Genuine savings: Leading indicator of sustainable development?
Interest in the relationships among national income, wealth, and welfare has revived in recent years, driven in large part by concern about the long-run consequences of natural resource depletion and environmental degradation. A fundamental result in this "green accounting" literature is that a comprehensive measure of a country's net investment across all forms of capital - produced, natural, human - should predict whether consumption will be higher or lower in the future compared to the present. In this article we conduct an empirical investigation of the World Bank's genuine savings estimates. Our objectives are to evaluate their consistency with green accounting theory and their accuracy as predictors of the difference between current and average future consumption. We begin by describing the estimates and discussing their limitations. Next, we present four hypotheses related to equation (4), and we discuss econometric issues that arise in testing them. We then present our results in two sections: the first focuses on consistency with theory, and the second focuses on predictive accuracy. We conclude by summarizing the implications of our analysis for the interpretation and use of the Bank's estimates. © 2005 by The University of Chicago. All rights reserved.
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