FOR the past 30 years, Malaysia has pursued a rapid economic growth course through foreign direct investments, industrialisation processes and services sector augmentation. To a large extent, Malaysia has been able to sustain a positive gross domestic product (GDP) growth trajectory.
However, there are increasing concerns among resource-based economists that the conventional GDP indicator may not be adequate to reflect if an economy is growing sustainably, as it essentially does not capture the changes in matters like national capital and pollution impacts. Hence, an important and growing apprehension is whether Malaysia's economy is moving on the sustainable growth path.
Although the fallacy of the GDP indicator as a true measure of economic performance has long been recognised, the need for alternative indicators became increasingly important especially following the UN Conference on Environment and Development in 1992. The Agenda 21 stresses very explicitly the need for the world at large to develop capacity to assess the true progress of the economy.
The operational definition of sustainable economic growth is that the total stock of the national capital — encompassing man-made capital, human capital, natural capital and even social capital should be maintained as a necessary condition to sustain future well-being. Such a definition essentially relates the sustainability conditions, especially for a resource-based economy, on the ability to maintain a constant stream of consumption into the infinite future.
This can be achieved via a savings and investment rule that ensures the aggregate stock of man-made and natural capital remains constant over time. Many studies have attributed the inability of resource-rich economies to achieve long-term welfare improvements to the failure to offset the depletion of natural resource stocks with sufficient investments in physical capital and human capital; consequently, their total national wealth — the sum of physical, human, and natural capital declines.
While there exists a theoretically sound alternative to the GDP such as the Green GDP framework to reflect true economic progress, its sheer complexity and resource requirements may not provide much hope for its practical implementation at least in the short-run. Hence, countries have increasingly rely on the World Bank initiated genuine savings (GS) indicator to draw a sense of economic performance that takes into account the depletion of natural resources and pollution impacts.
Operationally, GS is simply a country's gross domestic savings less consumption of fixed capital plus education expenditure less natural resources depletion and pollution damages. Note gross domestic savings as conventionally defined is GDP less the value of public and private consumption expenditures. Hence, upon adjusting it with the aforementioned components the term GS is derived. Education expenditure is added into the equation as it supposedly lead to productive human capital formation, thereby increasing the country's overall capital savings.
A negative GS rate or trend denotes the national capital in aggregate is depleting faster than renewed, hence it is a serious 'flag' denoting unsustainability. A positive GS is desirable, however, it still does not assure strict sustainability, as it presumes that natural capital can be perfectly substituted by man-made capital.
I calculated the GS for Malaysia for the 1990-2008 period to show if the country has been saving enough overall capital to sustain her future socio-economic development and related achievements. Results show that Malaysia's GS has been positive during 1990-2008. Overall, a 1% change in GDP is associated with 1% change in GS. This indicates well that Malaysia's economy has been operating on the sustainability track.
However, further investigation reveals that following the economic crisis of 1997/98, while Malaysia's GDP growth contracted by 2.2%, GS growth declined more pronouncedly by 9%. While the overall positive GS achievement is indeed encouraging, the larger decline of GS growth in the post crisis period causes serious concerns on Malaysia's capital accumulation capacity.
Investigation of the GS to GDP ratio further reveals a definite pattern where the ratio was increasing in the period prior to 1997/98 but declined substantially thereafter. This signifies to a large extent the declining capacity of the Malaysian economy to sustain the rates of overall national capital savings for future consumption and productive activities.
In the context of the GS framework, the positive GS elements refer to gross domestic savings and education expenditure. Since education expenditure features very prominently (18% of GS), it is imperative that it contributes meaningfully to human capital formation. Otherwise, the positive GS trend may result in biased policy implication or may only constitute a false sense of comfort.
On the other hand, the negative elements within the GS framework are pollution costs (CO2 emission) and natural resource depletion. The latter includes depletion in renewable and non renewable resources. Of the four negative elements of the GS, overall energy depletion costs at 36% of GS are most prominent. The percentage of energy depletion costs to GDP declined sharply from 1990 to 1994, but increased markedly from 1995-2008.
Appropriate strategies shall need to be devised to increase further investment in reproducible and consequential human capital to offset the depletion of natural resources as well as physical capital. It is very imperative to ensure that the education sector is truly capable to produce meaningful future's human and social capital as they feature very prominently as a positive element in the GS calculation.
In view of the importance of the GS indicator to reflect the macroeconomic sustainability path of an economy, it is recommended that the Malaysian Department of Statistics look into ways to develop a system where pertinent GS data inputs can be obtained on a routine basis from the respective line agencies. This will enable the calculation of the GS in a fast and efficient manner, yet yielding credible estimates.
It will also be a strategic initiative for the Malaysian GS to be calculated and appraised for the various states or regions, especially the relatively resource-richer states such as Terengganu, Kelantan, Pahang, Kedah, Sabah and Sarawak.
Dr Jamal Othman is professor of resource and environmental economics at Universiti Kebangsaan Malaysia. This article appeared in The Edge Financial Daily on May 14, 2012.