked forests tend to be the first harvested and the first to be cleared for agriculture (because they tend to be on the most fertile soil). We would expect this to bias the Hotelling rent estimates downward, if actual stocks did indeed decline more rapidly than our estimates indicated. The final step was to calculate a depletion coefficient, , by dividing the difference between the two stock estimates (S1980, S1990) by the sum of roundwood production (Ht) during 1980-89:

11
1989

= (S1980 S1990) / Ht.

t=1980

This coefficient indicates the net impact of the harvest of 1 cubic meter of roundwood on the stock. A coefficient equal to 0 would indicate that harvest exactly equaled growth, so there was no depletion. A coefficient greater than 1 might indicate that unrecorded harvesting occurred or that harvesting caused additional damage to the residual timber stand. The variable T in the Hotelling rent formula was set equal to the estimated stock divided by the product of roundwood harvest and the depletion coefficient: T = St / ( Ht). This procedure not only accounts implicitly for factors other than harvest that affected roundwood stocks, but it also ensures that data on roundwood stocks, which were expressed in cubic meters of stemwood in trees with a diameter at breast height of at least 10 cm, were consistent with data on roundwood production. That is, it implicitly converts production data into the same units as the data on roundwood stocks. In the case of industrial roundwood, production comes mainly from trees with diameters significantly greater than 10 cm; in the case of fuelwood, production can come from branches as well as stemwood. Agricultural soils The economic depreciation of agricultural soils equals the change in the discounted sum of agricultural rents that occurs as a result of soil degradation. If land markets are perfectly efficient and all other factors that affect current or future agricultural rents are unchanging, then economic depreciation simply equals the change in land values between one period and the next. In practice, and particularly in developing countries, land markets are too distorted and too

12 many other factors change to infer economic depreciation values directly from changes in land prices. There are, however, several other approaches that can be applied to estimate the economic depreciation of agricultural soils. Good illustrations of these approaches are contained in a study of Costa Rica by Repetto et al. (1991) and a study of Sri Lanka by Samarakoon and Abeygunawardena (1995). The most straightforward approach, which is the one we used, is the productivity-change method. One sets the depletion value of a unit of soil equal to the capitalized value of the future agricultural revenue that is forgone due to the loss of that unit. Specifically, we multiplied: (i) value-added in the agriculture sector times (ii) the percentage of agricultural land that is degraded times (iii) the ratio of the capitalized value of forgone future agricultural revenue to current value-added. For each country, we drew estimates of item (i) from the World Tables, and estimates of item (ii) from Table 6.3 in Brandon and Ramankutty (1993). The latter estimates were developed originally by ESCAP and pertain to the early 1990s. For our purposes, there were three problems with the ESCAP estimates. First, they exclude Malaysia, Papua New Guinea, and the East Asian "tigers." We set degradation values for these countries equal to zero, given the dominance of low-erosive, perennial tree crops in the first country and the relatively small areas in agriculture in the others. Second, they refer to all vegetated land (not just agricultural land), degraded due to all causes, not just agricultural land degraded by human activity. We assumed that the percentage of agricultural land degraded by human activity would equal the percentage of degraded vegetated land. This is a strong assumption, but as Brandon and Ramankutty comment (p. 117), "consistent estimates of only that amount of land that has been degraded by human activity are not available across Asia." The ESCAP estimates ranged from

13 low values of 3 percent, 7 percent, and 11 percent in Myanmar, Bangladesh, and Sri Lanka to high values of 30 percent, 34 percent, and 50 percent for China, Thailand, and India, with other countries falling in between. Third, the ESCAP estimates do not indicate the severity of degradation. Obviously, the degree of degradation strongly affects item (iii). Estimates of the severity of soil degradation are available for Asia as a continent, though not for individual countries, from two sources: a UNEPsponsored study summarized in WRI (1992, pp. 111-118), which reported estimates for 1990, and a USDA-sponsored study summarized in Brown et al. (1990), which reported estimates for the late 1970s. As the former study was based on a much more thorough data collection effort, we used its estimates. It classified 39 percent of the land degraded by human activities in Asia as "lightly" degraded, 45 percent as "moderately" degraded, 15 percent as "severely" degraded, and 0 percent as "extremely" degraded. These estimates are broadly similar to those for comparable categories in the USDA study, 56 percent "slightly" degraded, 28 percent "moderately" degraded, and 16 percent "severely" degraded. It is not clear whether UNEP's higher figure in the "moderately" degraded category indicates an increase in degradation between the late 1970s and 1990 or simply reflects different data sources or different definitions of degradation. For this reason, we restricted our estimates of the economic depreciation of agricultural soils to the early 1990s, specifically 1992. We used 1992 instead of 1990 because the former is the end-of-period year for the minerals and roundwood analyses. We translated UNEP's estimates of the severity of physical degradation into economic impacts by using values reported in Repetto et al. (1989) for Indonesia. That study estimated that the economic depreciation of agricultural soils as a percentage of the value of current agricultural output ranged from a low of 8.9-13.2 percent to a high of 100.3 percent, depending

14 on the type of crop and region in Java, with a mean value of 40.1 percent. Using these values as guidelines, we assumed that the economic depreciation of lightly degraded agricultural soils was equivalent to 10 percent of current value-added, moderately degraded soils to 40 percent, and severely degraded soils to 100 percent. Combining the figures from UNEP and Repetto et al., we set the value of item (iii) equal to 36.9 percent: 39 percent times 10 percent, plus 45 percent times 40 percent, plus 15 percent times 100 percent. As indicated, the analysis focused on on-site impacts. In many cases, off-site impacts such as sedimentation of reservoirs might be economically more important. Due to inadequate data, we were forced to ignore off-site impacts. Rough estimates reported in Repetto et al. (1989) indicate that off-site impacts were approximately an order of magnitude lower than onsite impacts in Indonesia. Off-site impacts were also found to be much smaller in the Repetto et al. (1991) study of Costa Rica. The Dixon and Hufschmidt (1986) volume contains some case studies on the valuation of off-site impacts in specific Asian watersheds, but this information was not sufficient for extrapolating to the national level. Results Tables I-VI present the principal results of the analysis. In Tables I-V, estimates of total rents and Hotelling rents have been aggregated across all mineral and roundwood resources. Of course, the relative importance of specific resources varies across countries. In Table VI, economic depreciation allowances for agricultural soils have been added to those for minerals and roundwood. Results are shown at three points in time, the beginning, midpoint, and end of the 1970-92 period, except in Table VI, where, as explained above, estimates were made only for 1992. Countries are divided into the subgroups used in a recent report by the Asian Development Bank (1997).

15 Tables I-III provide information on the economic significance of total mineral and roundwood rents. Table I shows total rents per capita. Values tended to be higher at the end of the period than at the beginning in most countries. This mainly reflects increases in production, as prices of most resource commodities either fell in real terms during the period or remained more or less constant. Per capita total rents fell in the Republic of Korea, the Philippines, and Myanmar due to declining production of the most important resources (roundwood in all three, and coal in the Republic of Korea, copper in the Philippines, and petroleum in Myanmar). Aside from these cases, however, the absolute economic significance of natural resources was generally greater at the end of the period than at the beginning. Not surprisingly, per capita total rents tended to be largest for countries in Southeast Asia, which are commonly regarded as resource-rich. The values for Malaysia were particularly high. Values were also large for the neighboring countries of Myanmar (at least in 1970 and 1981) and Papua New Guinea. Among the East Asian tigers,5 not surprisingly the Republic of Korea had larger values than the city-states of Hong Kong and Singapore, which do not produce any of the natural resources included in the analysis. Per capita rents in the Republic of Korea, which is not usually thought of as resource-rich, were in fact slightly larger than in Indonesia in 1970 and comparable to or larger than in Thailand in 1970 and 1981. What is perhaps most surprising are the relatively large values for China and India, which exceeded those for both the Philippines and Thailand in 1992. Again, the "large" countries are not usually thought of as resource-rich, but both are significant producers of roundwood and fossil fuels (primarily for domestic consumption), and China is a major producer of several metals. Table II places the economic significance of total mineral and roundwood rents in relative terms, dividing the estimates of per capita total rents in Table I by estimates of per capita

16 GDP. The resulting values are less variable within country groupings than in Table I. The Republic of Korea now looks like the other tigers in that the relative contribution of resource rents to GDP is insignificant, and Malaysia and Papua New Guinea no longer appear substantially more resource-rich than Indonesia. India and China still appear surprisingly comparable to the Southeast Asian countries, however. In fact, their values were not too much smaller than Indonesias and Malaysias in 1992. Outside of South Asia, most countries with large or moderately large per capita rents in Table I had lower rent/GDP ratios in 1992 than in 1981. In the cases of China, Indonesia, and Malaysia, this reflects the rapid growth of other sectors of the economy more than declining per capita rents (see Table I). Within South Asia (including India), however, most countries showed rising rent/GDP ratios (Myanmar is an exception, due to the sharp drop in per capita rents). In this sense, most of South Asia appears to have moved in an opposite direction from the rest of Asia, toward relatively more resource-based economies. South Asian values in 1992 were still in single digits, however, and well below the peak values in Southeast Asia in 1981. Table III compares total mineral and roundwood rents to gross domestic savings. Total rents were equivalent to a fifth or more of savings in at least one year during the period in all countries except the tigers. The large values for Southeast Asia and neighboring countries are no surprise, but the large or moderately large values for South Asia are, especially for Bangladesh. The values are large in South Asia because most South Asian countries have exceedingly low savings rates. So, even though total rents are small in absolute terms in those countries and small relative to GDP, they provide a significant source of potential savings. As discussed in the introduction, offsetting the economic depreciation of natural resources requires saving and investing an amount equivalent not to total rent, but rather to

17 Hotelling rent. Table IV shows the ratio of Hotelling rent to total rent for minerals and roundwood. As predicted by theory, the ratio rose in most countries, at least at a rate that was steeper during 1981-92 than 1970-81. In 1992, the ratio was a fifth to a quarter in Southeast Asia and India; it was even higher Bangladesh and Pakistan. In the latter two countries, the 1992 ratio was many times higher than in 1981. These trends suggest that the need for savings to offset resource depletion will be more critical in the future than it has been in the past. Most of Asia, but especially countries in Southeast Asia and South Asia (followed by China), appears to be entering a period when the economic depreciation of natural resources is likely to escalate rapidly. Table V shows our partial estimates of net domestic savings, calculated by subtracting Hotelling rents for minerals and roundwood from gross domestic savings, relative to gross domestic savings. For most countries and most years, the ratio was 0.9 or higher, indicating that savings have been much more than adequate to offset resource depletion. Net savings have differed little from gross savings. The lowest ratios are for Bangladesh, but even there the 1992 value was above 0.8. Countries with declining trends, which might signal movement in the direction of eventual inadequate savings (one must exercise some caution, as the ratios also reflect the vicissitudes of annual production levels), include Malaysia, the Philippines, India, China, Bangladesh, and Pakistan. These are, not coincidentally, the countries with the largest relative increases in the Hotelling rent/total rent ratios during 1970-92. The final table, Table VI, is identical to Table V except that the estimate of net domestic savings reflects the economic depreciation of agricultural soils as well as minerals and roundwood. In all countries except Indonesia, Malaysia, and Papua New Guinea, soil degradation had as large or larger an impact on net domestic savings in 1992 as the depletion of

18 minerals and roundwood: the difference between the values in Table VI and those in Table V is, in most cases, as large or larger than one minus the values in Table V. The minimal impacts in Indonesia and Malaysia are consistent with the findings of Repetto et al. (1989) for Indonesia and observations by Vincent (1997) about Malaysia, where most agricultural land is in flat or gently undulating areas and is under perennial tree-crop cover (rubber, oil palm, coconut, cocoa, etc.). Soil degradation had the greatest relative impact in South Asia, where it pushed net domestic savings to less than 70 percent of gross domestic savings in Bangladesh and India and to less than 85 percent in Pakistan. The lower net domestic savings rates for South Asia compared to East and Southeast Asia mirror the findings of the World Bank (1997). The most important cause of depreciation of natural capital in most of Asia in the early 1990s therefore appears to have been soil degradation. This situation will probably change in the future, however, as the Hotelling rent share for minerals and roundwood rises (Table IV). Already, soil degradation is relatively less important (though not necessarily unimportant in absolute terms) in major commodity producers like Indonesia, Malaysia, and Papua New Guinea. Conclusions The economic significance of total rents from extractive natural resources has varied across countries and time in Asia, although more in absolute (per capita) terms than relative to GDP. In most countries, per capita total rents were larger in 1992 than in 1970. In 1992, however, total rents exceeded 10 percent of GDP in only one country, Papua New Guinea, with the percentage having fallen since 1981 in several resource-rich countries due to the rapid growth of other economic sectors. Total rents were relatively more significant compared to gross domestic savings, being equivalent to a fifth or more of savings in at least one year during the period in all countries except the tigers.

19 All countries apparently saved enough to offset the economic depreciation of extractive natural resources, as Hotelling rents were much smaller than gross domestic savings in all years. This conclusion is consistent with the optimistic results of the analyses by Repetto et al. (1989) for Indonesia, Bartelmus et al. (1993) for Papua New Guinea, Vincent (1997) for Malaysia, and World Bank (1997) for the East Asia and South Asia regions. It suggests that the pessimistic findings by Pearce and Atkinson (1993) for Indonesia, Papua New Guinea, and the Philippines were due to that study's overestimation of economic depreciation allowances. It is strengthened if one takes into consideration the various assumptions that bias the Hotelling rent estimates in this paper upward. It holds even when the economic depreciation of agricultural soils is added to Hotelling rents for minerals and roundwood. Of course, the estimates in Tables V and VI are partial in that they ignore, among other things, the depreciation of physical capital. Available evidence indicates that net savings rates would remain positive even if the depreciation of physical capital were deducted from them. Estimates of the ratio of depreciation of physical capital to gross savings range from 0.25 in Indonesia (Pearce and Atkinson 1993), to about 0.5 in India (World Bank 1997, Box 2.1) and Malaysia (Vincent 1997), to 0.6 in Papua New Guinea and 0.73 in the Philippines (Pearce and Atkinson 1993). These estimates are smaller in all cases than the corresponding ratios in Tables V and VI. The analysis yielded three findings that may be somewhat surprising. First, per capita total rents have been moderate to large in China and India. These countries may not be as resource-rich by this measure as Indonesia, Malaysia, Myanmar, and Papua New Guinea, but they are as or more resource-rich than all other countries analyzed. Second, the total rent/GDP ratio rose in most South Asian countries (including India) during 1970-92. In contrast, it fell

20 during 1981-92 in all Southeast Asian countries, China, and the Republic of Korea (it equalled zero in Hong Kong and Singapore in all years). The fast-growing economies of East and Southeast Asia have moved in an opposite structural direction than the more slowly growing economies of South Asia. The total rent/GDP ratio in most South Asian countries was still small in absolute terms in 1992, however. Third, the total rent/gross domestic savings ratio was moderate to large in the large countries and South Asia during much of the periodin some cases, even larger than in resource-rich Southeast Asiaindicating that resource rents were a relatively significant source of potential savings. The most important finding is probably the rising share of Hotelling rents in total rents (Table IV). The relative magnitude of economic depreciation of natural resources is rising in most countries, sharply so in several cases. For this reason, the similarity of partial net domestic savings to gross domestic savings in Table V is not grounds for complacency. Asia will need to save and invest (productively, one might add) more of the rents generated by resource extraction in the future than it has had to in the past. The near-exponential escalation of the Hotelling rent share might suggest one reason why most resource-rich developing countries have had a dismal development experience (Sachs and Warner 1995): consuming (directly or indirectly) most of the total rent in the initial stages of resource exploitation is consistent with sustainability, but it might set a pattern that is difficult to break when the time comes to start saving a rapidly rising share of the rents. Most of Asia appears to be at that point today. Countries that already have high savings rates will need to maintain them, while countries with low savings rates will need to raise them. We close with a reminder about the very approximate nature of the rent estimates for minerals and roundwood and the economic depreciation estimates for agricultural soils. With

21 better access to information available within the countries, one could construct much more accurate estimates. The study of Malaysia by Vincent (1997) provides an example of how to do so for minerals and roundwood, and the studies of Indonesia and Costa Rica by Repetto et al. (1989, 1991) provide examples for agricultural soils. One might also be able to extend the analysis to include other natural resources, such as fisheries (here, the Costa Rican study provides a useful example) and groundwater. In most of Asia, however, the economic depreciation of these two resources is likely to be much smaller in absolute terms than the economic depreciation of minerals, roundwood, and agricultural soils. Finally, one might be able to extend the analysis to include some aspects of the economic depreciation of environmental capital (air and water quality, amenities, etc.). This is particularly difficult in practice but important to attempt, as by many measures the environmental capital stock is more degraded in Asia than in the rest of the world (Asian Development Bank 1997).

22 Notes 1. The required investment level is even higher if the stock of reproducible capital also depreciates. 2. Note that total rent equals the product of quantity extracted times average, not marginal, rent. 3. These results assume that the extraction profile for the resource is optimal, the discount rate and the price of the extracted resource are constant over time, the marginal cost curve for extraction is stationary, and, in the case of a renewable resource, that there is no time lag between regeneration and maturity. 4. Specifically, Weitzman (1976) demonstrated that net product equals the stationary equivalent of the future consumption stream. 5. Data were not available for the fourth tiger, Taiwan, which is not a member of the U.N. system.

23 References Asian Development Bank (1997), Emerging Asia: Changes and Challenges. Manila. Bartelmus, P., E. Lutz, and S. Schweinfest (1993), Integrated environmental and economic accounting: a case study for Papua New Guinea, in E. Lutz, ed., Toward Improved Accounting for the Environment. Washington, D.C.: The World Bank. Brandon, C., and R. Ramankutty (1993), Toward an environmental strategy for Asia. Discussion Paper No. 224. Washington, D.C.: The World Bank. Brown, L.R., et al. (1990), State of the World. New York: W.W. Norton & Company. Dixon, J.A., and M.M. Hufschmidt, eds. (1986), Economic Valuation Techniques for the Environment. Baltimore: Johns Hopkins University Press. El Serafy, S. (1989), The proper calculation of income from depleting natural resources, in Y.J. Ahmad, S. El Serafy, and E. Lutz, eds., Environmental Accounting for Sustainable Development. Washington, D.C.: The World Bank. Hartwick, J.M. (1977), Intergenerational equity and the investing of rents from exhaustible resources. American Economic Review 67(5), 972-974. Hartwick, J.M., and A. Hageman (1993), Economic depreciation of mineral stocks and the contribution of El Serafy, in E. Lutz, ed., Toward Improved Accounting for the Environment. Washington, D.C.: The World Bank. Pearce, D.W., and G.D. Atkinson (1993), Capital theory and the measurement of sustainable development: an indicator of weak sustainability. Ecological Economics 8, 103-108. Repetto, R., W. Magrath, M. Wells, C. Beer, and F. Rossini (1989), Wasting Assets: Natural

24 Resources in the National Income Accounts. Washington, D.C.: World Resources Institute. Repetto, R., W. Cruz, et al. (1991), Accounts Overdue: Natural Resource Depletion in Costa Rica. Washington, D.C.: World Resources Institute. Sachs, J.D., and A.M. Warner (1995), Natural resource abundance and economic growth. Development Discussion Paper No. 517a. Cambridge, Massachusetts: Harvard Institute for International Development. Samarakoon, S.M.M., and P. Abeygunawardena (1995), An economic assessment of on-site effects of soil erosion in potato lands in Nuwara Eliya District of Sri Lanka. Journal of Sustainable Agriculture 6(2/3), 81-92. Solow, R.M. (1986), On the intergenerational allocation of exhaustible resources. Scandinavian Journal of Economics 88(2), 141-156. Vincent, J.R. (1997), Resource depletion and economic sustainability in Malaysia. Environment and Development Economics 2(1), 19-37. Vincent, J.R., T. Panayotou, and J.M. Hartwick (1997), Resource depletion and sustainability in small open economies. Journal of Environmental Economics and Management, 33(3), 274-286. Weitzman, M.L. (1976), On the welfare significance of national product in a dynamic economy. Quarterly Journal of Economics 90, 156-162. World Bank (1997), Expanding the Measure of Wealth. Washington, D.C. WRI (World Resources Institute) (1992), World Resources 1992-93. New York: Oxford University Press.

25 Table I. Per capita total rents (1987 US$).

1970 Southeast Asia Indonesia Malaysia Philippines Thailand Pacific Islands Papua New Guinea Large Countries China India South Asia Bangladesh Myanmar Pakistan Sri Lanka East Asia Hong Kong Republic of Korea Singapore 0 18 0 1 85 4 3 4 10 79 17 71 29 20

1981

1992

67 250 27 12

58 258 14 21

80

111

23 15

25 28

3 95 8 8

5 10 8 12

0 17 0

0 6 0

26 Table II. Ratio of total resource rent to GDP.

1970 Southeast Asia Indonesia Malaysia Philippines Thailand Pacific Islands Papua New Guinea Large Countries China India South Asia Bangladesh Myanmar Pakistan Sri Lanka East Asia Hong Kong Republic of Korea Singapore 0 0.02 0 0.01 0.41 0.02 0.01 0.04 0.04 0.09 0.08 0.07 0.06 0.04

1981

1992

0.18 0.14 0.04 0.02

0.10 0.10 0.02 0.01

0.09

0.12

0.17 0.06

0.08 0.07

0.02 0.35 0.03 0.02

0.03 0.04 0.02 0.03

0 0.01 0

0 0 0

27 Table III. Ratio of total resource rent to gross domestic savings.

1970 Southeast Asia Indonesia Malaysia Philippines Thailand Pacific Islands Papua New Guinea Large Countries China India South Asia Bangladesh Myanmar Pakistan Sri Lanka East Asia Hong Kong Republic of Korea Singapore 0 0.12 0 0.10 3.86 0.22 0.07 0.14 0.25 1.46 0.55 0.27 0.26 0.19

1981

1992

0.53 0.50 0.16 0.07

0.31 0.28 0.14 0.04

1.38

0.59

0.59 0.25

0.20 0.33

0.61 2.10 0.34 0.20

0.42 0.31 0.13 0.17

0 0.03 0

0 0 0

28 Table IV. Ratio of Hotelling rent to total rent.

1970 Southeast Asia Indonesia Malaysia Philippines Thailand Pacific Islands Papua New Guinea Large Countries China India South Asia Bangladesh Myanmar Pakistan Sri Lanka East Asia Hong Kong Republic of Korea Singapore 0 0.01 0 0 0 0 0.01 0 0.01 0.03 0.02 0.01

1981

1992

0.20 0.01 0.08 0.13

0.25 0.21 0.26 0.26

0.01

0.01 0.05

0.09 0.26

0.10 0.07 0.07 0

0.39 0.04 0.55 0.01

0.06 -

0.05 -

29 Table V. Ratio of partial net domestic savings (excluding depreciation of agricultural soils) to gross domestic savings.

1970 Southeast Asia Indonesia Malaysia Philippines Thailand Pacific Islands Papua New Guinea Large Countries China India South Asia Bangladesh Myanmar Pakistan Sri Lanka East Asia Hong Kong Republic of Korea Singapore 1.00 1.00 1.00 1.00 0.99 1.00 1.00 1.00 1.00 1.00 1.00 0.99 1.00 1.00

1981

1992

0.89 0.99 0.99 0.99

0.92 0.94 0.96 0.99

0.99

0.99

0.99 0.99

0.98 0.92

0.94 0.85 0.98 1.00

0.84 0.99 0.93 1.00

1.00 1.00 1.00

1.00 1.00 1.00

30 Table VI. Ratio of partial net domestic savings (including depreciation of agricultural soils) to gross domestic savings.

1992 Southeast Asia Indonesia Malaysia Philippines Thailand Pacific Islands Papua New Guinea Large Countries China India South Asia Bangladesh Myanmar Pakistan Sri Lanka East Asia Hong Kong Republic of Korea Singapore 1.00 1.00 1.00 0.69 0.93 0.84 0.94 0.92 0.68 0.99 0.87 0.94 0.95 0.99