Measuring Development Prospects by 'Greening' the National Accounts
Working Paper #45
Development of both the theory and practice of environmental accounting over the past decade and a half suggests that the policy rule for increasing social welfare is to maintain positive genuine saving. This paper argued that while better and more environment-friendly economic policy does not automatically follow from greener measures of income, analysis of genuine saving offers a more direct route to policy. First, the sign and magnitude of genuine saving provide a clear indicator of the extent to which social welfare is increasing, and whether the economy is on an unsustainable path. Second, the decomposition of genuine savings into its component parts permits relatively direct linkages to be established between saving and particular policy levers. Among the components of gross saving, the level of public (government) dissaving is typically the issue, which is directly amenable to alteration by fiscal policies. Policies linked to private saving tend to be more indirect, involving tax incentives, maintenance of positive real interest rates, and the depth and stability of the financial system. For many developing countries a focus on government dissaving is likely to be the most important issue. In extreme circumstances consuming wealth is the correct policy option, when the alternative is starvation. But this should serve as a clear signal that some of these countries are not only poor but are getting poorer.
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