By
RONALD BAILEY
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?
Ronald Bailey is an American libertarian Science Writer.
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