Estimate of Natural Capital Wealth for Vietnam

Patricia Silva, University of Copenhagen

Workshop on “Vietnam’s Natural Resources Wealth”

Hanoi, 29 July, 2008

Outline1. Sustainability and Growth

2. Measuring Wealth: Theory and Evidence

3. Natural Capital Wealth Estimates for Vietnam

4. Policy Applications and Conclusion

1. Sustainability and Growth

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

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

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

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

2. Measuring Wealth: Theory and Evidence

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

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

Wealth Estimation Methods Capital value can be estimated in two ways:

1. The sum of additions (investment) and subtractions (depreciation) over time made to an initial stock

2. 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

Wealth across Income Levels

16% 19% 17%

26% 13%2%

59% 68%80%

0%10%20%30%40%50%60%70%80%90%

100%

Low Income Middle Income High IncomeOECD

Per

cen

t

Produced capital Natural capital Intangible capital

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

Importance of Land Resources Value of Natural Capital, 2000 ($ per capita)

Group Natural capital (total)

Subsoil assets

Timber resources

NTFR PA Cropland Pasture-land

Low-income countries

1,925

100%

325

17%

109

6%

48

2%

111

6%

1,143

59%

189

10%

Middle-income countries

3,496

100%

1,089

31%

169

5%

120

3%

129

4%

1,583

45%

407

12%

High-income OECD countries

9,531

100%

3,825

40%

747

8%

183

2%

1,215

13%

2,008

21%

1,552

16%

Note: NTFR: Non timber forest resources. PA: Protected areas. Oil states excluded. Dollar values at market exchange rates. Source: World Bank, 2006

Composition of Wealth Across East Asia and the Pacific

0%

20%

40%

60%

80%

100%

Pe

rce

nt

Ch

ina

Fiji

Ind

on

es

ia

Ma

lay

sia

Ph

ilip

pin

es

Th

aila

nd

Natural K Man-made K Intangible K

Source: World Bank (2006) Where is the Wealth of Nations? World Bank: Washington DC

3. Natural Wealth Estimates for Vietnam

Vietnam’s Natural Capital—An Overview of Results

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)

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

Oil Natural Gas Coal

$958 $115 $117

$600-1,773 $261 $309

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

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

Agriculture Estimates

CropLand Area(1000 ha)

Output(1000 tons)

Revenue (1000 $)

Rental Rate

Land Rent( $/ha)

Paddy Rice 7,411 35,365 6,482,036 0.45 394

Maize 961 3,321 472,378 0.36 177

Coffee 507 829 646,258 0.30 381

Rubber 464 422 489,634 0.31 329

Cassava 400 6,000 683,350 0.47 804

Sweet Potatoes 205 1,538 716,222 0.61 2,129

Tea 118 514 504,036 0.43 1,832

Bananas 105 1,365 233,074 0.42 930

Orange 53 519 264,716 0.42 2,081

Peppers 50 89 127,425 0.29 753

Pineapple 34 413 273,897 0.35 2,776

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

Vietnam’s Forest Resources

Designated function

Area (1000 hectares)

Primary function

1990 2000 2005

Forest      

Production 5.707 4.653 5.148

Protection of soil and water 2.925 5.502 5.881

Conservation of biodiversity 731 1.57 1.902

Total forest 9.363 11.725 12.931

Source: Global Forest Resource Assessment 2005, FAO: Rome

Vietnam’s Timber ProductionVolume (1000 cubic meters over bark)

Forest

1990 2000 2005

Industrial roundwood 3.446 2.376 2.500

Fuelwood 32.059 24.843 21.235

Total 35.505 27.219 23.735

Value (1000 US$)

Forest

1990 2000 2005

Industrial roundwood 212.062 90.037 91.579

Fuelwood 197.286 94.141 77.788

Total 409.348 184.178 169.367

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

Timber Wealth Estimates- Data and Assumptions

Plantation forest area (100% available for wood supply) 2.21 million ha

Natural production forest area (50% available) 2.55 million ha

Volume of forest per hectare 66 m3/ha

Estimated wood supply 230 million m3

Timber removal 25.5 million m3

Average annual increment (4 m3/ha/yr) 14.2 million m3

Net depletion 11.3 million m3

Time to exhaustion 20 years

Stumpage price (wt avg industrial and fuelwood) US$3.48

Timber Wealth Estimates-Results 1. Base scenario $15

2. Slower forest depletion (40 years to exhaustion) $16

3. Increase share roundwood to 50% $43

4. Double productivity to 8 m3/ha/yr $23

5. Double productivity and roundwood share 50% $67

6. Increase forest area by 3 million hectares $28

7. Same as 6 + double productivity $35

8. Same as 7 + roundwood 50% $121

9. Maximum sustainable yield $11

10. MSY with additional 3 million ha of forest $21

11. Same as 10 + double productivity $38

12. Same as 11 + roundwood share 50% $111

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

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

NTFP and PA Wealth NTFP wealth - $87 PA wealth - $196

2 million ha agriculture land value

(capitalized value of land rents between

~ $8,000 to 10,000/ha)

Protection forest area available for NTFP extraction

Wealth per capita

25% $44

75% $131

4. Policy Applications and Conclusions

Natural Resource Revenue Management (Norway)

Significant amounts of rents generated by oil industry but with high

fluctuations

Forests generate substantial rents – but rents accrue to producers (which are also

subsidized)

Oil and gas – Resource rents and taxes (1985-1996)

Forestry – Resource rents and taxes (1985-1995)

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

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