Productivity Measurement with Natural Capital

Abstract

This paper proposes a measurement framework that explicitly accounts for the role of natural capital in productivity measurement. It is applied to aggregate economy data from the OECD Productivity Database, with natural capital data from the World Bank. It is shown that the direction of the adjustment to productivity growth depends on the rate of change of natural capital extraction relative to the rate of change of other inputs. The extended framework also makes the contribution of natural capital to economic growth explicit. This can be useful for countries relying on non-renewable resources to better understand the need to develop other sources of growth-human or productive capital-to prepare for times of scarcer resource endowments. The framework can readily be applied to more encompassing natural capital data, once it becomes available.JEL Codes: D24, Q56, Q50

Environmentally Adjusted Multifactor Productivity

“…Therefore, as suggested in Brandt et al (2013), under profit maximisation the elasticities are equal to the shares of labour, produced capital and natural capital in the input mix. Note that , and are expected to be positive because input costs ( , , ) and quantities (L, K, S) are positive.…”

“…The user cost of natural capital may be explicit, such as license fees for exploiting a mine or using a stream to run a hydropower station, or implicit if the producer is an owner-user of the natural capital stock (Brandt et al, 2013). In that case, would be the private shadow price of using the natural capital in production, or the reduction in the value of the natural capital stock that results from extracting one (further) unit of the resource.…”

“…This is the method followed by the World Bank in its WAVES database. A mathematical proof of this rule can be found in Brandt et al (2013).…”

“…This calculation requires the assumption of constant returns to scale and perfect competition, implying zero profits. As explained in Brandt et al (2013), assigning all non-labour income to produced capital does not allow for unmeasured inputs and, when they are present, their income would be included in the estimate of the cost (or income) of produced capital. Hence, when including natural capital, the cost shares of labour and produced capital need to be adjusted downwards.…”

“…The approach presented here builds on the model developed by Brandt et al (2013;2014). 4 Consider the following transformation function:…”