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Appendix 1.1: Building the Wealth Estimates-Methodology
Energy and Mineral Resources
Despite all these difficulties, dollar values were assigned to the stocks of the main energy resources (oil, gas, and coal [Coal is subdivided into two groups: hard coal (anthracite and bituminous) and soft coal (lignite and subbituminous).]) and to the stocks of ten metals and minerals (bauxite, copper, gold, iron ore, lead, nickel, phosphate rock, silver, tin, and zinc) for all the countries that exhibit production figures.
This section is explained in greater depth in Appendix 1.1 of Where Is the Wealth of Nations?
The predominant economic use of forests has been as a source of timber. Timber wealth is calculated as the net present value of rents from roundwood production. The estimation then requires data on roundwood production, unit rents, and the time to exhaustion of the forest (if unsustainably managed).
The annual flow of roundwood production is obtained from the Food and Agriculture Organization of the United Nations database (FAOSTAT) (When data is missing, and if country’s forest area is less than 50 square kilometers, the value of production is assumed to be zero.). Calculating the rent is more complex. Theoretically, the value of standing timber is equal to the discounted future stumpage price received by the forest owner after taking out the costs of bringing the timber to maturity. In practice, stumpage prices are usually not readily available, and we calculated unit rents as the product between a composite weighted price times a rental rate.
The composite weighted price of standing timber is estimated as the average of three different prices (weighted by production): 1) the export unit value of coniferous industrial roundwood; 2) export unit value of non-coniferous industrial roundwood; and 3) an estimated world average price of fuelwood. Where country level prices are not available, the regional weighted average is used (After consultation with World Bank forestry experts, some country level prices were replaced by the regional average.).
Forestry production-cost data is not available for all countries. Consequently, regional rental rates ([price-cost]/price) were estimated using available studies and consultation with World Bank forestry experts.
Since we applied a market value to standing timber, it was necessary to distinguish between forests available and forests not available for wood supply as some standing timber is simply not accessible or economically viable. The area of forest available for wood supply was estimated as forests within 50 kilometers of infrastructure.
Rents were capitalized using a 4 percent discount rate to arrive at a stock of timber resources. The concept of sustainable use of forest resources is introduced via the choice of the time horizon over which the stream is capitalized. If roundwood production is smaller than net annual increments, that is, the forest is sustainably harvested, the time horizon is 25 years. If roundwood production is greater than the net annual increments, then the time to exhaustion is calculated. The smallest between this estimate and 25 is used. The time to exhaustion is based on estimates of forest volume divided by the difference between production and increment.
Roundwood and fuelwood production data is for the year 2000, and is from FAOSTAT forestry data online. Data on industrial roundwood (wood in rough) for coniferous and non-coniferous production were obtained from the United Nations Food and Agriculture Organization (UNFAO) yearbook: Forest products 1997–2001. Fuelwood price data is from FAOSTAT forestry data online. Roundwood export prices are calculated from data from FAO Forestry Products 1997– 2001. Studies used as a basis for rental rates were (Fortech 1997; Whiteman 1996; Tay 2001; Lopina 2003; Haripriya 1998; Global Witness 2001; Eurostat 2002).
Nontimber Forest Resources
Timber revenues are not the only contribution forests make. Nontimber forest benefits such as minor forest products, hunting, recreation, watershed protection, options, and existence values are significant benefits not explicitly accounted for. This leads to forest resources being undervalued. A review of nontimber forest benefits in developed and developing countries reveals that returns per hectare per year from such benefits vary from $190 per hectare in developed countries to $145 per hectare in developing countries (based on Lampietti and Dixon 1995 and Croitoru and others 2003 and adjusted to 2000 prices). Assuming that only one-tenth of the forest area in each country is accessible, this per hectare value is multiplied by one-tenth of the forest area in each country. Non-timber forest resources are then valued as the net present value of benefits over a time horizon of 25 years (When data is missing, and if country’s forest area is less than 50 square kilometers, the value of non-timber forest benefits is assumed to be zero.).
Country- level data on agricultural land prices are not widely published and even if local data were available, it is arguable that land markets are so distorted that a meaningful comparison across countries would be difficult. We have therefore chosen to estimate land values based on the present discounted value of land rents, assuming that the products of the land are sold at world prices.
The return to land is computed as the difference between market value of output crops and cropspecific production costs. Nine representative crops were taken mainly based on their production significance in terms of sowing area, production volume, and revenue. With these three aspects taken into consideration the following nine representative crops were considered: maize, rice, wheat, banana, grapes, apples, oranges, soybean, and coffee. Maize, rice, and wheat were calculated individually as they occupy most of the world’s agricultural land resources. Banana, grapes, apples, and oranges were used as proxies for the broader category of fruits and vegetables. Soybean and coffee were used as proxies for the broader categories of oil crops and beverages respectively. Roots, pulses, and other crops were calculated as the residual of total arable and permanent cropland minus the sowing areas of the above nine categories.
The crop-specific ratios are then multiplied by values of production at eorld prices. This has the effect of assigning higher land rents to more productive soils. However, applying average cropspecific ratios in this manner probably understates the value of the most productive lands and overstates the value of the least productive land within a country.
A country’s overall land rent is calculated as a weighted average (weighted by sowing areas) of rents from ten crop categories. Return to land for the tenth category (roots, pulses, and other crops) is calculated differently. Since there is no representative crop for it, the land rent is calculated as 80 percent of the weighted average (weighted by sow area) of the three major cereals. This is based on the assumption that roots, pulses, and other crops yield lower returns to land per hectare.
In order to reflect the sustainability of current cultivation practices, the annual return in 2000 is projected to the year 2020 based on growth in production (land areas are assumed to stay constant). Between 2020 and 2024, the vale of production was held constant. The growth rates are 0.97 percent and 1.94 percent in developed and developing countries respectively (Rosengrant 1995). The discounted present value of this flow was then calculated using a discount rate of 4 percent.
Pasturelands are valued at the opportunity cost of preserving land for grazing. The returns to pastureland are assumed to be a fixed proportion of the value of output. On average, costs of production are 55 percent of revenues, and therefore, returns to pastureland are assumed to be 45 percent of output value. Value of output is based on the production of beef, lamb, milk, and wool valued at international prices. As with croplands, this rental share of output values is applied to country-specific outputs of pastureland valued at world prices. The present value of this flow is then calculated using a 4 percent discount rate over a 25-year time horizon.
In order to reflect the sustainability of current grazing practices, the annual return in 2000 is projected to the year 2020 based on growth in production (land areas are assumed to stay constant). Between 2020 and 2024, the value of production was held constant. The growth rates are 0.89 percent and 2.95 percent in developed and developing countries respectively (Rosengrant 1995). The discounted present value of this flow was then calculated using a discount rate of 4 percent.
Protected areas provide a number of benefits that range from existence values to recreational values. They can be a significant source of income from a thriving tourist industry. These values are revealed by a high willingness-to-pay for such benefits. The establishment and good maintenance of protected areas preserves an asset for the future and therefore protected areas form an important party of the natural capital estimates.
We have valued protected areas using a per hectare value that is the minimum between that for cropland and pastureland, that is, the cost of demarcating these areas as protected are the foregone benefits from converting them to pasture or agricultural land. The willingness-to-pay to preserve natural regions varies considerably and there is no comprehensive data set on this. Limiting the value of protected areas to the opportunity cost of preservatio n probably captures the minimum value, and not the complete value, of protected areas. Protected areas (the World Conservation Union [IUCN] categories I-VI) are valued at the lower of per hectare returns to pasture land and cropland. These are then capitalized over a 25-year time horizon, using a 4 percent discount rate.
Data on protected areas is taken from the World Database of Protected Areas (WDPA) which is compiled by United Nations Environment Programme World Conservation Monitoring Centre (UNEP-WCMC). Given the frequent revisions to the database, the data used is for 2003. In the cases of missing data on protected areas, this was assumed to be zero.
The figures and text above are copyright the World Bank. Further information, along with the full report in PDF form, is available at www.worldbank.org/sustainabledevelopment
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