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Production and consumption activities in any economy have a
direct impact on the environment. Although increased economic activity
and population growth in developing countries continue to exert enormous
pressure on their natural environments, the role of the environment is
neglected in the estimation of national income. Such neglect at the
macroeconomic level is at least in part, an important cause of
environmental degradation in developing countries. Since the United
Nations Conference on Environment and Development in 1992 at Rio and
even as early as middle of the 1980s, a substantial literature had
developed on methods to integrate the environment into the economic
development process. The main assertion in this literature is that
natural resources represent a form of capital that is analogous to the
stock of manufactured capital. Sustainable income can be determined by
allocating a portion of income to allow for the deprecation of natural
capital [Ahmed, El Serafy, and Lutz (1989) and Solow (1992)]. Indonesia
had average real GDP growth rates of more than five percent per year up
to the early 1990s [World Bank (1994)]. But income inequality (measured
by the Gini coefficient) has been high. Although inequality continues to
be quite high, especially between rural and urban populations, Indonesia
has been successful in poverty alleviation up to mid 1990s. In 1976
almost 40 percent of its population was below the poverty line, which in
1993 decreased to less than 14 percent [Todaro (1994)]. Income
distributional consequences of economic growth would continue to be one
of the main policy issues in Indonesia. This is due to its large
population size, presence of different ethnic and religious groups,
large diversity between rural and urban groups, variety of natural
resources scattered over the country, huge distances and the effects of
a far-flung archipelago [Akita, Lukman, and Yamada (1999)].

Australia is highly dependent on its natural resources;
therefore it needs to develop a national accounting system whereby the
concept of natural resource asset depletion is incorporated into its
national income accounts. The present study suggests that if the
national income accounting system of the economy is deficient in
highlighting the gap in estimated income and sustainable income, then
such a system needs to be improved [Ahmed and Mallick (1997)]. In a
previous analysis of the Australian economy [Mallick, Sinden, and
Thampapillai (2000)], showed that reconciliation between the goals of
sustainability and employment may be achieved by a real wage reduction
of approximately 8-10 percent. The analysis was structured within the
framework of a simple Keynesian model of income determination and a
Cobb-Douglas production function.