I read an interview of Kirk Hamilton, the lead economist in the Development Research Group of the World Bank, where he was discussing his research published in a report by the World Bank entitled The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium. There are some pretty interesting observations, some new ways of analyzing countries’ economies, and some new ideas regarding economic development. I thought I’d try to summarize some of the better parts for you, and there’s enough stuff to fill two or three posts. So bear with me and let’s go.
The research is part of a fifteen year study at the World Bank trying to get beyond GDP as a way of measuring economic development. Simply, GDP is an income measurement, and it doesn’t tell the whole story of 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 don’t really have a more direct measure of how the wealth of a country is changing. So this is a long-term project to try to build ip 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.”
In looking at the wealth of countries, Hamilton distinguishes between tangible and intangible wealth. Tangible wealth is easy and familiar – factories, houses, roads, forests, etc. Intangible wealth is “human capital, social, and institutional capital which includes factors such as the rule of law and governance that contribute to an efficient economy.” Hamilton describes intangible capital as “the skills and knowledge that people have in their heads. Its what you can do with your head as opposed to what you can do with two hands and two feet. In high income countries like America, intangible wealth is about 80% of all wealth, whereas in low income, less developed countries, the intangible wealth portion is only around 50%.
One of the conclusions is that every American has access to $734,000 in wealth, of which $628,000 is intangible. By contrast, the average Chinese has access to only $19,234 of wealth of which $8,921 is intangible. In intangible wealth, America is number one in the world. Between 1995 and 2005 global wealth increased by 34%, and 80% of the increased wealth is intangible.
“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 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.”
There’s a lot more really good stuff in this article and interview. I’ll post part two very soon.