Sunday, September 30, 2007
Why are Americans so well off?
No, we Americans are not wealthy because of our natural resources. If natural resources were the driver of national wealth, Russia would be a lot richer than it is. And it isn't our embedded investment in physical capital -- machines, information systems, and such -- either. It is our "intangible" capital (WSJ sub. req.), broadly defined:
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%.
I have not read the World Bank study, but I have always thought that it was impossible for a country to get rich without reliable (and therefore tradeable) definitions of property. Poor people often own property that could support a loan that could start a business, but it is worthless as collateral if they cannot prove they own it and if there are no honest judges to defend the mortgagor from the unscrupulous mortgagee.
National wealth does not depend on resources. If it did, Hong Kong and Singapore would be poor and Iran would be rich. Wealth requires clear laws, honest -- or at least not corrupt -- public officials, and judges who enforce rights in property and contract without regard to the parties involved. Wealth requires investment of money, time, and labor, and investment requires a measure of certainty. The rule of law, particularly regarding the enforcement of property rights and contracts, is the fountainhead of certainty and therefore investment. In the present day and age, if a country does these simple and obvious things it will get rich in a hurry.
This, by the way, is why it is so important to oppose rather than abet corruption, especially in the poor countries of the world.
4 Comments:
By 
, at
Sun Sep 30, 10:07:00 PM:
"Wealth requires clear laws, honest -- or at least not corrupt -- public officials, and judges who enforce rights in property and contract without regard to the parties involved."
That is why the "culture of corruption" is so bad for the US. Now If I could only get my Congresswoman and Senators to understand that corrupt means "corrupt", not "Republican".
By , at
Sun Sep 30, 10:40:00 PM:
I read this article in the WSJ myself. I was astonished something so self-evidently true on the topic of economic growth and the reasons for wealth creation could have been produced by the World Bank. I'm getting up early tomorrow, fully expecting to see the sun rising in the West.
By 
D.E. Cloutier, at
Mon Oct 01, 01:09:00 AM:
Yes, the rule of law is great. It's a shame no country has it.
If you are rich, you can afford any lawyer. If you are poor, you have NGOs and legal aid. But if you are in the middle, you're screwed.
I won't bother to talk about celebrity justice. And I won't bother to mention the judges with personal agendas. And I won't bother to mention the world-famous lawsuit against the dry cleaners in the Washington (DC) area. You already know about that stuff.
By , at
Mon Oct 01, 01:36:00 AM:
From Monty Python and the Holy Grail:
ARTHUR:
How do you do, good lady? I am Arthur, King of the Britons. Who's castle is that?
WOMAN:
King of the who?
ARTHUR:
The Britons.
WOMAN:
Who are the Britons?
ARTHUR:
Well, we all are. We are all Britons, and I am your king.
WOMAN:
I didn't know we had a king. I thought we were an autonomous collective.
DENNIS:
You're fooling yourself. We're living in a dictatorship: a self-perpetuating autocracy in which the working classes--
WOMAN:
Oh, there you go bringing class into it again.
DENNIS:
That's what it's all about. If only people would hear of--
ARTHUR:
Please! Please, good people. I am in haste. Who lives in that castle?
WOMAN:
No one lives there.
ARTHUR:
Then who is your lord?
WOMAN:
We don't have a lord.
ARTHUR:
What?
DENNIS:
I told you. We're an anarcho-syndicalist commune. We take it in turns to act as a sort of executive officer for the week,...
ARTHUR:
Yes.
DENNIS:
...but all the decisions of that officer have to be ratified at a special bi-weekly meeting...
ARTHUR:
Yes, I see.
DENNIS:
...by a simple majority in the case of purely internal affairs,...
ARTHUR:
Be quiet!
DENNIS:
...but by a two-thirds majority in the case of more major--
ARTHUR:
Be quiet! I order you to be quiet!
WOMAN:
Order, eh? Who does he think he is? Heh.
ARTHUR:
I am your king!
WOMAN:
Well, I didn't vote for you.
ARTHUR:
You don't vote for kings.
WOMAN:
Well, how did you become King, then?
ARTHUR:
The Lady of the Lake,...
[angels sing]
...her arm clad in the purest shimmering samite, held aloft Excalibur from the bosom of the water signifying by Divine Providence that I, Arthur, was to carry Excalibur.
[singing stops]
That is why I am your king!
DENNIS:
Listen. Strange women lying in ponds distributing swords is no basis for a system of government. Supreme executive power derives from a mandate from the masses, not from some farcical aquatic ceremony.
ARTHUR:
Be quiet!
DENNIS:
Well, but you can't expect to wield supreme executive power just 'cause some watery tart threw a sword at you!
ARTHUR:
Shut up!
DENNIS:
I mean, if I went 'round saying I was an emperor just because some moistened bint had lobbed a scimitar at me, they'd put me away!
ARTHUR:
Shut up, will you? Shut up!
DENNIS:
Ah, now we see the violence inherent in the system.
ARTHUR:
Shut up!
DENNIS:
Oh! Come and see the violence inherent in the system! Help! Help! I'm being repressed!
ARTHUR:
Bloody peasant!
DENNIS:
Oh, what a give-away. Did you hear that? Did you hear that, eh? That's what I'm on about. Did you see him repressing me? You saw it, didn't you?
