The Concept of Adjusted Net Savings - Essay Example

The Concept of Adjusted Net Savings There is a general notion that sustainability of the development is associated to the evolution of the national wealth. In 1993, Atkinson and Pearce explored this notion by measuring the net savings rates that have been adjusted to reflect the degradation and environmental depletion. Some of the recent theoretical work has derived the association between development prospects and saving effort. There are two results associated with the linkage levels of the saving and the development prospect (positive and negative adjusted net savings). Savings in this case is described as the change in the real wealth excluding the capital gains (Organization for Economic Co-operation and Development 2004, p31). The first result is positive adjusted net savings and in this case, the current value of the social welfare that is along the path of development increases. It has the implication that the development path in which the net saving is positive is located where the current value of the social welfare is ever increasing. To evaluate the improvement of the social welfare, net saving can be used sufficiently to measure it. The second result is negative adjusted net savings and in this case, the current value of the social welfare is declining; the level of the social welfare over sometime in the future along the development path will be lower than the present social welfare. This implies that the economy is in a path that is unsustainable, thus, negative net savings indicates unsustainability in an economy (Organization for Economic Co-operation and Development 2004, p31). According to The World Bank, adjusted net saving is used as a sustainability indicator that is based on the concepts of the green national accounts. Adjusted net savings evaluates the economy’s true rate of savings after taking into consideration the account the depletion of the natural resources, investments in the human capital, and the harm caused by pollution. Other than serving as an indicator of sustainability, adjusted net savings is also an indicator of policy (The World Bank 2010, p1).It provides the nation-level decision makers with an indicator that is clear and simple in regard to how sustainable the nation’s investment policies are (Bolt, Clemens and Matete 2002, p4). It presents the environmental issues and resources within the framework that the development planning and finance can comprehend. It emphasizes the need to enhance the domestic savings and thus the requirement for a sound macroeconomic policy. It offers limelight into the fiscal aspects of the resource and environment management because the charging taxes on pollution and collection of resource royalties is a general way to ensure efficient utilization of the environment and to raise the development finance. This makes the growth of the environment trade-off open or explicit because the plan of these nations to grow at the present time and protect the environment in the future will be noticed by the depressed rates of the adjusted net savings of these nations (The World Bank 2010, p1). In the standard national accounting, the creation of a fixed produced capital is measured as a future investment and therefore an increase in the significance of the assets that are available to the society. On the other hand, the calculation of the net saving rates entails the depreciation of the human-made capital value as the decreases in the nation assets’ value. The framework of the adjusted net savings takes a wider view that the human and natural capital is an asset that the well-being of the nation and productivity rests. The overexploitation of a renewable source or the reduction of a non-renewable resource reduces the value of the resource in regard to an asset; the activity indicates future well-being and productivity that is not based on investment (Bolt, Clemens and Matete 2002, p4). On the other hand, the development of a skilled force and an educated population is the country’s human capital and increase in the value of this resource is seen as an investment. In most cases, the countries that are regarded as net investors is where the human and natural capital are taken as assets and the value of the assets decrease each year; the adjusted net savings becomes negative. Since all the assets are limited in nature, the situation fails to persist and in most of the cases it is unsustainable. The adjusted net savings offers a representation of the first approximation numeric indicator of the level to which the nation fulfils the Hartwick-Solow rule; the rule is commonly referred to as the weak sustainability (Bolt, Clemens and Matete 2002, p4). Weak sustainability is based on the assumption that any form of capital is absolutely substitutable for the natural capital as a contribution to the production. For example, a nation that has reinvested all the profits from the utilization of the non-renewable natural resources in the creation of the human capital via the educational system would not have imposed the net opportunity cost on the nation’s future citizens (Bolt, Clemens and Matete 2002, p4). Interpretation of Genuine Savings Estimates Soil erosion is a very crucial issue in the agrarian economies. Attaching the value of soil erosion needs a detailed local data that is not easily accessible and at times it can be very difficult to detach economic cost of soil erosion from the losses that are physical in nature (The World Bank Group n.d., p38). The adjusted saving is supposed to include the degradation and depletion of the land resources which contribute to approximately 18% of the total wealth in the countries that have low income. The availability and comparability of the data do not permit the systematic inclusion of the above mentioned things in the saving analysis (The World Bank Group n.d., p39). Majority of the low income earning countries depend entirely on the natural resources and it is the foundation for their development and the loss of the soil quality can prove to be a major problem for these countries. A policy was enacted by the UN in response to the trend and the policy is referred to as the UN Convention to Combat Desertification. The Millennium Ecosystem Assessment of 2005 indicated that there was degradation in the drylands and in particular the regions in Central Asia and Africa and this was one of the main challenges that faced the international community. Majority of the poor nations are faced with serious problems in regard to the level of land degradation (The World Bank Group n.d., p39). Information on the cost of land degradation in these nations is not widely available because the impact of soil erosion is difficult to measure accurately. It is not enough to evaluate the on-farm effects since the external results of soil erosion can be considerably enormous. Salinazation, siltation of dams, and the loss of biodiversity are examples of negative off-farm impacts of soil erosion. Other than negative effects of soil erosion, there are a number of positive effects such as the formation of delta landscapes; an example is the Bangladesh and Nile Delta. Their fertility depends on the annual deposit of nutrients and soil transported by the river (The World Bank Group n.d., p39). It can be stated with confidence that soil erosion that goes beyond the natural levels has negative impact on the economy. Case studies that have been done in seven developing countries in Asia, Latin America, and Africa estimate that the problem of sustainable land management takes 3 to 7 percent of the agricultural GDP (The World Bank Group n.d., p39). Bibliography Agenor, P-R. (2004) The economies of adjustment and growth. La Editorial, UPR. Australian Bureau of Statistics. (2005) Year book Australia, Issue 87. Australian Bureau of Statistics. Bolt, K., Clemens, M. & Matete, M. (2002), Manual for calculating adjusted net savings, The World Bank, September, pp1-23. Brookings Institution. (1999) Brookings papers on economic activity, Issue 1. Washington, D.C.: Brooking Institution Press. Fargeix, A., Janvry, A. D. & Sadoulet, E. (1991) Adjustment and equity in Ecuador. Paris, France: OECD Publishing. Holmes, F. W. (1987) Economic adjustment: Policies and problems: Papers presented at a seminar held in Wellington, New Zealand, February 17-19, 1986. Wellington, New Zealand: International Monetary Fund. Hulse, J. H. (2007) Sustainable development at risk: Ignoring the past. New Delhi, India: IDRC. International Monetary Fund. (1999) World Economic Outlook: May 1999. International Monetary Fund. Kosters, M. H. (1992) Personal saving, consumption, and tax policy. London, UK: American Enterprise Institute. Kuznets, S. S. (1975) National income and capital formation, 1919-1935: A preliminary report. New York, NY: Ayer Publishing. Nazfziger, E. W. (2006) Economic development. Cambridge, UK: Cambridge University Press. Norton, E. A. & Melicher, R. W. (2010) Introduction to finance: Markets, investments, and financial management. Hoboken, NJ: John Wiley and Sons. Organization for Economic Co-operation and Development. (1984) OECD economic outlook, Issues 35-38. Organization for Economic Co-operation and Development. Organization for Economic Co-operation and Development. (2004) Measuring sustainable development: Integrated economic, environmental and social frameworks. Paris, France: OECD Publishing. Pollin, R. (1997) The macroeconomics of saving, finance, and investment. University of Michigan Press. Shoven, J. B. (1988) Government policy towards industry in the United States and Japan. Cambridge, UK: Cambridge University Press. The World Bank Group. (n.d.) Where is the wealth of nations? The World Bank Group. The World Bank. (2010) Adjusted net saving [Online], The World Bank. Available from [Accessed 4 May 2011]. World Bank Publications. (n.d.) Public sector debt, fiscal deficits, and economic adjustment. World Bank Publications. World Bank. (2005) World development indicators. Washington, D.C.: World Bank Publications. Read More