Economic Depreciation of Natural Resources in Asia

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Harvard Institute for

International DevelopmentHARVARD UNIVERSITY

Development Discussion Papers

Economic Depreciation of Natural Resources in Asia

and Imp lications for Net Savings

and Long-Run Consum ption

Jeffrey Vincent and Beatriz Castaneda

Development Discussion Pap er No. 614

December 1997

Copyright 1997 Jeffrey Vincent, Beatriz Castaneda,

and Presiden t and Fellows of Harvard College


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

Jeffrey Vincent and Beatriz Castaneda

AbstractRents 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 countriesin 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 mostcountries 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 byresource rents does not necessarily imply that economic development in Asia risks being

undermined by resource depletion. Only a portion of resource rents represents the economicdepreciation 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 estimatesincluded the degradation of agricultural soils. This finding does not provide grounds forcomplacency, however, as depletion is causing the ratio of depreciation to rents to rise.

Key words: agricultural soils, Asia, national income accounts, minerals, natural resources, netproduct, 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 Projectin 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 inecological economics at the University of Maryland. She served as a research assistant at HIID

on the Asian Development Bank's "Emerging Asia" project.


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ECONOMIC DEPRECIATION OF NATURAL RESOURCES IN ASIAAND 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


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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


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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


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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.


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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 cross-

country 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 on-

site 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


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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:


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Hotelling rent = Total rent * (1+)/[1+(1+i)T],

where is the elasticity of the marginal cost curve, i is the discount rate, and Tis the number of

years until resource exhaustion. Examination of this formula indicates that the ratio of Hotelling

rent to total rent rises as Tfalls (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 resource-

specific 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 Tfor

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 Tto the current


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stock divided by the difference between quantity extracted and growth (Gt):

T = St/ (HtGt). (renewable resources)

If extraction equals growth (sustainable yield), then Tgoes 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.


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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 Tin the Hotelling rent formula probably

understates Tand 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).


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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:


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1989 = (S1980S1990) /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 Tin 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


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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


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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 UNEP-

sponsored 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


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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 on-

site 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).


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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,5not 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


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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


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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


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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.


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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


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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


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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).


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Notes

1. The required investment level is even higher if the stock of reproducible capital alsodepreciates.

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 equivalentof the future consumption stream.

5. Data were not available for the fourth tiger, Taiwan, which is not a member of the U.N.system.


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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 Review67(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 Economics8, 103-108.

Repetto, R., W. Magrath, M. Wells, C. Beer, and F. Rossini (1989), Wasting Assets: Natural


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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 Agriculture6(2/3), 81-92.

Solow, R.M. (1986), On the intergenerational allocation of exhaustible resources. Scandinavian

Journal of Economics88(2), 141-156.

Vincent, J.R. (1997), Resource depletion and economic sustainability in Malaysia.

Environment and Development Economics2(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 Economics90, 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.


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

1970 1981 1992

Southeast Asia

Indonesia 17 67 58

Malaysia 71 250 258

Philippines 29 27 14

Thailand 20 12 21

Pacific Islands

Papua New Guinea 79 80 111

Large Countries

China 4 23 25

India 10 15 28

South Asia

Bangladesh 1 3 5

Myanmar 85 95 10

Pakistan 4 8 8

Sri Lanka 3 8 12

East Asia

Hong Kong 0 0 0

Republic of Korea 18 17 6

Singapore 0 0 0


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Table II. Ratio of total resource rent to GDP.

1970 1981 1992

Southeast Asia

Indonesia 0.08 0.18 0.10

Malaysia 0.07 0.14 0.10

Philippines 0.06 0.04 0.02

Thailand 0.04 0.02 0.01

Pacific Islands

Papua New Guinea 0.09 0.09 0.12

Large Countries

China 0.04 0.17 0.08

India 0.04 0.06 0.07

South Asia

Bangladesh 0.01 0.02 0.03

Myanmar 0.41 0.35 0.04

Pakistan 0.02 0.03 0.02

Sri Lanka 0.01 0.02 0.03

East Asia

Hong Kong 0 0 0

Republic of Korea 0.02 0.01 0

Singapore 0 0 0


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

1970 1981 1992

Southeast Asia

Indonesia 0.55 0.53 0.31

Malaysia 0.27 0.50 0.28


Thailand 0.19 0.07 0.04

Pacific Islands


Large Countries

China 0.14 0.59 0.20

India 0.25 0.25 0.33

South Asia


Myanmar 3.86 2.10 0.31

Pakistan 0.22 0.34 0.13

Sri Lanka 0.07 0.20 0.17

East Asia

Hong Kong 0 0 0

Republic of Korea 0.12 0.03 0

Singapore 0 0 0


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Table IV. Ratio of Hotelling rent to total rent.

1970 1981 1992

Southeast Asia

Indonesia 0.01 0.20 0.25

Malaysia 0.03 0.01 0.21


Thailand 0.01 0.13 0.26

Pacific Islands

Papua New Guinea 0 0 0.01

Large Countries

China 0 0.01 0.09

India 0.01 0.05 0.26

South Asia


Myanmar 0 0.07 0.04

Pakistan 0 0.07 0.55

Sri Lanka 0 0 0.01

East Asia

Hong Kong - - -

Republic of Korea 0 0.06 0.05

Singapore - - -


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Table V. Ratio of partial net domestic savings (excluding depreciation of agriculturalsoils) to gross domestic savings.

1970 1981 1992

Southeast Asia

Indonesia 1.00 0.89 0.92

Malaysia 0.99 0.99 0.94


Thailand 1.00 0.99 0.99

Pacific Islands


Large Countries

China 1.00 0.99 0.98

India 1.00 0.99 0.92

South Asia


Myanmar 0.99 0.85 0.99

Pakistan 1.00 0.98 0.93

Sri Lanka 1.00 1.00 1.00

East Asia

Hong Kong 1.00 1.00 1.00

Republic of Korea 1.00 1.00 1.00

Singapore 1.00 1.00 1.00


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Table VI. Ratio of partial net domestic savings (including depreciation of agriculturalsoils) to gross domestic savings.

1992

Southeast Asia

Indonesia 0.87

Malaysia 0.94

Philippines 0.95

Thailand 0.99

Pacific Islands

Papua New Guinea 0.99

Large Countries

China 0.92

India 0.68

South Asia

Bangladesh 0.69

Myanmar 0.93

Pakistan 0.84

Sri Lanka 0.94

East Asia

Hong Kong 1.00

Republic of Korea 1.00

Singapore 1.00

Documents

Economic Depreciation of Natural Resources in Asia