From economic growth to sustainable development - lessons for Vietnam.pdf

1. UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES
HO CHI MINH CITY THE HAGUE
VIETNAM THE NETHERLANDS
VIETNAM – THE NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS
FROM ECONOMIC GROWTH TO
SUSTAINABLE DEVELOPMENT:
LESSONS FOR VIETNAM
BY
NGUYEN THI HONG
MASTER OF ARTS IN DEVELOPMENT ECONOMICS
HO CHI MINH CITY, NOVEMBER 2012

2. UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES
HO CHI MINH CITY THE HAGUE
VIETNAM THE NETHERLANDS
VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS
FROM ECONOMIC GROWTH TO
SUSTAINABLE DEVELOPMENT:
LESSONS FOR VIETNAM
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS
By
NGUYEN THI HONG
Academic Supervisor:
ASSOCIATE PROFESSOR DR. PHAM HOANG VAN
ASSOCIATE PROFESSOR DR. NGUYEN TRONG HOAI
HO CHI MINH CITY, NOVEMBER 2012

3. i
DECLARATION
I would like to declare that this thesis:" From economic growth to sustainable
development: Lessons for Vietnam" is original. I ensure that this paper has not been
submitted anywhere for the award of any degree.
This thesis was completed with big support from my supervisors. All source of data
and information have been fully referenced.
NGUYEN THI HONG
MDE16

4. ii
ACKNOWLEGDEMENT
I would like to express my greatest gratitude to respectful supervisors, Associate
Professors – Dr. PHAM HOANG VAN, Baylor University and Dr. NGUYEN TRONG
HOAI, Vice President of UEH. They already helped and supported me many interesting
courses, especially valuable advice, guidance and inspiration for me finish this study on time.
I also want to express my thanks to all Professor of the MDE Program during the past
two years (2009-2011), my friends of MDE16, UEH administrative staff at Economic
Development Faculty, who supported many useful documents and materials. I cannot forget
the support from my big family all the time I followed this program.
At last but not the least, I am so sorry and would like to share my condolences when
Professor KAREL JANSEN - who had great contributions to the program - passed away.
That was really a big loss for all of us.
Best regards.
NGUYEN THI HONG
MDE 16

5. iii
ABSTRACT
In the scenes of strong economic development all over the world during some decades
ago, the new problems that are happening everywhere is the consequence of progress can be
attract more concerns of economists. That is the trade-off of economic achievements and the
degradation of environment, the exploitation of natural resources, the global warming, the rise
of sea level and so on. The new concept about development - sustainable development - now
becomes familiar. It is a new economic approach to express the development which care not
only economic growth but also reservation of the natural resources, the environmental
pollution, the investment on education.
From that point of view, by using data of 90 countries, the author hopes to find out the
relationship between sustainable development and other determinants such as GDP growth,
export of natural resources and agricultural products, urban population growth, Human
Development Index, corruption impact and so on. I strongly believe that the discovery of
these relationships can provide some valuable lessons for development progress for
developing countries and Vietnam.
Key words: sustainable development, economic growth, adjusted net savings

6. iv
TABLE OF CONTENT
DECLARATION ............................................................................................................................. i
ACKNOWLEGDEMENT ..............................................................................................................ii
ABSTRACT...................................................................................................................................iii
TABLE OF CONTENT................................................................................................................. iv
LIST OF ABBREVIATIONS........................................................................................................ vi
LIST OF TABLES........................................................................................................................vii
LIST OF FIGURES, GRAPHS ...................................................................................................viii
CHAPTER I .................................................................................................................................. 1
INTRODUCTION......................................................................................................................... 1
1.1Research background................................................................................................................. 1
1.2 Statement of problem............................................................................................................... 2
1.3 Research objectives................................................................................................................... 3
1.4 Research questions.................................................................................................................... 4
1.5Research methodology............................................................................................................... 4
1.6 Structure of thesis ..................................................................................................................... 5
CHAPTER II................................................................................................................................. 6
LITERATURE REVIEW FOR SUSTAINABLE DEVELOPMENT ..................................... 6
2.1 Concepts of economic growth, economic development and sustainable development ............ 6
2.2 Approaches of sustainable development................................................................................... 8
2.3 Objectives and significance of sustainable development........................................................ 10
2.4 Indicators of sustainable development................................................................................... 11
2.5 Linkage of various determinants of sustainable development................................................ 14
2.6 Benefits and drawbacks of adjusted net savings..................................................................... 15
2.7 Empirical Models.................................................................................................................... 16
2.8 Empirical studies relating to sustainable development........................................................... 22
2.10 Chapter remarks.................................................................................................................... 30
CHAPTER III ............................................................................................................................. 32
RESEARCH METHODOLOGY AND DATA COLLECTION............................................ 32
3.1 Econometric techniques.......................................................................................................... 32

7. v
3.2 Data collection ........................................................................................................................ 35
3.3 Data analysis ........................................................................................................................... 35
3.4 Chapter remarks...................................................................................................................... 36
CHAPTER IV.............................................................................................................................. 37
RESEARCH RESULTS............................................................................................................. 37
4.1 Descriptive statistics ............................................................................................................... 37
4.2 Relationship between adjusted net saving and other factors .................................................. 41
4.3 Empirical analysis................................................................................................................... 44
4.4 Chapter remarks...................................................................................................................... 53
CHAPTER V............................................................................................................................... 55
SUSTAINABLE DEVELOPMENT IN VIETNAM ................................................................ 55
CHAPTER VI.............................................................................................................................. 58
CONCLUSIONS AND RECOMMENDATIONS.................................................................... 58
6.1 Main findings.......................................................................................................................... 58
6.3 Limitations of thesis title ........................................................................................................ 61
6.4 Further research ...................................................................................................................... 61
REFERENCES............................................................................................................................ 62
APPENDIX

8. vi
LIST OF ABBREVIATIONS
ADB Asian Development Bank
IMF International Monetary Bank
NGO Non Governmental Organization
CO2 Carbon Dioxide
CPI Corruption Perception Index
ELF Ethno-Linguistic Fractionalization
GDP Gross Domestic Product
GDPPC Gross Domestic Product per capita
GNI Gross National Income
HCMC Ho Chi Minh City
HDI Human Development Index
MPI Ministry of Planning and Investment
OECD The Organization for Economic Cooperation and Development
OLS Ordinary Least Squares
TFP Total Factor Productivity
TSLS Two Stage Least Squares
UN The United Nations
UNCED The United Nations Conference on Environment and Development
UNDP The United Nations Development Program
WB The World Bank
WTO World Trade Organization
WCED World Commission on Environment and Development

9. vii
LIST OF TABLES
Table 2.1: Expectation the influence of determinants on adjusted net savings ................22
Table 2.2: Summary of empirical studies relating to sustainable development. ..............27
Table 4.1: Descriptive statistics........................................................................................39
Table 4.2: Covariance and correlation..............................................................................40
Table 4.3: Regression adjusted net savings and GDP growth rates by OLS ....................44
Table 4.4: Regression adjusted net savings and GDP growth rates by TSLS ..................46
Table 4.5: Regression adjusted net savings and GDP per capita by OLS ........................47
Table 4.6: Regression adjusted net savings and GDP per capita by TSLS.......................48
Table 4.7: Regression adjusted net savings on Export of agricultural raw products........50
Table 4.8: Regression adjusted net savings on Export of natural resources....................51
Table 4.9: Regression adjusted net savings with GDP growth rates in developing countries
........................................................................................................................................... 52
Table 4.10: Summary results ............................................................................................54
Table 5.1: Vietnam Data...................................................................................................55

10. viii
LIST OF FIGURES, GRAPHS
Figure 2.1: Linkage of various determiants of sudtainable development……………….15
Graph 2.1: How to calculate adjusted net savings ............................................................12
Graph 2.1: Conceptual framework....................................................................................30
Graph 4.1: Relationship between Adjusted net savings and GDP growths (1996-2010).41
Graph 4.2: Relationship between Adjusted net savings and and GDPPC2010................42
Graph 4.3: Relationship between Adjusted net savings and export of agricultural raw products
in period 1996-2010..........................................................................................................42
Graph 4.4: Relationship between Adjusted net saving and and export of natural resources in
period 1996-2010..............................................................................................................43
Graph 4.5: Relationship between Adjusted net savings and GDP growth of developing
countries in period 1996-2010 ..........................................................................................44

11. 1
CHAPTER I
INTRODUCTION
1.1 Research background
Economic growth affects national wealth or income per capita by increasing its Gross
Domestic Production or Gross National Income. Research about economic growth and its
influences on environment and society always attract interest from economists all over the
world. Moreover, some targets of economic growth are directly to the sustainable use of these
natural resources and environmental protection. It means that economic growth is not at all;
many countries are saving of their scare natural resources than in some past decades for future
generations instead of the exploiting them and not paying any attention to these environmental
degradation.
Since the first appearance in the Brundtland report at World Commission on
Environment and Development in 1987, the concept of sustainable development has become
popular in many countries.1
The relationship between economic growth and sustainable
development has consideration from economists. Expressing sustainable development by
genuine saving rates or adjusted net savings, many studies found that sustainable development
has a consistent relationship with economic growth.
Hamilton et al. (1999) measured genuine saving rates of countries both developing
and developed countries. These rates were calculated by combination of different factors as
gross savings, fixed capitals, educational expenditures and polluted emissions. They found
that genuine saving rates were positive values in high-income countries and negative values
in developing countries. Negative rates of genuine savings would lead to declining of well-
being.2
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.

12. 2
Atkinson et al. (2003) studied the relationship between natural resource abundance
and growth rate of GDP per capita. The result shows a negative and significant relationship
between natural resource abundance and growth rate of GDP per capita. 3
By measuring genuine saving of Taiwan and United Kingdom- one developed country
and one industrial country in Asia, Grace et al. (2004) found that low annual GDP growth rate
of United Kingdom corresponded low rate of genuine saving ratio to GDP. 4
A study of genuine savings by Dietz et al. (2007), genuine saving rates of rich and
poor natural resource countries and some factors affecting them. They found that rich resource
countries had lower genuine saving rates than poor resource countries. Moreover, this negative
effect will decrease when institutional quality improves.
Therefore, economic growth affects significantly to genuine saving rate of a nation.
Many other factors such as institutional quality, abundance of resources affected genuine
saving rates at different levels. Genuine saving rates depend largely on economic growth rate;
developed countries usually have higher genuine saving rates than developing countries.
1.2 Statement of problem
Economic growth rates of Vietnam in some decades ago were very impressive,
especially after VIETNAM implemented its “Doi Moi” policy in 1986. Since that time,
VIETNAM has followed these new economic strategies, enhancing the market openness with
international corporations. VIETNAM has become one of the economy that have high
economic growth rates in Asia. Economic growth has given chances to improve standards of
living. However, after nearly 30 years of the “Doi moi” stage, VIETNAM is still one of these
poorest countries in the world with income per capita was only 723$US in 2010 though the
average rate of economic growth in Vietnam was about 7.07% over the period of 1996-2010.
5
3
Atkinson G., Hamilton K. (2003), “Saving, Growth and the Resource Curse Hypothesis.” World Development
31: 1793–1807.
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

13. 3
Comparing Vietnam with some other countries such as Singapore and the Netherlands
in the period from 1996 to 2010, we can see that an annual average growth rate of GDP in
Singapore was 5.87%, GDP per capita in 2010 was US$32,641. While the annual average
GDP growth of the Netherlands was only 2.2%, GDP per capita in 2010 is US$26,553.
Singapore and Netherlands are countries with high income while Vietnam is in a low-middle-
income group. 6
The problem of nations with higher economic growth rates but lower income
per capita happens all over the world. Is there a paradox in economic growth and
development?
In this context, a new concept - sustainable development or genuine saving – brings
a new look for evaluating the quality of growth or the wealth of a nation. By building on the
basis of gross saving and calculating many other factors which connect to fixed capital,
education, environment and natural resources, it is more useful and valuable than these
traditional indicators. Since 1996, the World Bank has used this indicator under the name
“adjusted net saving” in World Development Indicators. It also presents in the Little Green
Data Book from 2000.
Exploring the relationship between economic growth and other aspects of life such as
society, environment, natural resources, the impact of consumption of current generation with
the future generations still has been lacking until now, especially researches about the impact
of economic growth on sustainable development in Vietnam.
1.3 Research objectives
This paper will analyze the impact of economic growth and other factors on
sustainable development, especially sustainable development in Vietnam. It uses data of 90
nations from the World Bank source over the period from 1996 to 2010.
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

14. 4
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.
1.4 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?
1.5 Research methodology
This paper will apply both qualitative and quantitative methods for estimating the impact
of economic growth such as GDP growth on sustainable development by OLS estimation.
From models which are built up base on the empirical studies a long time ago, the paper will
be set up hypotheses and test the validity of proposed hypotheses by econometric techniques.
For solving the problems of endogeneity between sustainable development and GDP
growth, the paper will apply TSLS estimation. This estimation is used to test whether or not
there are reverse causation between GDP growth and sustainable development. It will be

15. 5
applied for finding the answer about the question: Do high adjusted net savings lead to high
GDP growth? 7
1.6 Structure of thesis
This thesis consists of six chapters in which chapter I will introduce the general view
about the background of research, the necessary of thesis for Vietnam context of economic
growth and sustainable development. Chapter II will review literature about economic
growth, economic development and sustainable development. It will also discuss empirical
studies done by other researchers some decades ago. Chapter III will show the data collection,
analysis data and econometric techniques, which apply analysis data. Chapter IV will display
the results, which were found out by testing hypothesis relating to models in this thesis.
Chapter V will derive a state of sustainable development and some main points of Agenda
21 in Vietnam. The end chapter will summaries all main findings and suggests some available
policies. It also shows some limitations of this research topic and suggest some further
possibilities for future.
7
Dimitrios Asteriou and Stephen G. Hall, Applied Econometrics a modern approach, revised edition, Palgrave
Macmillan, 2007.

16. 6
CHAPTER II
LITERATURE REVIEW FOR SUSTAINABLE DEVELOPMENT
This chapter supplies review literature that relates to the economic growth and
sustainable development. It also mentions their significance, methods of the measurement,
empirical studies over the world some past decades. From that, I will suggest appropriate
models for measuring the relationship between economic growth and sustainable
development.
2.1 Concepts of economic growth, economic development and sustainable development
2.1.1 Economic growth
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).
Traditionally, economists have made little distinction between economic growth and
economic development. Economic growth is necessary but it is not sufficient condition for
economic development. Moreover, GDP is still a narrow measure of economic welfare. It
does not consider to the importance of other aspects. Those are more leisure time, access to
health and education, environmental protection, freedom and social justice.
2.1.2 Economic development
While economic growth usually refers to increase in a country's production or income
per capita, economic development mentions to broadly scope. From the point of view of E.
Wayne - Kansas State University- economic development refers to economic growth
accompanied by changes in output distribution and economic structure. He stressed that the
improvement in material well-being of the poorer half of the population, a decline in
agriculture's share of GNI and corresponding in the increase in the GNP share of industry and
service, an increase in education and skill of labor force and substantial technical advances
originating within the country.8
8 E. Wayne Nafziger, Economic Development, fourth edition, Cambridge University Press, 2006

17. 7
So economic development is qualitative change in a country's economy in connection
with technological and social progress. Main indicator of economic development is increasing
GNP per capita or GDP per capita, reflecting an increase in economic productivity and average
material well being of a country's 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
So, there are many indexes to measure and evaluate the development of one nation. It
depends on development approaches, for example, HDI index for measuring the development
of humans and GINI index for measuring inequality in distribution of income and so on.
The United Nations Development Program (UNDP) ranks the development of a nation
by Human Development Index in yearly reports. This index calculates the human
development by combining three factors: income, life expectancy and education.
The GINI index measures the income distribution between the rich and total income
of a nation. It stresses the equality of income distribution. This problem happens within a
country and from country to country. It also occurs in top developed countries.
2.1.3 Sustainable development
There have been many different definitions about sustainable development. The
United Nations Brundtland report at World Commission on Environment and Development
in 1987 gives a basic idea about sustainable development. This concept defines sustainable
development as : “… meets the needs of the present without compromising the ability of
future generations to meet their own needs..."9.
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
Future, 1987, p.15

18. 8
concept for development; it did not give a way to measure factors contributing on
sustainability.
Pezzey (1992) defined sustainable development as a non-declining utility. This
definition is one of basic concepts in sustainable development. Moreover, Pearce and
Atkinson (1997) developed a new paradigm of sustainable development, and they favor on
the strong sustainability. 10
The Organization for Economic Cooperation and Development – OECD defines that: “
sustainable development as development path along which the maximization of human well-
being for today ‘s generations does not lead to declines in future well-being” 11
The United Nations (2008) stated that sustainable development should ensure the non-
decline of wealth of a nation over time. The development of a nation is based on many kinds
of stocks for production such as fixed capital, human capital, social capital and natural capital
so it should compensate for a decline of these capital stocks. The UN group proposed some
small set of indicators for international comparison. They found that this concept was difficult
to define and measure with precision.12
2.2 Approaches of sustainable development
There are two possibilities for sustaining growth. First, there is insufficient
substitutability between reproducible capital and nonrenewable resources so that economic
growth can be sustained while the nonrenewable resource stocks decline continuously.
Second, technological changes will enable society to shift from reliance on non-renewable
resource to another and finally to a new renewable resource.
Two approaches regarding sustainability refer to the ecological and the neoclassical
paradigms. In other words, that is strong or weak sustainability. Weak and strong
sustainability are terms of whether reproducible and natural capital will keep intact together
or separately. The degree of substitutability between natural capital and reproduced capital is
the subject of considerable debate.
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”

19. 9
Natural capital means the natural resources such as coal, oil, forest, land and
reproduced capital means human capital or human made capital. Because human made capital
can substitute for natural capital to some extent reproducible capital, it can reduce society's
reliance on natural resources by increasing the usefulness of services provided by non
renewable and renewable stocks.
Weak sustainability requires a high degree of substitutability between reproducible
and natural capital. According to this approach, more valuable human made capital will
replace the natural capital and the value of aggregate stock will increase overtime.
Strong sustainability stresses the substitutability between natural and reproduced
capital. It is difficult to ensure that future economic opportunities are maintained without
imposing some conditions on the depletion of natural capital.
2.2.1 Weak sustainability: the neoclassical paradigm
Weak sustainability refers to development which is not diminishing from one
generation to another. It comes from ideas of economists rather than ecologists. This means a
constraint on growth which Pezzey (1992) pointed out it as non-declining welfare over time.
In the case of reduction of welfare, he called it as “survivability”.
Based on the idea of unlimited substitution between man-made and natural capital and
Pezzey’s definition on sustainable development, Pearce and Atkinson (1997) suggested
formula for measure sustainable development as follows:
Z= S/Y-DM/Y-DN/Y (2-1)
In this formula, Z is an index of sustainable development, DM is depreciation of man-
made capital, DM/Y is a rate of depreciation of man-made capital, DN is depreciation of natural
capital, DN/Y is a rate of depreciation of natural capital and S is national savings, S/Y is saving
rates.13
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.

20. 10
From above formula, sustainable development is weak if Z is greater than zero and
vice versa. It means that if saving rates are higher depreciation both natural and man-made
capital will lead to sustainable development.
2.2.3 Strong sustainability: the ecological paradigm
In contrast with weak sustainability, strong sustainability stresses mainly on the
substitution limitedly between man-made and natural capital. A study by Herman Daly and
John Cobb (1999) favored strong sustainability for several reasons. First reason is the
relevance of some natural resources for production. Their loss or reduction would constitute
a catastrophic event. Second, with some production processes where natural capital is not yet
an essential ingredient, substitutability declines and resource stocks are depleted. Finally, they
argued that the elasticity of substitution between natural and reproducible capital is zero
because of the unique character of some form of natural capital. The implication is that certain
stocks of so-called critical natural capital should be conserved regardless of the opportunity
cost of so doing. 14
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.
So prices are not imperfect signal of scarcity of resources and prices do not capture the interest
of future generations. Because technological changes happen overtime, it will lower prices in
the future. Further, the ecological view is always pessimistic about the contribution of
technological change in the future for solving environmental problems.
2.3 Objectives and significance of sustainable development
In 1992, Earth Summit at the United Nations conference on Environment and
Development (UNCED) was held in Rio de Janerio, Brazil. The international community
adopted Agenda 21 which was “a landmark achievement in integrating environmental,
economic and social concerns into a single policy framework”. In Agenda 21, there are many
recommendations with detailed proposals for many nations around the world. For example,
14
Daly Herman, John Cobb (1999), “For the common good.” Beacon Press, Boston, MA.

21. 11
those recommendations include reducing wasteful consumption patterns, alleviating poverty,
protection of air, oceans and biodiversity, and developing sustainable agriculture.15
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;
 Strong international monitoring.
According to this summit, most important challenges which the world faces today include:
 Alleviating poverty;
 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.
2.4 Indicators of sustainable development
2.4.1 Adjusted net savings or genuine savings
Pearce et al. (1997) and Hamilton et al. (1999) introduced a new indicator for
evaluating sustainable development. Following the guides of the United Nations in 1993, they
calculated the cost for restoring environment to a beginning state. They defined it as the sum
of net investment in produced assets and these changes in the various 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

22. 12
Their studies focused mainly on the depletion of natural resource and carbon dioxide
emissions in time series data for 1970 -1993. They found that many countries have negative
rates of genuine savings. The problem here is this method not account for 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
Resources – CO2 Damage Costs. (2-2)
Graph 2.1 : How to calculate adjusted net savings
Source: World Bank
Nowadays, this indicator is a proxy of sustainable development in many countries all over
the world. One study of Hamilton et al (1999) which based on this formula showed that
adjusted net savings in high income are positive while this indicator is negative in developing
countries and negative rates lead to decline well- being.
2.4.2 Index of Sustainable Economic Welfare or ISEW
Daly et al. (1999) introduced an index to measure the relationship between welfare
and depletion of environment. It is an Index of Sustainable Economic Welfare or ISEW. This
index distinguishes between pollution (water, air and noise), loss of land (wet land, farmland)
and long-term environment by comparing conventional national income account and taking
factors of environmental damages and natural resource into account. We can see this index in
many studies (Lawn, 2003; Clarke 2005).

23. 13
2.4.3 Genuine Process Indicators or GPI
There is another indicator for measuring sustainable development, for example,
Genuine Process Indicator or GPI – one version of ISEW. This indicator assesses the
economic progress of conventional measure like GDP. From GDP, they got value of GPI by
adjusting the value of some factors such as the effects of income distribution, the depletion of
social and natural capital and costs of mobility and pollution (Hamilton C. 1999; Robert et al.
2004).
2.4.4 Environmental Sustainability Index or ESI
Yale University used data of 140 countries from the World Bank for calculating
Environmental Sustainability Index or ESI 2005. It is a composite profile of national
environmental stewardship based on a compilation of 21 indicators. These are indicators for
measuring pollution of air and water quality, environmental sustainability, biodiversity and
ecosystem. The fundamental measurement of environmental sustainability relates to the
endowed environmental carrying capacity and eco-efficiency. These sources cannot change
unless a society changes the way it produces and consumes (Lee et al. 2005).
The pollution category includes 2 indicators: Air Quality (SYS_AIR) and Water
Quality (SYS_WQL). The category for eco-efficiency related measures includes 9 indicators:
Biodiversity (SYS_BIO), Land (SYS_LAN), Reducing Air Pollution (STR_AIR), Reducing
Ecosystem Stress (STR_ECO), Reducing Waste and Consumption Pressures (STR_WAS),
Reducing Water Stress (STR_WAT) 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) suggested the method to measure sustainable development by using
the concept inclusive wealth. He noted an economy would enjoy sustainable development
if and only if, relative to its population, inclusive investment is not negative. An economy’s
inclusive wealth is the shadow value of its productive base, and inclusive investment is the
shadow value of the net change in its productive base. He considered the process of creating
economic performance by combining many other indexes such as Human Development Index,
total fertility rate, adult literacy (percent), female literacy (percent), index of government

24. 14
corruption, life expectancy at birth (years), under-5 mortality (per 1,000), rural population
(percent of total population).
2.5 Linkage of various determinants of sustainable development
In general, economic growth is only described by growth of GDP or GNI and
economic development is mentioned by HDI which this index combines three factors:
income, education and life expectancy. Sustainable development depicts a broader scale of
development than economic growth and economic development when it combines three
important factors which relate to economics, environment and society. According to point of
view of Harris et al. (2001), they stated that sustainable development should mention three
activities as follows:
Economic activities contribute to the growth of economic welfare and income of a nation;
they ensure to the creation of jobs, competitiveness in trade, wealth of a nation and income.
Environmental activities conserve the environment and reduce consumption of natural
resources (both nonrenewable and renewable resources) for these economic purposes:
maintenance of biodiversity, atmospheric stability, reduction CO2 emission and control
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.
So sustainable development achieves when a nation combines successfully three above
activities at the same time. In other words, it is a bridge which could link economic
determinants (income, welfare), social determinants (education expenditure, health care,
gender equity), environmental and natural determinants (emission of polluted wastes,
conservation of natural resources). Of course, this concept has some definitely limit but until
now, it is a sole concept which mentions most important accounts of a national development.
Figure 2.1: The three components of sustainable development

25. 15
Source : http://www.myacpa.org/task-force/sustainability/primer.cfm
2.6 Benefits and drawbacks of adjusted net savings
2.6.1 Benefits
So sustainable development is a very valuable concept because of its combination. It
considers physical, human and natural capitals. Until now, it is a development indicator which
reflects problems relating to natural capital. It also reflects more and larger scope of
development of a nation than existing national accounts. It reminds that the consumption of
current generation should not only focus on economic development, but also the depletion of
natural resource, air pollution and investment for future generations. The more we consume
today, the more depletion the future generations.
Hamilton et al. (1999) found that there was a relationship between sustainable
development and income of a nation. Genuine saving rate in high- income countries is positive
while this indicator is negative in developing countries. Negative rate of genuine saving leads
to declining 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) expressed that this indicator could be used to define wealth more
broadly than orthodox national account and aims to represent the value of the net change in
the whole range of assets that are important for development.

26. 16
2.6.2 Drawbacks
Of course, some benefits of sustainable development are obviously, and this indicator
shows several drawbacks. Its component lacks many factors which affect directly or indirectly
the development of a country. As we know, formula of adjusted net savings which the World
Bank introduced since 1997 are not fully reflect the environmental and social activities though
these factors significantly impact to development of countries.
Lele (1991) expressed that these weaknesses of sustainable development in his
research as two points: first, the incomplete perception of the problem of poverty and
environmental degradation and second, the confusion about the role of economic growth and
about the concepts of sustainability and participations. That will lead to inadequacies and
contradictions in policy making which are the demonstrated in the context of 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.
2.7 Empirical Models
2.7.1 Model specifications
Relating to determinants of the adjusted net savings in developing countries, Peter Hess
(2010) estimated the determinants of sustainable development or the adjusted net saving by
using a cross-section data of developing economies for 2001-2006. He used same
determinants for estimating gross national savings. He incorporated two kinds of savings
including gross national savings and adjusted net savings. Adjusted net savings equal gross
savings minus fixed capital so influences on the gross savings will be important for the
adjusted net savings.17
He captured economic development by Human Development Index or
HDI. The saving ability of a nation depends on the structure of the population or the age
dependency ratio. Many developing countries have a less developed financial system than
17 Peter Hess, Determinants of the adjusted net saving rate in developing economies, International Review of
Applied Economics, Vol. 24, No. 5, September 2010, 591–608

27. 17
those in developed countries. The economic activity usually happens in the informal sectors
so the formalization of the economy will measure the financial deepening or the ratio of money
supply to national income.
The adjusted net saving rates depend on natural resources because income from these
resources such as the export of fuels, ores and metals contribute to the savings of a nation so
the depletion of natural resource will decrease the 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)
With the gross national saving rates, the export income of natural resources will
contribute to the government revenues and public savings. He used the same determinants for
estimating the gross saving rate of a nation as follows:
SY =f ' (HDI, GYP, APL, FIN, XR) (2-4)
Where:
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 found that the HDI, the percentage of population of prime labor force age, the
share of natural resources in export and a measure of financial development are important
variables but economic growth did not a significant explanatory variable. With the gross
national savings, the change in share of population aged 15 to 64 along with economic growth
rate are significant determinants.
By using the reduced form equation for estimating the economic growth, with the
assumption that savings will flow to investment and measure savings or investment rates of a
nation will be used to measure physical capital formation, Hess also estimated the economic

28. 18
growth by using adjusted net saving as an indicator of net capital formation. Of course,
adjusted net saving does incorporate human capital formation and natural resource depletion
incompletely. He used HDI, APL, real growth rate of export of goods and services, FDI or
share of FDI in national output as determinants for estimating the economic growth with the
equation below:
GYP=g( ASY OR GRS, HDI, APL, GX. FDY) (2-5)
The result shows that the saving rate is a not statistically significant on the average annual
change in growth rate in real GDP per capita. APL and GX are statistically significant while
HDI and FDY are not explanatory variables.
Dietz et al. (2007) investigated whether the interaction between resource abundance
and indicator of institutional quality. Three indicators of institutional quality are lack of
corruption, bureaucratic and rule of law18
. From the result of Atkinson and Hamilton (2003),
the positive relationship between resource abundance and general institutional quality on
gross investment and savings, they test whether the negative effect of resource abundance on
genuine savings is explained by policy failure and specify a model to explain genuine savings
based on the interaction between natural resource endowment and institutional quality.19
Their model used data of 115 countries within 18 years in reduced form. In many
researches, these factors such as per capita income, economic growth, age dependency and
urbanization appear to have robust and significant effect on gross saving. They estimated two
models of gross savings and adjusted net saving rates with other determinants as follows:
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
31: 1793–1807.

29. 19
age, urbanization, investment and resource rent. They found that rich resource countries have
lower genuine savings than poor resource countries and institution failure will depress genuine
savings. The negative effect of resource abundance on genuine savings will decrease when
corruption reduces.
2.7.2 Suggested model
From main findings of Hess (2010) and Grace et al. (2004), models for finding these
answers about the relationship between economic growth with adjusted net savings with some
determinants as GDPGR or GDPPC, HDI, MS AGE, UBGR and CPI are as follows:
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)
Another findings of Dietz et al. (2007) and Atkinson et al. (2003) about the relationship
between adjusted net savings and natural resources, they found the negative relationship
between them so I set up two new models which relate to export of raw agricultural products
and ores and metals as follows:
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)
From the finding of Hess (2010), Hamilton et al. (1999) about determinants which can affect
to adjusted net savings in developing countries, I set up one more model as model 1 with data
of developing countries only.
Model 5: Faster growth of economics will lead to sustainable development in developing
countries
ANSi=α0+α1GDPGRi+α2HDIi+α3MSi+α4XRi+ α5AGEi+α6UBGRi+α7CPIi+εi (2-12)

30. 20
Where i denotes for country i, ε is residual
Determinants that will be used for estimating models include:
Adjusted net saving (ANS) is an indicator which measure the true saving rates after taking
into account investment in human capital (education expenditure), depletion of natural
resources (energy depletion, mineral depletion, forest depletion) and damages caused by
pollution (carbon dioxide damage, and particulate emissions damage).
GDP growth (GDPGR): Annual percentage growth rate of GDP at market prices based on
constant local currency. Aggregates are based on constant 2000 U.S. dollars. GDP is the sum
of gross value added by all resident producers in the economy plus any product taxes and
minus any subsidies not included in the value of the products. It is calculated without making
deductions for depreciation of fabricated assets or for depletion and degradation of natural
resources.
GDP per capita (GDPPC) is gross domestic product divided by midyear population. GDP is
the sum of gross value added by all resident producers in the economy plus any product taxes
and minus any subsidies not included in the value of the products. It is calculated without
making deductions for depreciation of fabricated assets or for depletion and degradation of
natural resources.
Human Development Index for 2010 (HDI) is a composite statistic of life expectancy,
education, and income indices to rank countries into four tiers of human development, score
from 0- 1, higher is more human development. The author expect that this factor will cause
positive impact on adjusted net savings because this indicator measure the development of
nation, high HDI means to high income, high education. These factors are important for
creating high perception in manner of consumption, production, high awareness in protection
of natural resources and environment.
Average age dependency ratios or AGE is the ratio of nonworking population -people under
15 or over 65- to the working population - people 15-64. This factor can cause negative impact
on adjusted net savings because high rate of it means the high rate of non- working people of
economy, this will lead to low productivity for a nation, high burden in society when
Government needs to consume more for social welfare, for health care program, for education
why the direct labor force contributes low for economy, especially in developing countries.

31. 21
Corruption perception index or CPI is an aggregate indicator that ranks countries in terms
of degree to which corruption is perceived to exist among public officials and politicians. It is
a composite index drawing on corruption -related data by a variety of independent and
reputable institutions. It has score from 0- 10, higher score means more perception about
corruption. Considering the impact in many developing countries then comparing with
developed countries, developed countries usually have higher index than developing
countries. So the author expect that this index will cause positive impact on adjusted net
savings or sustainable development.
Average annual growth rate in money and quasi money (MS) comprise the sum of
currency outside banks, demand deposits other than those of the central government, and the
time, savings, and foreign currency deposits of resident sectors other than the central
government. The change in the money supply is measured as the difference in end-of-year
totals relative to the level of M2 in the preceding year. In developed countries, they have
more developed financial system which service for multiple purposes in transfer.
Natural resources export is sum of export of fuels, ores and metals, measure as a share of
merchandise exports. This activity usually happen in developing countries, it requires the
exploitation of natural resources in raw state then export to developed countries where they
have advanced technology in manufacture. It will lead to the depletion and shortage of
materials for domestic production so it will decrease the savings for future generations.
Agricultural export is sum of export of agricultural raw materials, measure as a share of
merchandise exports. This factor can cause same impact as export of natural resources. In
specific cases, this activity always require more consumption of pesticides or chemicals for
high productivity that will cause the pollution of agricultural land and sources of water.
ONM is sum of export of ores and metals, measure as a share of merchandise exports. This
export is one part of natural resources, it removes the impact of fuels on adjusted net
savings so the author expect that this factor also cause negative impact on adjusted net
saving.
Urban population growth (UBGR ) is the growth of urban population. This factor
increase can supply more labor forces for economy, contribute to economic growth and
more savings for nation so this factor is expected to cause positive impact on sustainable
development.

32. 22
Table 2.1: Expectation the influences of determinants on adjusted net savings
Variables Symbol Unit Expected
sign
Dependent variable
Average adjusted net savings for 1996-
2010
ANS % of GNI
Independent variable
Average growth rate of real GDP for
1996-2010
GDPGR annual % growth +
Human Development Index for 2010 HDI score +
Age dependency ratio AGE % of working -age -
Corruption perception index CPI score +
Money and quasi growth in 1996-2010 MS % of GDP +
Fuels, ores, and metals in merchandise
exports for 1996-2010
XR % of merchandise
export
-
GDP per capita in 2010 GDPPC constant 2000$ +
Urban population growth UBGR annual % _
Agricultural raw material export AGRI % of merchandise
export
_
Ores and metals export ONM % merchandise
export
_
Source: The author summary
Note: (+) positive impact, (-) negative impact
2.8 Empirical studies relating to sustainable development
2.8.1Peter Hess (2010)
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)

33. 23
Where:
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
2006.
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
64, the share of natural resources in export and a measure of financial development are
important influences. But economic growth is not to be significant explanatory variable. With
the gross national saving, the change in share population aged 15 to 64 along with economic
growth rate are significant determinants.
By estimating the simultaneous model for economic growth and adjusted net saving,
he found that result is unjustified. It means that both savings- adjusted net saving and gross
saving – shows statistically insignificant on average growth rate in real GDP per capita.
2.8.2 Yacouba Gnegnè (2009)
Yacouba (2009) tested whether adjusted net savings explains the change in the welfare
over the period 1971-2000. Panel data included 36 developing and developed countries. With
proxies of a welfare are Human Development Index (HDI) and Infant Mortality Rate (IMR),
he used Gross National Income (GNI) as a control variable and NNS is a regressor. By using
the fixed effect model for estimation this relationship, he found that adjusted net savings and
welfare are positive significantly but the magnitude is weak.
2.8.3 Dietz et al., (2007)
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
curse. They used reduced-form model, fixed effect estimation, GMM estimation and

34. 24
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)
They found that rich resource countries have lower genuine saving rate than poor
resource countries and institution failure will depress genuine saving. The negative effect of
resource abundance on genuine saving will decrease when corruption reduces.
2.8.4 Alam et al., 2007
Their study measured the impact of economic growth on environment by using time
series data in a period of 1971-2005 in Pakistan. These factors in this study are GDP per capita,
carbon dioxide emission, energy consumption, population and urbanization. In their model,
they use VAR model and ADF test. They concluded that there is a positive relationship
between economic growth and carbon dioxide emission in the long term. In this case,
economic development is energy driven so it contributes considerably to carbon dioxide
emission.
2.8.5 Ram, 2005
In this paper, the author examines the conceptual and empirical characteristics with
policy implications of the measure of genuine saving. This study based on the formula of
genuine savings of the World Bank as follows:
GENSAV= (GDS-Dp+EDU-Rn,j-CO2damage)/GDP (2-18)
Where
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.

35. 25
From that, he suggested a global approach which need to find another sustainability issues,
and natural capital is not corporate in national accounting.
2.8.6 Lee et al., 2005
This study used data of 140 countries from World Bank for calculating ESI 2005
index. They found that there are many variables such as GDP per capita; Land; Civil and
Political liberty can affect to this index. They found that environmental sustainability
increases when income per capita increase, population declines and degree of civil and
political liberty higher. The ESI is a composite profile of national environmental stewardship
based on a compilation of 21 indicators. These are indicators for measure pollution of air and
water quality, environmental sustainability such as biodiversity and ecosystem. The
fundamental measurement of environmental sustainability relate to the endowed
environmental carrying capacity and the eco-efficiency. These sources cannot change unless
a society changes the way it produces and consumes. It seems to be no direct relationship
between the two in spite of a certain overlap between pollution measures and eco-efficiency
related measures of environmental sustainability.
2.8.7 Grace et al., 2004
From the time series data of United Kingdom and Taiwan from 1970 to 1998, they
calculate genuine saving in each country by using robustness analysis and sensitivity analysis.
From the formula of World Bank, they adjust by adding the deduction of air and water
pollution cost.
Genuine Savings or Adjusted net saving = Gross Domestic Savings – Consumption of
Fixed Capital (Depreciation) + Education Expenditure – Air pollution cost – Water
pollution cost – CO2 Damage Costs- nonrenewable natural resource depletion costs
(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.
2.8.8 Atkinson et al., 2003
In their study, they used data of 91 countries from 1980 to 1995, the World Bank.
These variables are genuine saving, GDP8095, GDP80, Education and Investment. By using
cross section econometrics, they found that there is negative and significant relationship
between natural resource abundance and growth rate of GDP per capita. This is the so-called

36. 26
resource curse hypothesis. Their study offered evidence that the curse may be a manifestation
of the inability of governments to manage large resource revenues sustainably. Besides, these
results offered another perspective on the resource curse hypothesis: the countries where
growth has lagged are those where the combination of natural resource, macroeconomic and
public expenditure policies have led to a low rate of genuine saving.
2.8.9 Hamilton et al., 1999
Based on the data of 1970s, 1980s and 1990s from World Bank, they calculate genuine
saving then comparing values of all country. They calculated a genuine saving rate from gross
domestic investment, net foreign borrowing, gross saving, depreciation and net saving by
formula:
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)
From that formula, they found that genuine saving rate in high- income countries is positive
while this indicator is negative in developing countries. Negative rate of genuine saving leads
to declining well-being.

37. 27
Table 2.2: Summary of empirical studies related to sustainable development
No Researchers Data and scope of
research
Dependent
variable
Methodology Main findings
1 Peter Hess,
2010
Developing
countries,
Period 2001-2006
Adjusted net
saving and
Gross Saving,
Cross-section
analysis
- HDI, CPL, FIN, XR
are important
- GDPPCGR is
statistically
insignificant
2 Gnegne,
2009
36 countries,
developed and
developing
countries, period
1971-2000
Adjusted net
saving
- Panel data, fixed
effect model
- Sagan and
Basman test for
quality of
instrument
Positive relationship
between ANS and
HDI, IMR, GNI but
weak magnitude
3 Dietz et al.,
2007
115 countries, 18
years, World Bank
data
Adjusted net
saving
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

38. 28
Arrelano –Bond
dynamic model
effect resource
abundance on GS low
4 Alam et al.,
2007
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.
5 Ram, 2005 GENSAV Apply formula,
GENSAV= (GDS-
Dp+EDU-Rn,j-
CO2damage)/GDP
Imperfect of the
measure both concept
and empirical
characteristics
6 Lee et al.,
2005
140 countries,
World Bank data
ESI index Calculation from
21 other indicators
ESI increases when
income per capita
increase, population
decrease, degree of
civil and political
liberty higher

39. 29
Source: Summary of the author
7 Grace et al.,
2004
United Kingdom
and Taiwan data,
period 1970- 1998,
World Bank data
Adjusted net
saving
(Genuine
saving rate -GS)
Robustness
analysis,
sensitivity analysis
Genuine saving rate
(GS) of UK is lower
than Taiwan,
Low GDP growth rate
will lead to low rate of
GS
8 Atkinson et
al, 2003
91 countries
period 1985-1995,
World Bank data
Adjusted net
saving,
Cross section
Resource curse
hypothesis
Growth lagged
combined of natural
resource,
macroeconomic and
public expenditure
policies have lead to
low rate of ANS rate.
9 Hamilton et
al., 1999
World Bank data,
1970s-1990s
Genuine saving
rate -GS
Calculation GS in high income
countries is positive
while this indicator is
negative in
developing countries,
GS negative will leads
to well-being decrease

40. 30

41. 30
2.9 Conceptual framework
Graph 2.2: Conceptual frame work
This framework shows the way to estimate the impact of economic growth to
sustainable development. First is a estimation the relationship between GDP growth and
adjusted net savings for evaluating the impact of economic growth on sustainable
development, control variables will be HDI, MS, AGE, UBGR, and CPI ; instrumental
variable will be ELF85. The same way will be applied for estimating the relationship between
sustainable development and export of raw agricultural products, ores and metals export or
the impact of economic growth on sustainable development in developing countries.
2.10 Chapter remarks
This chapter focus on theoretical literature with definitions of economic growth,
economic development and sustainable development; the ways to measure sustainable
Economic growth
-GDP growth
-GDPPC
Control variables
HDI, MS, AGE, UBGR, CPI
Export
-Raw agricultural products AGRI
- Ores and metals ONM
ADJUSTED NET
SAVINGS
SUSTAINABLE
DVELOPMENT
Developing
countries
Instrumental variables
ELF85
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42. 31
development; suggested models for evaluating the impacts of economic growth on sustainable
development. There are consistently the relationship between economic growth and
sustainable development in many cases both developed and developing countries. Many
studies showed that a high economic growth rate leads to sustainable development. Besides,
there are many factors, which can affect significantly on sustainable development such as
natural resources, institutional quality, age dependency ratio, urbanization, human investment
and so on.

43. 32
CHAPTER III
RESEARCH METHODOLOGY AND DATA COLLECTION
This chapter includes three parts, in which first part will display econometric technique
for setting up hypotheses about the relationship between adjusted net savings and economic
growth, export of raw natural resources or agricultural products; adjusted net savings in
developing countries. Second part will explain data collection, data sources. Last part will
display steps for analyzing data and testing the validity of models.
3.1 Econometric techniques
This paper estimate suggested models with cross section data by OLS estimation20
.
This technique are used in many studies for finding relationship between adjusted net savings
and other determinants such as GDP growth, GDPPC, AGE, UBGR, CPI, HDI, MS and so
on. All specification errors of models such autocorrelation, heteroskedasticity, stability be
tested as well at level of significance of 1%, 5% and 10%.
For endogeneity problem between adjusted net savings and GDP growth, model will
be estimated by 2TLS estimation. In this estimation, ELF will be uses as instrumental variable
for GDP growth or GDPPC. This index address the possibility of reverse causality of income
growth causes adjusted net savings, it is defined as follows:
where ni is the number of people in the ith group; N is total population and I is the number
of ethno-linguistic groups in the country.
This index measures “the probability two randomly selected persons from a given
country belong to the same ethno-linguistic group. The higher index of ELF, the more
fragmented the country.” In a study of Mauro, 1995, corruption is found that it lower
investment, thereby lower economic growth. His result was robust test to control for
endogeneity by using index of ethno-linguistics fractionalization as an instrument. He found
20
Dimitrios Asteriou and Stephen G. Hall, Applied Econometrics a modern approach, revised edition, Palgrave
Macmillan, 2007.
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44. 33
that higher ELF, higher corruption so worse institution and that would be bad for growth. It
means that there are relationship between ELF and GDP growth. 21
In this paper, ELF will be used as instrumental variable for controlling the problem
of endogeneity. This requires assumption that ELF affect the GDP growth but do not affect
adjusted net savings. By using a test of over identifying instrument, the null hypothesis will
be that the only channel through which ELF affect adjusted net savings is through 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 α1<0: there is a negative relationship between adjusted net savings and GDP growth
If α1=0: there is no relationship between adjusted net savings and GDP growth
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 (3-2)
Where i denotes for country i, μ is residual
Null hypothesis H0: there is no relationship between adjusted net saving and GDPPC2010.
Alternative hypothesis Ha: there is a between adjusted net saving and GDPPC2010
If β1>0: there is a positive relationship between adjusted net savings and income per capita
If β1<0: there is a negative relationship between adjusted net savings and income per capita
If β1=0: there is no relationship between adjusted net savings and income per capita
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 (3-3)
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Paolo Mauro (1995) “Corruption and Growth”, The Quarterly Journal Economics Vol. 110: 681-713, MIT
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