Wasting Assets: Natural Resources in the National Income Accounts

Abstract

Sustainable development implies meeting the needs of todays population in terms of production and income without compromising the ability of future generations to meet theirs. The present system of national income accounting includes provision for the depreciation of man-made assets such as plant and equipment but it fails to show how much of current income and product are made by depleting the natural resource base of the economy. Such methods of income accounting are dangerously asymmetric. They were developed by Keynesian economists of the 1930s who were concerned with national production under conditions of less than full employment. Under these systems of national accounting a country could exhaust its natural resources and still show a net profit. The UN Statistical Offices system of national accounts which has been adopted by most developing countries fails to account adequately for depreciation of publically owned natural resources. The integration of natural resource accounting into national income accounts can be achieved by assigning a cost value to natural resources which would have to be subtracted as are other costs when the gross national product is adjusted to calculate the net national product. A case study of national resource accounting applied to petroleum timber and soil resources of the island of Java in Indonesia is presented. By usual accounting methods Indonesias gross domestic product increased on average 7.1%/yr between 1971 and 1984. But this figure does not take into account the depreciation of oil and timber reserves or land. Upland farm production during these years for example increased Indonesias total agricultural by 4% a year but the capitalized losses in future productivity due to soil erosion are approximately 4% of the annual value of upland farm production thus cancelling out the productivity increase and since the population is increasing borrowing from the future. Failure to subtract depreciation of soil timber and petroleum accounts for 3.1% of the annual increase in Indonesias gross domestic product. If sustainable development is to be achieved resource depletion must be included in cost accounting for national income accounts.