Intangible Capital Explained
The World Bank's environmental economics department set out to assess the relative contributions of
various kinds of capital to economic development. But 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."
According to their regression analyses, for example, the rule of law explains 57 percent of countries'
intangible capital. Education accounts for 36 percent.
The rule-of-law index was devised using several hundred individual variables measuring perceptions of
governance, drawn from 25 separate data sources constructed by 18 different organizations. Switzerland
scores 99.5 out of 100 on the rule-of-law index and the U.S. hits 91.8. By contrast, Nigeria's score is a pitiful
5.8; Burundi's 4.3; and Ethiopia's 16.4. The members of the Organization for Economic Cooperation and
Development--30 wealthy developed countries--have an average score of 90, while sub-Saharan Africa's is a
dismal 28.
The natural wealth in rich countries like the U.S. is a tiny proportion of their overall wealth--typically 1
percent to 3 percent--yet they derive more value from what they have. 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% of the rich
countries' total wealth.
Overall, the average per capita wealth in the rich Organization for Economic Cooperation Development
(OECD) countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital, and a
whopping $354,000 in intangible capital.
Switzerland has the highest per capita wealth, at $648,000. The U.S. is fourth at $513,000. 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.
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 Democratic Republic of the Congo are
destroying their intangible capital and ensuring that their people will be poorer in the future. The countries
with the lowest per capita wealth are negatives; Ethiopia ($1,965), Nigeria ($2,748), and Burundi ($2,859).
In the U.S., according to the World Bank study, natural capital is $15,000 per person, produced capital is
$80,000 and intangible capital is $418,000. And thus, considering common measure used to compare
countries, its annual purchasing power parity GDP per capita is $43,800. By contrast, oil-rich Mexico's total
natural capital per person is $8,500 ($6,000 due to oil), produced capital is $19,000 and intangible capita is
$34,500--a total of $62,000 per person. Yet its GDP per capita is $10,700. When a Mexican, or for that
matter, a South Asian or African, walks across our border, they gain immediate access to intangible capital
worth $418,000 per person. Who wouldn't walk across the border in such circumstances?
The World Bank study bolsters the deep insights of the late development economist Peter Bauer. In his
brilliant 1972 book Dissent on Development, Bauer wrote: "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."
The World Bank's path breaking "Where is the Wealth of Nations?" convincingly demonstrates that the
"mainsprings of development" are the rule of law and a good school
system. The big question is, “How can the people of the developing world rid themselves of the kleptocrats
who loot their countries and keep them poor?”
Sending money is less effective than providing education and teaching honesty.
Econobot Index
Next
The World Bank's environmental economics department set out to assess the relative contributions of
various kinds of capital to economic development. But 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."
According to their regression analyses, for example, the rule of law explains 57 percent of countries'
intangible capital. Education accounts for 36 percent.
The rule-of-law index was devised using several hundred individual variables measuring perceptions of
governance, drawn from 25 separate data sources constructed by 18 different organizations. Switzerland
scores 99.5 out of 100 on the rule-of-law index and the U.S. hits 91.8. By contrast, Nigeria's score is a pitiful
5.8; Burundi's 4.3; and Ethiopia's 16.4. The members of the Organization for Economic Cooperation and
Development--30 wealthy developed countries--have an average score of 90, while sub-Saharan Africa's is a
dismal 28.
The natural wealth in rich countries like the U.S. is a tiny proportion of their overall wealth--typically 1
percent to 3 percent--yet they derive more value from what they have. 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% of the rich
countries' total wealth.
Overall, the average per capita wealth in the rich Organization for Economic Cooperation Development
(OECD) countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital, and a
whopping $354,000 in intangible capital.
Switzerland has the highest per capita wealth, at $648,000. The U.S. is fourth at $513,000. 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.
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 Democratic Republic of the Congo are
destroying their intangible capital and ensuring that their people will be poorer in the future. The countries
with the lowest per capita wealth are negatives; Ethiopia ($1,965), Nigeria ($2,748), and Burundi ($2,859).
In the U.S., according to the World Bank study, natural capital is $15,000 per person, produced capital is
$80,000 and intangible capital is $418,000. And thus, considering common measure used to compare
countries, its annual purchasing power parity GDP per capita is $43,800. By contrast, oil-rich Mexico's total
natural capital per person is $8,500 ($6,000 due to oil), produced capital is $19,000 and intangible capita is
$34,500--a total of $62,000 per person. Yet its GDP per capita is $10,700. When a Mexican, or for that
matter, a South Asian or African, walks across our border, they gain immediate access to intangible capital
worth $418,000 per person. Who wouldn't walk across the border in such circumstances?
The World Bank study bolsters the deep insights of the late development economist Peter Bauer. In his
brilliant 1972 book Dissent on Development, Bauer wrote: "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."
The World Bank's path breaking "Where is the Wealth of Nations?" convincingly demonstrates that the
"mainsprings of development" are the rule of law and a good school
system. The big question is, “How can the people of the developing world rid themselves of the kleptocrats
who loot their countries and keep them poor?”
Sending money is less effective than providing education and teaching honesty.
Econobot Index
Next
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