Economic Sustainability Poster

AN EVALUATION OF HICKSIAN SUSTAINABILITY IN A RAPIDLY DEVELOPING ECONOMY:
IS TRINIDAD AND TOBAGOS ECONOMIC GROWTH SUSTAINABLE?

Lendel K. Narine, Mattias Boman, Amanda D. Ali, & Stephan Moonsammy
Department of Agricultural Economics & Extension, Faculty of Food & Agriculture,
The University of the West Indies, Trinidad and Tobago
Introduction
Mankind is dependent on renewable and non-renewable natural resources. As such, there is a growing concern surrounding the issue of sustainability. Solow
(1991) stated that sustainability is an obligation to conduct ourselves so that we leave to the future the option or the capacity to be as well off as we are. This
definition implies weak sustainability, that is, any loss of natural capital must be balanced out by the formation of new capital of at least equal value. Trinidad and
Tobago (T&T) enjoys vast reserves of exhaustible natural resources, unmatched by other Caribbean nations. Resultantly, it is now one of the wealthiest and most
developed nations in the Caribbean. This study seeks to determine whether a non-renewable natural resource dependent economy T&T is developing along a
sustainable path based on several weak indicators of sustainability found in the literature. Specifically, this study aims to estimate (i) Genuine Savings (GS) and (ii)
the Approximate Environmentally Adjusted National Product (AENP) of T&T.
The Economy of Trinidad and Tobago
Theory
The petrochemical sector of T&T expanded greatly over the

previous decade. T&T is now the global leader of ammonia
exports, the largest supplier of Liquefied Natural Gas (LNG) to
the USA and the second largest exporter of methanol. The
exploitation of natural resources allowed a high GDP growth rate
of 7.5% during the period 2004-2008; the highest growth rate in
Latin America and the Caribbean (Clarke 2011). Standard
economic indicators presents a positive fiscal outlook for the
country. However, Clarke (2011) stressed that the continued
expansion of the energy sector is unsustainable as it comes at a
considerable cost to the economys future. With steady increases
in demand for goods caused by an average annual population
growth rate of 0.5%, environmental problems are expected to
intensify (NEP, 2006). Economists argue that the continued
exploitation of resources will satisfy short term growth but
thwart sustainability in the long run.
There is sustainable development if inter-temporal welfare is non-decreasing over time (Arrow et al. 2004). This
definition agrees with Hicksian income; the level at which an economy can consume and maintain its stock of
productive capital and indefinitely allow consumption at that level. In this framework, there is unlimited
substitution between man-made and natural capital (Pearce et al. 1996). Notably, Hicksian sustainability, which
defines a non-decreasing level of consumption, is theoretically equivalent to the "Hartwick-Solow sustainability
concept (Hartwick, 1977; Solow, 1986). This study focuses on two weak measures of Hicksian sustainability;
Genuine Savings (GS) and the Approximate Environmentally Adjusted National Product (AENP). AENP
measures consumption flows whilst GS is based on capital stocks. Sustainability exists when:
Criterion 1 (C.1): Income is returned to wealth; wealth is the capitalized value of future consumption (C), i.e.
savings is reinvested in capital stocks: a stock-based measure (GS).
Criterion 2 (C.2): The level of consumption is that which wealth/capital (K) is constant, i.e. consumption in t=1
(t: time) does not reduce potential consumption at t=n, a flow-based measure (AENP).
The GS measure provides an insight into the reinvestment of a nations savings into capital stocks. AENP is a
measure of Hicksian income (Hanley et al. 1998) in that it represents the maximum amount of possible
consumption during a given period that does not reduce the possibilities of future consumption (Hicks, C.2.:
AENP in t > consumption expenditure in t).
2500
8000
2000
6000
1500
1000
4000
500
2000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Consumption of fixed capital (USD mil)
50%
40%
30%
20%
10%
0%
-10%
-20%
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
-30%
Genuine Savings (% of GNI)

Net national savings (% of GNI)
30000
25000
20000
15000
10000
5000
Consumption expenditure (USD mil)

AENP
GNI (USD mil)
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
1999
GNI - Gross National Income

DER - Depletion of energy resources
CO2 - Carbon dioxide damages
PPD - Particulate pollution damages
There was a 700%

increase in the
consumption of
fixed capital and a
1900% increase in
the rate of energy
depletion. This
reflects multiple oil
Energy depletion (USD mil)
booms over the
past decade.
In 2007 - 2008, GS dropped considerably.
This implies that insufficient funds were
reinvested into stocks to account for the
depreciation of capital: C.1 not satisfied.
The GS trend showed that the country
followed an unsustainable path.
10000
1998
3000
1997
AENP (USD) is a measure of Hicksian income in

that it represents the maximum amount of possible
consumption during a given period that does not
reduce the possibilities of future consumption (C.2.).
As defined by Nourry (2007);
AENP = GNI DER CO2 PPD
12000
1996
GNS - Gross National Saving

EE - Education Expenditure
CFC - Consumption of Fixed Capital
DER - Depletion of Energy resources
DM - Depletion of Minerals
NDF - Net Depletion of Forests
CO2 - Carbon Dioxide damages
PPD - Particulate Pollution Damages
GNI- Gross National Income
3500
1996
14000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
GS (% of GNI) ranges from negative to positive, a

value of 0 indicates that the country is investing
exactly enough into man-made and natural capital to
offset declining natural resource stocks (C. 1.). Bolt et
al. (2002) noted;
GS = (GNS+EE+CFC-DER-DM-NDF-CO2-PPD)/GNI
Conclusion and Implications
4000
1995
This study focused on several aggregate indicators of

sustainability over a 14 year period (1995 2008).
Data was collected from the World Bank and
ECLAC databases.
Results
1995
Methods
url
During 1995 to 2000 there was a small

margin
of
difference
between
indicators, implying sustainable levels of
consumption.
From 2000 onwards, sustainability
weakened as the gap between GNI and
AENP
expanded. During
20072008, consumption expenditure exceeded
AENP for the 1st time in 14 years; the
county was spending more than it was
earning: C.2 not satisfied during 2007 2008.
AENP and GS were used as indicators of Hicksian sustainability. In

recent years, the country failed both measures. According to Hanley et
al. (1998), if a country cannot pass weak tests of sustainability, then it
will definitely fail more rigorous tests. These findings support the notion
that while there were increases in rents from natural gas and crude oil
extraction; T&Ts growth in recent years was unsustainable. While
national revenues have increased substantially, there were insufficient
returns to wealth i.e. a lack of reinvestment in capital stocks. Ideally, the
country should aim to follow the Hartwick rule by investing resource
rents into other forms of capital. There must be reductions in spending
(thereby increasing savings) and increases in capital investments to
sustain future levels of spending. If these conditions are not met, the
country will experience shortages of resources, effectively thwarting the
possibility of achieving sustainability. It is recommended that the
country adopts measures to manage its resource base and monitor its
capital stock capacity. The application of ecosystem and sustainability
concepts in capital management translates to achieving a balance
between the productive and renewal capacity of resources. As such,
resources can be used in a sustainable manner that supports a nondecreasing level of consumption over time.
References
Arrow, K., Dasgupta, P., Goulder, L., et al. 2004. Are We Consuming Too Much? Journal of Economic Perspectives 18(3), pp. 147172
Bolt, K., Matete, M., and Clemens, M. 2002. Manual for Calculating Adjusted Net Savings. Environment Department, World Bank.
Clarke, Trevonne. 2011. The Sustainability of Trinidad and Tobagos Rate of Economic Growth: An Assessment and Application of Green National
Accounting and Genuine Savings. JIEP 5thBiennial Conference 2011, Kingston, Jamaica, June 6 8, 2011.
Hartwick, J. M., 1977. Inter-generational equity and the investing of rents from exhaustible resources. American Economic Review, vol. 67: 972-974
Hanley, N., Mofatt, I., Faichney,R.,Wilson, M., 1999. Measuring sustainability: A time series of alternative indicators for Scotland. Ecological Economics
28, 5573.
National Environmental Policy (NEP). 2006. The National Environmental Policy of the Republic Of Trinidad And Tobago. Trinidad, Port of Spain.
Nourry, Myriam. 2008. Measuring sustainable development: Some empirical evidence for France from eight alternative indicators. Ecological
Economics, vol 67 (2008): 441-456.
Pearce, D. W., K. Hamilton and G. Atkinson. 1996. Measuring Sustainable Development: progress on indicators, Environment and Development
Economics, vol. 1: 85-101.
Solow, R.M. 1991. Sustainability: an economists perspective, the eighteenth J. Seward Johnson lecture to the Marine Policy Center, Woods Hole
Oceanographic Institution. In: Dorfman, R., Dorfman, N.S. (Eds.), Economics of the Environment: Selected Readings. Norton, New York, pp.
179187.
Fifth World Congress of Environmental and Resource Economists, 28 June - 2 July 2014, Istanbul, Turkey

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AN EVALUATION OF HICKSIAN SUSTAINABILITY IN A RAPIDLY DEVELOPING ECONOMY:

IS TRINIDAD AND TOBAGOS ECONOMIC GROWTH SUSTAINABLE?

The Economy of Trinidad and Tobago

The petrochemical sector of T&T expanded greatly over the

Consumption of fixed capital (USD mil)

Genuine Savings (% of GNI)

Consumption expenditure (USD mil)

GNI - Gross National Income

There was a 700%

AENP (USD) is a measure of Hicksian income in

GNS - Gross National Saving

GS (% of GNI) ranges from negative to positive, a

Conclusion and Implications

This study focused on several aggregate indicators of

During 1995 to 2000 there was a small

AENP and GS were used as indicators of Hicksian sustainability. In

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