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November 27, 2007

intangible wealth and international equity

If, by sheer dumb luck, you happen to be born one mile north of the Rio Grande, you have economic advantages that you'd miss if you were born one mile south of the same river. According to estimates by the World Bank, the total wealth per capita in Mexico is about $62,000. It's about $513,000 in the USA. If we imagine that everyone got an equal share of national assets, then simply by changing your citizenship from Mexico to the US, you would multiply your wealth eight-fold. Of course, that's a false presumption: wealth is very unevenly shared. Merely receiving a US passport does not give you access to $513k in assets. However, lots of per capita wealth is floating around in the US, which offers some trickle-down benefits to the poor and allows the state to afford a lot of public services. Even for the least advantaged, it's generally better to live in a country with eight times more per capita wealth.

Because one's location at birth is an accident, this difference seems unjust. One response is to open borders so that people can move; another is to redistribute wealth across borders. Both ideas are highly unrealistic politically but worth considering as moral principles. The World Bank's study, however, casts some doubt on both. That's because the Bank attempts to disaggregate national wealth. According to its analysis, the vast majority of a nation's per capital wealth is due to "intangible" assets such as education, social capital (trust and human networks) and rule of law. In the USA, for instance, natural resources contribute about $15,000 to per capita wealth, physical capital (including buildings, machines, and urban land) contribute about $80,000, but intangible assets contribute $418,000. In Mexico, natural resources contribute $8,000, physical capital adds $19,000, but intangible assets are worth $34,000. The big gap, in other words, is in education, social capital, and governance.

This means that the wealth gap is largely attributable to institutions and culture/society, not to natural resources or accumulated factories and machines. As Michael Edwards of the Ford Foundation wrote, "It's the polity, stupid."

This does not mean that we "deserve" the advantages we have. I didn't build my country's rule of law, education system, and social networks, any more than I put oil and coal under the earth. To profit from what other human beings have constructed is morally equivalent to benefiting from nature: it's a matter of luck. Thus it seems to me that if we can make life better in Mexico, we have an obligation to do so, even if it costs us wealth. The World Bank study does, however, raise doubts about whether we could achieve much by simply transferring cash or opening borders. That's because the path to prosperity lies through social and political reform. Cash would only help if it were very well invested, and emigration might hurt.

November 27, 2007 8:44 AM | category: none


Hey Peter,

By the Bank's own acknowledgment, one of the largest challenges for accounting for and aggregating wealth indicators in monetary terms is the unclear extent to which the various inputs are substitutable. For example, critics of this kind of wealth accounting argue that "a loss of some natural capital, such as an entire ecosystem, surely cannot be made up with an increase in physical capital if the very basis of social existence and well-being are destroyed in the areas affected by that system."

So, while I think the report's finding that "the vast majority of a nation's per capita wealth is due to "intangible" assets" is an important stylized fact, and thus highlighs the centrality of the political and social aspects of development, it's not very helpful in understanding the dynamic nature of wealth generation. While true that the path to greater wealth will surely involve social and political reform, it's not clear the timing, specific types, and contextual conditions that will translate these reforms into greater wealth, productive capacity, or income. Indeed, one interesting finding was that "the institutional indicators, however, have no statistically significant impact on income generation" (pg. 108).



December 2, 2007 3:19 PM | Comments (1) | posted by Joseph Sinatra

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