World Bank Develops New System to Measure Wealth of Nations

Released exclusively from Washington, D.C.

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Ismail Serageldin, World Bank Vice President for Environmentally Sustainable Development, and John O’Connor, principal author of the report, are available for interviews.

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The World Bank is in the process of developing a new system that measures the wealth of nations by integrating economic, social and environmental factors. This is a major addition to the international perspectives that have looked only at income, and it is the first time that wealth has been calculated for nearly all countries of the world.

“This new system challenges conventional thinking by looking at wealth and not just income in determining growth strategies of countries. It also expands the concept of wealth beyond money and investments,” says Ismail Serageldin, World Bank Vice President for Environmentally Sustainable Development, who is overseeing its development. “For the first time, it provides a three-dimensional picture of the wealth of nations as well as regions of the world, rather than the limited, one-dimensional world view we have all used until now.”

The new system bases the real wealth of nations on a combination of:

  • Natural capital — The economic value of land, water, timber, sub-soil assets: oil, gold, iron, etc.;
  • Produced assets — Machinery, factories, infrastructure: water systems, roads, railways, etc.;
  • Human resources — The value represented by people’s productive capacity (e.g. education, nutrition);
  • Social capital (not yet separately measured) — The productive value of human organizations and institutions such as families and communities, not represented in the individual, but in the collective processes.

Under the new system, the World Bank has determined the dollar value of each of the first three components — natural capital, produced assets and human resources — for 192 countries, and established a 25 years’ time series for 90 of the nations. The patterns are much more important than any one nation’s ranking, which could vary according to changing data and how the Bank refines this still developing system.

One of the most surprising results of the new analysis is that produced assets — which most countries view as the prime determinant of wealth — in reality constitute only 20 percent or less of the real wealth of most nations. Human resources make up a much larger share of real wealth, and richer countries are generally those that invest more in human resources — in education, nutrition, and health care. This supports the view that investing in human resources is the most important way of promoting development. For example:

Raw Material Exporters (63 developing countries) hold 4.6 percent of the world’s total wealth, with 20 percent of their total wealth in produced assets; 44 percent in natural capital; 36 percent in human resources.

Other Developing Countries (100 countries) hold 15.9 percent of the world’s wealth, with 16 percent of their total wealth in produced assets; 28 percent in natural capital; 56 percent in human resources.

High Income Countries (29 countries) hold 79.6 percent of the world’s wealth, with 16 percent of their total wealth in produced assets; 17 percent in natural capital; 67 percent in human resources.

“Our new analysis shows that despite tremendous differences in technology and achievements, countries like Madagascar and the United States may both derive about 16 percent of their total wealth from produced assets,” Mr. Serageldin says. “The difference in the composition of their wealth is that the United States has a much greater return from its human resources.”

The old system sometimes hides a country’s “true wealth,” or lack of it. If a nation is increasing its income by stripping away its wealth — selling natural assets such as oil, coal or forests and spending the income on consumption rather than on investment, then the new system will reveal a negative saving rate, or ‘dis-saving.’ Dis-saving is a subtraction from a country’s net worth. On the other hand, countries can create new wealth by genuine saving, or adding to a country’s net worth. Saving is defined by what a country produces, minus its consumption, depreciation of produced assets and the drawing down of natural resources. The result of dis-saving: less and less money to invest in human resources, making it more difficult for people to break out of poverty.

By focusing on wealth and genuine saving, the Bank is putting into action the concept of ‘sustainable development.’ “Sustainability is giving future generations as many, if not more, opportunities as we have had ourselves,” says Mr. Serageldin. “This means to pass on to them as much wealth per capita, if not more, than we have now. Capital here includes all four kinds, produced assets, natural, human and social capital. It also means that some substitution is possible, although there are critical limits to respect for each kind of capital, especially natural capital.”

“The drawing down of some natural resources is neither a positive or negative phenomenon,” says John O’Connor, principal author of the report. “It depends on what the money from such sales is used for, buying imported luxury cars, or educating girls.”

Based on these preliminary calculations, the Bank says that some 35 countries appear to raise concerns regarding the sustainability of their development paths because their tendency to exchange natural capital for produced assets seems very high, or is high and rising. Comparing this information to that on genuine saving reveals that almost all these countries have negative saving in the household/government sectors, meaning they are living off accumulated wealth.

The initial results of the new system are published in a World Bank publication, Monitoring Environmental Progress (MEP): A Report on Work in Progress. The methodology and preliminary results will be formally presented for the first time at the Effective Financing of Environmentally Sustainable Development Conference, to be held in Washington D.C., October 4-6. The conference will be attended by government officials, private sector leaders, non-government organizations, scientists and other scholars.

“This is just a start, and it is very crude,” says Mr. Serageldin. “We must refine our work, grapple with issues such as sustainability of ecosystems and social systems and look at equity and the real problems of poverty. Nevertheless, the start is very promising, and raises a lot of interesting questions for decision-makers, academics, economists, and environmentalists to consider.”

The Bank will be doing a more systemic analysis of some countries in the developing world over the next two years to refine the approach and methodology. The countries will be selected in consultation with national authorities. Looking at wealth and genuine saving should help people find the most appropriate ways to utilize existing resources with due regard for the rights of future generations. Finding the correct relative prices (for all components in the new system) is essential to ensure that markets receive coherent signals and for policy-makers and the international community to design appropriate policies.

The new Bank system still gives substantial but indirect attention to conventional income measures calculated by the Bank, based on Gross National Product (GNP) per capita, in valuing land and human resources. In doing so, however, it first considers environmental adjustments to such measures. A major result of measuring wealth, or the stock of capital, is that it would set aside the simplistic view that environmentally sustainable development requires leaving to the next generation exactly the same amount and composition of natural capital as currently exists.

MEP makes clear that wealth estimates should complement rather than replace measures of income and related flows of saving and investment, which are essential to the creation of wealth. In considering whether countries are saving enough for the future, the MEP report concludes that adjustments to per capita income measures advocated by some environmental activists would not have much analytical importance — although the same adjustments to saving measures were often significant.

Trends on wealth and saving are most clearly revealed in regional data. Sub-Saharan Africa entered into a period of dis-saving in the late 1970s, a process that accelerated during much of the 1980s, with some improvement in the early 1990s, but with dis-saving still progressing. At the same time, most nations in East Asia showed a rapidly increasing genuine saving rate beginning in the early 1980s.

“This conforms to everyone’s observations, and therefore adds confidence that measuring general savings captures important dimensions of reality,” Mr. Serageldin says. Focusing on genuine savings also shows the long-term consequences — future generations in sub-Saharan Africa will be disadvantaged with some of their inheritance being spent today. On the other hand, the future looks brighter for the 21st century inhabitants of East Asia, for what their 20th century parents are genuinely saving today.

South Asia has had much lower positive saving, also beginning in the late 1970s; Latin America and the Caribbean, after much fluctuation, entered a dis-saving pattern in the early 1990s, although no where near as severe as sub-Saharan Africa; and the Middle East and North Africa, after a great deal of increase in wealth in the 1970s, reflecting in part the revaluation of natural capital, and some in the 1980s, began dis-saving in the early 1990s.

Country Analyses

Australia and Canada come out as the world’s two richest nations because their vast natural wealth is owned by relatively small populations. The other wealthiest countries in descending order are: Luxembourg, Switzerland, Japan, Sweden, Iceland, Qatar, United Arab Emirates, Denmark, Norway and the United States. A country’s overall ranking can shift up or down as further data is added or the Bank refines its methods.

Countries like Switzerland and Japan, which have consistently surpassed the United States in per capita income, remain higher in terms of wealth despite modest natural capital because they invest far more in human resources and produced assets. Germany, with less than a fifth of the natural capital of the United States and similar investments in produced assets, is just about as wealthy, because it has invested more in human resources.

Ethiopia ranks as the world’s poorest nation under this list of estimated wealth per capita. The other poorest countries, with dollar figures so close they can be considered practically the same, are: Nepal, Burundi, Malawi, Uganda, Tanzania, Viet Nam, Mozambique, Sierra Leone, Guinea-Bissau and Rwanda.

These new estimates of wealth indicate that any country with $100,000 per capita in natural capital is going to be a wealthy country. But to be truly wealthy, it must balance preservation of this natural capital against investments in other forms of wealth, such as in human resources or in produced assets. The countries that seem to be developing reasonably have managed to invest tens of thousands of dollars, per capita, in produced assets — infrastructure, machinery, etc., and in their human resources.

Almost all of the 26 countries that rank significantly higher by wealth than in income tables have more than 60 percent of their wealth in natural resources, but so do about a dozen other countries that show no significant changes. The reason those 12 do not rank significantly higher is because they are relatively low in the two other categories in the measurement — produced assets and human resources.

Land is the predominant form of natural capital for most countries, but most of those nations that shifted upward have substantial endowments of standing timber or subsoil assets — oil, natural gas, coal, minerals, etc.

Developing nations with exceptional endowments of natural resources, like Suriname (forests, bauxite, iron ore) and Gabon (oil, forests, manganese) score dramatically higher in terms of wealth than income per capita. Suriname is comparable to Austria or Belgium in terms of wealth per capita but can provide its citizens with only a quarter of their per capita income; Gabon seems wealthier than New Zealand or Ireland but can only offer its citizens a third of the per capita income enjoyed in those advanced countries. “The challenge of sustainable development,” observes Mr. Serageldin, “is to help these countries balance preservation of their natural capital with the need to expand their productive base of human resources and produced assets.”

The MEP report finds that the “greening” of per capita income measures has significant effects on international ranking for only a handful of countries, all already among the poorest — Liberia, Guyana, Angola, Zaire and Somalia.

For about half the countries where estimates could be assembled, sales of natural assets (measuring only timber and sub-soil assets, so far) have been a significant way of financing the acquisition of produced assets (machinery, infrastructure, etc.). In these countries, at least a quarter of such acquisitions have been financed by the sale of natural capital for extended periods. Only two high income countries — Norway and Iceland — are in this group.

About two-fifths of these countries have relied on the sale of natural capital to finance at least half of their investment in fixed capital in all the periods reviewed (1970-75, 1978-83, 1985-90). Another fifth have done so for at least one of the periods under review and such reliance is increasing. The other two-fifths have relied heavily on sale of natural capital in the past, but this reliance is decreasing.

The stock of capital that this generation leaves for the future should be the same if not larger than what it began with. The new method encourages countries to consider whether they can substitute one form of capital for another, giving them much more flexibility in improving the lives of their citizens, but flags when they are actually depleting their capital rather than adding to it.

Given the limited domestic saving potential of countries, one way of bridging the saving-investment gap is foreign borrowing. In many cases, the sale (export) of natural resources is being similarly used. Being able to distinguish asset exchanges from the creation of new wealth (genuine saving) would help the international community in understanding why the overall development trend, when all variants are included, is up or down.

In many countries of sub-Saharan Africa, for example, the inordinate dependence on the exchange of natural capital for produced assets could potentially be the reason why one observes a downward trend in their per capita income, as compared to the rising trend experienced by exporters of manufactured goods, relative to high income countries. Rapid population growth, dividing an essentially unchanged endowment of natural capital among more people, also suggests the challenge that most countries in this region face, in terms of how much more they must invest in human resources and produced assets if they are to maintain–let alone increase–per capita wealth. That is the real measure of sustainability.

Most of the countries that fare worse with genuine saving as an indicator are those where at least a quarter of fixed investment is financed by sales of assets. In some cases, the dis-saving is more than 100 percent of investment, indicating a heavy reliance on sales of assets, not only to finance purchases of produced assets, but also to prop up current consumption, thereby placing countries on unsustainable growth paths.

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New (Wealth-based) System Vs. Old (Income-based) System
The new calculations are still tentative and the methodology and overall patterns are far more important than any individual set of country numbers. But in response to queries about how the rankings would compare using wealth instead of income, here are the results:

Some 30 countries of the 192 ranked countries dropped between 10 and 19 spots using the Bank’s new system, in comparison with the conventional rating using income statistics alone, and two nations dropped 20 spots or more. These are examples in which the system offers a radically new way to look at how countries are using their assets and investing in their people. Similarly, 18 countries jumped up 20 spots or more under this new system, and 8 countries rose between 10 and 19 spaces or more.

The countries that have fallen between 10 and 19 spots are: Rwanda, Niger, The Gambia, Somalia, Togo, Lesotho, Senegal, Egypt, Kyrgyz Republic, Myanmar, Romania, Guatemala, Morocco, El Salvador, Moldova, Lebanon, Tonga, Micronesia, Marshall Islands, North Korea, Ukraine, Kazakhstan, Tunisia, Albania, Slovak Republic, Turkey, Thailand, Latvia, Dominica and Mauritius. Afghanistan and Djibouti dropped 20 spots or more.

The countries rising 20 or more spots are: Bhutan, Zambia, Liberia, Central African Republic, Solomon Islands, Papua New Guinea, Guinea, Congo, Jamaica, Swaziland, Mongolia, Yugoslavia, Guyana, Namibia, Botswana, Gabon, Suriname and Australia.

The countries rising between 10 and 19 spots are: Sudan, Laos, Mauritania, Bolivia, Russia, New Caledonia, Qatar and Canada.

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