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

Abstract

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