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Contributions from
the Column
Monitor
Africa policy: Europe on the wrong track
World Investment Report 2005
Aid pledges for Africa to be monitored
Information summit to discuss control of internet
UN convention against corruption
Disappointing OECD guidelines
Bertelsmann Foundation rates progress
A new definition for the wealth of nations
Trade: disruptive chicken wings
IMF and World Bank endorse debt relief
Development and security: more cooperation needed
11/2005
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[ Resource protection ]
World Bank redefines
the wealth of nations
When a country fells its rainforest, it increases its gross domestic product and, according to today’s conventional wisdom, thus increases its wealth. This is assumed independently of whether the forest is used sustainably or is clear-felled. Furthermore, the conventional measure of wealth ignores whether the revenue received is invested in other assets (such as education) or is simply consumed. At the UN World Summit in late September, the World Bank presented a new measure for wealth in order to set right the second flaw at least. In contrast to gross domestic product, the new measure does not only take manufactured capital into account but also considers natural and intangible assets when calculating the wealth of nations.
On this basis, a team headed by Kirk Hamilton, a World Bank environmental economist, assessed the wealth of almost 120 countries. Intangible assets, for example the quality of institutions, human and social capital, have the greatest share of wealth almost everywhere. Unlike in high- and middle-income countries, the share of natural capital (for example, agricultural fields, subsoil assets and forests) is greater than that of human-made capital in many low-income countries. Some natural assets are renewable and can generate ongoing returns if managed properly. Others are not renewable – the revenue from their use must be invested in other resources, for example, in education and setting up institutions, to at least keep national wealth at a constant level.
Because they do not adhere to this rule, may poor countries lose wealth in spite of economic growth. Managing natural resources is a key factor for development. Indeed, development, in this perspective, means managing a country’s asset portfolio. With the help of good resource management and sober macro-economic policy, Botswana, Mauritius, Namibia, the Seychelles and Swaziland have succeeded in increasing their per-capita wealth. By contrast, many countries that make most of their money by exporting natural resources without investing sufficiently in skills or efficient production perform poorly – as showcased in countries like Nigeria, Algeria or Venezuela.
The World Bank assumes that natural resources can only be replaced up to a certain, but unspecified degree. Nonetheless, it’s logic is based on a weak model of sustainability which, ultimately, “allows” the total depletion of exhaustible resources as long as the revenue is invested in tangible and intangible assets. By contrast, the environmental precautionary principle (“we don’t know today what the consequences of the destruction of natural resources will be tomorrow”) and humankind’s responsibility to conserve the natural environment demand that the replacement of natural resources by human-made and intangible resources be restricted from the outset. Moreover, the international community should contribute to funding the conservation of natural resources that benefit all of humankind, as do forests, for instance, by stabilising the climate.
Despite this shortcoming, the World Bank’s innovative measure of wealth marks a significant step forward. It no longer credits the destruction of the natural environment as being an increase in wealth per se. According to the new concept, a country that does not manage its forests sustainably can only increase its wealth by saving the revenue and investing in other assets. This means it is impossible to increase wealth in the short-term at the expense of future generations. This understanding of wealth, the necessary quantification of all assets and the comprehensive economic analysis based on it present a good basis for political decision-making in the sense of sustainable development.
Nina V. Michaelis
On the internet:
http://www.worldbank.org/sustainabledevelopment
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