The document introduces the Capital Approach framework for analyzing sustainability and development. It views a government as managing a portfolio of four critical capital stocks - natural, human, social, and economic. These stocks contribute to societal well-being over time if their depletion is monitored and substitutions are developed. The framework helps broaden thinking about resource management, investments, future generations, and impacts of trends on sustainable development.

1. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The Capital Approach for Sustainability
and a Bequest for Next Generations
June 7-8, 2016
Helsinki, Finland

2. “The future will only contain
what we put into it now”
Graffiti, Sorbonne University,
French civil unrest, May 1968
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

3. Sustainable Development
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

4. Sustainable Development
Sustainability and Development are celebrated, popular, concepts in contemporary
socioeconomic discourse, and in Public Policy (from Brundtland Commission and
Our Common Future to SDGs).
Yet, the notion of Sustainable Development – a marriage of the two socially-
constructed concepts – is typified by ambiguity (Robinson, 2004; Lehtonen, 2004).
The UNECE notes that “sustainable development can mean all things to all
people... (it has) a cloud of ambiguity hanging over (it)” (UNECE, 2015).
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
A cloud of ambiguity hanging over

5. Sustainable Development
Due to this ambiguity, the ability to measure the sustainability of development has
remained limited. Limited measurement capacity of sustainable development
makes the task of management for sustainable development a difficult one.
It hinders governments from managing socioeconomic development in such a way
as to maintain wellbeing over time (Adams, 2006).
UNECE: “… to maintain wellbeing over time… it is imperative to protect (society’s)
resource base and the environment. Socioeconomic wellbeing cannot be improved
with measures that destroy (the resource base)” (2015).
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
A cloud of ambiguity hanging over

6. Sustainable Development
“Assuming we have been able to assess what is the current level of wellbeing, the
question is whether the continuation of present trends does or does not allow it to
be maintained…(for) the wellbeing of future generations compared to ours will
depend on what resources we pass on to them…
“Future wellbeing will depend upon the magnitude of the stocks of exhaustible
resources that we leave to the next generations…
- Report by the Commission on the Measurement of Economic Performance and Social Progress by Joseph Stiglitz,
Amartya Sen, Jean-Paul Fitoussi (2009)
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The purpose of government and future generations

7. Sustainable Development“The capacity of future generations to have standards of well-being at least equal
to ours depends upon our passing them sufficient amounts of all the assets that
matter for well-being.”
- Report by the Commission on the Measurement of Economic Performance and Social Progress by Joseph Stiglitz,
Amartya Sen, Jean-Paul Fitoussi (2009)
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The purpose of government and future generations

8. The Capital Approach
One unified theoretical approach
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

9. The premise that any government has a portfolio of critical assets at its disposal –
lies at the heart of the capital approach.
OECD’s How’s Life? (2013): sustaining wellbeing outcomes over time require the
careful management, measurement and preservation of four types of capital stock
for future generations: (a) economic capital, (b) natural capital, (c) human capital,
and (d) social capital.
These four capital stocks cover an index of tangible and intangible assets.
Together, they are affected by government decisions taken today, which contribute
to the creation of wealth and accumulation of capital.
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Governing a broad resource base; a portfolio of assets

10. Sustainable Development
This is an important, yet under-recognized, role of government is to manage this
portfolio. Time and again, this role has been overshadowed by governments’
emphasis on managing GDP growth.
Managing the broad national resource base has never been an explicit policy focus.
Perhaps in the past a focus on GDP growth was justified: wellbeing and progress
could be expected to increase in tandem with GDP.
This is no longer true, particularly as the world bumps up against capital
constraints: debt, depleting resources, climate change.
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Governing a broad resource base; a portfolio of assets

11. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

12. Sustainable Development
Governments need to begin measuring comprehensive wealth and setting policies
specifically to ensure its increase. With proper policies, the capital portfolio can be
managed to maximize its flows of goods and services (i.e. well-being).
For example, natural resource policies must be designed so that resource rents are
captured by governments for reinvestment in other assets, instead of being
squandered or plundered.
Norway presents the best example of how to do it right: the Government Pension
Fund (the Oil Fund).
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Governing a broad resource base; a portfolio of assets

13. Natural Capital Human Capital Economic Capital Social Capital
Government as Steward
Adjusts flows of investment and consumption
Monitors stock depletion
Develops asset substitutions
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

14. Natural Capital Human Capital Economic Capital Social Capital
Government as Steward
Adjusts flows of investment and consumption
Monitors stock depletion
Develops asset substitutions
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Substitutions and investments

15. Natural Capital Human Capital Economic Capital Social Capital
Government as Steward
Adjusts flows of investment and consumption
Monitors stock depletion
Develops asset substitutions
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Substitutions and investmentsDepletion

16. Natural Capital Human Capital Economic Capital Social Capital
Government as Steward
Adjusts flows of investment and consumption
Monitors stock depletion
Develops asset substitutions
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Substitutions and investmentsDepletion
Feedback

17. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

18. Capital Stocks
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

19. Economic capital consists of both produced capital assets, such as roads or
machinery; and of financial capital assets, for instance bonds and reserve funds.
Natural capital, includes extractive natural resources that are exploited for use in
economic production processes, such as hydrocarbons and metals. It also includes
non-market assets, such as air and seas.
Human capital includes labor, knowledge, skills, health and attributes embodied in
individuals that, together, create personal, social and economic development.
The term capital, in this context, emphasizes the fact that the skills, talents,
education and health of individuals impact on their wellbeing in the present and
can be “accumulated” and impact on their wellbeing in the future (Becker, 1964;
Becker, 1993).
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
A broad understanding of capital

20. Social capital, the least explored of the four terms, encompasses a variety of
factors related to the capacity of people to collaborate in a community, including
social norms and trust.
Social capital has been defined by the OECD (2001, p.119) as: “The network of
shared norms, values and understanding that facilitate cooperation within and
between groups”.
Putnam (1995; 2000), who brought the term to the political center stage, describes
trust as the necessary “lubricant” for a functioning society.
High levels of general trust strengthen common values and norms. It reduces
transaction costs and results in a lesser need for regulation and government
intervention in markets (Aghion, Algan, Cahuc and Shleifer, 2009).
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
A broad understanding of capital

21. Think of a capital stock as a bathtub.
Think of a flow of investment (in-flow) or consumption (out-flow) as a faucet and
pipe assembly, respectively, that fills or drains the stock.
“The stock-flow structure is the simplest dynamical system in the world… it is
based on the principle of accumulation…”
The government controls both valves.
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The bathtub representation

22. Critical Assets
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

23. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Economic Capital
Fixed assets per capita: the monetary value of fixed assets
owned by the government, firms and households, and used in
production processes, per capita. Assets are the basis for
consumption and material wellbeing over time.
Total value of patents (proxy for outcome of public
investment in R&D): the monetary value of patents owned by
the government, public institutions, firms and households.
Net foreign financial assets (national debt).

24. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

25. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Natural Capital
Change of land use: annual change in the area of open spaces
and the inventory of open spaces. Open spaces provide a
wealth of “goods and services” which contribute to aesthetic
inspiration, inspiration to art, heritage and cultural values,
recreation and tourism.
Inventory (physical units) and value (market price) of mineral
stocks: materials that contribute to a variety of production
processes in the economy, including construction materials.
Stock and value of water reserves (can be desalinated).
Stock and value of energy resources (can be substituted).

26. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

27. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Human Capital
Healthy life expectancy: average number of years that citizens
are expected to live in a health (lower than “life expectancy”).
It deducts years of chronic disease and/or injury. No matter
what the undertaking is (working, parenting, engaging in
leisure activities), healthy people give and gain more utility.
Labor force participation rate: size of the labor force available
to engage in activities that generate income.
Adult skills, a product of the OECD Programme for the
International Assessment of Adult Competencies (PIAAC)
measuring literacy, numeracy and problem solving in
technology-rich environments (age 15 and above).
Percentage of people with post-secondary education among
individuals aged 30.

28. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
Social Capital
General trust: the percentage of the population that believes
people can generally be trusted and that there is no special
need “to be very careful in dealing with people” in daily life.
Perceived corruption: the percentage of population that
believes that the society is exposed to corruption or that have
the impression that corruption has impacted on their own
lives (it is sufficient that people perceive that corruption
exists to hamper wellbeing).
Turnout for parliamentary elections.
Rate of volunteering.

29. The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

30. Strategic Benefits
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

31. Employing a well-anchored theoretical approach, which operationalizes the
concept of “sustainable development”;
Thinking broadly about investment and consumption policies, about national
resources, and about the state of capital stocks;
Focusing on the determinants of development, in a myopic environment:
complementing ordinary, near-term, present-biased thinking;
Applying the approach, decision makers can focus on the state of non-market
critical assets that contribute to sustainable wellbeing (air, trust, corruption);
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The advantages of using the framework: broad thinking

32. Discussing the bequest the government leaves for future generations, shifting the
discussion from “how much is left” to “what is left” for future generations;
“If we cast the problem as ‘how much’, this always implies that some amount of a
resource should be used and some left…
“We use 25% of a rainforest and leave the rest, for example. But then the next time
we make a decision we start all over again and use 25% of what’s left, and so on,
until it is all gone…
“By focusing on bequests of specific rights, opportunities and assets for future
generations, we can get away from the straightjacket of marginal tradeoffs of
neoclassical theory”.
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The advantages of using the framework: bequest

33. Finally, the framework assists policy makers evaluate and discuss how megatrends
might impact on sustainable development (sustainable well-being):
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The advantages of using the framework: foresight
Social Capital
General trust
Perceived corruption
Turnout for elections
Rate of volunteering
Trend 1: New technologies
Virtualization and data digitization
Artificial intelligence
The instrumentation of everything
Nano-materials
Biotechnology and pharmacology
Energy technology
Digital platforms
Block chain technology

34. Finally, the framework assists policy makers evaluate and discuss how megatrends
might impact on sustainable development (sustainable well-being):
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The advantages of using the framework: foresight
Economic Capital
Fixed assets per capita
Total value of patents
national debt
Trend 3: Sustainability crisis now
The one-planet lifestyle (Earth Overshoot)
Climate change
Conflicts
Difficult living conditions
The circular economy
Material life cycle

35. Finally, the framework assists policy makers evaluate and discuss how megatrends
might impact on sustainable development (sustainable well-being):
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development
The advantages of using the framework: foresight
Human Capital
Healthy life expectancy
Adult skills: literacy, numeracy,
problem solving in technological environments
Post-secondary education
Trend 1: New technologies
Virtualization and data digitization
Artificial intelligence
The instrumentation of everything
Nano-materials
Biotechnology and pharmacology
Energy technology
Digital platforms
Block chain technology

36. Sustainable DevelopmentTzachor, Asaf (2015): Report on the Measurement of Sustainability, State of Israel,
the Ministry of Environmental Protection, Jerusalem, available at:
http://www.sviva.gov.il/infoservices/reservoirinfo/doclib2/publications/p0801-
p0900/p0808.pdf
For more information
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development

37. The Capital Approach
for the Next Generations
Asaf Tzachor
Asaf.tz@gmail.com, Asaft@sviva.gov.il
https://il.linkedin.com/in/asaf-tzachor-0266945
The Capital
Approach
Capital Stocks Critical Assets Strategic Benefits
Sustainable
Development