Environmentally Adjusted Multifactor Productivity: Methodology and Empirical Results for OECD and G20 Countries

Abstract

This paper extends the analytical framework for measuring multifactor productivity in order to account for environmental services. A growth accounting approach is used to decompose a pollution-adjusted measure of output growth into the contributions of labour, produced capital and natural capital. These indicators allow the sources of economic growth, and its long run sustainability, to be better assessed. Results presented here cover OECD and G20 countries for the 1990–2013 period, and account for the extraction of subsoil natural assets and emissions of air pollutants and greenhouse gases. The main findings suggest that growth in OECD countries has been generated almost exclusively through productivity gains, while BRIICS countries have drawn largely on increased utilisation of factor inputs to generate additional growth. Regarding natural capital, in countries such as Russia, Saudi Arabia, and Chile, reliance on subsoil assets extraction has contributed to a significant share of income growth. Results also point to a shift towards more environmentally friendly production processes in many countries. In fact, most OECD countries have decreased their emissions over the last two decades, and these pollution abatement efforts result in an upward adjustment of their GDP growth rates, allowing for a more accurate assessment of their economic performance.