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SUMMARY AND IMPLICATIONS FOR FAO HANDBOOK

Summary

This report has argued that national income accounts, which are aimed at measuring production, suffer several shortcomings as a system for recording the aggregate welfare impacts of human use of forest resources. In Chapter 2 we summarized the principal adjustments that need to be made to the current accounts to convert them to a system that more accurately depicts the economic contributions of forest resources. Those adjustments were based on the list of economic aspects of forests listed at the start of that chapter. Other aspects could certainly be added.

Adjustments to the asset accounts parallel the adjustments to the current accounts. Given the list of economic aspects at the start of Chapter 2, there should be four balance sheets, for timber, carbon, forestland, and converted land. (The number would differ if forest-related assets were classified differently.) Opening and closing asset values equal the present value of future returns, broadly defined, generated by the assets. Asset values for forestland must exclude timber and carbon if, as proposed, timber and carbon are treated as separate assets. Net accumulation should be the same in the current accounts (as an adjustment to NDP) and the accumulation accounts. It equals the total change in value of the asset in question, not just the value of the change in the volume of the asset. In principle, it can be decomposed into increases in the volume, decreases in the volume, changes in quality, and holding gains/losses, but this is likely to be difficult in practice, especially for assets other than timber.

Empirical studies indicate that many of these adjustments are feasible, although they will be highly inaccurate if valuation techniques are not applied properly. Even when techniques are applied properly, the resulting estimates will often not be terribly precise. For this reason, we suggest that the adjustments proposed in this report be implemented as a satellite accounting system. Their implementation will most likely require a joint effort by national accountants and economists in planning or forestry agencies.

Consistency with SNA and SEEA

Implementation as a satellite system is in fact necessary in view of SNA accounting rules. Several of the proposed adjustments violate those rules. An evaluation of the proposed adjustments relative to the SNA yields the following:

Final consumption of nonmarket forests products The SNA permits imputation of the value of such consumption in the current accounts. It appropriately requires, however, that imputed income associated with production of such products also be included, to ensure that the accounts are in balance. In practice, these imputations are seldom made. Moreover, the SNA only permits such imputations for forests within the production boundary (i.e., cultivated forests), not for all forests as proposed in our framework.

Final consumption of forest amenities This falls outside the SNA production boundary, at least when it pertains to unpriced public goods.

Reallocation of value added The SNA does not explicitly permit this. Discussions with some national accountants indicated that such adjustments might be interpreted as being consistent with the SNA definition of production, even though the environmental services involved are not bought and sold in markets. Such adjustments would surely be controversial, at the very least, to most national accountants.

Net accumulation The SNA permits including in NDP only net investment (the value of the change, not the change in value), and then only for fixed (human-made) capital. It recommends including the imputed value of growth of timber in cultivated forests in GDP, and thus in NDP. We recommend including this in NDP, but not GDP, and including it for all timber production forests, natural as well as cultivated. We also recommend subtracting from NDP the value of the reduction in timber stocks when timber is harvested; due to its focus on fixed capital, the SNA does not permit this, though it does include the reduction in the asset accounts (for cultivated forests only), as a change in inventories. Moreover, we recommend also including other factors affecting asset values (e.g., holding gains/losses), so that NDP includes the full value of net accumulation, not just net investment narrowly defined.

Comparison to the SEEA yields similar results. The adjustments we recommend differ from those in the SEEA because ours do not stay strictly within the SNA production boundary, and because we use benefits-based, not costs-based, valuation methods. For example, although some versions of the SEEA propose a "depletion" adjustment for forest resources in NDP, this adjustment applies only to cultivated forests. Moreover, the SEEA defines the adjustment as the discrepancy in production value between actual harvests and sustainable harvests, not as net accumulation.

These differences indicate the fundamental difference in purpose between our proposed accounting system (measuring economic contributions in a welfare sense) and the SNA/SEEA (measuring production). The systems are different means to different ends.

Suggestions for the FAO handbook

In light of these differences, the first chapter of the FAO handbook should communicate clearly the rationale for the proposed system. The main point is that the proposed system is not a competitor to SNA/SEEA, but rather a system with a fundamentally different purpose.

The second chapter should briefly review the structure of the SNA, as the proposed system takes elements of the SNA as its starting point. The first chapter of Inter-Secretariat Working Group on National Accounts (1993) provides an overview of the SNA and should be the main source of information for this section of the report.

The third chapter should describe the proposed adjustments to the asset accounts. It should emphasize the present value method for calculating asset values, but also consider whether, in some countries at least, market prices for forestland can be used as proxies for the asset value of forests. It should illustrate applications of the present value method for nontimber as well as timber values, and include examples showing how to isolate holding gains/losses from net accumulation. It must pay attention to the issues of double-counting when forestland and timber stocks are treated as separate assets. Variants on the four-asset framework presented in this report should be considered.

The fourth chapter should describe the proposed adjustments to current accounts (GDP, industry value added, NDP). The discussion of net accumulation in the third chapter will have covered the principal adjustments required for NDP. Implementation of the other adjustments is basically a matter of estimating nonmarket values at the national level. The chapter should provide several examples for each category of nonmarket value.

The final chapter should discuss the use of information generated by the accounting system. It should include discussion on the value of the information for measuring sustainability, for both forestry and the national economy.

 

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