Natural capital, subjective well-being, and the new welfare economics of sustainability: Some evidence from cross-country regressions

The measurement of natural capital and its management during the economic development process are important aspects of the capital approach to sustainable development. However, the assessment of social welfare in terms of genuine savings (or changes in total wealth per capita) is arguably too limited. This paper tries to make a case for the incorporation of subjective well-being measures in debates about sustainable development by exploring the macro-level relationship between subjective well-being and natural capital in a cross-country setting. It is tested whether natural capital per capita is correlated with subjective well-being in a sample of fifty-eight developed and developing countries, using natural capital data from the World Bank's Millennium Capital Assessment. Bivariate regressions indicate that it is. When multiple regression models are estimated that include (a) major country-level determinants of subjective well-being (GNI per capita, social capital, income distribution, unemployment, inflation), and (b) regional dummy variables for ex-Soviet Union and Latin American countries, the positive correlation remains. The role of data outliers is carefully explored, and the sensitivity of the results to the use of alternative subjective well-being measures (i.e. life satisfaction, happiness, and a combined life satisfaction and happiness index) is investigated. This does not change the nature of the results. The findings arguably strengthen the case for a ‘new welfare economics of sustainability’ that takes subjective well-being measures into account.     

Wealth,Natural Capital,and Sustainable Development: Contrasting Examples from Botswana and Namibia

Theoretical work has demonstrated that sustainable development requires non-declining per capita wealth, where wealth is defined to include produced, natural, human and social capital. Several studies have attempted to measure total national wealth or changes in wealth, but have been seriously hampered by a lack of data, especially for natural and human capital. To address this problem, the UN and other international statistical agencies developed a standardized framework for environmental accounts, the System of integrated Environmental and Economic Accounts (SEEA). Using the newly available asset accounts for natural capital, national wealth accounts are constructed and used to assess the contrasting development paths of Botswana and Namibia. Botswana, with an explicit policy of reinvestment of resource rents, has roughly tripled per capita wealth and national income over the past two decades. Namibia, with no explicit policy to use natural capita to build wealth, has seen per capita wealth and income decline.     

Does More Consumption Promote Real GDP Growth?

This paper employs Hansen's (1999) panel threshold regression model [Journal of Econometrics 39 (1999) 345–68] based on a time series dataset of 109 countries from 1960 to 2007 to investigate the threshold relationship between the change in real GDP per capita and the consumption size (consumption‐income ratio, APC). The results show that the consumption level should not exceed the 49.68% threshold of real GDP per capita for each country regardless of the income level. Also, the relationship between the change in real GDP per capita and the consumption size seems to have ‘Armey curve’ or ‘inverted‐U shape’ characteristic. In order to promote real GDP growth, our results suggest that the high‐income, low‐APC countries should encourage more consumption while the low‐income, high‐APC countries should encourage more saving.     

Social capital, innovation and growth: Evidence from Europe

This paper investigates the interplay between social capital, innovation and per capita income growth in the European Union. We model and identify innovation as an important mechanism that transforms social capital into higher income levels. In an empirical investigation of 102 European regions in the period 1990-2002, we show that higher innovation performance is conducive to per capita income growth and that social capital affects this growth indirectly by fostering innovation. Our estimates suggest that there is no direct role for social capital to foster per capita income growth in our sample of European Union countries.     

Health and Income Variation – A Panel Data Study on the Developed and Less Developed Economies

In this paper, human capital in the form of ‘health status’ is introduced into a neoclassical economic growth model as one of the main factors differentiating rich and poor countries. Various panel data models are used to examine how health and other growth factors affect average income in different countries. Our main empirical finding indicates that a one-year increase in life expectancy (the health status measure) raises GDP per capita by 0.5–0.9%. Based on this result, a baseline health status can be established to help poor countries achieve a targeted economic growth rate.     

Do Natural Resources Depress Income Per Capita?

Most evidence for the resource curse comes from cross‐country growth regressions suffers from bias originating from the high and ever‐evolving volatility in commodity prices. These issues are addressed by providing new cross‐country empirical evidence for the effect of resources in income per capita. Natural resource dependence (resource exports) has a significant negative effect on income per capita, especially in countries with bad rule of law or bad policies, but these results weaken substantially once we allow for endogeneity. However, the more exogenous measure of resource abundance (stock of natural capital) has a significant negative effect on income per capita even after controlling for geography, rule of law and de facto or de jure trade openness. Furthermore, this effect is more severe for countries that have little de jure trade openness. These results are robust to using alternative measures of institutional quality (expropriation and corruption instead of rule of law).     

The positive correlation of affluence and freedom

Non-communist countries rated ‘free’ have on average a much higher per capita income than those rated ‘partly free’ or ‘not free’. The latter two groups differ primarily in terms of the dispersion of their per capita incomes, those rated ‘not free’ being much more dispersed than those rated ‘partly free’.     

Inequality and income: The mediating effects of social spending and risk

This paper estimates models of social spending, income risk, and per capita income levels using data from a post-war panel of OECD (Organisation for Economic Cooperation and Development) countries. The objective is to test two theories about the pathway from inequality to per capita income. According to one theory, inequality reduces incomes because it induces social spending, which acts as a drag on the economy. The results here suggest, however, that inequality does not seem to induce social spending, and social spending does not seem to lower per capita incomes. According to a second theory, inequality causes upheaval which adds to the volatility of per capita income, which may reduce the level of per capita income. The results suggest, however, that volatility, measured here as the standard deviation of per capita income, has little measurable impact on either per capita income or social spending. The mainsprings of per capita income are more likely to be the traditional factors: the work force, human capital, and physical capital.
JEL classification: E6.     

On poverty traps,thresholds and take-offs

Recent studies on economic growth focus on persistent inequality across countries. In this paper we study mechanisms that may give rise to such persistent inequality. We consider countries that accumulate capital in order to increase the per capita income in the long run. We show that the long-run growth dynamics of those countries can generate a twin-peak distribution of per capita income. The twin-peak distribution is caused by (1) locally increasing returns to scale and (2) capital market constraints. These two forces give rise to a twin-peaked distribution of per capita income in the long run. In our model investment decisions are separated from consumption decisions and we thus do not have to consider preferences. Empirical evidence in support of a twin-peak distribution of per capita income is provided.     

Sustainable per capita consumption under population growth

We establish two investment rules for maximal constant per capita consumption under exogenous population growth, one in terms of total capital stocks and the other in terms of per capita capital stocks. Both rules show the importance of the development of future population growth. The investment rules are illustrated in the one-sector model of capital accumulation, the DHSS model of capital accumulation and resource depletion, and the Stollery–d’Autume–Schubert model in which natural capital provides amenities. Application to recent empirical evidence indicates that actual genuine savings might be insufficient to sustain per capita consumption, when future population growth is combined with a large per capita consumption-wage gap.     

The effects of economic freedom,regulatory quality and taxation on the level of per capita real income: a preliminary analysis for OECD nations and non-G8 OECD nations

This study of the impact of economic freedom, regulatory quality and the relative burden of taxation on the level of per capita real income/GDP among OECD nations over the period 2003 to 2007 adopts a modified version of the overall economic freedom index computed by the Heritage Foundation (2013), one with the fiscal freedom and business freedom indices removed. This study then provides panel least squares fixed-effects estimates for five linear specifications/models. Each nation during this time frame can be regarded either as a nation per se or as a de facto ‘economic region’ within the OECD. The analysis first focuses upon all of the OECD nations and then, as a robustness test, subsequently focuses only on non-G8 OECD member nations. The estimations in this study all provide strong empirical support for the three central hypotheses proffered here, namely: (1) the higher the overall degree of economic freedom, the higher the per capita real income (GDP) level; (2) the higher the level of regulatory quality, the higher the level of per capita real income (GDP) and (3) the higher the overall tax burden, expressed as a per cent of GDP, the lower is the level of per capita real income (GDP).     

Inequality and economic growth: the role of initial income

We estimate a panel model where the relationship between inequality and GDP per capita growth depends on countries’ initial incomes. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. In High Income Countries inequality has a significant negative effect on transitional growth. For the median country in the world, that in the year 2015 had a PPP GDP per capita of around 10000USD, IV estimates predict that a 1 percentage point increase in the Gini coefficient decreases GDP per capita growth over a 5-year period by over 1 percentage point; the long-run effect on the level of GDP per capita is around ??5%.     

Freedom,affluence, growth and inequality

Following Gastil's classification of countries into ‘free’, ‘partly free’ and ‘not free’, and considering the developing world, there appears to be a mild negative correlation between freedom and per capita income. However, no clear pattern emerges in the relationship between freedom and income growth, or between freedom and intra-country inequality.     

Refitting the Kuznets curve using a gender-specific threshold model

Previous studies have reached mixed conclusions regarding the relationship between inequality and per capita income. These studies, however, fail to consider gender differences in income inequality and how these may impact on the relationship between income inequality and per capita income. Using Australian taxation statistics, we derive three sets of Gini coefficients (i.e. female, male and total) for the period 1950–2013. We then examine the relationship between inequality and real per capita income and find that a gender-specific threshold panel regression outperforms three other conventional models. Our findings suggest that ‘one set of coefficients does not fit all’ in that the use of aggregate and constant coefficients may mask variations within, and between, gender inequality over time.     

Institutional Quality Mediates the Effect of Human Capital on Economic Performance

This paper considers the relationship between institutional quality, educational outcomes, and economic performance. More specifically, we seek to establish the linkages by which government effectiveness affects per capita income via its mediating impact on human capital formation. Our empirical approach adopts a two‐stage strategy that estimates national‐level educational production functions that include government effectiveness as a covariate, and uses these estimates as instruments for human capital in cross‐country regressions of per capita income. Our results identify a significant and positive effect of human capital on per capita income levels, and partially resolves the inconsistency between macro‐ and micro‐level studies of the effect of human capital on income. The results remain robust to alternative specifications, extension to a panel setting, subsamples of the data and fully endogenous institutions.     

WHAT MAKES INTERNATIONAL CAPITAL FLOWS PROMOTE ECONOMIC GROWTH? AN INTERNATIONAL CROSS‐COUNTRY ANALYSIS

This paper re‐examines the relationship between international capital flows and economic growth within the context of various ‘conditional factors’ that possibly have the potential to influence such relationships. It achieves this by employing panel data for 80 countries that cover 1976–2007. International capital inflow is broken down into foreign direct investments (FDI) and foreign portfolio investments (FPI). We find interesting evidence that only FDI has a positive effect on growth and that FPI has an unfavorable, if not negative, effect on growth. The conditional variables of banking liberalization, high‐income level, twin crises, lower corruption, and human capital mitigate the positive impacts of FDI on growth. In contrast, the middle‐income level and good shareholder protection have a positive effect. As concerns FPI, the level of financial liberalization, being in a Latin American region, the wealth of countries, and market governance all influence the way that FPI affects growth, whereas the conditional variables of twin crises and human capital do not influence the effect of FPI on economic growth.     

Mineral wealth and human capital accumulation: a nonparametric approach

This article uses a nonparametric approach to investigate the nexus between mineral wealth and human capital accumulation across countries. Higher mineral wealth is associated with elevated levels of human capital in a cross-section of countries. Matching the overall level of economic development and political instability and violence, weakens but does not reverse this conclusion. These results are economically significant. Moving up from the bottom to the top quartile for subsoil wealth per capita decreases illiteracy by ≈ 12% among young and adult females. Conversely, moving down from the top to the bottom quartile for subsoil wealth per capita decreases the average years of primary and total education by ≈ 1.5 years for females. Results are consistent with Hirschman's conjecture that enclave economies have weaker production linkages but stronger government revenue linkages than other activities. Most importantly, this article argues that caution should be exercised when discouraging countries from exploiting their mineral wealth, especially for countries where human capital is scarce.

I know, [there is] no safe depositary of the ultimate powers of society, but the people themselves; and if we think them not enlightened enough to exercise their control with wholesome discretion, the remedy is not to take it from them, but to inform their discretion by education. This is the true corrective of abuses of constitutional power.     

Economic structure and factor payments

There is a growing body of evidence that the labour payment share in national income varies across countries and over time, suggesting that the popular aggregate Cobb–Douglas production function may not capture income share dynamics. There remains conflicting evidence on the importance of natural resource rents among low income economies and on estimates of the rate of return to produced capital. This paper focuses on the structural differences among countries, confirming the importance of the agriculture sector in estimates of labour and land’s share of factor income based on 81 countries at diverse levels of economic development in the year 2005. I find that cross-country data are best modelled by a CES production function with an elasticity of substitution of 0.8 and that many low income countries have a higher return to capital than the United States.     

Public Capital and Economic Growth: A Convergence Approach

This paper estimates dynamic effects of public capital on output per capita. Based on an open economy growth model, I derive a version of the income convergence equation augmented with public capital. This equation is estimated using panel data of United States and Japanese regions. Sensible results are obtained when public capital is disaggregated into components. In both countries, the infrastructure component of public capital turns out to have significantly positive effects. The implied elasticity of output with respect to infrastructure is somewhere around 0.1 to 0.15. This suggests a modest contribution of infrastructure to postwar growth of the two countries.     

International Trade and Growth Miracles: the Implications of Nonhomothetic Preferences

If the rate of saving increases with income then a low per capita level of the capital stock may be self‐sustaining. In these circumstances international trade may allow an economy to quickly increase its per capita capital stock in a self‐reinforcing “growth miracle” process. A labor‐abundant economy trading with a capital‐abundant economy will see its wage rate rise relative to autarky. This rise in the wage rate also increases the savings rate and so raises the following period’s per capita capital stock. In this way a low‐income economy may exhibit large and permanent increases in its level of GDP per capita after opening its markets to international trade.