Wednesday, September 8, 2010

Measuring GDP in resource rich, income poor countries

Hamilton and Ley suggest a new way of measuring economic progress for countries with significant exhaustible natural resources and important foreign investor presence: adjusted net national income (aNNI). It involves a charge to net national income for the depletion of natural resources. GDP itself does not account for the depletion of natural assets.


  • Net national income (NNI) = GDP + [Net foreign factor income] - [Depreciation of fixed capital]
  • Adjusted net national income (aNNI) = NNI - [Depreciation of natural capital]

For most of the African countries, aNNI shows that they have been consuming more than their incomes since 1990, particularly financed by resource boom. They argue that if this holds then over-confidence in growth on resource-rich countries should be revisited. These countries should manage mineral wealth in such a way that its exploitation aids sustainable growth. Some of the policies could include “macroeconomic policies that encourage savings, fiscal policies that capture resource rents, public investment programs that put resource revenues to their best use (including investment in human capital), and resource policies that lead to dynamically efficient rates of extraction.” The authors warn that failure to do so would increase the risks of “resource curse” which is plaguing resource rich African countries.