BrianGarst.com

An op-ed in the Wall Street Journal a few days ago reports on an intriguing study carried out by the World Bank.

… Two years ago the World Bank’s environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, “Where is the Wealth of Nations?: Measuring Capital for the 21st Century,” began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

But once the value of all these are added up, the economists found something big was still missing: the vast majority of world’s wealth! If one simply adds up the current value of a country’s natural resources and produced, or built, capital, there’s no way that can account for that country’s level of income.

The rest is the result of “intangible” factors — such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, “Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.”

Once one takes into account all of the world’s natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: “Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity.”

What the World Bank economists have brilliantly done is quantify the intangible value of education and social institutions. According to their regression analyses, for example, the rule of law explains 57% of countries’ intangible capital. Education accounts for 36%.

…

There are several important implications to take from this research. One, it puts to rest for good the canard that wealthy nations “stole” their wealth from other nations. Wealth acquisition is not a zero sum game. We can create it with ingenuity and hard work. We should not be ashamed of our wealth and success, and instead let’s be thankful that our founding fathers had the foresight and wisdom to establish a system that allowed our human resourcefulness to work to maximum effect.

Second, it reaffirms the importance of education and why we must reform our school system. We cannot continue down our current path of government run failing schools. It’s time to realize that we can’t afford to have the same people educating our children who run the DMV.

Third, it should cause policy makers to seriously reconsider our foreign aid efforts. Except in disaster or national interest situations, they are almost a complete waste. But as the article points out, this is not a novel observation:

… The World Bank study bolsters the deep insights of the late development economist Peter Bauer. In his brilliant 1972 book “Dissent on Development,” Bauer wrote: “If all conditions for development other than capital are present, capital will soon be generated locally or will be available . . . from abroad. . . . If, however, the conditions for development are not present, then aid . . . will be necessarily unproductive and therefore ineffective. Thus, if the mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, it will not occur even with aid.”

…

Other prominent works, such as The White Man’s Burden, have attacked the foreign aid racket in the past. It’s time we mount another such assault. The United States gives all kinds of different aid, and I’m not arguing that all of it is wasted. But let’s ask a simple question, what has Africa gained from all the foreign aid it has received over the decades (aside from the effort to fight AIDS)? All the money we’ve infused into the region has accomplished nothing in the way of political or economic objectives. In fact, our efforts should be considered detrimental to the region. Rather than spend time and effort attempting to build their own wealth – a process in which rewards are slowly realized – we’ve given them better incentive to fight for control of our donations. And that’s just what they do. Ruthlessly.