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«ENVIRONMENT AND DEVELOPMENT The Changing Wealth of Nations ENVIRONMENT AND DEVELOPMENT A fundamental element of sustainable development is ...»

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This book extends and builds upon Where Is the Wealth of Nations? Measuring Capital for the 21st Century (World Bank 2006), which reported comprehensive wealth accounts for more than 120 countries. As in that book, we conceive of development as a process of building and managing a portfolio of assets. The challenge of development is to manage not just the total volume of assets—how much to save versus how much to consume—but also the composition of the asset portfolio, that is, how much to invest in different types of capital, including the institutions and governance that constitute social capital.

The Changing Wealth of Nations adds several new components to the previous work. Most important, because wealth accounts are now available over a 10-year period, 1995 to 2005, it is possible to go beyond a snapshot of wealth at a point in time and provide the first intertemporal assessment of global, regional, and country performance in building wealth and achieving sustainable development.3 In this book we take a comprehensive approach to measuring wealth,

presenting accounts for the following categories of assets:

■ Total wealth: The measure of total (or comprehensive) wealth is built upon the intuitive notion that current wealth must constrain future consumption.

Chapter 5 presents the theory underpinning this assumption and the methods used to estimate total wealth.

■ Produced capital: This comprises machinery, structures, and equipment.4 ■ Natural capital: This comprises agricultural land, protected areas, forests, minerals, and energy.

■ Intangible capital: This asset is measured as a residual, the difference between total wealth and produced and natural capital. It implicitly includes measures of human, social, and institutional capital, which includes factors such as

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 5

the rule of law and governance that contribute to an efficient economy. Net foreign financial assets, the balance of a country’s total financial assets and financial liabilities, are generally included as part of intangible capital in this book (with the exception of chapter 5, in which theoretical concerns are tightly linked to empirical estimation methods).

The book is divided into two parts. The first part provides the big picture of changes in wealth by income group and geographic region, with a focus on natural capital because it is especially important for low-income developing countries. The second part presents case studies that illustrate particular aspects of wealth accounting, including accounting for climate change, the role of intangible capital in growth and development, measuring human capital, and the use of wealth accounting to improve transparency and governance in resource-rich economies. The final chapter reports on the implementation of wealth accounting by countries. The appendixes provide the full wealth accounts for individual countries and for aggregations by income group and geographic region.

How Does Wealth Change with Development?

Where Is the Wealth of Nations? established the links between development outcomes and the level and composition of comprehensive wealth. Some of the important insights from that volume, based on wealth accounts for 2000, continue to apply in 2005 and, indeed, across the decade from 1995 to 2005. In chapter 2 of this volume, we begin by analyzing patterns of wealth and changes in per capita wealth for countries grouped by income category. Grouping countries by income is useful because it reveals the direct links between wealth, income, and development. Among income groups, trends for low-income countries are of particular interest because of the concentration of the world’s poor in these countries. Developing countries must make decisions about (a) how much to invest versus how much to consume and (b) what mix of assets to invest in. The middle-income countries are important because they shed light on this process of wealth creation during the transition from low to high income. High-income countries provide insight into the volume and composition of wealth in those countries that have achieved high material standards of living. We then look more closely at developing countries, grouping them by geographic region because of the importance of shared geographic and historical features.

Between 1995 and 2005, global wealth increased in per capita terms by 17 percent in constant 2005 U.S. dollars.5 Wealth grew fastest in the lowermiddle-income countries, which are dominated by the economy of China;

per capita wealth in this group increased by nearly 50 percent. High-income countries in the Organisation for Economic Co-operation and Development (OECD) continue to hold most of the world’s wealth (82 percent), but there

6 THE CHANGING WEALTH OF NATIONS

have been slight gains by low- and middle-income countries. The world’s poorest countries, accounting for 10 percent of the global population, hold less than 1 percent of global wealth (table 1.1).

Intangible wealth is the largest single component of wealth in all income groups, and the fastest growing one as well. Whether one compares wealth across different income groups for a single year or looks at a single income group over time, the comprehensive wealth accounts tell a clear story about the relationship between development and wealth: development entails building total wealth, but also changing the composition of wealth. Most countries start out with relatively high dependence on natural capital—agricultural land, subsoil assets, and/or forests. They use these assets to build more wealth, especially produced capital and intangible (human and institutional) capital.





This relationship between development and capital is clearly seen in the lower-middle-income countries, where the economy of China dominates. As figure 1.1 shows, per capita wealth has increased dramatically, and just as important, the composition has changed markedly. The share of natural capital fell from 34 percent in 1995 to 25 percent in 2005 (although, as chapter 2 shows, the level of natural capital per person actually increased by nearly $1,100), while the shares of produced capital and intangible capital increased strongly.

The rapid growth of intangible capital is due partly to increased educational attainment in most countries, but a significant part of the increase in intangible capital results from improvements in institutions, governance, and other factors that contribute to better, more efficient use of all of a country’s capital—produced, natural, and human. The study of China in chapter 6 shows that rapid economic change and the transition to a market-oriented economy offered people opportunities to realize much higher returns for a given level of educational attainment.

Although wealth is dominated by intangible capital, in low-income countries natural capital constitutes a large share of comprehensive wealth, larger than produced capital. In upper-middle-income countries, natural capital is only slightly less than produced capital, 15 percent and 16 percent, respectively. The high dependence of low-income countries on natural capital and the important role of natural capital in building wealth suggest that it should receive close attention.

For countries dependent on nonrenewable natural capital, transforming natural capital into other forms of wealth is the path to sustainable development.

Where natural capital is potentially renewable, such as forest land, appropriate property rights and management regimes are essential if the country is to develop sustainably rather than deplete its natural capital, ending up poorer than before.

Furthermore, natural capital warrants special focus in the wealth management of all countries, even those where its share in wealth is small, because of TABLE 1.1 Wealth and Per Capita Wealth by Type of Capital and Income Group, 1995 and 2005 Total Wealth Per Capita Intangible Produced Natural Total Wealth Per Capita Intangible Produced Natural (US$ Wealth Capital Capital Capital (US$ Wealth Capital Capital Capital Income Group billions) (US$) (%) (%) (%) billions) (US$) (%) (%) (%)

–  –  –

8 THE CHANGING WEALTH OF NATIONS

several characteristics that set it apart from most produced and intangible capital.

Natural capital is the source of many ecosystem services, provided as externalities without market prices; hence, these services are often undervalued and vulnerable to threats. Many forms of natural capital are nonrenewable, or renewable only under restricted management regimes. Losses and degradation of natural capital may lead to irreversible changes in the provision of ecosystem services and biodiversity, and the potential for substitution is limited (for example, in the case of the ozone layer). Some natural “bads” (atmospheric carbon dioxide [CO2] for example) are global in scope and provenance and are both nonrival and nonexcludable; only cooperative solutions can deal with the problem.

As chapter 2 shows, among the developing countries, all geographic regions have increased their per capita wealth, but the gains appear smallest in FIGURE 1.1 Changing Volume and Composition of Wealth in Lower-Middle-Income Countries, 1995–2005 18,000 16,000 14,000

–  –  –

10,000 8,000 6,000 4,000 2,000

–  –  –

Source: Authors’ calculations based on World Bank data.

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 9

Sub-Saharan Africa: only 4 percent between 1995 and 2005. If we look more closely at this region, however, we find two sharply distinct stories. One story is about a handful of countries, led by resource-rich Nigeria, that experienced steep declines in per capita wealth and dragged down performance for the entire region relative to the rest of the world. The other story, however, is about the success in increasing per capita wealth achieved by nearly two-thirds of African countries over the decade. This second group was led by the largest African economy, South Africa, but also includes others such as Botswana, Burkina Faso, Ethiopia, Ghana, Mozambique, and Uganda. For the region as a whole, the successful countries were able to offset the decline in per capita wealth in the underperformers.

Most of the increase in per capita wealth in all regions resulted from the growth of intangible capital—improvements in human capital, institutions, and technology that support more efficient use of produced and natural capital.

But natural capital remains an important asset. Agricultural land dominates the natural capital of Asia, Latin America, and Sub-Saharan Africa, while subsoil assets account for more than 60 percent of the natural capital of Europe and Central Asia and the Middle East and North Africa. Forest land is particularly important in Latin America. Both Sub-Saharan Africa and South Asia experienced a decline in natural capital from 1995 to 2005, which is worrying given the continued dependence of so many people on agriculture.

Harnessing Natural Capital for Development The Hartwick rule (Hartwick 1977; Solow 1986) provides a simple rule of thumb for sustainable development in countries that depend on nonrenewable natural resources. The Hartwick rule holds that consumption can be maintained—the definition of sustainable development—if the rents from nonrenewable resources are continuously invested rather than used for consumption. But, in fact, many resource-rich developing countries do not reinvest the rents. So here we pose a counterfactual question: “What would total capital be if, each year since 1980, countries had invested all the resource rent in produced capital?”6 The hypothetical capital stock is then compared to actual produced capital to see (a) whether countries followed the Hartwick rule, and (b) if they did not, how much richer they could have been if they had followed the rule.

The consequences of not investing resource rents in productive assets were highlighted in Where Is the Wealth of Nations? through the analysis of the “Hartwick rule counterfactual.” We update these figures to 2005 to show what is foregone when resource-rich countries do not reinvest resource rents from nonrenewable natural capital.

Figure 1.2 shows the results of the Hartwick rule counterfactual for five resource-rich countries.

In 2005, Trinidad and Tobago had accumulated $20,021

10 THE CHANGING WEALTH OF NATIONS

FIGURE 1.2 Produced Capital Per Capita, Actual and Hypothetical, in Five Resource-Rich Countries, 2005

–  –  –

Source: Authors’ calculations based on World Bank data.

Note: Actual capital is the amount the country accumulated in 2005. Hypothetical produced capital is the amount the country could have accumulated if it had followed the Hartwick rule and reinvested all resource rents since 1980.

per capita in manufactured capital. If it had followed the Hartwick rule and reinvested all the resource rents from oil and gas, it would have accumulated more than three times as much manufactured capital: $66,359 per capita. The

situation is similar in the other four resource-rich countries shown in the figure:

if rents had been reinvested, these countries would have accumulated far greater amounts of produced capital per person, substantially adding to the productive base of their economies.

Figure 1.3 shows the same information for a large number of countries in which rents on nonrenewable resources constitute at least 1 percent of gross national income.

The horizontal axis shows the share of resource rents in GDP, while the vertical axis shows how much more produced capital a country would have if it had reinvested all its resource rents. Countries falling at or below the zero line have produced capital that meets or exceeds the Hartwick rule. Those above the zero line have not reinvested rents; if they had, they would have greater wealth in 2005.

Among the countries in figure 1.3 are a subset of resource-rich countries, defined as those in which resource rents account for at least 5 percent of GDP.



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