Saturday, September 29, 2007

Asked and answered once again

In today's WSJ, Ron Bailey writes about a recent World Bank study (Where is the Wealth of Nations?) that also tabulates wealth per capita for various nations ("The Secrets of Intangible Wealth ... For once the World Bank says something smart about the real causes of prosperity" excerpted below). It is not tangible capital or resources but, rather, institutions matter and human capital matters -- and they beget wach other. The authors' choice of title is a propos. The same question was asked and answered by Adam Smith in 1776.

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

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."