Inclusive wealth, total factor productivity, and sustainability: an empirical analysis

Abstract

Sustainability can be assessed by non-declining inclusive wealth, which refers to man-made capital, human capital, natural capital, and all other types of capital that are sources of human well-being. As the previous studies—including Arrow et al. (J Econ Perspect 18(3):147–172, 2004) and the Inclusive Wealth Report (2012 and 2014)—suggest, total factor productivity (TFP) is one determinant of inclusive wealth, because it is related to the resource allocation mechanism. TFP is one important component of sustainability. When considering the contribution of TFP toward inclusive wealth, attention needs to be paid to the improvement in the usage of human and natural capital as well as the traditional man-made capital. However, in the previous studies, only man-made capital and labor force have been considered. This study extends current measures of sustainability by capturing the efficient utilization of natural resources, giving us inclusive wealth-based TFP. Therefore, in contrast to conventional TFP measures, we consider both human and natural capital in addition to man-made capital. We examine 43 countries and find that a new indicator which asserts countries previously considered sustainable by earlier studies such as Arrow et al. (J Econ Perspect 18(3):147–172, 2004) as no longer sustainable.