The capital gains from trade are not enough: evidence from the environmental accounts of Venezuela and Mexico

Abstract

In principle, a country can not endure negative genuine savings for long periods of time without experiencing declining consumption. Nevertheless, theoreticians envisage two alternatives to explain how an exporter of non-renewable natural resources could experience permanent negative genuine savings and still ensure sustainability. The first one alleges that the capital gains arising from the expected improvement in the terms of trade would suffice to compensate for the negative savings of the resource exporter. The second alternative points at technological change as a way to avoid economic collapse. This paper uses the data of Venezuela and Mexico to empirically test the first of these two hypotheses. The results presented here prove that the terms of trade do not suffice to compensate the depletion of oil reserves in these two open economies.Keywords: exhaustible resources, environmental accounts, net national product, genuine savings, foreign trade. JEL: Q01, N5, P24, F18 The Capital Gains from Trade are not Enough: Evidence From the Environmental Accounts of Venezuela and MexicoThe traditional measure of a nation's rate of accumulation of wealth is gross saving. This is calculated as a residual: GNP minus public and private consumption. Gross saving represents the total amount of produced output that is set aside for the future.Gross savings rates can say little about the sustainability of development, however, because productive assets depreciate through time: if this depreciation is greater than gross saving, then aggregate wealth is in decline. Net saving, total gross saving less the value of depreciation of produced assets, is one step closer to a sustainability indicator, but focuses narrowly on produced assets. Environmental economist assimilate natural resources to man made capital, since a country's consumption may be mainly supported by draining natural resources, i.e. from the depreciation of natural capital. Traditionally computed net savings ignore the depreciation of natural capital. Once natural capital depreciation is also subtracted we arrive to the concept of 'genuine savings'.

Genuine Savings and Sustainability

“…Longer‐run estimates of GS have also been constructed. Rubio () constructed long‐run indicators of [1],[2],[3] and [8] for Venezuela and Mexico from the 1930s to the 1980s, but natural capital only considered one asset: oil. However, in the case of Venezuela, the subtraction of oil rents from net capital resulted in negative GS throughout almost the entire period of the study.…”

“…Hamilton and Bolt (2004) find them to be a sizeable share of GS for low income countries, transition and emerging economies. Rubio (2004) and Van der Ploeg (2010) investigate some specific cases, wondering whether capital gains could correct apparent unsustainability. They both conclude capital gains alone do not alter significantly overly negative or positive GS.…”

Sustainability and Depletion Accounting: A Case Study of Oil in Libya

“…The formula for accounting for the depletion of the oil resource is equal to price minus average cost multiplied by depletion minus resource discoveries or (P -AC) x (R -D). Rubio (2004) emphasizes that the net price method reveals natural capital depreciation (δ N K N ) is consistent with resource rent (N t ) for the year, where resource rent is estimated as the marginal profit multiplied by the quantity removed. Auty & Mikesell (1998) argue that resource rent (net price) may be used to establish depletion and so income is not calculated due to the effort required to estimate mineral reserves outside of the capital investment return calculation.…”

A Sustainable Century?

“…The time period covered by most estimates range from the 1970s to the present (Hamilton and Clemens, 1999;World Bank, 4 Sustainable Development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: the concept of 'needs', in particular the essential needs of the world's poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organisations on the environment's ability to meet present and future needs' (World Commission on Environment and Development, 1987, p.43 2011), although a number of studies have calculated GS for shorter (Pezzey et al, 2006;Mota and Domingos, 2013;Ferreira and Vincent, 2005;Pezzey and Burke, 2014;Ferreira and Moro, 2011) and longer horizons (Greasley et al, 2016;Lindmark and Acar, 2013;Greasley et al, 2014;Hanley et al, 2016;Rubio, 2004). Studies have tended to trade off scale and scope, with studies focusing on individual countries being richer in data quality but not directly comparable with other country-specific studies.…”