# **Box 1 – Wealth Economics** **<u>and Mineral Depletion</u>**

Gross National Savings (GNS) measure the national capacity to finance domestic investment. It is computed at the sum of Gross National Income plus net transfers from abroad (Gross National Disposable Income, GNDI), minus consumption (CONS, public and private). Total domestic investment is financed by the sum of gross national savings and foreign savings.

## GNS = GNDI - CONS

Net National Savings (NNS) subtracts from Gross National Savings the consumption of fixed capital (CFC), to account for the fact that past domestic investments lose value over time (attrition, obsolescence). To maintain wealth unchanged, new investments need to be made every year to offset attrition and obsolescence.

NNS = GNS – CFC Adjusted Net Savings (ANS) accounts for several other factors: It adds to NNS education expenditures (EDU), not considered in national accounting as investment (as almost entirely taking the form of teachers’ salaries), even if it can be considered as an investment to build human capital. It subtracts to NNS the economic cost of environmental degradation (ENV), as well as the amount of natural resource depletion (NRD), including mineral depletion.

Quantitative methodologies have been established to compute and compare across countries the economic costs of environmental pollution, as well as the value of natural capital depleted (World Bank, 2011a). Mineral depletion (MD), on which this paper focuses, is computed as the present value of the future rents, divided by the number of years of extraction, T. (also known as the Real Wealth valuation method). World Development Indicators retain a discount rate of 4 percent across countries for present value calculation.

The rent at the period t, Rt, is measured as the difference between the output (quantities produced multiplied by world prices) and the market remuneration of factors (intermediate inputs, labor, and capital – see Annex, Table A.2) used to extract the mineral resource (including acquisition, exploration, development, and site restoration) The present value computation of mineral depletion for a given period assumes that the rent (i.e. prices, quantities produced and costs) will be similar every year until exhaustion. Our computation of mineral depletion however, accounts for evolving world prices and costs (per World Bank forecasts, see Annex, Table A.4) over time, as well as changes in quantities extracted (per companies development plans) and the discovery of new reserves (until April 2012).

Comparing Ghana with Liberia and Sierra Leone illustrates the daunting governance challenges these last two countries will face in the coming years. Ghana, which ranks among the best countries in SubSaharan Africa for governance (the use of public resource), equity and macroeconomic management, with Country Policy and Institutional Assessment (CPIA) ratings between 3.8 and 4.0 since 2006, saw its adjusted net savings dropping by almost 6 percentage points since 2006 (as mineral depletion was not offset with sufficient additional savings). Liberia and Sierra Leone, starting from much more fragile initial conditions, with CPIA respectively at 2.9 and 3.3, and adjusted net savings at 3.5<sup>5</sup> and 0.2 percent of Gross National Income (GNI) in 2010, see Table 1, could very possibly see their national wealth declining. Liberia’s ―growth without development‖ and Sierra Leone’s diamond conflict

> 5 The computation of Liberia’s Adjusted Net Savings is rendered delicate due to (i) the size of UNMIL transfers to Liberia (exceeding GNI by 37 percent in 2010), and (ii) uncertainty regarding actual private consumption. The estimate of a 16.7 percent Gross national Savings rate retains the assumptions that (i) 50 percent of UNMIL transfers are invested (military building and equipments). A new household survey to be conducted in 2012 is anticipated to significantly revise upwards private consumption, thus lowering Gross National Savings as a percentage of GNI.

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