[tt] Reason: Ronald Bailey: The Secrets of Intangible Wealth

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Ronald Bailey: The Secrets of Intangible Wealth
http://www.reason.com/news/show/122854.html
[Linked by Arts & Letters Daily.]
7.10,5

For once the World Bank says something smart about the real causes
of prosperity


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 percent of countries' intangible capital. Education
accounts for 36 percent.
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 percent to 3
percent--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?

Ronald Bailey is Reason's science correspondent. His most recent
book, Liberation Biology: The Scientific and Moral Case for the
Biotech Revolution, is available from Prometheus Books.