The Intangible Wealth of Nations
Why you're worth more than you think
For the average American living in the United States is like having more than half a million dollars in wealth. So says a new study from the World Bank, Where is the Wealth of Nations?: Measuring Capital for the 21st Century, which makes estimates of the contribution of natural, produced, and intangible capital to the aggregate wealth of 120 countries.
Why are Americans so well off? It's not just because of America's fruited plains and its alabaster cities. In fact, it turns out that such natural and man-made resources comprise a relatively small percentage of our wealth.
The World Bank study begins by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal, and mineral resources), cropland, pastureland, forested areas, and protected areas. Produced capital is what many of us think of when we think of capital. It is the sum of machinery, equipment, and structures (including infrastructure) and urban land. The Bank then identifies intangible capital as the difference between total wealth and all produced and natural capital. Intangible capital encompasses raw labor; human capital, which includes the sum of the knowledge, skills, and know-how possessed by population; as well as the level of trust in a society and the quality of its formal and informal social institutions.
Once the analytical framework is set up, what the researchers at the World Bank find is fascinating. "The most striking aspect of the wealth estimates is the high values for intangible capital. Nearly 85 percent of the countries in our sample have an intangible capital share of total wealth greater than 50 percent," write the researchers. They further note that years of schooling and a rule-of-law index can account for 90 percent of the variation in intangible capital. In other words, the more highly educated a country's people are and the more honest and fair its legal system is, the wealthier it is.
Let's consider a few cases. The country with the highest per capita wealth is Switzerland at $648,000. The United States is fourth at $513,000. Overall, the average per capita wealth in the rich Organization for Economic Cooperation Development (OECD) countries is $440,000. By contrast, 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 Republic of the Congo are destroying wealth and ensuring that they will be poorer in the future.
Perhaps one way to think about what it means for the average wealth in the United States to be $513,000 per capita is to think about how much income that wealth produces annually. Not surprisingly, countries with high levels of wealth per capita also produce high levels of income per capita. For instance, in purchasing power parity terms, the United States per capita income is $41,500 annually. This yields roughly an 8 percent return on average wealth.
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. By contrast, the average wealth per capita in OECD countries of $440,000 consists of $9,531 in natural capital, $76,193 in produced capital; and a whopping $353,339 in intangible capital.
So if every American has $513,000 in capital, where is it? The vast majority of it is amassed in our political and economic institutions and our educations. The natural wealth in rich countries like the U.S. is a tiny proportion of their overall wealth—typically 1 to 3 percent—yet they have higher amounts of natural capital than poor countries. 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 percent of the rich countries' total wealth. And 80 percent of the wealth of rich countries consists of intangible capital. "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity," argues the World Bank study.
As noted above, 90 percent of intangible capital is accounted for by years of schooling and the rule of law. On average, the rule of law explains 57 percent of countries' intangible capital while schooling accounts for 36 percent. The World Bank has devised a rule-of-law index that measures the extent to which people have confidence in and abide by the rules of their society. An economy with a very efficient judicial system, clear property rights, and an effective government will produce higher total wealth.
On the World Bank's rule-of-law index, the United States scores 92 out of a possible 100. The Swiss are even more law-abiding, achieving a score of 99 out of 100. By contrast, Nigeria's rule-of-law index score is a pitiful 4.8; Burundi's 4.3; and Ethiopia's 16.4. The OECD's average score is 90, while sub-Saharan Africa's is 28.
The World Bank study notes, "A one-point increase in the rule of law index (on a 100-point scale) boosts total wealth by over $100 in low-income countries, over $400 in middle-income countries, and nearly $3,000 in high-income countries." So if Nigeria were somehow overnight to become as punctilious as Switzerland, its wealth would rise to $12,168 per person, a $9,420 increase that would more than quadruple the average Nigerian's wealth. If Americans were to become 100 percent law abiding, our wealth would increase by $24,000, or little more than 5 percent.
The report also calculates that a one-year increase in the mean level of schooling in low income countries increases a country's intangible capital by $838 per person. This means that poor countries can get a really big bang for their education buck, since they now spend only $51 per student per year in primary school.
Where is the Wealth of Nations? convincingly shows what countries need to do to create wealth and lift billions of people out of abject poverty. Establish the rule of law and educate people. The big question that the World Bank 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 book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.