The secrets of intangible wealth

"Intangible" capital – in the form of trust among people in a society, an efficient judicial system, clear property rights or effective government, for example – boost the productivity of labour in a country and result in higher total wealth, according to a World Bank report.

Consider:

The natural wealth in rich countries like the United States is a tiny proportion of their overall wealth – typically 1 per cent to 3 per cent – 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.

One way to quantify intangible wealth is through the rule-of-law index, which measures individual variables on perceptions of governance:

Switzerland scores 99.5 out of 100 on the rule-of-law index and the United States hits 91.8.

By contrast, Burundi's score is 4.3; Nigeria's is 5.8; and Ethiopia's is 16.4.

The members of the Organization for Economic Cooperation and Development (OECD) have an average score of 90, while sub-Saharan Africa's is a dismal 28.

That disparity contributes to the wide wealth gap between countries, says the World Bank:

The average per capita wealth in the rich OECD countries consists of $10,000 in natural capital, $76,000 in produced capital, and $354,000 in intangible capital.

By comparison, total wealth for the low income countries 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, 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, say the researchers.

Source: Ronald Bailey, The Secrets of Intangible Wealth, Wall Street Journal, September 29, 2007.

For text: http://online.wsj.com/article/SB119103046614343129.html

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

FMF Policy Bulletin/ 09 October 2007