WAVES Policy Briefing Mar 2015 Policy Briefing Summary Natural capital accounting: Poor people are providing information for poverty reduction dependent on natural capital for income. Poor countries and poor people are highly dependent on natural Not enough is known capital such as forests, water, farmland and minerals for their about the state of natural capital, how it development. Consequently policymakers and planners need is being used and its relevant information on the stocks and flows of natural capital, value. Natural capital on who is using it, how it is being used and on the values realized. accounting could be At present, this kind of information is often incomplete and/or a system for collating this information and unused by decision makers in developing countries. Natural presenting it in a way capital accounting could be a system for pulling together good that could inform poverty information and presenting it in ways that directly inform reduction strategies and national development. poverty reduction strategies. The World Bank’s WAVES Partnership programme is working with many developing Background country governments to support establishing nationally tailored This briefing was written natural capital accounting systems that can contribute to by Steve Bass and Paul national development and poverty reduction plans. Steele from the International Institute for Environment and Natural capital accounting (NCA) provides systematic information about the Development, London. assets that poor people and low income countries depend on for income, livelihoods, health, security and resilience. Natural capital is the stock of ecosystems (renewables, like forests, water, farmland, and biodiversity and non-renewables like minerals). It provides benefits to people in the form of flows of goods and services over time, such as food, timber, fibre, energy, clean water, clean air and protection from hazards — all of which contribute to development. www.wavespartnership.org Wealth Accounting and the Valuation of Ecosystem Services Principle asset for poor people Natural capital is the principal asset The use of natural capital, and its available to most poor people, apart transformation to other forms of from their own labour. Nearly three capital (like financial or manufactured), Natural capital quarters of the world’s poorest is a principal development strategy for is the principal citizens are directly dependent on most poor countries. Thirty six per asset available to natural capital: 50 per cent are cent of national wealth in developing most poor people, smallholder farmers, 20 per cent are countries is natural capital, compared apart from their rural labourers, and 10 per cent to just 2 per cent in OECD countries.2 own labour. depend on herding, fishing and Thus it is not surprising that natural forestry.1 While wealthier segments of resource rents are a principal source society can substitute between forms of national income. But for poor of capital (e.g. use fertilizers when soil people in particular, natural capital nutrients are low, build defence produces an estimated 47-89 per cent barriers to protect against floods, or of the ‘GDP of the poor’ in developing move to other places when it gets too countries.3 Their capacity to develop dry), the livelihoods of most poor other capital assets is closely linked to people depend completely on the their natural capital, for example skills condition of their natural capital and in farming, and equipment for are highly vulnerable to natural processing natural resources. But disasters and shocks. because of missing or incomplete markets, credit and technology, poor The importance of environmental people often depend on their income to the poor typically lies surrounding environment for survival.4 between 20 and 30 per cent of household income as illustrated by Figure 1. Figure 1. Relative importance of environmental income to household income  Source: Angelsen, A. et al. 2014. Environmental Income and Rural Livelihoods: A Global- Comparative Analysis, World Development. Environmental income (%) 35 30 25 20 15 10 5 0 Latin Asia Africa Global America Natural capital accounting providing information for poverty reduction 2 However, poor people’s dependence be reflected in the national accounts, on natural capital is rarely known the contribution of the informal beyond isolated studies. Much of this pastoralist sector — critical for poor ‘GDP of the poor’ is based on a groups — will not.5 When information Too often natural subsistence or informal economy in, on the GDP of the poor is analysed it is capital is used for example, agriculture, animal shown to be a very significant amount husbandry, forestry and fisheries. This (Figure 2). in ways that do activity does not often enter the not benefit poor For many poor groups, deprivation of market and tends to be ignored in people. the non-cash benefits of natural official economic statistics. For capital can be a more significant example, while production from a measure of poverty than deprivations country’s formal livestock sector will of cash income. Figure 2. GDP of the poor: estimates of ecosystem service dependence.  Source: TEEB (The Economics of Ecosystems and Biodiversity). 2010. Mainstreaming the Economics of Nature. A Synthesis of the Approach, Conclusions and Recommendations of TEEB. Share of agriculture, forestry and fisheries in classic gdp Indonesia India Brazil 11% 17% 6% Ecosystem services as % of “gdp of the poor” Indonesia India Brazil 75% 47% 89% Rural poor population considered in gdp of the poor (millions) Indonesia India Brazil 1,189 246 203 99 20 352 Total population Poor Natural capital accounting providing information for poverty reduction 3 Natural capital accounting: informing the poverty reduction-natural assets relationship The relationship between poverty and unless a major shift takes place.9 natural capital is not simple and can Relying on natural capital as a be negative as well as positive. pathway out of poverty is not enough. However, policy and plans are often Policies need to be place-specific and not informed by this relationship and use a variety of instruments like direct what influences a positive or negative investment to reduce dependence or trend. Poor people’s lives are more over-exploitation of environmental intimately tied up with the condition of resources through non-farm jobs and natural capital than other groups: improving access to affordable capital, technology and markets. • Typically, natural capital provides at least a safety net for poor people Too often natural capital is used in — smallholder farms, forests and ways that do not benefit poor people. fisheries providing a range of Economic growth policies have nutrition, energy and health needs6,7 favoured local elites or foreign • Sometimes natural capital can offer companies dominating access to natural capital, to manage it in ways a route out of poverty — realising income from its rental, from local that suit their interests. Conservation enterprises or employment in policies often exclude poor people natural resource management. For from using natural resources like example, a 10 per cent increase in forests and water bodies — for farm yields from sustainable example when national parks are agriculture reduces poverty by 7 per created or extraction licences are cent in Africa and 5 per cent in Asia8 given — and from economic incentives like subsidies for reforestation if linked • Occasionally, however, natural to clear tenure or require co- capital acts as a poverty trap investment. — where people’s lives become bound to underproductive or In such cases, others benefit (including degraded land and water bodies, society as a whole from preservation of especially if they live in areas remote resources) but it is the poor people from markets, education and who have suffered the costs. The health, with few opportunities to distribution of these social, invest in land improvement.4 environmental or financial costs and benefits are neither transparent nor The relationship changes over time, included in decisions — to the closely linked to market dynamics, detriment of both natural resource changes in resource scarcity, and management and poverty reduction governance regimes. For example, policies. with changes in legislation and international demand and supply, The challenges of natural resource poor countries and groups can be left management and poverty reduction with stranded assets, such as in the are highly significant, but each has case of coal-or oil-rich countries when been treated as a separate endeavour. climate legislation and carbon markets Isolated institutions, disciplines and tighten up. But given current information systems make it hard to population and poverty trends, the deal with the real-life interdependence rural poor will continue to lose out of these challenges. Equity-blind Natural capital accounting providing information for poverty reduction 4 approaches to natural capital • Productivity and efficiency: which management are not enough and a natural capital is being overused, much more systematic solution is efficiently used, or underused? needed. For example ecological outcomes are at risk if fairness and • Costs: what are the true costs of Natural capital using natural capital? What is the accounting offers a legitimacy (of access and distribution cost of losing or degrading it (e.g. in of benefits and costs) issues are not systematic overview terms of replacement cost or loss of considered.10 of different forms resilience) of natural capital More integrated information is a first • Opportunities for job creation — relevant to poverty step to opening up natural resource and possible alliances between the routes out of poverty, and to closing public and private sector to create reduction. down poverty traps. Ideally, we shared value for companies and should know: societies. • Natural capital stocks and flows: • Policy and investment: how is the what are the changing stocks of introduction of regulations and each type of natural capital such as market instruments, and new forests or soils, and the flows of investments, changing the above? goods and services from these Where are the effective levers for stocks? poverty reduction? • Waste and ‘brown’ agenda: what Developing countries don’t usually are the flows of ecosystem ‘bads’ have all this information. To answer (waste water, pollutants, CO2 the above questions requires research emissions)? What sectors are in specific localities, as well as involved and what opportunities interdisciplinary methodologies and may this create for others? institutional coordination. But efforts to provide this have variously been • Users and use: what sectors, short-term projects only, heavily localities or groups of people are value-based, poorly provided with using natural capital and for what data, and/or not tractable with purpose? What are poor groups mainstream disciplines and using, and what is their dependence institutions. Again, a more systematic on it? solution is needed. • Added value: what benefits are poor groups receiving from natural resource use — e.g. in terms of income per m3 of water or wood, as well as health, security or livelihood resilience? Natural capital accounting providing information for poverty reduction 5 What natural capital accounting offers Natural capital accounting offers a • It is produced through, and systematic overview of different supportive of, collaborative practice forms of natural capital relevant to across several departments and poverty reduction: potentially also with representatives of poor people. • The data presented is unbiased, structured, and comparable. It • It is repeated on a regular basis, employs an accounting framework which enables the correlation of that is agreed by the United Nations natural capital data and trends with (the System of Environmental and poverty data and trends. Economic Accounts, SEEA), and • It can focus research on the many follows a logic that is tested and knowledge gaps concerning the acceptable to statisticians, relationship of natural capital and accountants, economists and poverty. While NCA does not natural scientists. This eases its obviate the need for detailed policy adoption across sectors, and analysis in relation to particular enables it to complement other natural resources, locations or user high-level national information, groups, it offers a systematic particularly the system of national information base to support such accounts, but also poverty analysis and the policy decisions reduction and census information. that follow. • It provides a first step towards an • At the moment the information information base on natural capital, collected is at the national level. which can be used for poverty Future steps should move towards reduction planning, to inform e.g. disaggregation of data and a more national development plans, job distributional focus. creation and social protection programmes, as well as natural resource management plans that are critical for poverty reduction e.g. water supply and collaborative forest management. Natural capital accounting providing information for poverty reduction 6 Making progress in-country: the WAVES programme informing poverty reduction Developing countries face many critical for poor people — such as pressures and resource constraints, water in drought-prone countries, or and systemic solutions are often for economic growth — such as viewed as impracticable or expensive. minerals and forests. However, NCA can be built up in Although it is early days in most stages: countries can begin with countries, NCA has already begun to accounts for just one resource that is inform poverty reduction strategies. Botswana water accounts. These revealed a dilemma: the agriculture sector is the highest water user (43 per cent), but it is a low contributor to GDP and formal employment. In contrast, the service sector, notably tourism, produces significant added value from each m3 of water. However, if poverty is to be reduced, the income-generating potential of services needs to be balanced against agriculture’s support to much informal employment, which provides a critical social safety net to people in remote areas. Information from Botswana’s water accounts is aimed directly at supporting implementation of the National Water Master Plan and associated water sector reforms11. Guatemala agricultural accounts and food security. Guatemala has become the first WAVES country to address national policy around food security by undertaking agricultural accounts together with water, forest and energy accounts. Food security remains a major challenge in Guatemala. With half of pre-school chronically malnourished, Guatemala has the higher chronic malnutrition in the Latin American and Caribbean region and one of the highest in the world. Over half of the malnourished children in the region live in Guatemala. Malnutrition not only increases child mortality, but lowers education performance and adult productivity.12 The WAVES programme will apply the System of Environmental Accounts to agriculture to inform this debate. Provisional engagement with key stakeholders from public and private sector is taking this work forward. Philippines accounts inform land use options. The Philippines has chosen to undertake accounts in two regions — Southern Palawan and Laguna Lake — both of which involve poor and non-poor groups competing over natural assets. In Southern Palawan, an island of rich natural assets there are active struggles ongoing over whether to preserve the biodiversity for ecotourism and sustainable use or to allow mining of the rich deposits that have been discovered. In Laguna Lake by the capital Manila, there is competition between large- and small-scale fishers and the many other users of the lake. Natural capital accounting providing information for poverty reduction 7 As NCA progresses, it needs to • NCA should pay attention to the address several challenges if it is to data challenges of the particular realise its potential to support poverty natural capital types on which poor reduction. The World Bank is making groups depend — which are often progress in developing and applying non-marketed — such as watershed NCA with developing countries, quality and biodiversity. through the WAVES Partnership. The task is not straightforward, • NCA should avoid inadvertent bias towards national issues and however. There are challenges in account for differences across ensuring NCA can be precisely geographies, social groups and tailored to the needs of poor countries employment types. Local accounts and poor groups. The partnership might be one way forward. welcomes debate and collaboration in tackling these challenges: • Although these are tough challenges, as NCA is an • As far as possible, NCA should internationally agreed, credible, incorporate data relevant to natural information system that works for resource-using SMEs and informal all sectors, disciplines and economic activities, and not only resources, it is more likely to attract the major formal sectors (e.g. data, to be used, and to be decentralised water abstraction, influential. NCA encourages a artisanal mining production, etc). whole-of-government approach to Community reporting, use of mobile data assembly and analysis. This devices, and so on can provide improves the likelihood of its being channels for poor groups to input used in cross-institutional, central data to NCA, and to validate data. and/or high-level decisions — and • NCA should be transparent and of systemic solutions being found. accessible to poor groups – at least in terms of its overall findings. Social networking is one way of achieving this. Notes 1. FAO. 2014. The state of food insecurity in the world 8. African Development Bank. 2010. Agriculture 2014. FAO, Rome Sector Study 2010-2014 2. World Bank. 2011. The changing wealth of nations: 9. Barbier, E. 2012. Natural capital, ecological scarcity Measuring sustainable development in the new and rural poverty. The World Bank Development millennium. World Bank, Washington DC Research Group, Washington DC 3. TEEB. 2011. The Economics of Ecosystems and 10. Pascual, U, J Phelps, E Garmendia, K Brown, E Biodiversity in National and International Policy Corbera, A Martin, E Gomez-Baggethun, and R Making. Edited by Patrick ten Brink. Earthscan, Muradian. 2014. Social Equity Matters in Payments for London and Washington DC. Ecosystem Services. BioScience (forthcoming) 4. Barbier, EB. 2010. Poverty, development and 11. World Bank (2014) Botswana Water Accounts, environment. Environment and Development http://www.wavespartnership.org Economics 15:635-660. 12. World Bank (2013) Implementation completion 5. Hesse C and J MacGregor. 2006. Pastoralism: and results report (IBRD 73570) on a loan in the drylands’ invisible asset? Developing a framework for amount of US$49.0 million to the Republic of assessing the value of pastoralism in East Africa, IIED Guatemala for a maternal-infant health and nutrition 6. OECD 2008 Natural resources and pro-poor project November 26, 2013, Human Development growth: The economics and politics. DAC Guidelines Sector Management Unit, Central America Country and Reference Series. OECD, Paris Management Unit, Latin America and Caribbean 7. UNEP. 2012. Poverty reduction. Green Economy Region http://www-wds.worldbank.org Briefing paper. UNEP Economics and Trade Branch, Geneva Download Policy Briefings at www.wavespartnership.org Wealth Accounting and the Valuation of Ecosystem Services (WAVES) is a global partnership led by the World Bank that aims to promote sustainable development by ensuring that natural resources are mainstreamed in development planning and national economic accounts.