Teaching Comparative

Rule of law and wealth of nations

Jim Lerch sent me a tiny message with the URL of an article from ReasonOnLine.

If you're looking for a way to get students involved in thinking about the connections between economics, government, and politics, this is a great introduction. Well, I think it's an introduction. You might have to do some teaching (and your students do some learning) about the basics of economics. It depends on what the students have learned about economic systems before your class.

Our Intangible Riches

"Oil, soil, copper, and forests are forms of wealth. So are factories, houses, and roads. But according to a 2005 study by the World Bank, such solid goods amount to only about 20 percent of the wealth of rich nations and 40 percent of the wealth of poor countries.

"So what accounts for the majority? World Bank environmental economist Kirk Hamilton and his team... have found that most of humanity's wealth isn't made of physical stuff. It is intangible... Hamilton's team found that 'human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.'

"The World Bank study defines natural capital as the sum of cropland, pastureland, forested areas, protected areas, and nonrenewable resources (including oil, natural gas, coal, and minerals). Produced capital is what most of us think of when we think of capital: machinery, equipment, structures (including infrastructure), and urban land. But that still left a lot of wealth to explain...

"The rest of the story is intangible capital. That encompasses raw labor; human capital, which includes the sum of a population's knowledge and skills; and the level of trust in a society and the quality of its formal and informal institutions. Worldwide, the study finds, 'natural capital accounts for 5 percent of total wealth, produced capital for 18 percent, and intangible capital 77 percent.'

"Social institutions are most crucial. The World Bank has devised a rule of law index that measures the extent to which people have confidence in and abide by the rules of their society. An economy with a very efficient judicial system, clear and enforceable property rights, and an effective and uncorrupt government will produce higher total wealth. For example, Switzerland scores 99.5 out of 100 on the rule of law index and the U.S. hits 91.8. By contrast, Nigeria gets a score of just 5.8... The members of the Organisation for Economic Co-operation and Development -- 30 wealthy developed countries -- have an average score of 90, while sub-Saharan Africa's is 28. 'Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity,' the study concludes. According to Hamilton's figures, the rule of law explains 57 percent of countries' intangible capital. Education accounts for 36 percent.

"The rule of law index was created using several hundred individual variables measuring perceptions of governance, drawn from 25 separate data sources constructed by 18 different organizations. The latter include civil society groups, political and business risk-rating agencies, and think tanks...

"[The study] convincingly shows what countries need to do to create wealth and lift billions of people out of abject poverty: Establish the rule of law and educate their people. That's a lot harder to do than building giant dams or aluminum factories, but it would be a lot more effective in reducing poverty..."

The article ends with a thoughtful and valuable Q&A with Kirk Hamilton. I thought the questions about

• What sorts of institutions help countries become rich?
• How do you define rule of law?
• You claim that "there's no apparent empirical relationship between current net savings and future well being." This seems astonishing to me. Why is that?
• The economic historian Angus Madison calculates that it took 1,800 years for average incomes in Western Europe to rise from $450 per capita in the Roman Empire to $1,250 in 1820... If we know what kind of institutions work to create wealth, it would seem we should try to duplicate that in poor countries if we want them to develop.

---

See also:

• Home page for Where is the Wealth of Nations? Measuring Capital for the 21st Century (where you can download the book)
• A preview of Where is the Wealth of Nations? Measuring Capital for the 21st Century from Google Books

---

Labels: concepts, economics, rule-of-law, theory

posted by Ken Wedding @ 8:25 PM