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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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changes over time, drawing out lessons for development. We start by comparing comprehensive wealth over several widely spaced intervals to understand how the volume and composition of wealth change with development and population growth. We then turn to adjusted net saving to understand better the process of building wealth on an annual basis. These two measures provide related ways of analyzing changes in social welfare and complementary information for policy makers seeking to guide their country on a path of sustainable development.

Changing Global Wealth Global wealth reached $673,593 billion in 2005 (table 2.1).1 Intangible capital was the largest single component in all regions, and its share increases in importance with rising income, from 57 percent of total wealth in low-income countries to 81 percent in high-income countries. We see a symmetrical decline in the importance of natural capital as income rises, from 30 percent in low-income countries to 2 percent in high-income countries. But does this apparent relationship between the composition of wealth and income, seen when comparing different regions

28 THE CHANGING WEALTH OF NATIONS

at a point in time, really hold for a given income group as it develops over time?

To answer that question, we look at our wealth accounts from 1995 to 2005.2 Global wealth increased by 34 percent over the decade (table 2.2). All income groups increased their capital between 1995 and 2005, and there has been little change in the distribution of wealth over time. The majority of global wealth is concentrated in high-income countries of the Organisation for Economic Co-operation and Development (OECD), although its share declined slightly from 84 percent to 82 percent. Low- and middle-income countries saw their combined share grow from 14 percent to 17 percent; despite rapid accumulation of wealth, their share of wealth is still far less than their share of world population, which was 81 percent in 2005. The poorest countries, accounting for 10 percent of global population, held only 1 percent of global wealth.

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Changing Composition of Wealth For the world as a whole, most of the new wealth created between 1995 and 2005 ($169,045 billion) consisted of intangible capital (80 percent), followed by produced capital (16 percent) and a relatively small amount of natural capital (4 percent) (figure 2.1).

How has the composition of wealth changed over time? For the world as a whole, where high-income countries dominate trends in wealth, there is virtually no change in composition over time. This reflects the virtually unchanged composition of capital in high-income countries, where intangible wealth already accounts for at least 80 percent of total wealth (table 2.3). However, a different dynamic is observed in low-income and lower-middle-income countries, where there was a large decline in the share of natural capital and a corresponding increase in produced and intangible capital.

Among low-income countries, natural capital accounts for 30 percent of total wealth in 2005, down from 41 percent in 1995, and among the lower-middleincome countries, natural capital declined from 34 percent to 25 percent of FIGURE 2.1 Additions to Wealth by Type of Asset and Income Group, 1995–2005 % new wealth

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wealth. Even in upper-middle-income countries, natural capital still accounts for 15 percent of wealth. The continued importance of natural capital in lowand middle-income countries suggests that management of natural resources, especially agricultural land, must be a key part of development strategies. In high-income OECD countries, natural capital has remained at only 2 percent of wealth. But its small share does not mean that natural capital is unimportant in these countries. Even at only 2 percent of the total, the value of natural capital in high-income countries ($10,367 billion) is still more than nine times that in low-income countries ($1,094 billion).3 Changing Wealth Per Capita In economies where the population is growing, and especially in developing countries that aspire to higher material standards of living for their citizens, sustainable development requires not just increasing wealth but also increasing per capita wealth. This requires sufficient accumulation of capital to overcome the “population dilution effect,” whereby more and more people must share the benefits from a fixed amount of wealth, reducing the share each one receives. If wealth increases only enough to keep per capita wealth constant over time, there will be no sustainable increase in average social welfare. If wealth increases, but not enough to compensate for population growth, average social welfare will decline. Only when per capita wealth increases will average social welfare grow.

Between 1995 and 2005, global wealth grew rapidly (by 34 percent), but population also grew rapidly, so that the net increase in per capita wealth was only 17 percent over the period (figure 2.2, table 2.4). Per capita wealth grew fastest, by 49 percent, in lower-middle-income countries, a group dominated by China’s economy. Per capita wealth in high-income OECD countries continued to increase rapidly, widening the gap between them and many developing countries.

Generally, the share of produced capital in total wealth is relatively similar across all income groups, a phenomenon noted in Where Is the Wealth of Nations?





(World Bank 2006). The exception to this trend occurs in the lower-middleincome countries, which have a share of produced capital, 24 percent, that is a third higher than the global average of 18 percent. China is the largest economy in this group, large enough to determine the trends for this set of countries.

China has invested heavily in produced capital to expand its manufacturing base, and this trend is reflected in the wealth accounts for the entire group of lower-middle-income countries. India, the second-largest economy in this group, has also invested heavily in produced capital, although not as much as China.

The relationship between economic development and the changing composition of wealth over time can be seen most clearly in this same group of lower-middle-income countries. From 1995 to 2005, the share of natural capital

32 THE CHANGING WEALTH OF NATIONS

declined while produced capital and intangible capital increased (figure 2.3).

The changing relative shares of capital suggest a development process in which economic growth takes place in manufacturing and later services, sectors that require large amounts of human capital.

FIGURE 2.2 Growth in Per Capita Wealth, 1995–2005 change in wealth (%)

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Source: Authors’ calculations based on World Bank data.

Note: Figures are based on the set of countries for which wealth accounts are available from 1995 to 2005, as described in annex 2.1.

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Source: Authors’ calculations based on World Bank data.

Wealth Creation in Developing Countries Analysis by geographic region can provide additional insight into wealth creation because of the importance of shared geographic and historical features.

Our set of countries includes the low- and middle-income countries, organized by geographic region, and continues to include only those countries for which wealth accounts are available from 1995 to 2005. But we make an exception for Europe and Central Asia, as information for most countries in this region was only available from 2000. So, in the results discussed below, we include the comparison of wealth accounts in Europe and Central Asia from 2000 to 2005, while results for the other regions compare wealth in 1995 and 2005.

Among developing countries, wealth creation, both total and per capita, was highest in East Asia, followed by South Asia (figure 2.4). Surprisingly, total wealth creation in Sub-Saharan Africa was relatively high—higher than in either Latin America or Europe and Central Asia. However, on a per capita basis those two regions both outperformed Sub-Saharan Africa. In both, the smaller increase in total wealth supported an increase in per capita wealth because their populations grew more slowly than the population of Sub-Saharan Africa.

Looking more closely at Sub-Saharan Africa, we find that the regional results do not necessarily reflect the trends for most African countries. In this region, 27 countries increased per capita wealth between 1995 and 2005, including South Africa but also Botswana, Burkina Faso, Ethiopia, Ghana, Mozambique, Uganda, and many others. A much smaller number of countries, 12, saw per capita wealth decline. The latter group includes several whose poor performance is no surprise, such as the Democratic Republic of Congo, Nigeria, and Zimbabwe.

34 THE CHANGING WEALTH OF NATIONS

FIGURE 2.4 Change in Wealth and Per Capita Wealth in Developing Countries, 1995–2005 change in wealth (%)

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Source: Authors’ calculations based on World Bank data.

Note: Changes for Europe and Central Asia are for 2000 to 2005 due to lack of data for 1995.

Sub-Saharan Africa is dominated by two economies: Nigeria and South Africa.

Wealth in Nigeria declined by 15 percent, while South Africa—the larger of the two—increased per capita wealth by 13 percent from 1995 to 2005. The increase in per capita wealth in South Africa, and in most other Sub-Saharan African countries,4 offset the decline in Nigeria and raised per capita wealth for all of Sub-Saharan Africa by 4 percent. Indeed, the growth of per capita wealth in Sub-Saharan Africa was quite high in many countries and more similar to that observed in other regions.

Intangible capital accounted for most of the growth in all regions except the Middle East and North Africa, where natural capital, mainly subsoil assets, accounted for 56 percent of additional wealth (figure 2.5).5 Natural capital declined in both South Asia and Sub-Saharan Africa. In South Asia, large increases in produced and intangible capital more than compensated for the decline in natural capital, so total wealth per capita increased by 38 percent. In Sub-Saharan Africa, by contrast, the increase in intangible and produced capital was much smaller, raising wealth per capita by only 4 percent over the decade, as noted above. Again, performance for the region as a whole is greatly affected WEALTH AND CHANGES IN WEALTH, 1995–2005 35 FIGURE 2.5 Changes in Wealth in Developing Countries by Type of Asset, 1995–2005 18,000 16,000 14,000

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Source: Authors’ calculations based on World Bank data.

Note: Changes for Europe and Central Asia are for 2000 to 2005 due to lack of data for 1995.

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Natural capital is important in both South Asia and Sub-Saharan Africa, accounting for 25 percent and 28 percent, respectively, of total capital in 2005.

The decline in per capita natural capital in both these regions was almost entirely due to a decline in agricultural land value and, to a lesser extent in Sub-Saharan Africa, forest land (reasons for this are discussed in the next chapter). This is indeed a worrisome trend given the dependence of large numbers of people on agriculture for their livelihood.

Savings and Changes in Wealth The key to increasing standards of living lies in building national wealth, which requires investment and national savings to finance this investment. We have looked at per capita comprehensive wealth for three points in time between 1995 and 2005; savings/investment is the dynamic behavior that drives wealth changes from one point to the next. These dynamics are captured by adjusted net saving (ANS), or genuine savings, defined as gross national savings adjusted for the annual changes in the volume of all forms of capital. Since wealth changes through saving and investment, ANS measures the annual change in a country’s national wealth.

This discussion suggests that there are two ways of measuring a change in wealth: calculating ANS or comparing comprehensive wealth between two time periods. In theory they are very similar. The major difference is that comprehensive wealth includes capital gains—changes in the real prices of assets over time.

But as currently implemented on a global scale, ANS differs from changes in comprehensive wealth because we do not have adequate data to measure changes in all types of capital on an annual basis. ANS is measured as net national savings minus the value of environmental degradation, depletion of subsoil assets, and deforestation, and credited for education expenditures (figure 2.6). Two important assets are missing: agricultural land and parts of intangible capital (box 2.1).

Comprehensive wealth offers two advantages over ANS: it includes all assets and it can be used to monitor how per capita wealth is changing over time, not just total wealth. But we cannot provide comprehensive wealth each year because some of the assets it includes—those excluded from ANS—are difficult to measure meaningfully on an annual basis in many countries, as described in box 2.1. Hence, comprehensive wealth provides a medium- to long-term indicator that is more comprehensive than ANS, but ANS provides policy makers immediate feedback on an annual basis about the direction the economy is headed and possible changes they may need to make. Furthermore, ANS includes most of the assets that policy makers can influence directly and for which the results can be directly measured. A policy maker looking at an ANS of 10 percent of gross national income (GNI) would be certain the country was on an unsustainable path if all assets were included. However, to the extent that we have unmeasured assets, the

38 THE CHANGING WEALTH OF NATIONS

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Source: Authors’ calculations based on World Bank data.

BOX 2.1 Adjusted Net Saving and Missing Capital Intangible capital, the largest component of wealth, is measured as a residual. In chapter 5, we report on work to identify the components of intangible capital, but we are far from having the ability to independently measure these components. ANS includes a measure of additions to human capital, the largest component of intangible wealth. But it is measured from the cost side, by expenditures on education, rather than as the value of the asset created, that is, the net present value of returns to education.



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