• Fiona Smith

Luke McGrath on examining Ireland's Genuine Savings and sustainable development

Dr Luke McGrath

LUKE McGRATH left his role as an economist within the Department of Communications, Climate Action and the Environment to undertake a PhD in environmental economics, focusing on natural capital accounting. Here, he summarises his recent publication with Dr Stephen Hynes and Prof John McHale in the journal Ecological Economics. The publication presents an economic approach to natural capital accounting and examines if Ireland’s development path over the last 30 years was an unsustainable one. Free access to the full publication is available until September 14th. 2019. 

I have always been interested in the idea of sustainable development. Developing in a sustainable manner became a hugely popular policy goal following the work of the Brundtland Commission in 1987 who presented a seminal, if extremely vague, definition, “meet the needs of the present without compromising the ability of future generations to meet their own needs.”  For sustainability to be an 'operationalisable' concept, we need to put meat on these bones.

Environmental economists offer what is arguably the most internally consistent theory of sustainable development. This 'capital' approach, views our stocks of environmental assets, our natural capital, equivalent to produced capital (e.g. machinery and roads). The achievement of sustainable development requires ensuring sufficient (broadly defined) capital resources exist to allow future generations to have the opportunity to create living standards at least as good as the present.

My research analyses whether or not these assets have been running down in Ireland by constructing estimates of Ireland’s Genuine Savings (GS), the leading economic indicator of sustainable development, over the past 30 years.

Measuring Sustainable Development: Genuine Savings GS measures the change in the monetary value of the stocks of natural (clean air, natural resources), produced (machines and infrastructure) and human (knowledge) capital on an annual basis. Negative GS imply unsustainable development signalling that we are running down our capital resources and diminishing future welfare opportunities. GS goes “beyond GDP” by including important assets missing from the conventional national accounts. GS has gained international recognition through the World Bank who publish estimates for most countries. My research presents augmented estimates of Irish GS by constructing a time-series from national data sources that includes important characteristics omitted by the World Bank (peat depletion, forestry growth, agricultural land value and air pollution) and examines further issues such as the role of technological advancement, transboundary pollution, climate change uncertainty and population growth dynamics. 

Ireland’s Genuine Savings 1990-2016 “Celtic Tiger” growth did not appear to coincide with unsustainable development. Pre-Tiger, the Irish economy signals unsustainability through low or negative savings from 1990-'95. Under certain scenarios, unsustainability was recorded during the economic downturn. Our GS estimates are considerably lower than the World Bank’s and, contrary to the GS literature, show that a well-developed economy can signal unsustainable development. Remarkable damages from local air pollution during the early '90s, primarily sulphur dioxide, drive the results (Fig. 1). During the economic boom period, we find evidence to suggest a transition away from an unsustainable path as rapid economic growth and rapid declines in environmental degradation occurred concurrently. In terms of policy use, it is important to note the one-sided nature of the GS indicator. If savings are negative, this implies unsustainability. However, the opposite is not necessarily true, positive savings imply a welfare improvement but cannot guarantee sustainable development. Results should be interpreted carefully, a strong warning is indicated when savings rates are negative or low but finding positive GS cannot be taken as a clean bill of health. GS provides important information that should be supplemented with further analysis, the information provided by the GS indicator can point to where further analysis ought to be undertaken  

Fig. 1: Components of Irish Genuine Savings for selected years

​Policy Implications There are often calls for a curtailment of economic growth to “save the environment” - our results reinforce the suggestion that what matters is not economic growth per se but the way economic growth is secured. In the Irish case, it appears that total pollution damages were declining substantially while rapid levels of economic growth were secured. Our results demonstrate the potentially large benefits attainable from pollution reductions (Fig. 2) and provide a reminder that a system of regulations prioritising one particular problem, such as carbon dioxide emissions, at the expense of other damaging local air pollutants, may result in misguided public policy. The measurement of genuine savings provides a valuable framework for aggregate assessments where such trade-offs are involved.

In terms of sustainability assessments, governments and statistical agencies should be cognisant of the theoretical literature suggesting measuring GS should be the focus for the economic component of a wider sustainability analysis. The European Union currently monitors progress towards sustainable development with a dashboard of 100 indicators split between economic, social and environment, based on the United Nations Sustainable Development Goals. These individual indicators are clearly important but fail to provide any clear information to aid in the determination of whether or not the EU, or any individual member state, is on an unsustainable economic development path.

Fig. 2: Breakdown of total pollution damages​

This blog is a summary of McGrath, L., Hynes, S., & McHale J. (2019). Augmenting the World Bank’s estimates; Ireland’s Genuine Savings through boom and bust. Ecological Economics, 165, https://doi.org/10.1016/j.ecolecon.2019.106364

Free access is available through: https://authors.elsevier.com/a/1ZSfp3Hb~0IZT8 until September 14th.

You can follow Luke’s research:  https://www.researchgate.net/profile/Luke_Mcgrath & https://twitter.com/moody_economist

Luke’s research is funded by the Irish Research Council and NUIG Hardiman Scholarship.


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