ABSTRACT
Optimum economic growth models provide the framework for the derivation of the social discount rate. Although modelling of optimum growth is a well developed area in economics, the empirical derivation of the social discount rate remains as one of the most difficult exercises. Considerable efforts have been made by economists for the empirical derivation of the social discount rate for developed and developing countries with unsatisfactory outcomes. Moreover, in many developing countries where the rate of per capita consumption is decreasing and in countries where substantial environmental degradation and resource exhaustion are occurring, any study showing the empirical derivation of the social discount rate has not been undertaken or reported. This study presents an illustrative, though realistic exercise of estimating the social discount rate in an economy where the rates of growth of per capita GDP and consumption are negative. The estimated social discount rate in an illustrative example are reported and the limitations of the methodology in the case of decreasing per capita consumption and environmental degradation are stated. As the theory of optimum economic growth cannot provide a suitable guidance in these situations, concerns have been raised as to what should be the right method for choosing a social discount rate in these cases. The choice is probably a partly political economic one. Further research is necessary to resolve this issue which may require the development of a new paradigm.
