[MLUG - DISCUSSION] Where Is the Wealth of Nations?

[Mike Miller <EMAIL:PROTECTED>]

See the WSJ article below.  This is really fascinating information to 
ponder and it makes a lot of sense to me.  Corruption in government and 
failure of legal/policing systems are the major causes of economic failure 
in many nations.  What can we do to improve the situation?  It's a 
tremendous challenge but one worth confronting.

The World Bank produced this publication in late 2005:

Where Is the Wealth of Nations?: Measuring Capital for the 21st Century
http://go.worldbank.org/U055JOCQT0

I found two versions of the PDF document:

http://siteresources.worldbank.org/INTEEI/214578-1110886258964/20748034/All.pdf
http://siteresources.worldbank.org/INTEEI/Home/20666132/WealthofNationsconferenceFINAL.pdf

The first seems to be the formatted, published version and the second 
seems to be a conference version from a couple of months earlier with 
similar (identical?) text and better graphics.  --Mike

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http://online.wsj.com/article/SB119103046614343129.html?mod=googlenews_wsj

Wall Street Journal
September 29, 2007

The Secrets of Intangible Wealth

By Ronald Bailey
Word Count: 1,038

A Mexican migrant to the U.S. is five times more productive than one who 
stays home. Why is that?

The answer is not the obvious one: This country has more machinery or 
tools or natural resources. Instead, according to some remarkable but 
largely ignored research -- by the World Bank, of all places -- it is 
because the average American has access to over $418,000 in intangible 
wealth, while the stay-at-home Mexican's intangible wealth is just 
$34,000.

But what is intangible wealth, and how on earth is it measured? And what 
does it mean for the world's people -- poor and rich? That's where the 
story gets even more interesting.

Two years ago the World Bank's environmental economics department set out 
to assess the relative contributions of various kinds of capital to 
economic development. Its study, "Where is the Wealth of Nations?: 
Measuring Capital for the 21st Century," began by defining natural capital 
as the sum of nonrenewable resources (including oil, natural gas, coal and 
mineral resources), cropland, pasture land, forested areas and protected 
areas. Produced, or built, capital is what many of us think of when we 
think of capital: the sum of machinery, equipment, and structures 
(including infrastructure) and urban land.

But once the value of all these are added up, the economists found 
something big was still missing: the vast majority of world's wealth! If 
one simply adds up the current value of a country's natural resources and 
produced, or built, capital, there's no way that can account for that 
country's level of income.

The rest is the result of "intangible" factors -- such as the trust among 
people in a society, an efficient judicial system, clear property rights 
and effective government. All this intangible capital also boosts the 
productivity of labor and results in higher total wealth. In fact, the 
World Bank finds, "Human capital and the value of institutions (as 
measured by rule of law) constitute the largest share of wealth in 
virtually all countries."

Once one takes into account all of the world's natural resources and 
produced capital, 80% of the wealth of rich countries and 60% of the 
wealth of poor countries is of this intangible type. The bottom line: 
"Rich countries are largely rich because of the skills of their 
populations and the quality of the institutions supporting economic 
activity."

What the World Bank economists have brilliantly done is quantify the 
intangible value of education and social institutions. According to their 
regression analyses, for example, the rule of law explains 57% of 
countries' intangible capital. Education accounts for 36%.

The rule-of-law index was devised using several hundred individual 
variables measuring perceptions of governance, drawn from 25 separate data 
sources constructed by 18 different organizations. The latter include 
civil society groups (Freedom House), political and business risk-rating 
agencies (Economist Intelligence Unit) and think tanks (International 
Budget Project Open Budget Index).

Switzerland scores 99.5 out of 100 on the rule-of-law index and the U.S. 
hits 91.8. By contrast, Nigeria's score is a pitiful 5.8; Burundi's 4.3; 
and Ethiopia's 16.4. The members of the Organization for Economic 
Cooperation and Development -- 30 wealthy developed countries -- have an 
average score of 90, while sub-Saharan Africa's is a dismal 28.

The natural wealth in rich countries like the U.S. is a tiny proportion of 
their overall wealth -- typically 1% to 3% -- yet they derive more value 
from what they have. Cropland, pastures and forests are more valuable in 
rich countries because they can be combined with other capital like 
machinery and strong property rights to produce more value. Machinery, 
buildings, roads and so forth account for 17% of the rich countries' total 
wealth.

Overall, the average per capita wealth in the rich Organization for 
Economic Cooperation Development (OECD) countries is $440,000, consisting 
of $10,000 in natural capital, $76,000 in produced capital, and a whopping 
$354,000 in intangible capital. (Switzerland has the highest per capita 
wealth, at $648,000. The U.S. is fourth at $513,000.)

By comparison, the World Bank study finds that total wealth for the low 
income countries averages $7,216 per person. That consists of $2,075 in 
natural capital, $1,150 in produced capital and $3,991 in intangible 
capital. The countries with the lowest per capita wealth are Ethiopia 
($1,965), Nigeria ($2,748), and Burundi ($2,859).

In fact, some countries are so badly run, that they actually have negative 
intangible capital. Through rampant corruption and failing school systems, 
Nigeria and the Democratic Republic of the Congo are destroying their 
intangible capital and ensuring that their people will be poorer in the 
future.

In the U.S., according to the World Bank study, natural capital is $15,000 
per person, produced capital is $80,000 and intangible capital is 
$418,000. And thus, considering common measure used to compare countries, 
its annual purchasing power parity GDP per capita is $43,800. By contrast, 
oil-rich Mexico's total natural capital per person is $8,500 ($6,000 due 
to oil), produced capital is $19,000 and intangible capita is $34,500 -- a 
total of $62,000 per person. Yet its GDP per capita is $10,700. When a 
Mexican, or for that matter, a South Asian or African, walks across our 
border, they gain immediate access to intangible capital worth $418,000 
per person. Who wouldn't walk across the border in such circumstances?

The World Bank study bolsters the deep insights of the late development 
economist Peter Bauer. In his brilliant 1972 book "Dissent on 
Development," Bauer wrote: "If all conditions for development other than 
capital are present, capital will soon be generated locally or will be 
available . . . from abroad. . . . If, however, the conditions for 
development are not present, then aid . . . will be necessarily 
unproductive and therefore ineffective. Thus, if the mainsprings of 
development are present, material progress will occur even without foreign 
aid. If they are absent, it will not occur even with aid."

The World Bank's pathbreaking "Where is the Wealth of Nations?" 
convincingly demonstrates that the "mainsprings of development" are the 
rule of law and a good school system. The big question that its 
researchers don't answer is: How can the people of the developing world 
rid themselves of the kleptocrats who loot their countries and keep them 
poor?

  ---

Mr. Bailey is Reason magazine's science correspondent.

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