From economic growth to sustainable development lessons for vietnam

From that point of view, by using data of 90 countries, the author hopes to find out the relationship between sustainable development and other determinants such as GDP growth, export of

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FROM ECONOMIC GROWTH TO SUSTAINABLE DEVELOPMENT:

LESSONS FOR VIETNAM

BY

NGUYEN THI HONG

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, NOVEMBER 2012

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FROM ECONOMIC GROWTH TO SUSTAINABLE DEVELOPMENT:

LESSONS FOR VIETNAM

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

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DECLARATION

I would like to declare that this thesis:" From economic growth to sustainable development: Lessons for Vietnam" is original I ensure that this paper has not been submitted anywhere for the award of any degree

This thesis was completed with big support from my supervisors All source of data and information have been fully referenced

NGUYEN THI HONG

MDE16

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ACKNOWLEGDEMENT

I would like to express my greatest gratitude to respectful supervisors, Associate Professors – Dr PHAM HOANG VAN, Baylor University and Dr NGUYEN TRONG HOAI, Vice President of UEH They already helped and supported me many interesting courses, especially valuable advice, guidance and inspiration for me finish this study on time

I also want to express my thanks to all Professor of the MDE Program during the past two years (2009-2011), my friends of MDE16, UEH administrative staff at Economic Development Faculty, who supported many useful documents and materials I cannot forget the support from my big family all the time I followed this program

At last but not the least, I am so sorry and would like to share my condolences when Professor KAREL JANSEN - who had great contributions to the program - passed away That was really a big loss for all of us

Best regards

NGUYEN THI HONG

MDE 16

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ABSTRACT

In the scenes of strong economic development all over the world during some decades ago, the new problems that are happening everywhere is the consequence of progress can be attract more concerns of economists That is the trade-off of economic achievements and the degradation of environment, the exploitation of natural resources, the global warming, the rise

of sea level and so on The new concept about development - sustainable development - now becomes familiar It is a new economic approach to express the development which care not only economic growth but also reservation of the natural resources, the environmental pollution, the investment on education

From that point of view, by using data of 90 countries, the author hopes to find out the relationship between sustainable development and other determinants such as GDP growth, export of natural resources and agricultural products, urban population growth, Human Development Index, corruption impact and so on I strongly believe that the discovery of these relationships can provide some valuable lessons for development progress for developing countries and Vietnam

Key words: sustainable development, economic growth, adjusted net savings

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TABLE OF CONTENT

DECLARATION i

ACKNOWLEGDEMENT ii

ABSTRACT iii

TABLE OF CONTENT iv

LIST OF ABBREVIATIONS vi

LIST OF TABLES vii

LIST OF FIGURES, GRAPHS viii

CHAPTER I 1

INTRODUCTION 1

1.1Research background 1

1.2 Statement of problem 2

1.3 Research objectives 3

1.4 Research questions 4

1.5Research methodology 4

1.6 Structure of thesis 5

CHAPTER II 6

LITERATURE REVIEW FOR SUSTAINABLE DEVELOPMENT 6

2.1 Concepts of economic growth, economic development and sustainable development 6

2.2 Approaches of sustainable development 8

2.3 Objectives and significance of sustainable development 10

2.4 Indicators of sustainable development 11

2.5 Linkage of various determinants of sustainable development 14

2.6 Benefits and drawbacks of adjusted net savings 15

2.7 Empirical Models 16

2.8 Empirical studies relating to sustainable development 22

2.10 Chapter remarks 30

CHAPTER III 32

RESEARCH METHODOLOGY AND DATA COLLECTION 32

3.1 Econometric techniques 32

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3.2 Data collection 35

3.3 Data analysis 35

3.4 Chapter remarks 36

CHAPTER IV 37

RESEARCH RESULTS 37

4.1 Descriptive statistics 37

4.2 Relationship between adjusted net saving and other factors 41

4.3 Empirical analysis 44

4.4 Chapter remarks 53

CHAPTER V 55

SUSTAINABLE DEVELOPMENT IN VIETNAM 55

CHAPTER VI 58

CONCLUSIONS AND RECOMMENDATIONS 58

6.1 Main findings 58

6.3 Limitations of thesis title 61

6.4 Further research 61

REFERENCES 62

APPENDIX

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LIST OF ABBREVIATIONS

ADB Asian Development Bank

IMF International Monetary Bank

NGO Non Governmental Organization

CO2 Carbon Dioxide

CPI Corruption Perception Index

ELF Ethno-Linguistic Fractionalization

GDP Gross Domestic Product

GDPPC Gross Domestic Product per capita

GNI Gross National Income

HCMC Ho Chi Minh City

HDI Human Development Index

MPI Ministry of Planning and Investment

OECD The Organization for Economic Cooperation and Development

OLS Ordinary Least Squares

TFP Total Factor Productivity

TSLS Two Stage Least Squares

UN The United Nations

UNCED The United Nations Conference on Environment and Development

UNDP The United Nations Development Program

WTO World Trade Organization

WCED World Commission on Environment and Development

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LIST OF TABLES

Table 2.1: Expectation the influence of determinants on adjusted net savings 22

Table 2.2: Summary of empirical studies relating to sustainable development 27

Table 4.1: Descriptive statistics 39

Table 4.2: Covariance and correlation 40

Table 4.3: Regression adjusted net savings and GDP growth rates by OLS 44

Table 4.4: Regression adjusted net savings and GDP growth rates by TSLS 46

Table 4.5: Regression adjusted net savings and GDP per capita by OLS 47

Table 4.6: Regression adjusted net savings and GDP per capita by TSLS 48

Table 4.7: Regression adjusted net savings on Export of agricultural raw products 50

Table 4.8: Regression adjusted net savings on Export of natural resources 51

Table 4.9: Regression adjusted net savings with GDP growth rates in developing countries 52

Table 4.10: Summary results 54

Table 5.1: Vietnam Data 55

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LIST OF FIGURES, GRAPHS

Figure 2.1: Linkage of various determiants of sudtainable development……….15 Graph 2.1: How to calculate adjusted net savings 12 Graph 2.1: Conceptual framework 30 Graph 4.1: Relationship between Adjusted net savings and GDP growths (1996-2010) 41 Graph 4.2: Relationship between Adjusted net savings and and GDPPC2010 42 Graph 4.3: Relationship between Adjusted net savings and export of agricultural raw products

in period 1996-2010 42 Graph 4.4: Relationship between Adjusted net saving and and export of natural resources in period 1996-2010 43 Graph 4.5: Relationship between Adjusted net savings and GDP growth of developing countries in period 1996-2010 44

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CHAPTER I INTRODUCTION

1.1 Research background

Economic growth affects national wealth or income per capita by increasing its Gross Domestic Production or Gross National Income Research about economic growth and its influences on environment and society always attract interest from economists all over the world Moreover, some targets of economic growth are directly to the sustainable use of these natural resources and environmental protection It means that economic growth is not at all; many countries are saving of their scare natural resources than in some past decades for future generations instead of the exploiting them and not paying any attention to these environmental degradation

Since the first appearance in the Brundtland report at World Commission on Environment and Development in 1987, the concept of sustainable development has become popular in many countries.1 The relationship between economic growth and sustainable development has consideration from economists Expressing sustainable development by genuine saving rates or adjusted net savings, many studies found that sustainable development has a consistent relationship with economic growth

Hamilton et al (1999) measured genuine saving rates of countries both developing and developed countries These rates were calculated by combination of different factors as gross savings, fixed capitals, educational expenditures and polluted emissions They found that genuine saving rates were positive values in high-income countries and negative values

in developing countries Negative rates of genuine savings would lead to declining of being.2

2

Atkinson et al (2003) studied the relationship between natural resource abundance and growth rate of GDP per capita The result shows a negative and significant relationship between natural resource abundance and growth rate of GDP per capita 3

By measuring genuine saving of Taiwan and United Kingdom- one developed country and one industrial country in Asia, Grace et al (2004) found that low annual GDP growth rate

of United Kingdom corresponded low rate of genuine saving ratio to GDP 4

A study of genuine savings by Dietz et al (2007), genuine saving rates of rich and poor natural resource countries and some factors affecting them They found that rich resource countries had lower genuine saving rates than poor resource countries Moreover, this negative effect will decrease when institutional quality improves

Therefore, economic growth affects significantly to genuine saving rate of a nation Many other factors such as institutional quality, abundance of resources affected genuine saving rates at different levels Genuine saving rates depend largely on economic growth rate; developed countries usually have higher genuine saving rates than developing countries

1.2 Statement of problem

Economic growth rates of Vietnam in some decades ago were very impressive, especially after VIETNAM implemented its “Doi Moi” policy in 1986 Since that time, VIETNAM has followed these new economic strategies, enhancing the market openness with international corporations VIETNAM has become one of the economy that have high economic growth rates in Asia Economic growth has given chances to improve standards of living However, after nearly 30 years of the “Doi moi” stage, VIETNAM is still one of these poorest countries in the world with income per capita was only 723$US in 2010 though the average rate of economic growth in Vietnam was about 7.07% over the period of 1996-2010

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Comparing Vietnam with some other countries such as Singapore and the Netherlands

in the period from 1996 to 2010, we can see that an annual average growth rate of GDP in Singapore was 5.87%, GDP per capita in 2010 was US$32,641 While the annual average GDP growth of the Netherlands was only 2.2%, GDP per capita in 2010 is US$26,553 Singapore and Netherlands are countries with high income while Vietnam is in a low-middle-income group 6 The problem of nations with higher economic growth rates but lower income per capita happens all over the world Is there a paradox in economic growth and development?

In this context, a new concept - sustainable development or genuine saving – brings

a new look for evaluating the quality of growth or the wealth of a nation By building on the basis of gross saving and calculating many other factors which connect to fixed capital, education, environment and natural resources, it is more useful and valuable than these traditional indicators Since 1996, the World Bank has used this indicator under the name

“adjusted net saving” in World Development Indicators It also presents in the Little Green Data Book from 2000

Exploring the relationship between economic growth and other aspects of life such as society, environment, natural resources, the impact of consumption of current generation with the future generations still has been lacking until now, especially researches about the impact

of economic growth on sustainable development in Vietnam

1.3 Research objectives

This paper will analyze the impact of economic growth and other factors on sustainable development, especially sustainable development in Vietnam It uses data of 90 nations from the World Bank source over the period from 1996 to 2010

These main objectives will be as follows:

1.3.1 Evaluating the significance of economic growth on sustainable development

6 http://data.worldbank.org/data-catalog/world-development-indicators

1.3.5 Finding valuable lessons for sustainable development in Vietnam

1.4 Research questions

From these above objectives, this paper will find answers to these questions:

1.4.1 Will faster growth lead to sustainable development?

1.4.2 Will wealthier economies be more sustainable than poorer economies?

1.4.3 Does the increased export of raw agricultural products lead to decrease of sustainable development?

1.4.4 Does the increased export of natural resource lead to decrease of sustainable development?

1.4.5 Will faster growth lead to sustainable development in developing countries? 1.4.6 Which lessons should Vietnam could apply to maintain the state of sustainable development?

1.5 Research methodology

This paper will apply both qualitative and quantitative methods for estimating the impact

of economic growth such as GDP growth on sustainable development by OLS estimation From models which are built up base on the empirical studies a long time ago, the paper will

be set up hypotheses and test the validity of proposed hypotheses by econometric techniques For solving the problems of endogeneity between sustainable development and GDP growth, the paper will apply TSLS estimation This estimation is used to test whether or not there are reverse causation between GDP growth and sustainable development It will be

21 in Vietnam The end chapter will summaries all main findings and suggests some available policies It also shows some limitations of this research topic and suggest some further possibilities for future

7 Dimitrios Asteriou and Stephen G Hall, Applied Econometrics a modern approach, revised edition, Palgrave Macmillan, 2007

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CHAPTER II LITERATURE REVIEW FOR SUSTAINABLE DEVELOPMENT

This chapter supplies review literature that relates to the economic growth and sustainable development It also mentions their significance, methods of the measurement, empirical studies over the world some past decades From that, I will suggest appropriate models for measuring the relationship between economic growth and sustainable development

2.1 Concepts of economic growth, economic development and sustainable development 2.1.1 Economic growth

Economic growth is quantitative change or expansion in a country's economy Economic growth is conventionally measured as the percentage increase in GDP or GNP during one year (World Bank)

Traditionally, economists have made little distinction between economic growth and economic development Economic growth is necessary but it is not sufficient condition for economic development Moreover, GDP is still a narrow measure of economic welfare It does not consider to the importance of other aspects Those are more leisure time, access to health and education, environmental protection, freedom and social justice

2.1.2 Economic development

While economic growth usually refers to increase in a country's production or income per capita, economic development mentions to broadly scope From the point of view of E Wayne - Kansas State University- economic development refers to economic growth accompanied by changes in output distribution and economic structure He stressed that the improvement in material well-being of the poorer half of the population, a decline in agriculture's share of GNI and corresponding in the increase in the GNP share of industry and service, an increase in education and skill of labor force and substantial technical advances originating within the country.8

8 E Wayne Nafziger, Economic Development, fourth edition, Cambridge University Press, 2006

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So economic development is qualitative change in a country's economy in connection with technological and social progress Main indicator of economic development is increasing GNP per capita or GDP per capita, reflecting an increase in economic productivity and average material well being of a country's population

Three main objectives of economic development include:

(1) To increase the ability and widen the distribution of basic-life sustaining goods; (2) To raise the level of livings;

(3)To expand the range of economics and social choices

So, there are many indexes to measure and evaluate the development of one nation It depends on development approaches, for example, HDI index for measuring the development

of humans and GINI index for measuring inequality in distribution of income and so on

The United Nations Development Program (UNDP) ranks the development of a nation

by Human Development Index in yearly reports This index calculates the human development by combining three factors: income, life expectancy and education

The GINI index measures the income distribution between the rich and total income

of a nation It stresses the equality of income distribution This problem happens within a country and from country to country It also occurs in top developed countries

This definition expressed strongly that the current consumption of resources for economic development should not affect future generations This definition gives a general

9 The United Nations, Report of the World Commission on Environment and Development: Our Common Future, 1987, p.15

The Organization for Economic Cooperation and Development – OECD defines that: “ sustainable development as development path along which the maximization of human well-being for today ‘s generations does not lead to declines in future well-being” 11

The United Nations (2008) stated that sustainable development should ensure the decline of wealth of a nation over time The development of a nation is based on many kinds

non-of stocks for production such as fixed capital, human capital, social capital and natural capital

so it should compensate for a decline of these capital stocks The UN group proposed some small set of indicators for international comparison They found that this concept was difficult

to define and measure with precision.12

2.2 Approaches of sustainable development

There are two possibilities for sustaining growth First, there is insufficient substitutability between reproducible capital and nonrenewable resources so that economic growth can be sustained while the nonrenewable resource stocks decline continuously Second, technological changes will enable society to shift from reliance on non-renewable resource to another and finally to a new renewable resource

Two approaches regarding sustainability refer to the ecological and the neoclassical paradigms In other words, that is strong or weak sustainability Weak and strong sustainability are terms of whether reproducible and natural capital will keep intact together

or separately The degree of substitutability between natural capital and reproduced capital is the subject of considerable debate

10 Pezzey J (1992), “Sustainable Development concepts.” World Bank Environment paper Number 2

11 OECD, 2001, “Sustainable Development: Critical issues”, p 2

12 The United Nations, 2008, “Measuring Sustainable Development”

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Natural capital means the natural resources such as coal, oil, forest, land and reproduced capital means human capital or human made capital Because human made capital can substitute for natural capital to some extent reproducible capital, it can reduce society's reliance on natural resources by increasing the usefulness of services provided by non renewable and renewable stocks

Weak sustainability requires a high degree of substitutability between reproducible and natural capital According to this approach, more valuable human made capital will replace the natural capital and the value of aggregate stock will increase overtime

Strong sustainability stresses the substitutability between natural and reproduced capital It is difficult to ensure that future economic opportunities are maintained without imposing some conditions on the depletion of natural capital

2.2.1 Weak sustainability: the neoclassical paradigm

Weak sustainability refers to development which is not diminishing from one generation to another It comes from ideas of economists rather than ecologists This means a constraint on growth which Pezzey (1992) pointed out it as non-declining welfare over time

In the case of reduction of welfare, he called it as “survivability”

Based on the idea of unlimited substitution between man-made and natural capital and Pezzey’s definition on sustainable development, Pearce and Atkinson (1997) suggested formula for measure sustainable development as follows:

Z= S/Y-DM/Y-DN/Y (2-1)

In this formula, Z is an index of sustainable development, DM is depreciation of made capital, DM/Y is a rate of depreciation of man-made capital, DN is depreciation of natural capital, DN/Y is a rate of depreciation of natural capital and S is national savings, S/Y is saving rates.13

13 Pearce D., Atkinson G., Hamilton K., Dubourg R., Young C and Munasinghe M (1997), Measuring Sustainable Development: Macroeconomics and the Environment, Cheltenham: Edward Elgar Publishing Ltd., United Kingdom

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From above formula, sustainable development is weak if Z is greater than zero and vice versa It means that if saving rates are higher depreciation both natural and man-made capital will lead to sustainable development

2.2.3 Strong sustainability: the ecological paradigm

In contrast with weak sustainability, strong sustainability stresses mainly on the substitution limitedly between man-made and natural capital A study by Herman Daly and John Cobb (1999) favored strong sustainability for several reasons First reason is the relevance of some natural resources for production Their loss or reduction would constitute

a catastrophic event Second, with some production processes where natural capital is not yet

an essential ingredient, substitutability declines and resource stocks are depleted Finally, they argued that the elasticity of substitution between natural and reproducible capital is zero because of the unique character of some form of natural capital The implication is that certain stocks of so-called critical natural capital should be conserved regardless of the opportunity cost of so doing 14

They underestimated the role of prices and technological changes because of market imperfections brought about by a preponderance of large companies or State-own companies

So prices are not imperfect signal of scarcity of resources and prices do not capture the interest

of future generations Because technological changes happen overtime, it will lower prices in the future Further, the ecological view is always pessimistic about the contribution of technological change in the future for solving environmental problems

2.3 Objectives and significance of sustainable development

In 1992, Earth Summit at the United Nations conference on Environment and Development (UNCED) was held in Rio de Janerio, Brazil The international community adopted Agenda 21 which was “a landmark achievement in integrating environmental, economic and social concerns into a single policy framework” In Agenda 21, there are many recommendations with detailed proposals for many nations around the world For example,

14 Daly Herman, John Cobb (1999), “For the common good.” Beacon Press, Boston, MA

 Integration of environment and development at the international level;

 Adoption of environment and development targets to revitalize and provide focus to the Rio process;

 Strong international monitoring

According to this summit, most important challenges which the world faces today include:

 Alleviating poverty;

 Increasing ability to meet the challenges of globalization;

 Reducing waste and over-reliance on natural resources;

 Ensuring people have access to the energy sources needed;

 Reducing environment-related health problems;

 Improving access to clean water to raise children and maintain their livelihoods for children

2.4 Indicators of sustainable development

2.4.1 Adjusted net savings or genuine savings

Pearce et al (1997) and Hamilton et al (1999) introduced a new indicator for evaluating sustainable development Following the guides of the United Nations in 1993, they calculated the cost for restoring environment to a beginning state They defined it as the sum

of net investment in produced assets and these changes in the various stocks of natural resources and pollutants

15 The United Nations, Earth Summit Agenda 21, Program of Action from Rio, 1992

16 The United Nations, Johannesburg Summit 2002, Taking Actions for Earth Future, 2002

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Their studies focused mainly on the depletion of natural resource and carbon dioxide emissions in time series data for 1970 -1993 They found that many countries have negative rates of genuine savings The problem here is this method not account for human capital They added educational expenditure as value added in genuine savings, and used this formula for calculating genuine savings of many developing countries They defined genuine savings

as follows:

Adjusted net savings or Genuine Savings = Gross Domestic Savings – Consumption of Fixed Capital (Depreciation) + Education Expenditure – Depletion of Nonrenewable Natural

Graph 2.1 : How to calculate adjusted net savings

Source: World Bank Nowadays, this indicator is a proxy of sustainable development in many countries all over the world One study of Hamilton et al (1999) which based on this formula showed that adjusted net savings in high income are positive while this indicator is negative in developing countries and negative rates lead to decline well- being

2.4.2 Index of Sustainable Economic Welfare or ISEW

Daly et al (1999) introduced an index to measure the relationship between welfare and depletion of environment It is an Index of Sustainable Economic Welfare or ISEW This index distinguishes between pollution (water, air and noise), loss of land (wet land, farmland) and long-term environment by comparing conventional national income account and taking factors of environmental damages and natural resource into account We can see this index in many studies (Lawn, 2003; Clarke 2005)

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2.4.3 Genuine Process Indicators or GPI

There is another indicator for measuring sustainable development, for example, Genuine Process Indicator or GPI – one version of ISEW This indicator assesses the economic progress of conventional measure like GDP From GDP, they got value of GPI by adjusting the value of some factors such as the effects of income distribution, the depletion of social and natural capital and costs of mobility and pollution (Hamilton C 1999; Robert et al 2004)

2.4.4 Environmental Sustainability Index or ESI

Yale University used data of 140 countries from the World Bank for calculating Environmental Sustainability Index or ESI 2005 It is a composite profile of national environmental stewardship based on a compilation of 21 indicators These are indicators for measuring pollution of air and water quality, environmental sustainability, biodiversity and ecosystem The fundamental measurement of environmental sustainability relates to the endowed environmental carrying capacity and eco-efficiency These sources cannot change unless a society changes the way it produces and consumes (Lee et al 2005)

The pollution category includes 2 indicators: Air Quality (SYS_AIR) and Water Quality (SYS_WQL) The category for eco-efficiency related measures includes 9 indicators: Biodiversity (SYS_BIO), Land (SYS_LAN), Reducing Air Pollution (STR_AIR), Reducing Ecosystem Stress (STR_ECO), Reducing Waste and Consumption Pressures (STR_WAS), Reducing Water Stress (STR_WAT) Natural resource Management (STR_NRM), Energy Efficiency (CAP_EFF), and Greenhouse Gas Emissions (GLO_GHG)

2.4.5 Inclusive wealth index or IWI

Dasgupta (2007) suggested the method to measure sustainable development by using the concept inclusive wealth He noted an economy would enjoy sustainable development

if and only if, relative to its population, inclusive investment is not negative An economy’s inclusive wealth is the shadow value of its productive base, and inclusive investment is the shadow value of the net change in its productive base He considered the process of creating economic performance by combining many other indexes such as Human Development Index, total fertility rate, adult literacy (percent), female literacy (percent), index of government

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corruption, life expectancy at birth (years), under-5 mortality (per 1,000), rural population (percent of total population)

2.5 Linkage of various determinants of sustainable development

In general, economic growth is only described by growth of GDP or GNI and economic development is mentioned by HDI which this index combines three factors: income, education and life expectancy Sustainable development depicts a broader scale of development than economic growth and economic development when it combines three important factors which relate to economics, environment and society According to point of view of Harris et al (2001), they stated that sustainable development should mention three activities as follows:

Economic activities contribute to the growth of economic welfare and income of a nation; they ensure to the creation of jobs, competitiveness in trade, wealth of a nation and income Environmental activities conserve the environment and reduce consumption of natural resources (both nonrenewable and renewable resources) for these economic purposes: maintenance of biodiversity, atmospheric stability, reduction CO2 emission and control polluted wastewater

Social activities create fairness in distribution of these welfare opportunities for a community; including all social services such as health care programs, education, gender equity and accountability of politics

So sustainable development achieves when a nation combines successfully three above activities at the same time In other words, it is a bridge which could link economic determinants (income, welfare), social determinants (education expenditure, health care, gender equity), environmental and natural determinants (emission of polluted wastes, conservation of natural resources) Of course, this concept has some definitely limit but until now, it is a sole concept which mentions most important accounts of a national development

Hamilton et al (1999) found that there was a relationship between sustainable development and income of a nation Genuine saving rate in high- income countries is positive while this indicator is negative in developing countries Negative rate of genuine saving leads

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2.6.2 Drawbacks

Of course, some benefits of sustainable development are obviously, and this indicator shows several drawbacks Its component lacks many factors which affect directly or indirectly the development of a country As we know, formula of adjusted net savings which the World Bank introduced since 1997 are not fully reflect the environmental and social activities though these factors significantly impact to development of countries

Lele (1991) expressed that these weaknesses of sustainable development in his research as two points: first, the incomplete perception of the problem of poverty and environmental degradation and second, the confusion about the role of economic growth and about the concepts of sustainability and participations That will lead to inadequacies and contradictions in policy making which are the demonstrated in the context of international trade, agriculture and forestry

J Ram (2005) showed that formula of adjusted net savings is imperfect measurement both conceptual and empirical characteristics and suggested that a global approach need to find another sustainability issues, and natural capital is not corporate in national accounting

2.7 Empirical Models

2.7.1 Model specifications

Relating to determinants of the adjusted net savings in developing countries, Peter Hess (2010) estimated the determinants of sustainable development or the adjusted net saving by using a cross-section data of developing economies for 2001-2006 He used same determinants for estimating gross national savings He incorporated two kinds of savings including gross national savings and adjusted net savings Adjusted net savings equal gross savings minus fixed capital so influences on the gross savings will be important for the adjusted net savings.17 He captured economic development by Human Development Index or HDI The saving ability of a nation depends on the structure of the population or the age dependency ratio Many developing countries have a less developed financial system than

17 Peter Hess, Determinants of the adjusted net saving rate in developing economies, International Review of Applied Economics, Vol 24, No 5, September 2010, 591–608

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those in developed countries The economic activity usually happens in the informal sectors

so the formalization of the economy will measure the financial deepening or the ratio of money supply to national income

The adjusted net saving rates depend on natural resources because income from these resources such as the export of fuels, ores and metals contribute to the savings of a nation so the depletion of natural resource will decrease the adjusted net savings

From these arguments, Hess showed the general equation for the adjusted net saving rates

as follows:

With the gross national saving rates, the export income of natural resources will contribute to the government revenues and public savings He used the same determinants for estimating the gross saving rate of a nation as follows:

Where:

ASY= adjusted net saving rate for 2000-2006

HDI=Human Development Index for 2000

GYP=average growth rate of real GDP per capita

APL= average share of population of ages 15-64 for 2000 and 2006

FIN=ratio of liquid liabilities to GDP in 2000

XR = share of fuels, ores, and metals in merchandise exports in 2000

SY = average gross national saving rate for 2001–2006

GX = average annual growth rate in exports of goods and services for 2000–2006 FDY = foreign direct investment as a share of GDP in 2000

Hess found that the HDI, the percentage of population of prime labor force age, the share of natural resources in export and a measure of financial development are important variables but economic growth did not a significant explanatory variable With the gross national savings, the change in share of population aged 15 to 64 along with economic growth rate are significant determinants

By using the reduced form equation for estimating the economic growth, with the assumption that savings will flow to investment and measure savings or investment rates of a nation will be used to measure physical capital formation, Hess also estimated the economic

18

growth by using adjusted net saving as an indicator of net capital formation Of course, adjusted net saving does incorporate human capital formation and natural resource depletion incompletely He used HDI, APL, real growth rate of export of goods and services, FDI or share of FDI in national output as determinants for estimating the economic growth with the equation below:

The result shows that the saving rate is a not statistically significant on the average annual change in growth rate in real GDP per capita APL and GX are statistically significant while HDI and FDY are not explanatory variables

Dietz et al (2007) investigated whether the interaction between resource abundance and indicator of institutional quality Three indicators of institutional quality are lack of corruption, bureaucratic and rule of law18 From the result of Atkinson and Hamilton (2003), the positive relationship between resource abundance and general institutional quality on gross investment and savings, they test whether the negative effect of resource abundance on genuine savings is explained by policy failure and specify a model to explain genuine savings based on the interaction between natural resource endowment and institutional quality.19

Their model used data of 115 countries within 18 years in reduced form In many researches, these factors such as per capita income, economic growth, age dependency and urbanization appear to have robust and significant effect on gross saving They estimated two models of gross savings and adjusted net saving rates with other determinants as follows: GrossSR i,t=α+β1lnY i,t+β2Growthi,t-1+β3Agei,t+β4Urbani,t +β5Insti,t+β6Rsi,t+β7Insti,txRs

19

age, urbanization, investment and resource rent They found that rich resource countries have lower genuine savings than poor resource countries and institution failure will depress genuine savings The negative effect of resource abundance on genuine savings will decrease when corruption reduces

2.7.2 Suggested model

From main findings of Hess (2010) and Grace et al (2004), models for finding these answers about the relationship between economic growth with adjusted net savings with some determinants as GDPGR or GDPPC, HDI, MS AGE, UBGR and CPI are as follows:

Model 1: Faster growth of economics will lead to sustainable development

ANSi=α0+α1GDPGRi+α2HDIi+α3MSi+α4XRi+α5AGEi+α6UBGRi+α7CPIi+εi (2-8)

Where i denotes for country i, ε is residual

Models 2: Wealthier economies will be more sustainable than poorer economies

ANSi=β0+ β 1Lg(GDPPCi)+ β 2UBGRi+ β 3AGEi+ β 4XRi+ β 5 CPIi+μi (2-9)

Another findings of Dietz et al (2007) and Atkinson et al (2003) about the relationship between adjusted net savings and natural resources, they found the negative relationship between them so I set up two new models which relate to export of raw agricultural products and ores and metals as follows:

Model 3: Higher rate of agricultural export will be lessen sustainable development ANSi=γ0+ γ 1AGRIi+ γ 2UBGRi+ γ 3MSi+ γ 4XRi+ γ 5AGEi+ γ 6CPIi+ψi (2-10)

Model 4: Higher rate of ores and metals export will be lessen sustainable development ANSi=δ0+ δ 1ONMi+ δ 2UBGRi+ δ 3MSi+ δ 4XRi+ δ 5AGEi+ δ 6CPIi+φi (2-11) From the finding of Hess (2010), Hamilton et al (1999) about determinants which can affect

to adjusted net savings in developing countries, I set up one more model as model 1 with data

of developing countries only

Model 5: Faster growth of economics will lead to sustainable development in developing countries

ANSi=α0+α1GDPGRi+α2HDIi+α3MSi+α4XRi+ α5AGEi+α6UBGRi+α7CPIi+εi (2-12)

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Where i denotes for country i, ε is residual

Determinants that will be used for estimating models include:

Adjusted net saving (ANS) is an indicator which measure the true saving rates after taking into account investment in human capital (education expenditure), depletion of natural resources (energy depletion, mineral depletion, forest depletion) and damages caused by pollution (carbon dioxide damage, and particulate emissions damage)

GDP growth (GDPGR): Annual percentage growth rate of GDP at market prices based on constant local currency Aggregates are based on constant 2000 U.S dollars GDP is the sum

of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources

GDP per capita (GDPPC) is gross domestic product divided by midyear population GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources

Human Development Index for 2010 (HDI) is a composite statistic of life expectancy, education, and income indices to rank countries into four tiers of human development, score from 0- 1, higher is more human development The author expect that this factor will cause positive impact on adjusted net savings because this indicator measure the development of nation, high HDI means to high income, high education These factors are important for creating high perception in manner of consumption, production, high awareness in protection

of natural resources and environment

Average age dependency ratios or AGE is the ratio of nonworking population -people under

15 or over 65- to the working population - people 15-64 This factor can cause negative impact

on adjusted net savings because high rate of it means the high rate of non- working people of economy, this will lead to low productivity for a nation, high burden in society when Government needs to consume more for social welfare, for health care program, for education why the direct labor force contributes low for economy, especially in developing countries

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Corruption perception index or CPI is an aggregate indicator that ranks countries in terms

of degree to which corruption is perceived to exist among public officials and politicians It is

a composite index drawing on corruption -related data by a variety of independent and reputable institutions It has score from 0- 10, higher score means more perception about corruption Considering the impact in many developing countries then comparing with developed countries, developed countries usually have higher index than developing countries So the author expect that this index will cause positive impact on adjusted net savings or sustainable development

Average annual growth rate in money and quasi money (MS) comprise the sum of currency outside banks, demand deposits other than those of the central government, and the time, savings, and foreign currency deposits of resident sectors other than the central government The change in the money supply is measured as the difference in end-of-year totals relative to the level of M2 in the preceding year In developed countries, they have more developed financial system which service for multiple purposes in transfer

Natural resources export is sum of export of fuels, ores and metals, measure as a share of merchandise exports This activity usually happen in developing countries, it requires the exploitation of natural resources in raw state then export to developed countries where they have advanced technology in manufacture It will lead to the depletion and shortage of materials for domestic production so it will decrease the savings for future generations Agricultural export is sum of export of agricultural raw materials, measure as a share of merchandise exports This factor can cause same impact as export of natural resources In specific cases, this activity always require more consumption of pesticides or chemicals for high productivity that will cause the pollution of agricultural land and sources of water ONM is sum of export of ores and metals, measure as a share of merchandise exports This export is one part of natural resources, it removes the impact of fuels on adjusted net savings so the author expect that this factor also cause negative impact on adjusted net saving

Urban population growth (UBGR ) is the growth of urban population This factor increase can supply more labor forces for economy, contribute to economic growth and more savings for nation so this factor is expected to cause positive impact on sustainable development

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Table 2.1: Expectation the influences of determinants on adjusted net savings

Fuels, ores, and metals in merchandise

exports for 1996-2010 XR % of merchandise export -

Note: (+) positive impact, (-) negative impact

2.8 Empirical studies relating to sustainable development

2.8.1Peter Hess (2010)

Using data for 2001-2006 of developing economies, he estimates the determinants of the adjusted net saving rate For comparison, he also runs regression for estimating the determinants of gross saving

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Where:

ASY= adjusted net saving rate for 2000-2006

SY = average gross national saving rate for 2001–2006

HDI=Human Development Index for 2000

GYP=average growth rate of real GDP per capita

APL= average share of population of ages 15-64 for 2000 and 2006

CPL = average annual change in the share of the population of ages 15–64 for 2000 to

2006

FIN= ratio of liquid liabilities to GDP in 2000

XR = share of fuels, ores, and metals in merchandise exports in 2000

GX=average annual growth rate in exports of goods and services for 2001–2006 FDY= foreign direct investment as a share of GDP in for 2001–2006

Hess found that the HDI, the percentage of population of labor force age from 15 to

64, the share of natural resources in export and a measure of financial development are important influences But economic growth is not to be significant explanatory variable With the gross national saving, the change in share population aged 15 to 64 along with economic growth rate are significant determinants

By estimating the simultaneous model for economic growth and adjusted net saving,

he found that result is unjustified It means that both savings- adjusted net saving and gross saving – shows statistically insignificant on average growth rate in real GDP per capita 2.8.2 Yacouba Gnegnè (2009)

Yacouba (2009) tested whether adjusted net savings explains the change in the welfare over the period 1971-2000 Panel data included 36 developing and developed countries With proxies of a welfare are Human Development Index (HDI) and Infant Mortality Rate (IMR),

he used Gross National Income (GNI) as a control variable and NNS is a regressor By using the fixed effect model for estimation this relationship, he found that adjusted net savings and welfare are positive significantly but the magnitude is weak

2.8.3 Dietz et al., (2007)

In this study, they used panel data of 115 countries within 18 years from World Bank source for studying the relationship between genuine saving, corruption and the resource curse They used reduced-form model, fixed effect estimation, GMM estimation and

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Arrellano-Bond dynamic model with variables genuine saving rate, gross saving, growth, GDP, age, urbanization, investment and resource rent They set up two hypotheses for relationships as follows:

GrossSR i,t=α+β1lnY i,t+β2Growthi,t-1+β3Agei,t+β4Urbani,t +β5Insti,t+β6Rsi,t+β7Inst i,txRs

2.8.4 Alam et al., 2007

Their study measured the impact of economic growth on environment by using time series data in a period of 1971-2005 in Pakistan These factors in this study are GDP per capita, carbon dioxide emission, energy consumption, population and urbanization In their model, they use VAR model and ADF test They concluded that there is a positive relationship between economic growth and carbon dioxide emission in the long term In this case, economic development is energy driven so it contributes considerably to carbon dioxide emission

2.8.5 Ram, 2005

In this paper, the author examines the conceptual and empirical characteristics with policy implications of the measure of genuine saving This study based on the formula of genuine savings of the World Bank as follows:

GENSAV= (GDS-Dp+EDU-Rn,j-CO2damage)/GDP (2-18)

Where

GENSAV is genuine domestic saving rates; GDS is gross domestic savings

Dp is depreciation of physical capital; EDU is current expenditure on education

Rn,i is the rent from depletion of i-th natural capital (energy, mineral and forest depletion are included); CO2 damage is damage from CO2 emissions

His analysis showed that the imperfect of the measure both conceptual and empirical characteristics He also found that the error of policy implications based on this measurement

a society changes the way it produces and consumes It seems to be no direct relationship between the two in spite of a certain overlap between pollution measures and eco-efficiency related measures of environmental sustainability

2.8.7 Grace et al., 2004

From the time series data of United Kingdom and Taiwan from 1970 to 1998, they calculate genuine saving in each country by using robustness analysis and sensitivity analysis From the formula of World Bank, they adjust by adding the deduction of air and water pollution cost

Genuine Savings or Adjusted net saving = Gross Domestic Savings – Consumption of Fixed Capital (Depreciation) + Education Expenditure – Air pollution cost – Water pollution cost – CO2 Damage Costs- nonrenewable natural resource depletion costs

(2-19) They found that UK has a lower rate of genuine saving than Taiwan and lower annual GDP growth rate exhibits low rate of genuine saving to GDP

2.8.8 Atkinson et al., 2003

In their study, they used data of 91 countries from 1980 to 1995, the World Bank These variables are genuine saving, GDP8095, GDP80, Education and Investment By using cross section econometrics, they found that there is negative and significant relationship between natural resource abundance and growth rate of GDP per capita This is the so-called

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resource curse hypothesis Their study offered evidence that the curse may be a manifestation

of the inability of governments to manage large resource revenues sustainably Besides, these results offered another perspective on the resource curse hypothesis: the countries where growth has lagged are those where the combination of natural resource, macroeconomic and public expenditure policies have led to a low rate of genuine saving

2.8.9 Hamilton et al., 1999

Based on the data of 1970s, 1980s and 1990s from World Bank, they calculate genuine saving then comparing values of all country They calculated a genuine saving rate from gross domestic investment, net foreign borrowing, gross saving, depreciation and net saving by formula:

Genuine Savings or Adjusted net saving = Gross Domestic Savings – Consumption of Fixed Capital (Depreciation) + Education Expenditure – Depletion of Nonrenewable

From that formula, they found that genuine saving rate in high- income countries is positive while this indicator is negative in developing countries Negative rate of genuine saving leads

to declining well-being

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Table 2.2: Summary of empirical studies related to sustainable development

research

Dependent variable

2010

Developing countries, Period 2001-2006

Adjusted net

Gross Saving,

Cross-section analysis

- HDI, CPL, FIN, XR are important

statistically insignificant

2009

36 countries, developed and developing

countries, period 1971-2000

Adjusted net saving

- Panel data, fixed effect model

- Sagan and Basman test for

instrument

Positive relationship between ANS and HDI, IMR, GNI but weak magnitude

2007

115 countries, 18 years, World Bank data

Adjusted net saving

Panel data Using reduced form, fixed effect estimation, GMM estimation

- Rich resource countries have lower rate of ANS than poor resource countries

- If corruption can be reduced, negative

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Arrelano –Bond dynamic model

emission in long term, economic

development is energy driven

GENSAV= Dp+EDU-Rn,j-CO2damage)/GDP

(GDS-Imperfect of the measure both concept

21 other indicators

ESI increases when income per capita increase, population decrease, degree of civil and political liberty higher

29 Source: Summary of the author

2004

United Kingdom and Taiwan data, period 1970- 1998, World Bank data

Adjusted net saving

(Genuine saving rate -GS)

Robustness analysis, sensitivity analysis

Genuine saving rate (GS) of UK is lower than Taiwan,

Low GDP growth rate will lead to low rate of

Adjusted net saving,

Cross section Resource curse hypothesis

combined of natural resource,

macroeconomic and public expenditure policies have lead to low rate of ANS rate

countries is positive while this indicator is

developing countries,

GS negative will leads

to well-being decrease

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