Adjusted Net Saving

Adjusted net saving – a proxy for sustainability

Adjusted net saving, (also known as genuine saving), is a sustainability indicator building on the concepts of green national accounts. Adjusted net savings measure the true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution.

How to calculate Adjusted net saving

Adjusted net savings are derived from standard national accounting measures of gross national savings by making four types of adjustments. First, estimates of capital consumption of produced assets are deducted to obtain net national savings. Then current expenditures on education are added to net domestic savings as an appropriate value of investments in human capital (in standard national accounting these expenditures are treated as consumption). Next, estimates of the depletion of a variety of natural resources are deducted to reflect the decline in asset values associated with their extraction and harvest. Estimates of resource depletion are based on the calculation of resource rents. An economic rent represents the excess return to a given factor of production. Rents are derived by taking the difference between world prices and the average unit extraction or harvest costs (including a 'normal' return on capital). Finally, pollution damages are deducted. Many pollution damages are local in their effects, and therefore difficult to estimate without location-specific data. Here we estimate health damages due to urban air pollution. As for global pollution damages, the estimates include damages from carbon dioxide emissions.

A note on negative adjusted net saving rates

Negative adjusted net saving rates imply that total wealth is in decline; policies leading to persistently negative adjusted net savings are policies for unsustainability. In addition to serving as an indicator of sustainability, adjusted net savings has several other advantages as a policy indicator. It presents resource and environmental issues within a framework that finance and development planning ministries can understand. It reinforces the need to boost domestic savings, and hence the need for sound macroeconomic policies. It highlights the fiscal aspects of environment and resource management, since collecting resource royalties and charging pollution taxes are basic ways to both raise development finance and ensure efficient use of the environment. And it makes the growth-environment trade-off quite explicit, since those countries planning to grow today and protect the environment tomorrow will be notable by their depressed rates of adjusted net saving.