Our intangible riches: World Bank economist Kirk Hamilton on the planet's real wealth.OIL, SOIL, COPPER, and forests are forms of wealth. So are factories, houses, and roads. But according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. a 2005 study by the World Bank, such solid goods amount to only about 20 percent of the wealth of rich nations and 40 percent of the wealth of poor countries.
So what accounts for the majority? World Bank environmental economist Kirk Hamilton Hamilton, city, Bermuda
Hamilton, city (1990 est. pop. 3,100), capital of Bermuda, on Bermuda Island. It is a port at the head of Great Sound, a huge lagoon and deepwater harbor protected by coral reefs. and his team in the bank's environment department have found that most of humanity's wealth isn't is·n't
Contraction of is not.
isn't is not
isn't be made of physical stuff. It is intangible. In their extraordinary but vastly underappreciated report, Where Is The Wealth Of Nations?: Measuring Capital for the 21st Century, Hamilton's team found that "human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."
The World Bank study defines natural capital as the sum of cropland crop·land
Land that is fit or used for growing crops. , pastureland, forested areas, protected areas
Protected areas , and nonrenewable resources (including oil, natural gas, coal, and minerals). Produced capital is what most of us think of when we think of capital: machinery, equipment, structures (including infrastructure), and urban land. But that still left a lot of wealth to explain. "As soon as you say the issue is the wealth of nations and how wealth is managed, then you realize that if you were only talking about a portfolio of natural assets, if you were only talking about produced capital and natural assets, you're you're
Contraction of you are.
you're you are
you're be missing a big chunk of the story," Hamilton explains.
The rest of the story is intangible capital. That encompasses raw labor; human capital, which includes the sum of a population's knowledge and skills; and the level of trust in a society and the quality of its formal and informal institutions. Worldwide, the study finds, "natural capital accounts for 5 percent of total wealth, produced capital for 18 percent, and intangible capital 77 percent."
Social institutions are most crucial. 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 and enforceable property fights, and an effective and uncorrupt government will produce higher total wealth. For example, Switzerland scores 99.5 out of 100 on the rule of law index and the U.S. hits 91.8. By contrast, Nigeria gets a score of just 5.8, while the war-torn Democratic Republic of the Congo obtains a miserable I out of 100. The members of the Organisation for Economic Co-operation and Development--30 wealthy developed countries--have an average score of 90, while sub-Saharan Africa's is 28. "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity," the study concludes. According to Hamilton's figures, the rule of law explains 57 percent of countries' intangible capital. Education accounts for 36 percent.
The rule of law index was created using several hundred individual variables measuring perceptions of governance Governance makes decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems. , drawn from 25 separate data sources constructed by 18 different organizations. The latter include civil society groups, political and business risk-rating agencies, and think tanks.
This new focus on the importance of social and political institutions marks a dramatic shift away from the World Bank's infatuation with financing mega-projects in poor countries. Examples include the $2.5 billion Lesotho Highlands Water Development Project and the $3.7 billion Chad-Cameroon oil pipeline project. Most such projects are failures. The World Bank's own self-audited evaluations found that the projects it financed failed 55 to 60 percent of the time. In its 1997 World Development Report, the bank recognized the failure of such top-down technocratic aid interventions: "Governments embarked on fanciful fan·ci·ful
1. Created in the fancy; unreal: a fanciful story.
2. Tending to indulge in fancy: a fanciful mind.
3. schemes. Private investors, lacking confidence in public policies or in the steadfastness stead·fast also sted·fast
1. Fixed or unchanging; steady.
2. Firmly loyal or constant; unswerving. See Synonyms at faithful. of leaders, held back. Powerful rulers acted arbitrarily. Corruption became endemic endemic /en·dem·ic/ (en-dem´ik) present or usually prevalent in a population at all times.
1. . Development faltered, and poverty endured" Evidently, the World Bank is coming to realize that the late economist Peter Bauer was right when he wrote in his brilliant 1972 book Dissent An explicit disagreement by one or more judges with the decision of the majority on a case before them.
A dissent is often accompanied by a written dissenting opinion, and the terms dissent and dissenting opinion are used interchangeably. on Development: "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."
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 their people. That's a lot harder to do than building giant dams or aluminum factories, but it would be a lot more effective in reducing poverty.
Science Correspondent Ronald Bailey
Ronald Bailey (born November 23, 1953) is the science editor for Reason magazine. interviewed Hamilton at his office in the World Bank's gleaming headquarters in downtown Washington, D.C. Where Is The Wealth of Nations? can be downloaded from worldbank.org.
reason: What do you mean by intangible capital?
Kirk Hamilton: Intangible capital is capital that has an economic value but is not something you can drop on your foot.
It's the preponderant pre·pon·der·ant
Having superior weight, force, importance, or influence. See Synonyms at dominant.
pre·ponder·ant·ly adv. form of wealth. When we look at the shares of intangible capital across income classes, you see it goes from about 60 percent in low-income countries to 80 percent in high-income countries. That accords very much with that notion that what really makes countries wealthy is not the bits and pieces, it's the brainpower brain·pow·er
1. Intellectual capacity.
2. People of well-developed mental abilities: a country that doesn't value its brainpower.
Noun 1. and the institutions that harness that brainpower. It's the skills more than the rocks and minerals.
reason: What sorts of institutions help countries become rich?
Hamilton: I tend to think of them as social structures that allow societies to achieve certain outcomes. An institution could be a village-level committee that deals with how common property is used. It could be something as abstract as the legal system.
We know quite a bit about how to create human capital. It's called education. But we're learning more and more about the inefficiencies in the education system in many developing countries. There's a famous study in Uganda: The government reports that it spends 2 or 3 percent of GDP GDP (guanosine diphosphate): see guanine. on education. The study found that maybe 13 cents on the dollar made it to the schoolhouse. [In the U.S. the figure is about 60 to 65 cents.] So there's the question of how much money are we spending on education broadly, and then there's a question of how effective that money is: how much of it is reaching the school, whether the school has books, whether it has a qualified teacher, etc. We can see ways to increase the efficiency and improve the teacher training, be sure the books are there, etc. It's a matter of money, effort, and reforming institutions to make these things "These Things" is an EP by She Wants Revenge, released in 2005 by Perfect Kiss, a subsidiary of Geffen Records. Music Video
The music video stars Shirley Manson, lead singer of the band Garbage. Track Listing
1. "These Things [Radio Edit]" - 3:17
But investing in these broader institutions is hard and slow. Just think of what it means to build a legal system. Start with a body of law, a system of courts, a legal tradition that determines the role of prosecutor prosecutor
Government attorney who presents the state's case against the defendant in a criminal prosecution. In some countries (France, Japan), public prosecution is carried out by a single office. In the U.S., states and counties have their own prosecutors. versus defense. Is it a common law system or a Napoleonic system? There's a whole large set of issues, and all of the interlocking interlocking /in·ter·lock·ing/ (-lok´ing) closely joined, as by hooks or dovetails; locking into one another.
interlocking Obstetrics A rare complication of vaginal delivery of twins; the 1st pieces have to fit.
reason: You try to capture some of what you mean by "institutional capital" with measures like the rule of law index.
Hamilton: There's reasonable quantification quan·ti·fy
tr.v. quan·ti·fied, quan·ti·fy·ing, quan·ti·fies
1. To determine or express the quantity of.
2. of things like education because we have estimates of average years of education that have been obtained country by country; we know the stock of human capital in terms of formal education. Then we have this whole wonderful piece of work on governance that Daniel Kaufmann and Aart Kraay and others at the World Bank have been working on for the last several years. They've come up with these five or six broad indicators of governance measuring different aspects of institutional quality.
The problem with the governance indices is that they're all very highly correlated cor·re·late
v. cor·re·lat·ed, cor·re·lat·ing, cor·re·lates
1. To put or bring into causal, complementary, parallel, or reciprocal relation.
2. with each other. If you have good rule of law, you tend to have good voice [freedom of expression] and accountability [the extent to which citizens of a country are able to participate in the selection of governments]. To do our analysis, we had to choose one. The logical strongest contributor to intangible capital--rule of law--fit into the story that we're telling.
reason: How do you define rule of law?
Hamilton: It's partly a question of the efficiency of the legal system and how many days it takes to get to trial, how many days it takes to get a decision once you're at trial, lack of corruption, degree of transparency--a whole set of issues that go into this one number called "rule of law."
reason: The development economist Peter Bauer made the argument that the British imposed the rule of law in its colonies and they began developing economically very rapidly compared to what they had been before. Then when the colonial period Colonial Period may generally refer to any period in a country's history when it was subject to administration by a colonial power.
Hamilton: Objectively, if you look at outcomes in terms of GDP growth, that's a supportable argument. Now, from the point of view of the Nigerians, they were colonized Colonized
This occurs when a microorganism is found on or in a person without causing a disease.
Mentioned in: Isolation , conquered, imposed upon. If you were being pressed into forced labor of one sort or another, you might not have felt the benefits of the colonial experience. We have to be careful about how countries themselves view that experience.
Nonetheless, it's fair to say that there's a certain level of institutions created up to the point of independence. There was a deterioration de·te·ri·o·ra·tion
The process or condition of becoming worse. of institutions beyond that, with economic consequences.
reason: You write that in Nigeria there is now "negative intangible capital."
Hamilton: It's mostly in the oil-producing countries where this happens. If the best way to get rich is to somehow get a piece of the oil action, schooling might not be the most important thing on your mind. What we think the negative numbers are telling us is that for this set of countries--typically the very resource-dependent ones--that resource dependence has manifested itself in very low efficiency in the rest of the economy. That depresses the level of sustainable consumption that the population can enjoy, and our measure of total wealth is the present value of the future stream of consumption, so that's how we get a negative number.
reason: Moving on to more hopeful things: You suggest that if a country saves and invests more in both produced capital and human capital than in the value of the natural resources that are depleted de·plete
tr.v. de·plet·ed, de·plet·ing, de·pletes
To decrease the fullness of; use up or empty out.
[Latin d , there are no limits to growth.
Hamilton: As countries get richer they're using smaller and smaller amounts of natural capital--minerals, energy, soils, forests, fish, etc. It's closer and closer to zero, but you're able to use it productively to maintain your level of output. [In crude terms, richer countries increase their efficiency faster than they use up natural resources.]
By and large, we can say that rich countries are doing a reasonable job on managing their environment. That's much less true in developing countries, and what we have in the poorest countries is problems of natural resource management. In the middle-income countries, we have problems of pollution. Think of China compared with Malawi. Malawi's problem is not a pollution problem.
reason: They should be so lucky.
Hamilton: Yeah. It's not a pollution problem; it's a natural resources management problem. How do you maintain soil quality? How do you generate profits with the assets that you have, which in this case is land that can be invested in other things? The problem in China is they've figured out how to grow 9 percent a year pretty successfully but they're now facing the environmental consequences of uncontrolled growth.
reason: You note that the level of natural wealth per capita [Latin, By the heads or polls.] A term used in the Descent and Distribution of the estate of one who dies without a will. It means to share and share alike according to the number of individuals. actually rises with income. This contradicts the common assumption that development necessarily entails the depletion depletion n. when a natural resource (particularly oil) is being used up. The annual amount of depletion may, ironically, provide a tax deduction for the company exploiting the resource because if the resource they are exploiting runs out, they will no longer be able of the environment and natural resources. Do your findings imply that the richer people become, the more they're withdrawing from the natural world?
Hamilton: Well, no. What it's saying is that they've got more natural resources in terms of dollars. There's the endowment A transfer, generally as a gift, of money or property to an institution for a particular purpose. The bestowal of money as a permanent fund, the income of which is to be used for the benefit of a charity, college, or other institution. and the management. The difference in natural capital--$2,000 per person in low income countries, $9,000 in high income countries--is saying that the rich countries are managing their endowment in a way that's giving higher yields from the endowment that they have.
reason: So even in rich countries, nature becomes more valuable over time.
Hamilton: Yes. We don't have enough data to prove this, but I think it's a reasonable proposition to say that's linked to better management of the natural resources you have. Better technologies and techniques being applied to the soil make the soil more productive. Better management of the forests makes the forests more valuable.
reason: And we have strong private property rights, too.
Hamilton: I don't doubt the importance of property rights in determining economic outcomes, but we shouldn't assume that this is something that can be imposed on every community everywhere and lead to improved welfare overnight.
reason: You claim that "there's no apparent empirical relationship In science, an empirical relationship is one based solely on observation rather than theory. An empirical relationship requires only confirmatory data irrespective of theoretical basis. between current net savings and future well being." This seems astonishing a·ston·ish
tr.v. as·ton·ished, as·ton·ish·ing, as·ton·ish·es
To fill with sudden wonder or amazement. See Synonyms at surprise. to me. Why is that?
Hamilton: When we look at this question of what explains future growth, it doesn't seem to be very closely tied to accumulation of things. It doesn't seem to be tied to accumulating buildings, machines, and infrastructure, and the corresponding using-up of some types of natural resources.
So it must be something else. But what is the something else? It's the technologies and the institutions that are making that difference. The other side of that coin is that for the poorest countries we do find a fairly strong link between accumulation of physical and natural assets and future growth. Which tells us that the development problem is rather different if you're a rich country or a poor country. And that shouldn't be surprising.
reason: The economic historian Angus Angus (ăng`gəs), council area (1993 est. pop. 111,020), 842 sq mi (2,181 sq km), and former county, NE Scotland. Under the Local Government Act of 1973, the county of Angus became part of the Tayside region in 1975. Madison calculates that it took 1,800 years for average incomes in Western Europe Western Europe
The countries of western Europe, especially those that are allied with the United States and Canada in the North Atlantic Treaty Organization (established 1949 and usually known as NATO). to rise from $450 per capita in the Roman Empire to $1,250 in 1820. About that time, the West somehow stumbled onto the institutions that allow people to create wealth at exponential 1. (mathematics) exponential - A function which raises some given constant (the "base") to the power of its argument. I.e.
f x = b^x
If no base is specified, e, the base of natural logarthims, is assumed.
2. rates. If we know what kind of institutions work to create wealth, it would seem we should try to duplicate DUPLICATE. The double of anything.
2. It is usually applied to agreements, letters, receipts, and the like, when two originals are made of either of them. Each copy has the same effect. that in poor countries if we want them to develop.
Hamilton: The only difficulty is that the institutions are local creations. They reflect a particular place and a particular history. If you think of some of the most important institutions we have in the Anglo-Saxon world--things like the beginnings of rule of law and control of the power of the elites--the roots go back to the Magna Carta Magna Carta or Magna Charta [Lat., = great charter], the most famous document of British constitutional history, issued by King John at Runnymede under compulsion from the barons and the church in June, 1215. . The roots of English Common Law go back even farther than that.
Some people tend to be a little bit pessimistic pes·si·mism
1. A tendency to stress the negative or unfavorable or to take the gloomiest possible view: "We have seen too much defeatism, too much pessimism, too much of a negative approach" about our ability to impose or create institutions. If it's true that it actually took centuries of slow, painful, incremental Additional or increased growth, bulk, quantity, number, or value; enlarged.
Incremental cost is additional or increased cost of an item or service apart from its actual cost. building to get to the point where you are, that's not a very good message for developing countries. So we have to hope that pessimistic point of view is wrong. We do have some examples in recent history in developing countries--South Korea, India, Thailand--where some sort of crisis or impetus Impetus is a stimulus or impulse, a moving force that sparks momentum.
Impetus may also refer to:
We have recently been putting more focus on investing in countries where there are better institutions, but it leaves us with the question of what do you do with the rest, the poor countries, the low-income countries under stress Low-Income Countries Under Stress (LICUS) is a World Bank program aimed at poverty reduction in developing countries. Source
reason: I was struck by your statement that there are no sustainable diamond mines but there are sustainable diamond mining countries. Could you explain?
Hamilton: At any given diamond mine there's a finite finite - compact amount of diamonds. Someday some·day
At an indefinite time in the future.
Usage Note: The adverbs someday and sometime express future time indefinitely: We'll succeed someday. Come sometime. , the diamonds run out. But in Botswana, a diamond-mining country, before the diamonds run out you have the opportunity to take the profits that you're getting from diamonds and invest those profits in other types of assets. In particular, you can invest them in the other types of assets we have been talking about: human capital, better institutions, infrastructure. You transform one form of wealth that you know is going to run out--a finite asset, a wasting asset--into other types of assets that can give you a sustainable income stream and human capital. Good institutions in particular have that quality.
reason: In your book, you say that the average wealth in the United States This article is about the economic concept of wealth. For a discussion of affluence, see Affluence in the United States.
Wealth in the United States is commonly measured in terms of net worth which is the sum of all assets, including home equity minus all per capita is $513,000. People are sure to ask, "Where the hell is my half million?"
Hamilton: Add up bank accounts, other financial assets Financial assets
Claims on real assets. , houses, other land--and what you're carrying around in your head. The value of that asset is the present value of the earning power Earning power
Earnings before interest and taxes (EBIT) divided by total assets.
1. The earnings that an asset could produce under optimal conditions. For example, AT&T may currently be earning $2. it's giving you, and the institutions that allow you to realize the brainpower that you've got.
reason: Fifty years ago at the World Bank, it was all about tangible capital--factories, railroads rail·road
1. A road composed of parallel steel rails supported by ties and providing a track for locomotive-drawn trains or other wheeled vehicles.
2. , dams, and roads. Now it seems that enhancing intangible capital is huge, comparatively speaking, if the bank wants to spur more development.
Hamilton: In the old days, we thought if you built the infrastructure then development would come--the Field of Dreams model of development. It turns out to be a lot harder than that.
Countries With Highest Per Capita Wealth, 2000 Country Wealth per Natural Produced Intangible Capita Capital Capital Capital (US$) % % % Switzerland 648,241 1 15 84 Denmark 575,138 2 14 84 Sweden 513,424 2 11 87 United States 512,612 3 16 82 Germany 496,447 1 14 85 Japan 493,241 0 30 69 Austria 493,080 1 15 84 Norway 473,708 12 25 63 France 468,024 1 12 86 Belgium/Luxembourg 451,714 1 13 86 Source: Where Is the Wealth of Nations?, World Bank 2006 Countries With Lowest Per Capita Wealth, 2000 Country Wealth per Natural Produced Intangible Capita Capital Capital Capital (US$) Ethiopia 1,965 41 9 50 Burundi 2,859 42 7 50 Niger 3,695 53 8 39 Nepal 3,802 32 16 52 Guinea-Bissau 3,974 47 14 39 Mozambique 4,232 25 11 64 Chad 4,458 42 6 52 Madagascar 5,020 33 8 59 Source: Where Is the Wealth of Nations?, World Bank 2006