Research background
Economic growth plays a crucial role in enhancing national wealth and increasing income per capita through improvements in Gross Domestic Product (GDP) and Gross National Income (GNI) Economists globally are keenly interested in studying the relationship between economic growth, environmental sustainability, and societal impacts Many countries are now prioritizing the sustainable use of natural resources and environmental protection as integral targets of economic growth This shift indicates a growing awareness of the need to conserve scarce natural resources for future generations, moving away from past practices of exploitation and neglecting environmental degradation.
Since its introduction in the 1987 Brundtland Report by the World Commission on Environment and Development, sustainable development has gained significant traction globally Economists have explored the interplay between economic growth and sustainable development, often measuring it through genuine saving rates or adjusted net savings Numerous studies indicate a consistent correlation between sustainable development and economic growth, highlighting its importance in shaping economic policies.
Hamilton et al (1999) analyzed the genuine saving rates of both developing and developed countries by considering factors such as gross savings, fixed capital, educational expenditures, and pollution emissions Their findings revealed that high-income countries exhibited positive genuine saving rates, while developing countries showed negative rates The negative genuine saving rates in these countries indicate a decline in overall well-being.
1 The United Nations, Report of the World Commission on Environment and Development: Our Common Future, 1987
2 Hamilton C (1999), “The genuine progress indicator: methodological developments and results from Australia.” Ecological Economics 30: 13–28
Atkinson et al (2003) conducted a study examining the connection between natural resource abundance and the growth rate of GDP per capita Their findings revealed a significant negative relationship, indicating that an increase in natural resource abundance is associated with a decrease in the growth rate of GDP per capita.
A study by Grace et al (2004) analyzed the genuine saving rates of Taiwan and the United Kingdom, revealing a correlation between the UK's low annual GDP growth rate and its reduced genuine saving ratio to GDP.
A study by Dietz et al (2007) examined genuine savings in both rich and poor natural resource countries, revealing that wealthier resource-rich nations tend to have lower genuine saving rates compared to their poorer counterparts Additionally, the research indicated that this negative relationship can be mitigated through improvements in institutional quality.
Economic growth plays a crucial role in determining a nation's genuine saving rate Additionally, factors like institutional quality and resource abundance influence these saving rates in varying degrees Generally, developed countries tend to exhibit higher genuine saving rates compared to their developing counterparts, highlighting the strong correlation between economic growth and saving behaviors.
Statement of problem
Vietnam's economic growth has been remarkable since the implementation of the "Doi Moi" policy in 1986, which opened the market to international corporations and positioned the country among the fastest-growing economies in Asia This growth has contributed to improved living standards; however, despite nearly three decades of progress, Vietnam remains one of the poorest countries globally, with a per capita income of only $723 in 2010, even as the average economic growth rate reached approximately 7.07% from 1996 to 2010.
3 Atkinson G., Hamilton K (2003), “Saving, Growth and the Resource Curse Hypothesis.” World Development
4 Grace T R Lin, Hope C (2004), “Genuine savings measurement and its application to the United Kingdom and Taiwan”, The Developing Economies XVII-1: 3−41.
5 http://data.worldbank.org/data-catalog/world-development-indicators
Between 1996 and 2010, Singapore experienced an impressive annual GDP growth rate of 5.87%, leading to a GDP per capita of US$32,641 by 2010, while the Netherlands had a modest growth rate of 2.2% and a GDP per capita of US$26,553 Both Singapore and the Netherlands are classified as high-income countries, in stark contrast to Vietnam, which falls into the low-middle-income category This raises the question of whether there is a paradox in economic growth and development, as nations can have higher growth rates yet lower income per capita, a phenomenon observed globally.
Sustainable development, also known as genuine saving, offers a fresh perspective on assessing a nation's growth and wealth This approach goes beyond traditional indicators by incorporating gross saving alongside critical factors such as fixed capital, education, environmental health, and natural resources Since 1996, the World Bank has adopted this comprehensive indicator to provide a more valuable evaluation of economic progress.
“adjusted net saving” in World Development Indicators It also presents in the Little Green Data Book from 2000
The relationship between economic growth and its effects on society, the environment, and natural resources is crucial yet underexplored, particularly in the context of Vietnam Research on how current consumption patterns influence future generations and sustainable development remains limited, highlighting the need for more comprehensive studies in this area.
Research objectives
This study examines the effects of economic growth and various factors on sustainable development, with a particular focus on Vietnam Utilizing data from 90 countries sourced from the World Bank, the analysis covers the period from 1996 to 2010, highlighting the relationship between economic progress and sustainability.
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
1.3.2 Evaluating the effect of export raw agricultural products on sustainable development
1.3.3 Evaluating the effect of export natural resources on sustainable development 1.3.4 Evaluating the significance of economic growth on sustainable development in developing countries
1.3.5 Finding valuable lessons for sustainable development in Vietnam.
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?
Research methodology
This paper employs both qualitative and quantitative methods to assess the impact of GDP growth on sustainable development using OLS estimation Building on established empirical models, it formulates hypotheses and tests their validity through econometric techniques To address the endogeneity issues between sustainable development and GDP growth, the study utilizes TSLS estimation to explore potential reverse causation Specifically, it investigates whether high adjusted net savings contribute to increased GDP growth.
Structure of thesis
This thesis is structured into six chapters, beginning with an introduction to the research background and the significance of the study in the context of Vietnam's economic growth and sustainable development Chapter II reviews existing literature on economic growth, economic development, and sustainable development, alongside empirical studies conducted by researchers over the past decades Chapter III outlines the data collection methods, data analysis, and econometric techniques employed in the analysis Chapter IV presents the results obtained from testing hypotheses related to the models discussed in the thesis Finally, Chapter V assesses the current state of sustainable development and highlights key points from the Agenda.
The concluding chapter of this research on Vietnam summarizes the key findings and proposes relevant policy recommendations It also addresses the limitations of the study and outlines potential avenues for future research.
7 Dimitrios Asteriou and Stephen G Hall, Applied Econometrics a modern approach, revised edition, Palgrave
Concepts of economic growth, economic development and sustainable development
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)
Economists have often conflated economic growth with economic development; however, while economic growth is essential, it alone does not ensure comprehensive economic development Furthermore, GDP serves as a limited indicator of economic welfare, failing to account for critical factors such as leisure time, access to health and education, environmental sustainability, freedom, and social justice.
Economic growth typically denotes an increase in a country's production or per capita income, while economic development encompasses a broader scope According to E Wayne from Kansas State University, economic development involves not only growth but also changes in the distribution of output and the economic structure He emphasizes the importance of enhancing the material well-being of the lower half of the population, reducing agriculture's share of Gross National Income (GNI), and increasing the GNI share of industry and services Additionally, it includes improvements in the education and skills of the labor force, along with significant technological advancements originating within the country.
8 E Wayne Nafziger, Economic Development, fourth edition, Cambridge University Press, 2006
Economic development refers to the qualitative transformation of a nation's economy, driven by advancements in technology and social progress A key indicator of this development is the rise in GNP per capita or GDP per capita, which signifies enhanced economic productivity and improved material well-being for the 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
Various indexes are utilized to assess a nation's development, with different approaches highlighting specific aspects For instance, the Human Development Index (HDI) evaluates human development, while the GINI index measures income inequality These tools provide valuable insights into the overall progress and disparities within a country.
The United Nations Development Program (UNDP) annually assesses national development through the Human Development Index (HDI), which evaluates human progress by integrating three key factors: income, life expectancy, and education.
The GINI index is a key metric that assesses income distribution disparities within a nation, highlighting the gap between the wealthy and the overall income of its citizens This issue of income inequality is prevalent both within countries and among different nations, affecting even the most developed countries.
Sustainable development has been defined in various ways, but the 1987 United Nations Brundtland Report provides a foundational understanding It defines sustainable development as the ability to meet the needs of the present without compromising the capacity of future generations to meet their own needs.
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 concept for development; it did not give a way to measure factors contributing on sustainability
Sustainable development, as defined by Pezzey (1992), is characterized by non-declining utility, establishing a foundational concept in the field Additionally, Pearce and Atkinson (1997) introduced a new paradigm that emphasizes the importance of strong sustainability.
The Organization for Economic Cooperation and Development (OECD) defines sustainable development as a pathway that ensures the maximization of human well-being for current generations without compromising the well-being of future generations.
The United Nations (2008) emphasized that sustainable development must maintain a nation's wealth over time, relying on various production stocks, including fixed, human, social, and natural capital To address potential declines in these capital stocks, the UN proposed a limited set of indicators for international comparison, although they acknowledged the challenges in precisely defining and measuring this concept.
Approaches of sustainable development
Sustaining economic growth can occur through two key avenues: first, the limited substitutability between reproducible capital and nonrenewable resources allows for continued growth even as nonrenewable resource stocks diminish Second, advancements in technology can facilitate a transition away from dependence on nonrenewable resources, ultimately leading society towards the adoption of renewable resources.
Sustainability can be viewed through two main paradigms: ecological and neoclassical, often referred to as strong and weak sustainability These concepts address the relationship between reproducible and natural capital, questioning whether they can coexist or must be maintained separately A significant point of contention in this discussion is the degree to which natural capital can be substituted with reproduced capital.
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”
Natural capital refers to natural resources like coal, oil, forests, and land, while reproduced capital encompasses human-made or human capital Human-made capital can partially substitute for natural capital, thereby decreasing society's dependence on natural resources This substitution enhances the utility of both renewable and non-renewable resources, promoting sustainable development.
Weak sustainability emphasizes the importance of substitutability between human-made capital and natural resources, suggesting that as human-made capital becomes more valuable, it can effectively replace natural capital This perspective posits that the overall value of the combined capital stock will grow over time.
Strong sustainability emphasizes the need for a balance between natural and reproduced capital, highlighting that future economic opportunities may be compromised without regulating the depletion of natural resources.
2.2.1 Weak sustainability: the neoclassical paradigm
Weak sustainability focuses on ensuring that development does not deteriorate from one generation to the next Rooted in economic concepts rather than ecological ones, it emphasizes the importance of maintaining non-declining welfare over time, as highlighted by Pezzey (1992).
In the case of reduction of welfare, he called it as “survivability”
Pearce and Atkinson (1997) proposed a formula for measuring sustainable development, grounded in the concept of unlimited substitution between man-made and natural capital, as well as Pezzey's definition of sustainable development.
The formula defines Z as an index of sustainable development, incorporating various factors such as DM, which represents the depreciation of man-made capital, and DN, indicating the depreciation of natural capital Additionally, DM/Y and DN/Y denote the respective rates of depreciation for man-made and natural capital, while S signifies national savings and S/Y reflects the savings rate.
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
Sustainable development is compromised when the value of Z exceeds zero, indicating that higher saving rates relative to depreciation of both natural and man-made capital are essential for achieving sustainability.
2.2.3 Strong sustainability: the ecological paradigm
Strong sustainability emphasizes the limited substitutability between man-made and natural capital, contrasting with weak sustainability A study by Herman Daly and John Cobb (1999) supports strong sustainability for several reasons: certain natural resources are crucial for production, and their depletion could lead to catastrophic outcomes Additionally, in production processes where natural capital is not yet vital, the ability to substitute diminishes, leading to resource depletion They also argue that the elasticity of substitution between natural and reproducible capital is effectively zero due to the unique nature of some natural resources, indicating that critical natural capital must be preserved regardless of opportunity costs.
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
Prices often fail to accurately reflect the scarcity of resources and do not consider the interests of future generations As technology evolves, it is expected to reduce prices over time However, from an ecological perspective, there is a prevailing skepticism regarding the ability of technological advancements to effectively address future environmental challenges.
Objectives and significance of sustainable development
In 1992, the Earth Summit at the United Nations Conference on Environment and Development (UNCED) took place in Rio de Janeiro, Brazil, where the international community adopted Agenda 21 This landmark achievement aimed to integrate environmental, economic, and social concerns into a cohesive policy framework Agenda 21 includes numerous recommendations and detailed proposals for nations worldwide, highlighting the importance of sustainable development.
In "For the Common Good" by Daly Herman and John Cobb, the authors emphasize the importance of promoting sustainable practices to benefit society Key recommendations include minimizing wasteful consumption, addressing poverty, safeguarding air and ocean quality, preserving biodiversity, and advancing sustainable agriculture initiatives.
In the Johannesburg Declaration on sustainable development in 2002, the task of all nations in the world is “Taking action for Earth’s future” as follows: 16
Improving global equity and an effective global partnership for sustainable development;
Integration of environment and development at the international level;
Adoption of environment and development targets to revitalize and provide focus to the Rio process;
According to this summit, most important challenges which the world faces today include:
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.
Indicators of sustainable development
2.4.1 Adjusted net savings or genuine savings
Pearce et al (1997) and Hamilton et al (1999) proposed a novel indicator for assessing sustainable development, aligning with the United Nations' guidelines established in 1993 They calculated the cost of restoring the environment to its original state as the total of net investments in produced assets, along with changes in the 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
Research conducted on time series data from 1970 to 1993 revealed a concerning trend of natural resource depletion and rising carbon dioxide emissions The findings indicated that numerous countries experienced negative rates of genuine savings However, a significant limitation of this approach is its failure to consider the impact of 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
According to the World Bank, adjusted net savings serve as a key indicator of sustainable development globally A study by Hamilton et al (1999) revealed that high-income countries exhibit positive adjusted net savings, whereas developing nations often report negative values These negative rates are associated with a decline in overall well-being.
2.4.2 Index of Sustainable Economic Welfare or ISEW
Daly et al (1999) developed the Index of Sustainable Economic Welfare (ISEW) to evaluate the interplay between welfare and environmental degradation This index differentiates between various forms of pollution—such as water, air, and noise—and the loss of land, including wetlands and farmland, by contrasting traditional national income accounts with considerations of environmental damage and natural resource depletion The ISEW has been referenced in numerous studies, including those by Lawn (2003) and Clarke (2005).
2.4.3 Genuine Process Indicators or GPI
The Genuine Progress Indicator (GPI), an alternative to the Index of Sustainable Economic Welfare (ISEW), serves as a crucial metric for evaluating sustainable development Unlike traditional economic measures such as GDP, GPI provides a more comprehensive assessment by adjusting for factors like income distribution, the depletion of social and natural capital, and the costs associated with mobility and pollution This nuanced approach highlights the importance of considering broader societal and environmental impacts when measuring economic progress.
2.4.4 Environmental Sustainability Index or ESI
Yale University developed the Environmental Sustainability Index (ESI) 2005 using data from 140 countries provided by the World Bank This index serves as a comprehensive profile of national environmental stewardship, incorporating 21 key indicators that assess air and water pollution, environmental sustainability, biodiversity, and ecosystem health The core measurement of environmental sustainability is based on the inherent environmental carrying capacity and eco-efficiency, which can only be improved through significant changes in societal production and consumption practices (Lee et al 2005).
The pollution category encompasses two key indicators: Air Quality (SYS_AIR) and Water Quality (SYS_WQL) In contrast, the eco-efficiency measures category comprises nine indicators, which include Biodiversity (SYS_BIO), Land (SYS_LAN), and various strategies for reducing environmental impacts, such as Air Pollution (STR_AIR), Ecosystem Stress (STR_ECO), Waste and Consumption Pressures (STR_WAS), Water Stress (STR_WAT), along with 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) proposed a method for measuring sustainable development through the concept of inclusive wealth, emphasizing that an economy achieves sustainable development only when its inclusive investment remains non-negative relative to its population He defined inclusive wealth as the shadow value of an economy's productive base, while inclusive investment represents the shadow value of the net changes in that base To assess economic performance, Dasgupta integrated various indices, including the Human Development Index, total fertility rate, adult literacy rates, female literacy rates, government corruption index, life expectancy at birth, under-5 mortality rates, and the percentage of the rural population.
Linkage of various determinants of sustainable development
Economic growth is typically measured by GDP or GNI, while economic development is assessed through the Human Development Index (HDI), which incorporates income, education, and life expectancy In contrast, sustainable development encompasses a wider range of factors, integrating economic, environmental, and social dimensions According to Harris et al (2001), sustainable development should focus on three key activities.
Economic activities play a crucial role in enhancing a nation's economic welfare and income by generating jobs, fostering trade competitiveness, and increasing overall wealth Concurrently, environmental activities are essential for conserving natural resources and maintaining ecological balance, focusing on biodiversity preservation, atmospheric stability, reducing CO2 emissions, and managing 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
Sustainable development occurs when a nation effectively integrates economic, social, and environmental activities This concept serves as a bridge connecting key economic factors such as income and welfare, social aspects like education expenditure and healthcare, and environmental considerations including pollution management and resource conservation While the concept has its limitations, it remains a fundamental framework for understanding national development.
Figure 2.1: The three components of sustainable development
Source : http://www.myacpa.org/task-force/sustainability/primer.cfm
Benefits and drawbacks of adjusted net savings
Sustainable development is a crucial concept that integrates physical, human, and natural capitals, serving as a comprehensive indicator of a nation's development It highlights the issues related to natural capital and emphasizes that current consumption should prioritize not only economic growth but also the preservation of natural resources, reduction of air pollution, and investment for future generations Ultimately, excessive consumption today leads to greater depletion for future generations.
Hamilton et al (1999) established a link between a nation's income and sustainable development, revealing that high-income countries exhibit a positive genuine saving rate, whereas developing countries show a negative rate This negative genuine saving rate in developing nations contributes to a decline in overall well-being.
Lele (1991) thought this concept emerged as the latest development catch phase and embraced it as the new paradigm of development
Grace et al (2004) suggested that this indicator can broaden the definition of wealth beyond traditional national accounts, aiming to capture the value of the net change in various assets crucial for development.
Sustainable development offers clear benefits; however, its indicators reveal significant drawbacks The components of these indicators often overlook critical factors that directly or indirectly influence a country's development Notably, the adjusted net savings formula introduced by the World Bank in 1997 fails to fully capture the effects of environmental and social activities, despite their substantial impact on national development.
Lele (1991) identified two key weaknesses in sustainable development: an incomplete understanding of poverty and environmental degradation, and confusion regarding the roles of economic growth, sustainability, and participation These shortcomings result in inconsistencies and contradictions in policymaking, particularly evident in 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.
Empirical Models
Relating to determinants of the adjusted net savings in developing countries, Peter Hess
In 2010, researchers analyzed the factors influencing sustainable development by examining adjusted net savings in developing economies from 2001 to 2006 They utilized the same determinants to assess gross national savings, which includes both gross national savings and adjusted net savings Adjusted net savings are calculated by subtracting fixed capital from gross savings, indicating that influences on gross savings significantly affect adjusted net savings Economic development was measured using the Human Development Index (HDI), and the saving capacity of a nation is closely linked to its population structure, particularly the age dependency ratio Many developing countries face challenges due to underdeveloped financial systems.
In developing economies, the adjusted net saving rate is influenced by various determinants, often differing from those in developed countries Economic activities predominantly occur in informal sectors, highlighting the need for formalization This process is crucial for measuring financial deepening, which is defined as the ratio of money supply to national income.
Adjusted net saving rates are influenced by natural resources, as income from the export of fuels, ores, and metals significantly contributes to a nation's savings Consequently, the depletion of these natural resources leads to a decline in adjusted net savings.
From these arguments, Hess showed the general equation for the adjusted net saving rates as follows:
ASY = f (HDI, GYP, APL, FIN, XR) (2-3)
The gross national saving rates, bolstered by export income from natural resources, play a crucial role in enhancing government revenues and public savings To estimate a nation's gross saving rate, key determinants are utilized consistently.
SY =f ' (HDI, GYP, APL, FIN, XR) (2-4)
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 identified key variables influencing economic development, including the Human Development Index (HDI), the proportion of the prime labor force age population, the share of natural resources in exports, and a measure of financial development Interestingly, economic growth itself was not found to be a significant explanatory factor Instead, gross national savings and changes in the population share aged 15 to 64, along with the economic growth rate, emerged as significant determinants of economic progress.
The reduced form equation for estimating economic growth assumes that savings directly translate into investment, utilizing adjusted net saving as a key indicator of net capital formation While adjusted net saving accounts for human capital formation and natural resource depletion, it does so incompletely Key determinants for estimating economic growth include the Human Development Index (HDI), Average Product of Labor (APL), real growth rate of exports, and Foreign Direct Investment (FDI) as a share of national output, as illustrated in the following equation:
GYP=g( ASY OR GRS, HDI, APL, GX FDY) (2-5)
The findings indicate that the saving rate does not significantly impact the average annual change in the growth rate of real GDP per capita In contrast, APL and GX are identified as statistically significant factors, while HDI and FDY do not serve as explanatory variables.
Dietz et al (2007) explored the relationship between resource abundance and institutional quality, focusing on indicators such as corruption levels, bureaucratic effectiveness, and adherence to the rule of law Building on Atkinson and Hamilton's (2003) findings of a positive correlation between resource abundance and overall institutional quality concerning gross investment and savings, they examined whether the detrimental impact of resource abundance on genuine savings could be attributed to policy failures To address this, they proposed a model that illustrates the interaction between natural resource endowment and institutional quality in explaining genuine savings.
A study analyzing data from 115 countries over 18 years found that factors like per capita income, economic growth, age dependency, and urbanization significantly influence gross savings The researchers developed two models to estimate gross savings and adjusted net saving rates, incorporating these key determinants.
GrossSR i,t=α+β1lnY i,t+β2Growthi,t-1+β3Agei,t+β4Urbani,t +β5Insti,t+β6Rsi,t+β7Insti,txRs i,t+Tt+ε i,t (2-6)
GSR i,t=α+β1lnY i,t+β2Growthi,t-1+β3Agei,t+β4Urbani,t +dβ5Insti,t+β6Rsi,t+β7Insti,txRs i,t+Tt+ε i,t (2-7)
They used reduced-form model, fixed effect estimation, GMM estimation and Arrellano-Bond dynamic model with variables genuine savings, gross savings, growth, GDP,
18 Dietz S., Neumayer E., Soysa I D (2007), “Corruption, the resource curse and genuine saving”, Environment and Development Economics 12:33-53
19 Atkinson G., Hamilton K (2003), “Saving, Growth and the Resource Curse Hypothesis.” World Development
From 1793 to 1807, research indicated that countries rich in resources tend to exhibit lower genuine savings compared to their poorer counterparts This disparity is often exacerbated by institutional failures, which further diminish genuine savings However, the detrimental impact of resource abundance on genuine savings can be mitigated when corruption levels are reduced.
According to the key findings of Hess (2010) and Grace et al (2004), various models have been developed to explore the relationship between economic growth and adjusted net savings, considering determinants such as GDP growth rate (GDPGR), GDP per capita (GDPPC), Human Development Index (HDI), median age (MS AGE), urban growth rate (UBGR), and consumer price index (CPI).
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)
Dietz et al (2007) and Atkinson et al (2003) discovered a negative correlation between adjusted net savings and natural resources In light of these findings, I developed two new models focusing on the export of raw agricultural products and ores and metals.
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)
Based on the findings of Hess (2010) and Hamilton et al (1999) regarding the factors influencing adjusted net savings in developing countries, I have developed an additional model, referred to as Model 1, utilizing data exclusively from these nations.
Model 5: Faster growth of economics will lead to sustainable development in developing countries
Where i denotes for country i, ε is residual
Determinants that will be used for estimating models include:
Adjusted net saving (ANS) is a key indicator that reflects the actual saving rates by considering investments in human capital, such as education expenditure, as well as the depletion of natural resources, including energy, minerals, and forests Additionally, ANS accounts for the environmental damages caused by pollution, specifically the impact of carbon dioxide and particulate emissions.
GDP growth (GDPGR) refers to the annual percentage increase in GDP at market prices, measured in constant local currency and based on constant 2000 U.S dollars It encompasses the total gross value added by all resident producers within the economy, factoring in product taxes while excluding subsidies not accounted for in product value Notably, GDP is calculated without accounting for depreciation of fabricated assets or the depletion and degradation of natural resources.
Empirical studies relating to sustainable development
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
ASY=f (HDI, GYP, APL, FIN, XR) (2-13)
SY=f ' (HDI, GYP, APL, FIN, XR) (2-14)
GYP=g (ASY OR GRS, HDI, APL, GX FDY) (2-15)
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
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
Natural resources account for 64% of exports and play a crucial role in financial development, while economic growth itself is not a significant explanatory factor Instead, gross national savings and the demographic shift of the population aged 15 to 64, along with the economic growth rate, emerge as key determinants of economic performance.
The simultaneous model estimation for economic growth and adjusted net saving revealed that the findings were unjustified, indicating that both adjusted net saving and gross saving have a statistically insignificant impact on the average growth rate of real GDP per capita.
Yacouba (2009) examined the relationship between adjusted net savings and changes in welfare from 1971 to 2000, utilizing panel data from 36 developing and developed countries The study employed the Human Development Index (HDI) and Infant Mortality Rate (IMR) as welfare proxies, with Gross National Income (GNI) as a control variable and adjusted net savings (NNS) as a regressor Using a fixed effect model for estimation, the findings indicated a significant positive relationship between adjusted net savings and welfare, although the effect size was found to be weak.
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
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 i,t+Tt+ε i,t (2-16)
GSR i,t=α+β1lnY i,t+β2Growthi,t-1+β3Agei,t+β4Urbani,t +β5Insti,t+β6Rsi,t+β7Inst i,txRs i,t+Tt+ε i,t (2-17)
Research indicates that countries rich in resources tend to have a lower genuine saving rate compared to their poorer counterparts Additionally, institutional failures can significantly hinder genuine saving However, this adverse impact of resource abundance on genuine saving diminishes as levels of corruption decrease.
A study conducted in Pakistan from 1971 to 2005 analyzed the impact of economic growth on the environment, focusing on GDP per capita, carbon dioxide emissions, energy consumption, population, and urbanization Utilizing a VAR model and ADF test, the research found a positive long-term relationship between economic growth and carbon dioxide emissions The findings indicate that energy-driven economic development significantly contributes to increased carbon dioxide emissions.
This paper explores the conceptual and empirical aspects of genuine saving, highlighting its policy implications The study utilizes the World Bank's formula for measuring genuine savings to provide a comprehensive analysis.
GENSAV= (GDS-Dp+EDU-Rn,j-CO2damage)/GDP (2-18)
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
From that, he suggested a global approach which need to find another sustainability issues, and natural capital is not corporate in national accounting
This study analyzed data from 140 countries using the Environmental Sustainability Index (ESI) 2005, revealing that variables such as GDP per capita, land use, and civil and political liberties significantly impact environmental sustainability The findings indicate that as income per capita rises, population declines, and civil and political liberties increase, environmental sustainability improves The ESI, a composite measure of national environmental stewardship, is based on 21 indicators that assess air and water pollution, biodiversity, and ecosystem health Key metrics of environmental sustainability are linked to the natural environmental carrying capacity and eco-efficiency, which can only change through shifts in societal production and consumption patterns Notably, there is no direct correlation between pollution measures and eco-efficiency, despite some overlap in their implications for environmental sustainability.
Between 1970 and 1998, researchers conducted a robustness and sensitivity analysis on time series data from the United Kingdom and Taiwan to calculate genuine saving for each country Utilizing the World Bank's formula, they adjusted their findings by incorporating the costs associated with air and water pollution.
Genuine savings, also known as adjusted net saving, is calculated by taking gross domestic savings and subtracting the consumption of fixed capital (depreciation), while adding education expenditure and deducting costs associated with air pollution, water pollution, CO2 damage, and the depletion of nonrenewable natural resources.
(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
In a study analyzing data from 91 countries between 1980 and 1995 sourced from the World Bank, researchers examined variables such as genuine saving, GDP from 1980 to 1995, education, and investment Utilizing cross-section econometrics, they identified a significant negative relationship supporting the resource curse hypothesis The findings suggest that the resource curse may stem from governments' inability to manage substantial resource revenues sustainably Additionally, the study provides a new perspective, indicating that countries with slower economic growth often experience low rates of genuine saving due to a detrimental mix of natural resource management, macroeconomic policies, and public expenditure strategies.
Using data from the 1970s, 1980s, and 1990s provided by the World Bank, researchers calculated genuine saving rates for various countries This calculation involved a formula that incorporates gross domestic investment, net foreign borrowing, gross saving, depreciation, and net saving.
Genuine Savings or Adjusted net saving = Gross Domestic Savings – Consumption of Fixed Capital (Depreciation) + Education Expenditure – Depletion of Nonrenewable
Natural Resources – CO2 Damage Costs (2-20)
The study reveals that high-income countries exhibit a positive genuine saving rate, whereas developing countries face a negative genuine saving rate This negative trend in genuine saving is linked to a decline in overall well-being.
Table 2.2: Summary of empirical studies related to sustainable development
No Researchers Data and scope of research
Adjusted net saving and Gross Saving,
- HDI, CPL, FIN, XR are important
36 countries, developed and developing countries, period 1971-2000
- Panel data, fixed effect model
- Sagan and Basman test for quality of instrument
Positive relationship between ANS and HDI, IMR, GNI but weak magnitude
115 countries, 18 years, World Bank data
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
Arrelano –Bond dynamic model effect resource abundance on GS low
Time series data, period 1971-2005 in Pakistan
CO2 emission VAR model, ADF test
Positive relationship between economic growth and CO2 emission in long term, economic development is energy driven
Dp+EDU-Rn,j- CO2damage)/GDP
Imperfect of the measure both concept and empirical characteristics
ESI increases when income per capita increase, population decrease, degree of civil and political liberty higher
United Kingdom and Taiwan data, period 1970- 1998, World Bank data
Genuine saving rate (GS) of UK is lower than Taiwan,
Low GDP growth rate will lead to low rate of
91 countries period 1985-1995, World Bank data
Cross section Resource curse hypothesis
Growth lagged combined of natural resource, macroeconomic and public expenditure policies have lead to low rate of ANS rate
Calculation GS in high income countries is positive while this indicator is negative in developing countries,
GS negative will leads to well-being decrease
This framework provides a method to assess the impact of economic growth on sustainable development by estimating the relationship between GDP growth and adjusted net savings Key control variables include Human Development Index (HDI), Market Size (MS), Age (AGE), Urban Growth Rate (UBGR), and Consumer Price Index (CPI), with ELF85 serving as the instrumental variable Additionally, the same approach will be utilized to evaluate the relationship between sustainable development and the export of raw agricultural products, as well as ores and metals, focusing on the effects of economic growth in developing countries.
Chapter remarks
This chapter focus on theoretical literature with definitions of economic growth,
Control variables HDI, MS, AGE, UBGR, CPI
Export -Raw agricultural products AGRI
Instrumental variables play a crucial role in evaluating the impacts of economic growth on sustainable development, as evidenced by the ELF85 development models Research consistently shows a positive relationship between economic growth and sustainable development in both developed and developing countries High economic growth rates are often linked to advancements in sustainable development Additionally, various factors significantly influence sustainable development, including natural resources, institutional quality, age dependency ratio, urbanization, and human investment.
Econometric techniques
This study employs Ordinary Least Squares (OLS) estimation to analyze cross-sectional data, aiming to identify the relationships between adjusted net savings and various determinants, including GDP growth, GDP per capita (GDPPC), age, unemployment benefit growth rate (UBGR), consumer price index (CPI), human development index (HDI), and monetary supply (MS) The analysis also includes testing for specification errors such as autocorrelation, heteroskedasticity, and stability at significance levels of 1%, 5%, and 10%.
To address the endogeneity issue between adjusted net savings and GDP growth, the model will be estimated using Two-Stage Least Squares (2TLS) estimation In this approach, the Ethno-Linguistic Fractionalization (ELF) index will serve as an instrumental variable for GDP growth or GDP per capita (GDPPC) The ELF index helps mitigate the potential reverse causality where income growth may influence adjusted net savings It is calculated based on the number of individuals in each ethno-linguistic group relative to the total population and the number of ethno-linguistic groups within the country.
The Ethno-Linguistic Fractionalization (ELF) index quantifies the likelihood that two randomly chosen individuals from a country belong to the same ethno-linguistic group, indicating that a higher ELF index reflects greater national fragmentation Mauro's 1995 study revealed that corruption negatively impacts investment and, consequently, economic growth His findings were validated through robust tests that accounted for endogeneity by employing the ELF index as an instrumental variable.
Higher levels of Economic Freedom (ELF) are associated with increased corruption, leading to weaker institutions that negatively impact economic growth This indicates a significant relationship between ELF and GDP growth, suggesting that enhancing economic freedom may foster better institutional quality and promote overall economic development.
This paper employs ELF as an instrumental variable to address endogeneity issues, operating under the assumption that ELF influences GDP growth without impacting adjusted net savings To validate this assumption, an over-identifying instrument test will be conducted, with the null hypothesis positing that ELF affects adjusted net savings solely through its effect on GDP growth.
Model 1: Faster growth of economics will lead to sustainable development
ANSi=α0+α1GDPGRi+α2HDIi+α3MSi+α4XRi+α5AGEi+α6UBGRi+α7CPIi+εi (3-1)
Where i denotes for country i, ε is residual
Null hypothesis H0: there is no relationship between adjusted net saving and average GDP growth in period 1996-2010
Alternative hypothesis Ha: there is a between adjusted net saving and average GDP growth in period 1996-2010
If α1>0: there is a positive relationship between adjusted net savings and GDP growth
If α10: there is a positive relationship between adjusted net savings and income per capita
If β10: there is a positive relationship between adjusted net savings and export of agricultural products
If γ10: there is a positive relationship between adjusted net savings and export of ores and metals
If δ10: there is a positive relationship between adjusted net savings and economic growth in developing countries
If α1