ED: Capitals and Investment

*Some parts of this note are borrowed from references for teaching purpose only.

ED <Lecture Note 4> 13.3.29

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Income Level by Region and Country

World Bank Scheme- ranks countries on GNI/capita

2

Factors of Economic Development

Understanding Economic Development

– Overall understanding (‘seeing the forest’): Understanding of main macro indicators such as economic growth – Partial Understanding (‘seeing the trees’): Understanding of main components as a point of the whole

Main Factors for Enhancing Development/Barriers

－ Resources (physical/human capital, labor, land, natural resources, etc.)－ Technologies (productive technology, know-how, knowledge, etc.)－ Institutions (law, regulation, etc.)－ Cultures (custom, morality, life style, etc.)－ Others (politics, international relations, etc.)

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Key Factors of Economic Development

4

Institutions(Rules, Laws)

Culture(Value system)

Technology(Production

function)

Resources(Production

factors)

Stages of Economic Development

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Factor-driven Economy

Investment- driven Economy

Innovation- driven Economy

• Basic factor conditions (low cost labor, natural re-sources, geographic loca-tion) are the dominant sources of competitive advantage

• Technology is assimilated through imports, FDI and imitation

• Companies have limited roles in the value chain, and focus on assembly, labor intensive manufac-turing, and resource ex-traction

• The economy is highly sensitive to world eco-nomic cycles, commodity prices, and exchange rates

• Innovative products and services at the global technology frontier are the dominant sources of competitive advantage

• Characterized by strengths in all areas to-gether with the presence of deep clusters

• Companies compete with unique strategies that are often global in scope

• The economy has a high service share, and is re-silient to external shocks

• Efficiency in producing standard products and services is the dominant source of competitive ad-vantage

• Foreign technology is ac-cessed through licensing, joint ventures, FDI, and imitation

• The nation is not only as-similating foreign tech-nology, but has the capac-ity to improve on it

• Heavy investment is made in efficient infrastructure, modern production process, and ease of do-ing business

Source: Porter, Michael E. Competitive Advantage of Nations, 1990.

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Changes in Production Capacity

Production (Capital, Labor, Technology)

EAP&

HR

Consumption

Investment

Savings

Physical Capital Ac-cumulation

Population Support

EAP=Economically Active Population

R&D

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Basic Relationship of Capital Accumulation and Growth

ConsumptionPopulationgrowth anddepreciation

Household savings

Tax paymentsPublic investment

Impoverishedhousehold

Economic growth

Capital per person

Public budget

Basic needs

household savings

Populationgrowth anddepreciation

Zero taxpayments

ZeroImpoverishedhousehold

Decline incapital per per-son

Negativeeconomicgrowth

Zero publicinvestmentbudget

Poverty Trap

Household savings

Populationgrowth anddepreciation

Budgetsupport

Humanitarianrelief

Micr

ofina

nce

Publicinvestment

Basic needs

Role of ODA in Breaking the Poverty Trap

Impoverishedhousehold

Economicgrowth

Economicgrowth

Official devel-opment assis-tance

Public budget

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Private and Public Investments in Capital

Tax payments

Public budget

Household income

Business capital

Human capital

Knowledge capital

Infrastructure

Natural capital

Institutional and

Social capital

Human CapitalN

atural C

apital

Social Capita

l

Ph

ysic

al C

apit

al

Financial Capital

Source: DFID Sustainable livelihoods Guidance Sheets

ShelterMachinery

Infra-structure

NetworksMembership

Political Rights

KnowledgeSkillsHealth

LandWater

Livestock

SavingsPensionsInsurance

11

How Inter-relationship of Society’s Assets

12

Source: International Monetary Fund.

Factors Accounting for Economic Growth in Selected Regions

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Capitals

Three types of capital, or resources, are used to produce goods and ser-vices. – Natural capital includes resources and services produced by the

earth’s natural processes, which support all economies and all life.– Human capital, or human resources, includes people’s physical and

mental talents that provide labor, innovation, culture, and organization.– Physical capital, or manufactured resources, are items such as ma-

chinery, equipment, and factories made from natural resources with the help of human resources.

– Most economic systems use three types of resources to produce goods and services.

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Concept of Capital and Human Capital

Concepts of Capital

o Broad meaning: All sources generating future income flowso Narrow meaning: Physical capital and human capital only

– Accumulation of physical capital, human capital and technology (knowledge) increase in production and income increase in accumulation ……(virtuous circle)

– The ability embodied in individuals as a result of investment in the form of education, training, health, regional movement (migrant),etc. that increases quality of labor.

Capital and Technology Accumulation

Human Capital

Physical Capital

– Economic growth requires and depends, in part, on inputs of capital. The rate of growth implied by a given capital formation proportion depends on the capital/output ratio and the rate of growth of the labor force.

– The process of growth involves saving to create a surplus for capital formation. Saving is not tightly related to incomes per capita.

– Saving can be undertaken by government, and it can be forced upon households and businesses by inflation. All economies have a limited ca-pacity to absorb new investments, but most do not ever test the limits.

– When investment increases continuously, additional (marginal) rates of re-turn to capital tends to fall because better opportunities have been exploited already.

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– Physical capital is a scarce resource, in rich and poor countries alike. It is also an input into the production process. In general, the higher the level of inputs, the higher will be the level of output. The poverty of physi-cal resources obviously characterizes poor countries. Thus conven-tional views would urge higher rates of capital formation to overcome poverty.

– Physical capital takes the form of long-lived goods such as machinery used to produce other goods. Capital goods are themselves the result of the process of capital formation, a process that takes time and that uses re-sources.

– In an efficient economy, higher rates of capital formation (and thus, the higher potential rates of growth of overall output in the future) mean lower production of consumer goods in the present. Thus, there are trade-offs between current consumption and future consumption.

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Capital and Investment

Importance of Capital

Harrod-Domar’s Model

– Interested in investment conditions for achieving sustainable growth with-out inflation and unemployment

The View called ‘capital fundamentalism’

– Claim that capital formation is the key factor for economic growth.

– The issue of economic development is essentially to gain investment re-sources necessary to achieve the target (minimum) rate of economic growth needed for desirable employment and income distribution.

– They assume that high economic growth is expected to automatically reduce unemployment and excessive income inequality.

Adding the concept of human capital

– In principle, human capital is the same as physical capital so that it rein-forces the importance of capital for economic development.

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Problems of ‘capital fundamentalism’– High investment and capital formation do not necessarily guarantee desir-

able economic growth and income distribution.

– There are many cases of inefficient investments or investments for mainly demonstration purpose that are not appropriate for the reality of developing countries.

– In developed countries (during 1960-1975), 50% of economic growth was resulted from capital investment. In developing countries (newly industrial countries), 25-35%of economic growth was resulted from capital accumu-lation.

– Investment rate of 15-20% should be maintained for sustainable develop-ment for a long period.

Required Investment

Capital-Intensive Investment vs. Labor-Intensive Investment

– In developing countries lacking capital, if more emphasis is given to capital- in-tensive production, economic growth rate may be lowered and/or consumption may be constrained.

Saving: A Fundamental Determinant of Economic Growth

• To have more consumption in the future, people must consume less today and save the difference between consumption and income.

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Source: World Bank.

Relationship Between Rate of Saving and Per Capita Real GDP

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Relationship between Savings and Investment at the Macro-Economic Level

Savings Financial IntermediariesInvestment ( by firm, gov-ernment, person, etc. )

Domestic private savings

Bank deposit

Stock purchase

Cash holding

Domestic government savings

Foreign savings

FDI

From foreign bank

Domesticbank

Stock market

Person to person

Foreign financial institutions

Domestic borrowing from banks or individuals ( these are debt ) and in-vested in capital or oper-ation

Through domestic stock market, new stocks are issued and invested as equity

Foreign borrowingor equity investment

Savings and Economic Growth

* Hong Kong, Singapore,Taiw an,S.Korea,Indonesia,

Malaysia, Thailand

0,070,04

0,02

0,08

0,27

0,20,18

0,29

0

0,05

0,1

0,15

0,2

0,25

0,3

0,35

High-grow th

countries

Middle-grow th

countries

Low -grow th

countries

* EastAsia

Real GDP grow th (% increase)

Total savings (% GDP)

Source: IMF World Economic Outlook, May 1993 (Annual data, 1971-92).

Savings and Growth in 90 Developing Countries

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Diversity of Economic Outturn across SSA groupings

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2004-08 2007 2008 2009Real GDP Growth (Percent) (%)

SSA 6.5 7 5.6 2.5Of which

Oil Exporting Countries 8.5 9.2 7 4.8Middle Income Countries 4.9 5.5 3.7 -1.7Low Income Countries 6.3 6.4 6.3 4.7Fragile Countries 3.3 3.2 3.5 3.3

Total Investment (Percent of GDP)SSA 21.1 21.9 22.8 22.8Of which

Oil Exporting Countries 21.4 21.5 22 25.3Middle Income Countries 20.5 21.7 22.9 20.1Low Income Countries 21.5 22.6 23.5 22.9Fragile Countries 13.4 12.9 14.3 13.9

Gross National Savings(Percent of GDP)SSA 21.5 22.6 21.6 21.4Of which

Oil Exporting Countries 32.8 35.8 33.5 31.4Middle Income Countries 16.3 16.1 16.4 16.1Low Income Countries 15.5 15.9 14.5 16.3Fragile Countries 10.1 9.2 7.9 10.9

Real GDP growth has out-stripped population growth since 2004. Because of bet-ter oil prices, real GDP growth has been high in Oil exporting countries

Improved macro policies, low income countries have been growing at higher rates

Gross national savings are low, perhaps constraining to-tal investment

Accumulation Speed of Physical Capital

(Unit: Real Domestic Investment/Real GDP, %)

  1960 1965 1970 1975 1980 1985 1990 Growth Rate,%

Korea 7.0 10.6 21.9 23.3 28.0 28.5 36.9 5.6

Taiwan 14.0 16.8 21.9 25.9 29.1 19.9 23.1 1.7

Singapore 11.0 21.9 38.8 33.9 37.8 37.3 35.0 3.9

Hong Kong 21.7 23.8 16.8 18.5 23.4 17.4 17.7 -0.7

The Philippines 10.9 13.0 13.0 18.1 19.3 11.3 17.7 1.6

Thailand 11.3 15.5 18.3 17.4 17.2 16.8 27.0 2.9

Indonesia 6.2 6.8 11.1 17.2 18.0 26.9 28.2 5.2

Brazil 18.9 19.0 19.8 26.0 22.0 15.6 15.2 -0.7

Chile 20.4 21.5 21.6 20.6 22.0 15.6 15.2 -0.7

Mexico 14.5 16.9 17.7 19.1 21.4 15.3 15.0 0.1

Ghana 11.0 10.7 7.0 6.3 4.0 4.2 5.5 -2.3

Kenya 23.2 13.4 27.6 11.8 17.2 13.8 11.0 -2.5

Note: 1. Measured in 1985 constant dollars. 2. Average Annual Growth Rate for the period, 1960-1990.

Source: Summers and Heston Data Set 5.6.

Roles of Remittances

Count as the 2nd largest source of capital inflow to many developing countries.

Only foreign direct investment account for more sources of external fi-nance.

Remittances exceeds inflows that come from international aid. Receiving countries become more dependent on global economies

rather than sustaining their own local economies. Promotes economic growth in developing countries. World Bank estimates $240 billion in total remittances in 2007, a stag-

gering jump from only $31.2 billion in 1990. Remittances exceed all other imports of private and public

capital in 36 developing countries.

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Advantages of Remittances

Finance much needed investment in recipient countries to contribute to in-creased productivity.

Believed to reduce poverty. Mainly due to the poor that migrate and send back remittances.

Increase of income in households also increase consumption. Remittances do not have to pay interest. More stable than foreign direct investment or foreign portfolio investments.

These are highly volatile in developing countries. Unskilled workers may return to their home countries with useful skills ac-

quired abroad. Recipients have a higher propensity to own bank accounts.

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Disadvantages

Promotes idleness among the recipients.

May cause appreciation of receiving country’s currency. Thus leading to lower net exports and negative economic growth.

Some emigrants may be educated or highly skilled causing what commonly known as “brain drain”.– Loss of human capital lowers productivity and economic growth.– Home country invested time, effort and money on their education.– Migration of skilled workers worsens the distribution of income between

rich and poor countries.

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Top Remittances Countries

Developing countries receive the highest amount of remittances.

One-third of remittances to the developing world go to India, China, and Mexico.

Share of remittances in GDPTajikistan 50%Moldova 31%Lebanon 25%

Top recipient countries 2008India $51.5 billionChina $48.5 billionMexico $26.3 billionPhilippines $19.1 billion

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Trends of Remittance Flows

Most of the developing world has been increasing flows of remittances by double digits annually between 1990-2005.

Remittances by region (US$ billions)1990 1995 2000 2005 Annual growth

Eastern Europe and Central Asia 3.2 8.1 13.4 30.8 15.1%East Asia and Pacific Region 3.3 9.7 16.7 43.9 17.3%South Asia 5.6 10 17.2 34.9 12.2%Latin America and Caribbean 5.8 13.4 20.1 47.6 14.0%Middle East and North Africa 11.4 13.6 13.2 23.5 4.8%Sub-Saharan Africa 1.9 3.2 4.6 7.4 9.1%

30Source: World Bank

Remittances by Area

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Labor and Human Capital

– While physical capital may be the scarcest input to development, labor is usually plentiful. Usually low-income countries are characterized by capi-tal-poor and labor-rich.

– Productivity of workers is dependent on their native ability, the amount of raw labor they bring to the marketplace, and the returns to their stock of human capital.

– Investments in human capital include formal schooling, on-the-job training, health care, and nutrition, among others. (=> human devel-opment)

– Intensity of effort also affects output and is influenced by labor supply. Backward-bending supply curves for labor seem less accurately descriptive of current low-income countries.

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– Managing the process of human capital formation is a challenge to policy-makers. Educational requirements depend in an indirect but quantifiable way on future output and its prospective composition.

– Poor countries have lost some trained workers through emigration. The re-sults of the so-called brain drain are amenable to economic analysis.

– Unions affect the development process through both the economic and noneconomic roles they play. Their organizational capabilities seem more limited in poor countries than rich countries.

– The use of political instruments to gain their ends is more pronounced. Early hopes that unions might act on behalf of the society as a whole have proved unrealistic.

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Population Changes

o The relationship between population growth rate and economic growth rate

– The inter-relationship between the two variables is important, but the casual relationship is complicated.

– The size and growth rate of population affect economic growth rate and economic development, and vice versa.

o The relationship between population and income

– Population and income distribution (Y/P): moving in the opposite di-rection

– However, population size is positively related to production scale, market size and defense power.

– Higher population density may lower productivity. In contrast, it may encourage technological innovation.

The Importance of Population Issue

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Population and Per Capita Income

Slope indicates per capita income (Y/P)

Output

Population

YA

CB

P

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o Population and resource depletion

Resource depletion = Population size X Per capita income X Intensity

• Pessimistic view:– The report by the Club of Rom, The Limits to Growth warned a gloomy fu-

ture of mankind.

• Optimistic view of neo-classical economists:– Supply of resource is determined by resource market price mechanism.

(E.g. Recent oil price fluctuations)

• Dissemination of technology positively affects resource utilization.

Population Growth Rate

o Population growth rate = Birth rate - Death rate Migration rate

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Distribution and Growth Rate of Population by Region in the World

Distribution (%) Growth (%)

1950 1990 1980-91

China 22.1 21.5 1.5

India 14.2 16.1 2.1

Asia-other 18.9 26.8 -

Africa 8.8 12.1 3.1

Europe 22.8 14.8 0.9

Latin America 6.6 8.5 2.0

North America 6.6 5.2 1.0

World Population 2.5 billion 5.3 billion 1.7%

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Demographic Transition

o Shortening Demographic Transition Period

– Compared to demographic transition in developed countries in the past, the transition process in developing countries is more radical and fast due to fast decrease in both birth rate and death rate so that the transition process tends to be shortened.

o Increase in Young Population vs. Old Population

– The increase in young population results in increasing dependency rate which in turn requires job creating and human capital investment. Relative increase in old age group also increases dependency rate and results in negative effects on economic growth.

o Determinants of Birth rate

– Malthusian hypothesis: Population growth rate is constrained by food produc-tion. Population growth is geometric whereas food production growth is arith-metic so that income increase (and economic growth) above the subsistence level is impossible in the long run, since population will increase faster if food (income) per capita increases due to some reason.

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• Modern Theory of Birth Rate : Birth rate is affected by many factors.

• Economics of human behavior: Are children investment goods of parents?!

• Decision and preference of women are most important: culture, income level, education level, opportunity costs, etc.

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Demographic Transition Process

Time

Demographic transition

%

Birth rate

Death rate

Population

growth rate

Demographic Transition and Population

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Estimated Human Population Growth

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Five Features of World Migration

Major world migration is from less to more developed regions of the world.

New demands for immigrants in highly developed countries are increas-ing due to demographic transitions.

Globalization creates contradictory labour demands and displacements, creating mobility opportunities for some and uprooting others.

Economic globalization creates contradictory tendencies in international migration.

World migration has added racial and cultural diversity to historically ho-mogeneous populations.

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44Source: United Nations, International Migration, 2009

Africa Asia Europe L. America & Caribbean

N. America Oceania-1500000

-1000000

-500000

0

500000

1000000

1500000

Average Annual Net Migration By Region, 2005-2010

Average annual net migration

Human Capital Definitions

Human capital is the accumulation of skill and knowledge imbedded in labor performance in order to produce economic value.

“the acquired and useful abilities of all the inhabitants or members of the so-ciety. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person.” - Adam Smith, The wealth of the nations (Short title of the book)

Human capital refers to the collection of innate and acquired individual abilities that are substantially durable, persisting over some signific-ant portion of the life of the possessor

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Economic growth closely depends on the relation between new knowl-edge and human capital, which is why large increases in education and training have accompanied major advances in technological knowl-edge in all countries that have achieved significant economic growth.

Quantitatively, the early studies compared school enrollment ratios or lit-eracy rates. The problem with that, is there is no adequate measure of aggregate stock of human capital available as an input of production.

Technological progress is invaluable when there are only few skilled workers that know how to benefit from it.

Role of HC and Measurement

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Social capabilities(“know-how”, “know-who”):

e.g., diligence, loyalty,cooperativeness, trust, etc.

Flexibility:Multi-task performance,

re-trainability.

Problem-solving,leadership,

managing complex tasks.

Psycho-motorbased skills

("know-how", "can-do").

HumanCapital

LongevityHealth

Physiologicalcondition:

e.g. Strength, eyesight etc.

Proceduralcapabilities

Cognitivecapabilities

("know-why"'know-what")

Tangible Intangible

Creativeness, innovativeness

Component of HC

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The Human Capital Model

18 22

Age

Ann

ual e

arni

ngs

H

H

C

C

65

(3)Incremental earnings

(2)Opportunity

cost

(1)Directcost

Age-Earnings Profiles with and without college education48

Age-earnings Profiles by Level of Education (Venezuela, 1989)

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Comparison Of Human Capital And Physical Capital

Differences– There are major differences in terms of the returns obtained from

the investment in human capital and physical capital. The investment in physical capital has only monetary and market returns whereas invest-ment in human capital has non-monetary as well as non-market returns.

– The returns to human and physical capital tend to behave differently. When individual invest in physical capital, they are return-takers i.e. the owners accepts the return dictated by the market and cannot influence them. Since there are no market for the stock of human capital, in-vestors in human capital become return-maker, as the amount, the quality and the maintenance of their human capital will dictate what the market will be willing to offer for their services.

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Similarities

- Investment are made in both human capital and physical capital. When a person (or person’ s parents or society at large) makes a current ex-penditure on education and training, it is anticipated that the individual's knowledge and skills and therefore future earnings will be enhanced. The important point is that expenditures on education and training can be fruitfully treated as investment in human capital just as expenditure on capital equipments can be understood as investment in physical capital.

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School Attendance Rate (2000) (%) Illiteracy Rate of Age 15-25 (2001)

Elementary Education

Secondary Education

Higher Ed-ucation

Male Female

ChinaJapanKorea

Chinese TaipeiSingaporeHong KongIndonesiaPhilippineThailandMalaysiaVietnam

106101101100

--

1101139499

106

631029499--

5777827067

7487877--

1531352810

1-0-0121125

3-0-0031224

United States 101 95 73 - -

World 102 67 22 - -

Education Level

Source: World Bank, World Development Indicators, 2001, 2002, 2003

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Tertiary Enrollment Rate by Country (1998)

0

10

20

30

40

50

60

70

80

90

China Hong Kong(a) Indonesia Japan Korea(b) Malaysia Philippines Singapore(a)Thailand USA

%

Notes: a. 1997 b. 2001

Sources: World Bank, World Development Indicators. Various years; Hong Kong, China. Education and

Manpower Bureau.

Primary School Enrollment and Pupil-Teacher Ratios, 2010

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Human Development Index for 24 Selected Countries (2007 Data)

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Under-5 Mortality Rates, 1990 and 2005

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Wealth of Nations

• Produced assets: human-made things

• Human resources– Human capital: physical, psychological, and cultural attributes of a popu-

lation– Social capital: the social and political environment people create for

themselves in society– Knowledge assets: the codified or written fund of knowledge that can be

transferred to others

• Natural capital: goods and services supplied by natural ecosystems– Renewable– Nonrenewable – Subject to depletion

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Land and Other Natural Resources

– A long tradition in economics treats land differently from other physical as-sets and from labor. Land and subsoil natural resources have usually been considered nonreproducible.

– Natural resources similarly have limited reproducibility. The possibilities of substitution between raw materials exist.

– Land and subsoil minerals are usually immobile. They cannot be trans-ported from place to place as cheaply as other assets and labor. This char-acteristic is central to the consideration of their economic properties in poor countries.

– Land is relatively unimportant for a developed country that has abundant capital to alter the character and capacity of its existing resources, and hu-man drive and creativeness to substitute for the natural constraints.

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Problem of Resources

Exporting large quantities of primary products

- Making the country vulnerable to changes in prices

- Low YED / low incomes

- Deteriorating terms of trade

- Forcing up the exchange rate and negatively impact on the competitiveness

of other (manufacturing) sectors to emerge (the Dutch disease)

- Political corruption and instability is often associated with the natural

resource curse

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0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

-5

-4

-3

-2

-1

0

1

2

3

4

5

Natural capital as share of total wealth

Gro

wth

of

pe

r ca

pit

a G

DP,

ad

just

ed

fo

r in

itia

l in

com

e (

% p

er

ye

ar)

-0.67

60

Natural Capital and Economic Growth

Natural capital share and growth are inversely related. The most striking aspect is not the average performance of resource rich countries but the huge variation.

Relationship between Resource Exports and Growth

61

… while many strategic resources are located in poor coun-tries with severe limitations to their governance capacities

Antimony

BaryteBauxite

Chromium

Cobalt

Diamond

Fe (ore)

Fluorite

GoldManganese

Molybdenum

Phosphate

Platinoids

Rare earth

SilverTin Tungsten

Vanadium

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Localization of the Reserves of Main Mineral Commodities

(per gross national income per capita) Low-income country (2006 GNI < 2.5 $/day per capita) Upper middle income country (2006 GNI < 30.5 $/day per capita)

Lower middle income country (2006 GNI < 10 $/day per capita) High-income country (2006 GNI > 30.5 $/day per capita)

Source: Christmann, 2009Data Sources: USGS and World Bank

Source: Google

Location of Production for Nine Important Minerals

63

World Supply and Demand

Source: Google64

Mineral Resources

Source: Google65

Regional Primary Energy Consumption Patterns

Source: BP Statistical Review of World Energy, 201066

Primary Energy Consumption Per Capita

Source: BP Statistical Review of World Energy, 201067

Primary Commodity Dependence

Developing countries’ exports dependency on commodities is an issue that has for decades and constrains economic development of such countries.

More than half (78) of all developing countries rely on four commodi-ties for 50 per cent of their earnings; 31 per cent rely on four commodi-ties for more than 75 per cent of their export earnings.

The boom of commodity prices seems to have increased dependency, since commodity export represent a higher value of total export of develop-ing countries due to higher prices.

The current commodity boom should provide new possibility to countries to come out of dependency.

Dependency is not only factor contributing to the vulnerability of countries – the capacity to sustain shocks ( called resilience ) also plays an important role. Although resilience and dependency go together, the more dependent a country is, the less resilient it is and thus the more vulnerable it is.

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Primary Commodity Dependence

Source: UNCTAD, Development and Globalization

69

Sustaining Natural Capital

Natural capital contributes enormously to human development and welfare. The term natural capital encompasses the sink functions, that is, air and water as receiving media for human-generated pollution and source functions, that is, production based on forests, fisheries, and mineral ores.

Protecting sink functions is essential for human health. Protecting the productive or source functions is critical to the economic security of many who depend on these re-sources for their livelihoods.

High-quality natural capital contributes to welfare indirectly as an essential part of the sustained production of economic goods and services. It also contributes to welfare di-rectly as people derive enjoyment from pristine surroundings, old growth forests, and clean lakes and rivers in which to swim and fish.

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If we truly care about the future of our planet, we must stop leaving it to “them” out there to solve all the problems. It is up to us to save the world for tomorrow; it’s up to you and me.

-Jane Goodall, Reason for Hope

Human, Physical and Natural Capital and the Economic System

71

HumanKnowledge

Economic Process

HumanWelfare

ProductionBuiltEnvironment

Aesthetics,Life Support

KP KN KH

Source: Barbier (2002)

Sustainable Economic Development

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SustainableDevelopment

Development that meets the needs of the present without compromising the ability of future generations to meet their needs

Welfare does not decline over time

Requires managing and enhancing a portfolio of eco-nomic assets

Total Capital Stock

NaturalCapital

KN

Physical Capital

KP

HumanCapital

KH

Substitutes for KN

Keep essential KN “in-tact” because of:

• Imperfect substitu-

tion

• Irreversible losses

• Uncertainty over

value

“Weak”Sustainabil-ity

All KN is non-essential

“Strong”Sustainability

Some KN is Es-sential

Source: Barbier (2002)

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Definition of Social Capital

Social capital consists of the networks, norms, relationships, values and in-formal sanctions that shape the quantity and co-operative quality of a soci-ety’s social interactions.

Social capital represents the degree of social cohesion which exists in communities. It refers to the processes between people which establish networks, norms and social trust, and facilitate co-ordination and co-opera-tion for mutual benefit.– World Health Organization. Health Promotion Glossary.1998.

Social capital is created from the myriad of everyday interactions between people, and is embodied in such structures as civic and religious groups, family membership, informal community networks, and in norms of voluntar-ism, humanity and trust. The stronger these networks and bonds, the more likely it is that members of a community will co-operate for mutual bene-fit.

Social Capital Defined

Definition of Social Capital - “Connections among people add value to a society in much the same

way that financial capital does. Social capital refers to the collective value of all social networks - or who people know.” (Robert Putnam, Bowling Alone)

Social Capital and Economic Growth

- Social capital generates positive externalities for members of a group, but

not necessarily a country.

- The externalities arise from shared norms and values and their

implications for expectations and behavior.

- These values and norms arise from informal forms of organizations

based on networks and organizations.

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A narrow measurement:Social capital concentrates on the degree of horizontal con-tact between individual in a community.(Putnam, 1993)

Broader Measurement:Social capital includes vertical (power distribution) as well as horizontal associations among members in community.(Coleman, 1988,1990)

Torsvik apply a narrow definition of social capital. He developed micro-foundations for the link be-tween social capital and economic performance.The microfoundations consist of clearly specified mechanisms that can explain why social capital fa-cilitates production.

Measurements in Social Capital

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Difference between HC and SC

Human Capital Social Capital

Focus Individual Agent Relationships

MeasuresDuration of Schooling,

Qualifications

AttitudesMembership, Participation,

Trust Level

OutcomesDirect: Income, Productivity

Indirect: Health, Civic Activity

Social CohesionEconomic Achievement

More Social Capital

Model Linear Network

Rise and Fall of Social Capital

• Robert Putnam has shown most indicators of social capital fol-lowed an inverted U path in the United States during the twenti-eth century.

• During the first two thirds of the century “Americans took a more and more active role in the social and political life of their com-munities”, and they behaved in an increasingly trustworthy way toward one another.

• Then, beginning in the 1960s and 1970s and accelerating in the 1980s and 1990s, an erosion of the stock of American social capital started.

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Nature and Role of Economic Institutions

• Institutions provide “rules of the game” of economic life

• Provide underpinning of a market economy

• Include property rights; contract enforcement

• Can work for improving coordination

• Restricting coercive, fraudulent and anti-competitive behavior

• Providing access to opportunities for the broad population

• Constraining the power of elites, and managing conflict

• Provision of social insurance 78

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References

Christmann, Patrice, “Why EUROPE Needs a Mineral Resources”, Natu-ral Resources Reporting Workshop Institute of Geologists of Ireland, Du-blin, May 14th, 2009.

Gylfason, Thorvaldur, “Natural Resource Abundance and Economic Growth: Some Lessons from Norway and Iceland”, (Google, PPT)

Thomas, Vinod., et al. The Quality of Growth. the World Bank and Oxford University Press. 2000.

UN, Trend of Sustainable Development, 2006.

UNCTAD, Development and Globalization, Facts and Figures, 2008.