China

Our Wealthier World

World Bank economist Kirk Hamilton explains how China is growing while the U.S. flirts with asset depreciation.

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Every American has access to $734,000 in wealth, according to a new report by the World Bank, The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium. But most of it—85 percent—is "intangible." The U.S. ranks first in the world in intangible wealth per capita, at $628,000. In comparison, the average Chinese has access to just $19,234, of which $8,921 is intangible. 

These are the estimates that Kirk Hamilton, lead economist in the Development Research Group of the World Bank, and his team calculated for the update to their groundbreaking 2006 report Where Is the Wealth Of Nations?: Measuring Capital for the 21st Century. The new study finds that between 1995 and 2005 global wealth increased by 34 percent and that 80 percent of the additional wealth created consists of intangible capital. 

We all intuitively know what tangible wealth is. It's oil wells, automobile factories, houses, roads, sewage treatment plants, farms, forests, and so forth. But what is intangible wealth? As The Changing Wealth of Nations explains, such wealth consists of "human capital, social, and institutional capital which includes factors such as the rule of law and governance that contribute to an efficient economy." The World Bank report quantifies how living in free countries with honest governments surrounded by educated people dramatically boosts your ability to earn income and create wealth. The poorest countries, meanwhile, have the worst governments and least educated people, with economies that depend on exploiting natural resources. Think of oil-rich Nigeria, where corruption runs rampant, social trust is fragile, and adult literacy is just 60 percent. On the World Bank's rule of law index Nigeria scores 63rd on order and security out of the 66 countries ranked, whereas the United States ranks 13th. 

The policy conclusion is that if countries want to get rich they must aim at improving their human capital (educating their citizens), strengthening the rule of law, and making government accountable. Otherwise, they will remain mired in poverty.

reason interviewed Hamilton back in 2006, so we invited him to drop by our Washington, D.C., office to catch up on his latest findings. A version of this interview can be seen at reason.tv.

reason: Why did you write this book?

Kirk Hamilton: It's part of a 15-year work program at the World Bank to say: How do we get beyond GDP? We know finance ministers everywhere say the growth of GDP is how we measure our success, but we have a strong sense that it is only picking up part of the story when we talk about development. It doesn't pick up the fact that you're depleting your natural resources. It doesn't pick up the fact that policies and institutions are changing over time. You see the outcome of that if the changes are positive. You also see the outcome if the changes are negative. But you don't really have a more direct measure of how the wealth of the country is changing. So this is a long-term project to try to build up evidence on this question of where is the wealth of nations. Coming out of that then we can start to change how development policies are implemented.

reason: OK, so where is the wealth of nations?

Hamilton: We now have three years of estimates of the wealth of nations: 1995, 2000, and 2005. Some things changed between the two books and some things are the same. What's certainly the same is that the intangible wealth of nations is still the largest share of wealth in virtually all countries. In low-income countries it's about half of wealth, about 50 percent. But for high-income countries like the United States it's as high as 80 percent or more. 

When we look at developing countries, however, we see something interesting, which is that the natural resource base for them is a much more important share of wealth. It's something like over 30 percent of the wealth of low-income countries compared with produced capital—buildings, machines, infrastructure, things like that—which is about half that. So for low-income countries in particular, how they manage their natural wealth is a big part of the development story. But half of the wealth is still intangible—it's still this mixture of human capital, institutional quality, social capital, all those things that aren't measured directly in the national accounts.

reason: Let's go through some of those components: What is natural capital?

Hamilton: In the data that we have it consists largely of land. Agricultural land is a big part of the story, especially in low-income developing countries. But forest land as well; we look at some of the services that forests provide as well as the timber values. We put a very rough value on protected areas. If you think of the national parks in the U.S., we have a very crude estimate on the wealth that represents. And then we have data on about a dozen types of minerals, and then oil, gas, and coal. In many countries those are the big natural assets. 

reason: What about produced capital?

Hamilton: It's all the assets that we produce. So infrastructure, like roads, highways, ports, buildings, whether it's office buildings or private dwellings. Those are the big things that produce assets. Things that aren't used up in a year, that produce a service over time. 

reason: That's what most people think of as wealth: natural wealth plus the produced wealth. But there's something else that looms much larger—intangible capital. What is that? 

Hamilton: That's the skills and the knowledge that people have in their heads. It's what you can do with your head as opposed to what you can do with two hands and two feet. 

reason: In your concrete figures for intangible wealth in some countries, the institutions are reducing the human capital value by more than the value of the capital, right? In some of these places it's negative $200,000.

Hamilton: Yeah, in fact there's a few countries—typically some of the big oil producers, places like that—where we do actually see a total measure of intangible wealth that's negative. When you think about that, of course, it doesn't really make any sense. You don't really have negative wealth, you don't really have a liability of that size for countries. What it's telling us is that the returns that you're getting from the wealth that you have, the oil and the other produced capital, are very, very low. 

There's a whole literature on the so-called resource curse: that having a lot of natural wealth in something like oil is often very bad for institutions and very bad for development. It's easy money, sort of free money if you like, and that reduces the need to reform your institutions, you can just sort of drift along. It can be a source of corruption, and that starts drawing people into trying to get their hands on the resource wealth, rather than productive activities, rather than trying to develop the country. 

reason: You mentioned that most of the world's wealth is intangible: It's in institutions, it's in human brains, it's not the stuff of the world. And if you added it all up according to the book, in 2005, the total wealth of the world as I understand it is somewhere around $675 trillion. Is that right?

Hamilton: That's about right.

reason: And the income off of that would be around $65 trillion a year? 

Hamilton: We find that for 80 percent of the countries that we look at, the return on total wealth is somewhere between four and six percent. Which is what you would expect. If you think of long-run rates of return on the whole range of assets that the financial markets look at, for example, that's the sort of return you would expect to see over the long term. 

reason: Between 1995 and 2005 what happened to the wealth of the world?

Hamilton: Well there's a very positive story. We see that overall the wealth of the world grew by 34 percent, so that's strong growth. We look at that by region and there it's really striking. Even in sub-Saharan Africa, where development we know has been a struggle, the average increase in the total wealth in sub-Saharan Africa is exactly the same as the world average, it's almost dead on, 34 percent. 

Now what we're seeing in East Asia is very striking, because that's the China story. Their total wealth grew by something like 80 percent. South Asia, which is India, grew something like 60 percent. So that's a really positive story for development. If you care about developing countries, the new book is telling us that we saw strong progress over those 10 years. 

reason: Is it possible that what high-income countries are doing is in a certain way dematerializing their growth? In other words, they don't get richer because they're using more stuff or accumulating more stuff. They get richer for other reasons, like experiences, services, that kind of thing. Is that part of that story?

Hamilton: You would think that would be part of it. We're seeing that we don't have any measurable significant contribution of the physical aspects, the natural and the produced capital. And that certainly could be related to what you were alluding to, which is the growth of the service sector. That's a big thing in high-income countries. I forget the exact year, but I was surprised to learn that the year that services became over half of the GDP of the United States was way back in the 1800s. I mean this is something that happened a long time ago in the U.S. as the most advanced country in the world at that point. And of course that's accelerated; now close to 80 percent of the U.S. economy is services. 

reason: Let's go to China. I was struck by a lot of the data on that. What accounts for China's remarkable growth over that period of time in your data? In 1982, the majority of people had "no schooling," on your definition, which actually shocked me. I had thought that something that communist countries did was to at least provide some schooling. You need to teach people to read the propaganda.

Hamilton: We have a chapter in the book on human capital in China. And yes, we certainly saw a very major transformation from a very low level of human capital to a strong growth, a much higher level of human capital going into the 2000s. That's certainly an important part of the story of China's development. That chapter also highlighted some interesting changes within the country.

What's happening is that it's in the cities where we see the major growth in human capital in China. It's this agglomeration, bringing people together in cities that allows these spillovers between people with ideas; this is why cities are important. The countryside in China is lagging. I would expect to find that in many other developing countries as well. 

reason: But one of the things I noticed that you say is that human capital in China increased from $12 trillion in '95 to now $22 trillion. That doesn't seem like a huge amount, actually.

Hamilton: But still, we're talking trillions of dollars. That is substantial growth. I mean, 12 to 22, if we look at that in percentage terms that's nearly 100 percent growth in capital. It's a big number. 

When we look at these changes in wealth between 1995 and 2005 and break it down into the three types of capital, then what's very striking about China is that yes, there is strong growth in intangible wealth as we see in other countries. But we also see an enormous growth in produced capital. We see the rate at which highways are being built, ports are being built, cities are shooting up. Shanghai is one of the mega-cities of the world, and a relatively rich city as well. 

I think it's quite possible that going forward they're going to be looking at how to change that mix. As they develop from a middle-income country to a high-income country, part of that process probably has to be relying less on accumulating physical capital and accumulating more of this intangible wealth. So in some sense they're still in this intermediate stage of development where these physical factors are still very important for their growth, but you would think that that would decrease, and probably decrease fairly rapidly as they move towards high-income status.

reason: Except what is the institutional quality of China? I looked at your world governance numbers for China and they're abysmal. They're terrible! Won't that get in the way eventually if you're moving in the direction of intangible capital? Won't this eventually create a barrier to stop that growth unless they change their institutions?

Hamilton: I would think eventually of course it has to. But one of the striking things about China is that when it moves, when government has a policy, scale matters a lot. They can move in very large scale. 

One of the recent stories about China is how they're building up their capacity for green energy, wind farms and solar photovoltaics, things like that. They're just deploying huge amounts of investment into that sector and making real progress. They're driving down the cost of solar energy faster than anybody else in the world. That's a function of scale. So in spite of poor overall institutional quality, scale sometimes makes a difference in something like, say, developing the solar sector. 

The other thing is that they can move with speed. With their government structure—it's not a democratic government structure—they can move very quickly and do things that other countries cannot.

reason: But they can move very quickly to make bad investments, too. If you don't have the right institutional structure—

Hamilton: Indeed, indeed. That's why you would think ultimately, yes, the institutional quality will be the limiting factor. But again, when you think of the summer Olympics, they basically were able to shut down every factory upwind of Beijing in order to get clean air. You couldn't really imagine doing that in the United States.

reason: Of course we have clean air here now.

Hamilton: Not to defend non-democratic institutions, but simply to say that some things certainly can move quickly in that institutional setting. But you would think that if human capital is the most important part of intangible wealth, then ultimately the institutions are going to limit the capacity of human capital in a country like China.

reason: In the United States you calculate that total wealth is $734,000 per person, in Mexico it's $131,000 per person. In China, the total is $19,000 per person. It's tiny still. It's the great growth story of the last two decades, but still; $19,000 per person.

Hamilton: It's still a developing country, no doubt about that. But if you look at Shanghai, there are parts of it that very much look like a high-income country. I think it's important to emphasize that we really don't do comparisons between countries in the book because we don't have this adjustment for purchasing power on the asset side. 

reason: One of the striking things in your data is that 80 percent of the world's growth took place in rich countries. Why is that? Are the rich countries just getting richer faster than the poor countries are getting richer?

Hamilton: Well, actually the rates of growth in high-income countries are generally quite a bit lower than low-income countries.

reason: Right, but it's on a much bigger base.

Hamilton: Exactly, and that's really the story. So if the question is about rates, then average growth rates of per capita income in high-income countries are a little bit over 1 percent, right?

reason: Yes, but I'm getting $10,000 extra a year and they're getting a hundred dollars extra a year. That does not imply convergence. 

Hamilton: But over time of course it would, right? It would converge, that's the whole point. If China could grow at 10 percent for decades into the future and rich countries are growing at one percent for decades into the future, they'll catch up very quickly. So that is actually a convergence story. Many growing countries are growing at much faster rates. India, seven, eight percent growth rates over the last decade. And these are big countries. So this will have an effect on the size of the world economy and the catching up with rich countries, for sure.

reason: One of the other concerns you address it in the book is sustainability. What does it mean to have a sustainable, growing economy?

Hamilton: That's actually one of the strong motivations for doing the work. The notion of sustainability is, from an economic point of view, that a country is sustainable if its well-being doesn't decline over time. So if from one year to the next you find that how well-off people are, the amount that they can consume, the things they can enjoy, doesn't decline—if that's true over time, off into the future— you'd say that's a sustainable economy. 

Now, what underpins well-being, the amount we can consume and the other things we can enjoy, is assets, is wealth. So there's a very direct line between how much wealth you accumulate—or how much wealth you use up, in the case of some countries—and whether or not you're sustainable. And when we look at this question of saving for the future, the saving rates of countries adjusting for depletion of natural resources in particular, then we see 30 or so countries who actually have negative savings, where the wealth of the country is actually going down. That's not a sustainable country. 

You can think of the same analogy at the household level. If you find from one month to the next that you're running down the bank account, or if you've had to sell the car in order to keep food on the table in order to maintain consumption, then you would say that's not a very sustainable household. It's exactly the same notion that we're looking at at the level of countries as a whole. 

And so when we see 30 countries—and it's true every year, there are roughly 30 countries with negative saving rates, once we adjust for the depletion of nature—then this is a strong message that some of these countries do have a problem with sustainability and do need to change their development policies.

reason: It's intriguing that the United States is one of those countries with a savings gap. Is that going to undermine our future well-being? 

Hamilton: The U.S. for a number of years has sort of been on the knife edge of almost zero accumulation of tangible wealth. And even when we include investment in human capital measured very crudely, when you're measuring how much the U.S. spends on educating people, it's still pretty much on the knife edge. The net creation of wealth seems to be very small. 

On the other hand we do see the American economy growing, and we do see this enormous wealth that it has, the produced, the natural, the intangible capital. So I think our savings measures, because they're so heavily weighted towards tangible wealth, produced capital, natural capital, may be missing part of the story, which is that human capital especially is such a big part of the story of the U.S. 

reason: So it may be the case that this particular 2 percent gap in adjusted net savings is not that significant for the future?

Hamilton: It may well be that in the sense that you are continuing to grow the human capital and you're getting those positive spillovers from human capital, the Silicon Valleys. This is a really important factor in development. It's what makes rich countries rich. 

reason: So I have this vision of a bunch of very educated Americans running around producing things as the infrastructure falls down around us. Is that the implication of this essay?

Hamilton: It could be part of the story, because part of dissaving is depreciation of fixed assets, right? It's why your car is worth less this year than it was last year. So the depreciation of infrastructure of course is important. If your bridges and your highways and so on are running down, having to be taken out of service because of emergency repairs or whatever, there's a cost to society of having that happen. And when we measure the savings of the United States, that's in there, the depreciation.

If you choose to ignore one type of capital, and it's the type of capital that depreciates, like highways and bridges, it will catch up with you, undoubtedly. 

NEXT: Texas Sheriff's Dept. Gets Unmanned Aerial Drone, But Don't Worry: "It'll Be Used For Situations We Have With Criminals."

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47 responses to “Our Wealthier World

  1. Why all of this amazement at Communist China growing while Taiwan has been blowing their doors off since that little civil war?

    1. Especially as Taiwan has essentially no natural resources. Hell, don’t they have to import water?

      I love how otherwise educated people talk about natural resource like they’re the source of wealth. How many millions of years did petroleum sit in the ground? How many thousands of years was it a nuisance in farmers’ fields before it became wealth?

    2. Because Taiwan’s economic basis is capitalistic. That doesn’t appropriately mesh with the leftist narrative.

      1. Because Capitalist/Communist China — where the American Capitalist elites stick their factories to take advantage of Communist slave labor — wants to absorb Taiwan. That doesn’t appropriately mesh with the right-wingnut narrative.

    3. Not to mention that unlike Taiwan much of Chinas recent growth has been completely unsustainable. The technocrats in China have been bailing out local goverments and goverment sponsored businesses because they took on too many projects that ultimately will have a net negative ROI. But the eggheads never notice this, they are too in love with the idea that if given the opportunity they could solve the worlds economic problems by decree.

  2. Do I have to read the article? Obama and his economically dimwitted minions tell me it’s because of their aggressive investment in trains that are high speed and run on time.

    1. Yes. So that I don’t have to.

    2. In fact, they also serve as supplemental population control!

      1. I imagine they’d be more effective at population control if they weren’t so damned empty.

  3. The only threat to the United States right now is itself.

    1. Yeah, that does seem to be the short version.

    2. Yes, our lack of investment in green jobs and high speed rail is killing us!

    3. is the United States.

  4. Just wait until the Chinese bubble bursts.

    http://www.salon.com/2011/10/3…..singleton/

    1. IceTrey: See also my earlier article The China Derangement Syndrome.

      1. Ok. That article is about GDP growth, not a debt crisis. As you yourself stated, “Instead, the Japanese financial bubble burst.”

      2. Japan’s adventures with National Socialism in the 1970’s were what caused their economic bubble burst? Your article sounds sort of that way.

        1. The real problem is that the Japanese bubble never really burst, they wanted to keep things as they were, the worst thing that one can do.

    2. Just wait until the Chinese bubble bursts.

      Do we have to?

  5. Trying to quantify intangible wealth is a contradiction.

    1. “Intangible wealth” is a term created to make us feel better about our selves as our society outlaws all usable natural wealth, oil, trees,etc. and If you find a away to make money without that then they regulate your business to death. So a new term to make us think were richer than we actually are.

      1. I thought the Objectivist cult which helped to create modern libertarianism emphasizes intangible capital (“the power of man’s mind”) as the ultimate source of wealth.

  6. China is growing because, when your GDP per person really, really sucks because of Communist idiocy over decades, and then some of the idiocy is ended, your GDP per person can grow quickly but still be very low because of the lingering idiotic policies.

    1. Michael Moore disagrees!!!!!11111111111

  7. I can imagine an authoritarian government coming to power in the U.S. and I sometimes think it might not be a bad thing. Then I think of the clowns that would probably be running things. We are doomed!

    1. Wangtang (whatever the Internet progogandists the Chinese Reds pay are called), or what?

    2. America probably needs a Pinochet, not a Ron Paul.

      Whom do you want to send to the Soccer Stadium?

  8. Regarding the whole “why is China growing” debate. I remember reading some survey of countries asking the people which system the prefer, capitalism/communism/democracy etc. I don’t know which site the survey is on, but I do remember that the Chinese picked capitalism over communism by far, France was actually the country with the highest proportion of communist sympathy.

    There is a stereotype of Chinese people being a big collective horde, they actually have a big number of enterprising individuals and it is no surprise that they would have an economy that is booming.

    1. Very true. Just walk into any Chinese neighborhood in say New York City and you’ll quickly see they’re up their as the most entrepreneurial people.

      1. I’ve met a few Chinese immigrants that identify strongly with the Republic of China (Taiwan) even though they’ve never even been there before, pretty much all of them rabidly anti-communist.

      2. It is cultural. Thomas Sowell has an interesting book called Race and Culture. In it, he talks about how certain cultures produce certain qualities that are related to different economic activities.

        The largest beer producers in the US, and Brazil are Germans. Italians the world around make some of the best tailors. Chinese are industrious entrepreneurs and the Lebanese are merchants. While obviously not universal, culture effects how people behave.

    2. One of the reason why the Chinese have such a huge diaspora. The most enterprising of the bunch left for greener pastures around the world.

  9. Think of oil-rich Nigeria, where corruption runs rampant, social trust is fragile, and adult literacy is just 60 percent.

    Sounds like my house.

    1. Sorry to hear that!

      The Niger Delta is the worst I know of, but by no means unique. Places where they depend on natural resource export as their main industry seem to follow that same nasty pattern.

      1. We call that a colony.

    2. Rentier paradox.

  10. Oh, and I really liked Kirk Hamilton in L.A. Confidential.

  11. i like your site a lot!

  12. Do you guys think it’s coincidence that no lefty I’ve ever talked to, ever, knew anything about Taiwan at all? I guess the fact that it’s capitalistic, highly developed, and prosperous doesn’t really gel well with all their pro-Red China chanting.

    1. Do you guys think it’s coincidence that no right wingnut I’ve ever talked to, ever, knew anything about Sweden at all? I guess the fact that it’s socialistic, highly developed, and prosperous doesn’t really gel well with all their government for me but not for thee chanting.

      1. Yeah, but can you gambol about freely in Sweden until your digits fall off due to frostbite?

      2. Actually, Red State America, Sweedes will tell you that there country has a capitalist economy that supports an expansive welfare state. Except for the minority that belong to the socialist party they reject socialism altogether.

        Except for healthcare, Swedish economic activity is in private hands at least as much as the US economy is.

        1. Mises Institute, white courtesy phone please, I’ve got good news from Isaac Bartram.

          We both felt that Sweden desperately needed it, because libertarianism and sound economics are almost completely missing from the public debate.
          http://www.mises.se/om/mises-sweden/

  13. The policy conclusion is that if countries want to get rich they must aim at improving their human capital (educating their citizens), strengthening the rule of law, and making government accountable. Otherwise, they will remain mired in poverty.

    I agree – though governments should refrain from administering education.

    However, governments do not seek to make their citizens rich. Politicians and bureaucrats generally seek to make themselves rich and to expand their influence. Therefore, government officials look to hand out favors to specific recipients if doing so expands their influence.

    Additionally, the whole notion that government should provide leadership to the civilian population tastes especially horrible. Government officials lead other government officials – but they don’t lead civilians (or they aren’t supposed to). Therefore, it is not up to government to seek to make its citizens rich (as if it were playing a really big and expensive game of SimCity). The responsibility of government is provide national defense, a system of laws, and the means to impartially administer the law. What we citizens decide to do with such an environment is up to us as individuals – not as some mission-focused collective.

    “America wasn’t founded so that we could all be better. America was founded so we could all be anything we damned well pleased.”
    ? P.J. O’Rourke

    1. Yeah well, worshiping Mother Earth damned well better please you, sonny boy. Because your betters have taken over the government, and nothing less will please them.

      Oh, and don’t forget the Chinese are taking over the world. Pronto. At least until Americans stop buying TVs, at which point China will (shhhhh, vewy vewy qwuietly on tip toes) implode.

  14. Where Is the Wealth Of Nations?: Measuring Capital for the 21st

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