Estimate of Natural Capital Wealth for Vietnam

1. Estimate of Natural Capital Wealth for Vietnam Patricia Silva, University of Copenhagen Workshop on “Vietnam’s Natural Resources Wealth” Hanoi, 29 July, 2008

2. Outline • Sustainability and Growth • Measuring Wealth: Theory and Evidence • Natural Capital Wealth Estimates for Vietnam • Policy Applications and Conclusion

3. 1. Sustainability and Growth

4. Traditional vs. Sustainable Growth Concepts • A traditional view of GDP • Increasing output measured by gross national product • A sustainable view of GDP • Output should be adjusted for other important elements: • Depreciation of natural capital (subtract) • Damages caused by pollution (subtract) • Defensive expenditures (subtract) • The result is the maximum sustainable consumption • Sustainable growth is growth that does not affect future growth

5. Sustainable Growth and Welfare • A development path is sustainable if social welfare does not decline along the path • Future generation are allowed a level of welfare at least as high as current generations’ • Social welfare is determined by the level of capital • Produced capital • Natural capital • Human, social, and institutional capital • Non-decreasing welfare requires non-decreasing capital

6. Key Elements of Sustainable Growth • Invest in produced capital • Invest in human capital: health and education programs • Manage natural capital • Allow sustainability of renewable resources • Invest rents from exhaustible resources • Manage pollution through regulations and incentives

7. Key Elements of Sustainable Growth • Sustainability = non declining wealth • Natural capital is an important share of wealth in developing countries • Sustainability requires that depletion of natural capital be balanced by investment in other forms of capital

8. 2. Measuring Wealth: Theory and Evidence

9. Why Measure Wealth? • A useful conceptual framework: development as a process of managing a portfolio of assets • A useful measure of sustainability • A means to integrate environment and natural resources issues into financial and economic planning

10. Wealth Estimation Method • Total wealth – corresponds to the present value of future consumption • Produced capital – includes structures, equipment, machinery and urban land. It is obtained from historical investment data • Natural capital – the value of the stock of natural capital is the present value of net rents from natural resources estimated using international prices and local costs • Intangible capital – includes human capital, quality of institutions and governance. It is estimated as a residual

11. Wealth Estimation Methods • Capital value can be estimated in two ways: • The sum of additions (investment) and subtractions (depreciation) over time made to an initial stock • The present value of future earnings over the capital stock • Method 2 is particularly appropriate to estimate natural capital, where: Earnings = Rents = Price – Marginal Cost

13. Wealth across Income Levels • Intangible capital is the largest share of wealth • Natural capital share declines with income • In low income countries, natural capital is more important than produced capital Source: World Bank (2006) Where is the Wealth of Nations? World Bank: Washington DC

14. Importance of Land Resources

15. Composition of Wealth Across East Asia and the Pacific Source: World Bank (2006) Where is the Wealth of Nations? World Bank: Washington DC

16. 3. Natural Wealth Estimates for Vietnam

17. Vietnam’s Natural Capital— An Overview of Results

18. Energy and Mineral Wealth • 3 energy sources (oil, gas, hard coal) and 7 minerals (chrome, copper, iron ore, lead, nickel, phosphate rock, tin and zinc) • Growth rate of rent is assumed to be constant (nearly 3% growth) • The exhaustion time is estimated to be on average 25 years (which likely to be an underestimate of the exhaustion time for some resources, such as coal)

19. Energy and Mineral Wealth, (cont’d) • Energy resources account for nearly all mineral wealth—particularly oil (80%) • Uncertainty of estimates • Cost of extraction often not available • Reserves unknown, new discoveries

20. Agriculture Land Wealth • Country level data on land values not available and affected by price distortions • Agriculture land wealth is based on the present discounted value of land rents • Land rents • International price of crops minus local cost of production • Crop yields are assumed to grow at a constant annual rate of 1.94% for the period 2005-2025 and stabilize thereafter

21. Agriculture Land Wealth (cont’d) • Representative crops: • 2 cereals (maize, rice) • 4 fruits (bananas, oranges, pineapple, mango) • 2 vegetable crops (peppers, sweet potato) • 2 beverage crops (coffee, tea) • Other (rubber, cassava) • Data: • Vietnamese statistics on total output production and area cultivated for each type of crop • International export price of crop (FAO) • Rental rate—estimated from local production cost for some crops, while others come from sector studies in literature • Wealth = $1, 134 per capita

22. Agriculture Estimates

23. Pasture Land Wealth • Same methodology as agriculture crop land • Representative products: • Beef, buffalo meat, pig meat, chicken, and fresh milk • Growth rate of 2.95% a year is assumed • Wealth = $486 per capita

24. Vietnam’s Forest Resources Source: Global Forest Resource Assessment 2005, FAO: Rome

25. Vietnam’s Timber Production

26. Timber Wealth - Assumptions • Necessary to distinguish between forest available and not available for wood supply • Assumed that 50% of natural productive forest area and 100% of plantation forest area is available for wood supply • Time to exhaustion • Estimated as forest volume divided by the difference between production and increment • At current extraction rates, forest resources exhausted in about 20 years in Vietnam

27. Timber Wealth Estimates- Data and Assumptions

28. Timber Wealth Estimates-Results

29. Non-Timber Forest Wealth • Assumed that only 50% of protective forest area is accessible for NTFB • Based on Dixon and Lampietti (1995), returns per hectare per year from NTFP: • Developing countries: $145 • Developed countries: $190

30. Protected Areas Wealth • Nearly 2 million ha forest area for conservation of biodiversity • Benefits ranging from recreational values to existence • No comprehensive measure of WTP for protected areas exist • Fall-back is a quasi opportunity cost: • Lower of per-hectare return to pasture land and cropland

31. NTFP wealth - $87 PA wealth - $196 2 million ha agriculture land value (capitalized value of land rents between ~ $8,000 to 10,000/ha) NTFP and PA Wealth

32. 4. Policy Applications and Conclusions

33. Natural Resource Revenue Management (Norway) Oil and gas – Resource rents and taxes (1985-1996) Significant amounts of rents generated by oil industry but with high fluctuations Forestry – Resource rents and taxes (1985-1995) Forests generate substantial rents – but rents accrue to producers (which are also subsidized)

34. Some Conclusions • In low income countries, natural capital is about 25% of wealth—or twice the share of produced capital – managing natural resources matters • Natural resources are a basis of subsistence • Natural resources – especially commercial ones – are a source of development finance • But, for growth to be sustainable rents should be invested in some other form of capital • The value of natural capital per capita (at world prices) actually rises with income – maintaining or increasing the value of natural capital is a realistic policy goal

35. Some Conclusions (2) • Agricultural land accounts a large share of natural capital in Vietnam (+50%) – maintaining soil quality and boosting its productivity is a priority • Potential exists to further increase wealth generated from forest resources — increasing forest area as well as managing productive forest more efficiently are important