Natural capital and aggregate income growth

Abstract We explore the theoretical conditions in which natural capital improves explanations of aggregate income growth from factor changes. With positive total factor productivity (TFP) growth, including natural capital better explains growth if natural capital growth rates exceed physical capital growth rates. With negative TFP growth and higher natural capital growth rates, natural capital worsens explanations of growth. Using a comprehensive dataset on natural resource stocks and income shares in GDP, we perform an empirical analysis with 99 countries over three time periods between 2001 and 2015 and find that 41 per cent of country-time periods meet the conditions for improved growth explanation with natural capital. Of these, 59 per cent occur because TFP growth is negative, and physical capital growth exceeds that of natural capital. In these cases, including natural capital simultaneously reduces bias in factor shares and TFP estimates and improves the share of growth explained by changes in factors.