Thursday, July 12, 2012

A Report on the Wealth of Nations

It has become common to think of GDP, or per capita GDP, as a measure of a nation’s wealth. These may be useful quantities if one is only interested in a snapshot in time. However, a simple example indicates the weakness in this approach. Consider a country whose income comes almost entirely from the export of a valuable natural resource. As long as the resource continues to be available the country is deemed wealthy. This can occur right up to the point at which the resource is totally consumed and the country instantaneously becomes poor. A broader definition of wealth is clearly needed.

An organization called the International Human Dimensions Programme on Global Environmental Change (IHDP) has produced a report that utilizes a more inclusive definition of wealth. It is titled, appropriately, the Inclusive Wealth Report 2012 (IWR 2012). The subtitle of the report is indicative of the program’s goals: Measuring progress towards sustainability.

The intent is to provide information that will be of assistance in long-term national planning.

"....provides a different perspective for assessing the performance of an economy—this by switching the focus of attention from flows (income) to stock metrics (wealth). This stresses the importance of preserving a portfolio of capital assets to insure that the productive base can ultimately be maintained to sustain the well-being of future generations."

The approach taken in defining wealth is based on determining values as they relate to the health of a society.

"Wealth is the social worth of an economy’s assets: reproducible capital; human capital; knowledge; natural capital; population; institutions; and time."

Reports are to be issued biennially. The first includes:

" index that measures the wealth of nations by looking into a country’s capital assets, including manufactured, human and natural capital, and its corresponding values: the Inclusive Wealth Index (IWI). Results show changes in inclusive wealth from 1990 to 2008, and include a long-term comparison to GDP for an initial group of 20 countries worldwide, which represent 72% of the world GDP and 56% of the global population."

An article in The Economist, The real wealth of nations, provides some discussion of this report, as well as some of the data produced.

"They included three kinds of asset: "manufactured", or physical, capital (machinery, buildings, infrastructure and so on); human capital (the population’s education and skills); and natural capital (including land, forests, fossil fuels and minerals)."

Given those definitions of the three categories, this interesting chart is provided:

If one takes this analysis at face value, a number of interesting conclusions can be drawn.

While the US has by far the greatest total inclusive wealth, it falls behind Japan in wealth per person. Also, Japan, often derided as being mired in an economic stall, has experienced a greater wealth growth rate than the US over the past two decades. France is often indicated as the prime example of a stagnant economy, but its inclusive wealth growth has been at twice the rate of that of the US and is almost as great of that as Germany. The metrics chosen by the authors of IWR 2012 place considerable weight on human capital, which encompasses education and training. One suspects that many would argue with that degree of emphasis.

The IHDP effort is intended to be long-term, and to be refined as time goes on. It seems like a worthwhile task. Countries need some sort of broad metric to evaluate the evolution of their economies and their societies.

IHDP is associated with the United Nations University and collaborates with the United Nations Environment Program (UNEP) and other agencies.

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