May 8, 2006	Monday	Rabi-us-Sani 9, 1427

THE field of developmental economics is comparatively new. It gained recognition as formerly colonized developing countries tried to follow their ex- masters to progress and prosperity.

Initially, only economic growth was given importance and GNP/GDP was the criterion to measure it. In the 1950s, developing countries tried to increase their GDP and ignored everything else.

However, soon it was realized that this criterion overlooked important factors like rate of population increase, which can derail the progress of a country. This led to the GDP per capita criterion. Later on, more criteria were added but economic factors still played the dominant role in measuring development.

A major change in this field came in eighties, with the development of UN human development index (HDI). HDI, for the first time, put forward the idea that long-term economic growth is impossible, if only economic factors are given importance. Social factors like provision/ access to education and health are equally important.

Recently, however, some economists have claimed that both of these criteria __ economic factors and HDI __ only consider the short-term perspective on an economy. These economists point toward the need of sustainability and inter-generational equity. They argue that while HDI tries to address these concerns, it has not succeeded so a new measure has to be devised to take care of these important considerations. For example, life expectancy, which is an important measure in HDI, can be rising even when economy’s long-term prospects are shrinking.

The basis of this new thinking is importance of natural capital as compared to financial wealth and human capital. Economic criteria of growth gave importance to a country’s financial wealth only. HDI created awareness of the need of human and social capital for long-term growth but natural capital consisting of oil/gas reserves, minerals, environment, forests, fisheries, ecosystems, biodiversity etc. was ignored. This overlooking of natural capital can be disastrous in terms of sustainability.

Take the example of a major oil producer like Saudi Arabia. During the last forty years, its GDP per capita is increasing steadily and now it is one of middle-income countries. Similarly, Saudi Arabia has also improved in terms of HDI as it spends billions on the provision of education and health to its population.

It appears that long-term growth is sustainable for Saudi Arabia as it is making the right choices but this is a façade. Saudi Arabia is increasing its financial wealth and improving in terms of HDI but it is losing its natural capital (oil/ gas reserves). Natural capital can be used for long-term growth but it must be replaced by financial or human capital that is equal in value to the natural resource loss.

Saudi Arabia is growing now but once the oil reserves are fully depleted, what will it export? Can the rate of investment in infrastructure, health, and education be maintained? How will it maintain the standard of living, it enjoys now? Will its financial or human capital be at a stage to bear the burden of developing further?

The answers of these questions are uncertain. The sustainability of Saudi Arabia’s growth looks improbable as it is totally dependent on its oil exports and once these are finished, it might suffer.

Brazil is another resource rich country that is growing in terms of GDP per capita and HDI but may be hurting its long-term growth prospects. The natural capital of Brazil is much more difficult to measure as compared to Saudi Arabia as it consists of rain forests, exotic ecosystems, biodiversity etc beside minerals.

Brazil too is using its natural capital to increase its financial wealth and human capital but is it a fair bargain? Some of its resources (like rainforests and biodiversity) are priceless and once used, are gone forever. So, is it a wise decision to use the priceless natural capital for increasing economic growth that is unsustainable?

The advocates of this new perspective on growth say that each country should take stock of its natural capital and assign an economic value to it. Putting a price tag on natural capital is difficult but not impossible. Even erroneous prices will be better than no prices at all, as at least the economic value of these resources will be recognized.

Second, they argue that ways can be found to use the natural capital, without depleting it. Game reserves in sub-Saharan Africa and ecotourism in Latin America are examples of this approach.

Exotic species and ecosystems earn money not only once__ by being destroyed __ but many times and for many generations. Finally, natural resource productivity has to be increased to decrease the usage of natural capital and enhancing its sustainability.

For this, a portion from profit generated from natural resources should be re-invested in research.

As the world once realised that human and social capital are crucial for growth, it is time to acknowledge the importance of natural capital and its value to sustainable development.