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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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A few of these countries have followed the Hartwick rule. Countries like Mexico (MEX) or Peru (PER) have largely compensated for depletion of minerals by investing in produced capital, so their hypothetical capital is not much different from their actual capital accumulation. Countries like Malaysia (MYS) and

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 11

FIGURE 1.3 Resource Abundance and Capital Accumulation: Where Has the Hartwick Rule Been Applied?

increase in produced capital if Hartwick rule followed (%)

–  –  –

Source: Authors’ calculations based on World Bank data.

Note: Resource abundance is indicated by the share of resource rents in GDP. Capital accumulation shows the increase in produced capital a country could have achieved if it had reinvested all the rent. See World Bank (2006) for further explanation of the approach. Country names per ISO 3166–1 alpha–3.

China (CHN) have invested far more than the Hartwick rule requires. However, many resource-rich countries have not followed the Hartwick rule. In fact, the greater the dependence on mineral rents, the greater the gap between actual produced capital and hypothetical capital. All countries in which rents account for 15 percent or more of GDP have underinvested.

Extending and Deepening Wealth Accounts This introductory chapter has presented some key analytical insights derived from the wealth accounts for 1995, 2000, and 2005, regarding how wealth changes with development and how natural capital can drive development.

These insights preview results that are presented in more detail in chapter 2, which examines the composition of and trends in total wealth and its components over the decade. We now turn to the main messages of the remaining chapters of the book.

12 THE CHANGING WEALTH OF NATIONS

Decomposing Changes in Natural Wealth from 1995 to 2005 Having described the changing composition of capital, we would also like to understand the driving forces behind this change. We focus on natural capital both because of the importance of natural capital to developing countries and because we have concrete, independent measures for detailed components of this type of wealth to support this analysis.

Changes in the value of natural capital can result from many factors, some related to the price or returns to an asset and some related to the physical quantity of an asset. For example, the value of total agricultural land in a country may increase when more land is brought under cultivation (a quantity effect) or when the net price of crops produced on a given amount of land increases (price effect). Similarly, the value of subsoil assets may increase with rising world market prices (price effect) or an increase in proven reserves (quantity effect).

Obviously, many of these factors change simultaneously and it is not easy to sort out the relative importance of each one.

A technique called decomposition analysis, applied in chapter 3, is used to determine the relative importance of different factors that change the value of natural capital over time. We found that price changes played a significant role in many regions. Declining agricultural land value in Sub-Saharan Africa and South Asia has been driven mainly by declining prices for crop and livestock products.7 The decline was partly offset by increases in production and yields, but the price effect has dominated in these regions. By contrast, in East Asia and the Pacific as well as Latin America and the Caribbean, there was a net increase in agricultural land values because the decline in prices was more than offset by increases in crop production area, crop yields, and livestock production. Forest land has been particularly important to wealth creation in Latin America and the Caribbean, mainly because of the increase in timber prices. The effect is particularly important in Brazil.

In other regions, the rising value of subsoil assets played a major role in changing the value of natural capital. While the expanding volume of reserves contributed, the most important factor was the sharp increase in unit rents for subsoil assets. Worldwide, 71 percent of the growth in subsoil asset values can be explained by increases in unit rents. In developing countries, unit rent increases contributed 65 percent of the increase in subsoil asset values.

Greenhouse Gas Emissions and the Wealth of Nations Damages from greenhouse gas emissions will have an impact on future well-being and on the sustainability of individual countries and the world. The high level of global concern with climate change demands that we start to look at greenhouse gas emissions from a wealth–accounting perspective.8 Annual country emissions of greenhouse gases are closely monitored, and estimates of the shares of the

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 13

stock of atmospheric CO2 by country, based on emissions from 1850 to 2006, are now available from the Climate Analysis Indicators Tool (CAIT) database.

In chapter 4, we calculate the economic value of the stock of CO2 attributable to countries by applying an estimate of the social cost of carbon to cumulative CO2 emissions by country, adjusted for the (slow) decay of CO2 in the atmosphere over time. In per capita terms, this value is particularly large in high-income countries, while it is large as a share of total wealth in many developing countries, particularly in the transition economies of Eastern Europe and Central Asia.





To bring these CO2 values formally into the national accounting and wealth framework, there would have to be agreement about property rights, the principles of international law to apply, and the ethics of imposing either climate damages or the costs of climate mitigation on developing countries. These stocks of carbon “depreciate” according to physical laws, unlike financial obligations that can be discharged by increased savings. Accordingly, as argued in World Development Report 2010, the development process itself must be transformed, because high-carbon growth is no longer sustainable (World Bank 2010b).

Achieving this transformation must also accord with the “common but differentiated responsibilities” of all countries embodied in the United Nations Framework Convention on Climate Change.

Understanding the Intangible: The Importance of Human and Social Capital Intangible capital encompasses human, social, and institutional capital, and other unaccounted-for factors that contribute to human well-being. It makes up a large share of total wealth, an estimated 60–80 percent, in most countries. However, unless we understand more about the composition of intangible wealth, governments may be tempted to conclude that a wide range of public expenditures are somehow yielding intangible benefits. Where Is the Wealth of Nations? showed that education and the rule of law accounted for most of the intangible capital (World Bank 2006). Using the more extensive database afforded by country wealth accounts for three time periods and new data on net foreign financial assets, this book is able to clarify the composition and contribution of intangible capital to development.

Chapter 5 presents two key findings in this regard:

■ Human capital is the most important component of intangible wealth for all countries and especially for high-income countries. In developing countries, human capital dominates intangible wealth, but the quality of institutions and the legacy of geography and history are also strong factors.

■ Intangible capital is the only statistically significant factor of production in high-income OECD countries. This suggests that in these economies all of

14 THE CHANGING WEALTH OF NATIONS

the potential constituents of intangible capital—the quantity and quality of human capital, the constituents of total factor productivity (closely linked to technological change), and institutional quality broadly conceived—may be the key drivers of production and growth.

This analysis holds clear policy implications for developing-country governments. It is no surprise that investments in human capital are an important part of the development process. But strengthening institutions and developing the capacity to generate and use knowledge—the precursors to total factor productivity growth—will also be strongly wealth-enhancing. Finally, our growth accounting analysis shows that governments also need to ensure that complementary investments in infrastructure and natural resource management will support these investments in intangible capital, and vice versa.

Human Capital Accounting in China Delving more deeply into human capital accounting, chapter 6 reports a case study for China, based on country-specific data (Li et al. 2009), to explore the relation between economic development and human capital. The Chinese case provides an important contribution to our understanding of the global importance of human capital. First, China is the most populous country in the world. Second, it has undergone very rapid economic and demographic changes (due, for example, to the one-child policy, migration, and urbanization), accompanied by the rapid expansion of education during the course of economic development. Human capital accounts support better assessment of the contribution of human capital to growth and development.

Global evidence indicates that the share of human capital in total wealth increases as national income increases, and that is certainly the case for China.

Between 1985 and 2007 both total and per capita human capital grew rapidly in China, especially after 1995, when annual growth averaged 9.6 percent. Growth of human capital has been driven mainly by increases in educational attainment and the higher returns to education offered by a market-driven economy, rather than by population growth, as evidenced by the rapidly increasing value of per capita human capital. A gender gap exists for total human capital, and on a per capita basis the gap between male and female human capital has increased somewhat since 1985.

In 1985 the rural population held 60 percent of China’s total human capital, but by 2007 the situation was reversed and a large urban-rural gap has developed since then. This is in part the result of urbanization and large-scale rural-urban migration, as well as higher educational attainment of the urban population and the higher returns to education in urban areas where the modern economy is concentrated. On a per capita basis, there is also a significant gap: by 2007 per capita human capital in urban areas was twice that of the rural population.

INTRODUCTION AND MAIN FINDINGS: THE CHANGING WEALTH OF NATIONS 15

The Challenge Facing Resource-Rich Countries: Transforming Natural Wealth into the Capital Needed for Growth and Development Natural capital constitutes a major component of wealth and is a principal source of income for many developing countries. Nonrenewable resources, the subsoil assets, present a particular challenge: the revenue stream represents a one-time opportunity to finance rapid development and poverty reduction. Evidence has shown that the economic performance of less-developed countries has often been inversely related to their natural resource wealth, a phenomenon known as the “resource curse.”9 However, this relationship is not deterministic; some countries such as Chile and Botswana have done well with their natural capital.

As described in chapter 7, having the right policy matters.

The development challenge for resource-rich economies is to transform nonrenewable natural capital into other forms of productive wealth so that once the extractive resources (oil, gas, and minerals) are exhausted, there are other income-generating assets to take their place. Mining is not sustainable, but the revenue from the extractive sector can be invested in other forms of wealth— infrastructure, human capital, renewable natural capital, and strengthening institutions (social capital)—to build economies that are sustainable. To achieve

this transformation requires getting policy right in three areas:

■ Promoting efficient resource extraction in order to maximize resource rent generated ■ A system of taxes and royalties that enables government to recover rent ■ A clear policy for investment of resource rent in productive assets The last point is especially important: for sustainable economic development, income from nonrenewable resources must be reinvested, not used to fund consumption. Comprehensive wealth accounts can strengthen and underpin endeavors like the Extractive Industries Transparency Initiative (EITI) to promote greater accountability in resource-rich countries through transparency about the full economic consequences of revenue (mis)management.

Mainstreaming Wealth Accounting in Country Statistical Systems In addition to the work by the World Bank reported in this volume, a considerable amount of work on wealth accounting has been done by other institutions and individual scholars over the last two decades. Considering only work carried out by official statistical offices, wealth accounting has been institutionalized in more than 30 countries, 16 of which compile at least one type of asset account on a regular basis. The majority of countries focus on mineral and energy assets, but some countries, notably Australia and Norway, construct comprehensive accounts for natural capital. Chapter 8 provides a detailed description of this work.

Along with the study by Hamilton and Clemens (1999) at the World Bank, substantial theoretical advances in comprehensive wealth accounting for

16 THE CHANGING WEALTH OF NATIONS

sustainable development have been achieved by Kenneth Arrow, Partha Dasgupta, and Karl-Göran Mäler (e.g., Arrow, Dasgupta, and Mäler 2003; Dasgupta and Mäler 2000, 2004). National statistical offices, the academic community, and nongovernmental organizations (NGOs) have produced a large body of empirical work on natural capital accounting at the national, regional, and local levels.

Taken together, these studies have deepened our knowledge of wealth accounting and clarified issues related to it.



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