Environmental capital and sustainable income in Ethiopia

ABSTRACT

Conventional GDP measurements often overlooks the significant contribution of the environment to a country’s long-term economic performance, leading to inaccurate assessments and the concealment of important environmental and economic benefits. The aim of this study is to estimate the level of environmental capital and sustainable income. To determine the contribution of environmental capital to GDP, the concept of the neoclassical growth model was used. This analytical approach begins by defining the two types of capital inputs, such as: human capital and environmental capital used in the production of final goods and services. The study found that the total share of environmental capital in GDP was 32% over the study period, while the contribution of environmental capital to gross national production fell from 39% in 2000 to 29% in 2018. The gap between GDP and sustainable GDP estimate also widened between 2003 and 2011. A comparison between GDP and sustainable GDP shows that environmental resource damage can account for up to 15.5% of GDP, leading to an overestimation of GDP. The decline in the share of environmental capital may have long-term implications for the potential of low-income countries to grow sustainably. Therefore, policymakers need to pay adequate attention to environmental capital investments to ensure the long-term sustainability of the economy. Institutions directly involved in GDP estimation also should have been transformed to a more comprehensive and environmental integrated GDP measurement.

KEYWORDS:

• Depreciation
• national income
• GDP, Environmental capital: human-made capital
• Resource Depletion

Public Interest Statement

This paper estimates the amount of environmental capital and sustainable GDP for Ethiopia using the concept of a neo-classical growth model. The study found that the contribution of environmental capital to gross national production fell during the study period, and the gap between GDP and the sustainable GDP estimate also widened. The decline in the share of environmental capital and the increase in the gap between GDP and sustainable GDP may have long-term implications for the potential of low-income countries to grow sustainably. Therefore, institutions directly involved in GDP estimation should also have been transformed to a more comprehensive and environmentally integrated GDP measurement.

Disclosure statement

No potential conflict of interest was reported by the author.

Data availability statement

Data will be made available upon request to the corresponding author.

Author contribution

The author conceived the original study concept and design. He led the analysis of the collected data, prepared the first draft of the manuscript, and made extensive revisions to the manuscript. The author read and approved the final manuscript.

Additional information

Notes on contributors

Mohammed Adem

Mohammed Adem is an assistant professor of economics at Bahir Dar University in Ethiopia. His research interests include food security, poverty, impact assessment, resource and environmental economics, production economics, and technology adoption using econometric models.