1. Is this the first time the World Bank has published a book on wealth accounting?
The World Bank has spearheaded work in this area for more than a decade, publishing “Where is the Wealth of Nations” in 2006, followed by a second volume in 2011. The Changing Wealth of Nations 2018 tracks the wealth of 141 countries between 1995 and 2014. This new book improves estimates for natural capital and for the first time provides estimates of human capital. The goal is to broaden the measures economists, policymakers, the private sector and civil society use to assess economic progress and sustainable development.
2. How is wealth calculated in the report and how is it helpful for countries?
A country’s wealth includes produced capital (buildings, machinery, and infrastructure); natural capital such as agricultural land, forests, protected areas, minerals, oil, coal and gas reserves; human capital (broken down by gender and types of employment); and net foreign assets. Wealth accounting provides an estimate of the total wealth of nations by aggregating values of these different components of wealth. A change in wealth is an indicator to assess a country’s potential to grow in the future. A fall in wealth indicates that a country is depleting its assets and may not be able to sustain its future GDP growth.
3. What do we learn from wealth versus GDP
It is useful to think of GDP as a `return on wealth’. GDP is calculated by looking back on the previous year’s economic activity and is considered a `flow’ measure. Wealth and its composition tells us if the portfolio of assets or `stocks’—produced, natural, human capital and net foreign assets—are balanced to support GDP growth in the long-term. Wealth provides information about the long-term health of an economy, its capacity to sustain growth, reflecting depreciation and depletion of assets, and whether investments and accumulation of assets are keeping pace with population growth.
4. Should Wealth Accounting replace GDP as a measure?
This form of accounting should be viewed as a complement to GDP and not a replacement. Wealth complements GDP as it reflects the state of assets that produce GDP and whether investments in human, produced and natural capital are sufficient to keep pace with population growth and a country’s development aspirations. Policymakers need this information to design strategies to ensure that their GDP growth is sustained in the long run and make corrections when needed.
5. Are country trends for GDP and wealth similar or do they vary?
Generally, country trends are similar when looking at wealth and GDP. Part of the reason for this is that produced capital and human capital, which account for more than 90 percent of total wealth, are often correlated with GDP. Nevertheless, there can be situations in which trends in wealth do not follow trends in GDP. It helps to look at the composition of wealth and the balance among different assets (produced, human and natural capital in addition to net foreign assets).
6. Which countries are the `most wealthy’ in per capita terms and which ones are at the bottom of the list?
The objective of this research is not to rank countries according to wealth, but to outline general trends, both in overall wealth and in wealth per capita. The top 10 countries in terms of per capita wealth starting from the wealthiest are as follows in 2014: Norway, Qatar, Switzerland, Luxembourg, Kuwait, Australia, Canada, and the United States. Countries with the least per capita wealth are: The Gambia, Burundi, Mozambique, Comoros, Guinea, Madagascar, Liberia, Malawi, Niger, and DRC. It is important to look at trends in wealth apart from levels to assess a country’s development path.
7. What happened to natural capital over the past 20 years?
The value of natural capital assets doubled between 1995 and 2014. However, it is a mixed picture when you look at the breakdown of assets. Most of the growth in natural capital was in non-renewables (308 percent), largely because of changes in both the volume and prices of minerals and fossil fuels. The renewables—forests, protected areas, and agricultural land— did not decline in value overall, but increased far more slowly than total wealth (44 percent compared to 66 percent). In Latin America and Sub-Saharan Africa, about 7-9 percent of forest area gave way to agricultural land. The value of total forest assets (timber, non-timber forest products, recreation and watershed protection services) fell by 3 percent with timber assets falling 9 percent globally. In Latin America, total forest assets fell by 2 percent while in Sub Saharan Africa, they fell by 11 percent.
8. What did you include when calculating natural capital? Did you leave anything out?
When calculating natural capital, we took into account fossil fuel energy (oil, gas, hard and soft coal) and minerals (bauxite, copper, gold, iron ore, lead, nickel, phosphate, silver, tin, and zinc), agricultural land (cropland and pastureland), forests (timber and some nontimber forest products, including some eco-system services), and protected areas (a proxy for bio-diversity). However, some natural assets were not included, such as water, fish, renewable energy sources, and several critical eco-system services. These may be included in later wealth accounting work.
9. What are some other interesting trends that you are seeing in this analysis?
- The report found that global wealth grew 66 percent (from $690 trillion to $1,143 trillion in constant 2014 U.S. dollars at market prices).
- The top 20 countries with the fastest growing wealth per capita were dominated by developing countries—including two of the biggest—China and India, which were both classified by the World Bank as low income countries in 1995 and are now ranked as middle-income.
- Countries with large gains in per capita wealth also included smaller countries like Chile, Peru, Vietnam, as well as countries rapidly recovering from civil disturbances like Bosnia-Herzegovina, Ethiopia, Rwanda, and Sri Lanka as well as some of the resource rich countries in the former USSR, like Azerbaijan.
- Per capita wealth declined or was stagnant in more than two dozen countries in various income brackets. These include several large low-income countries, some carbon-rich countries in the Middle East, and high-income OECD countries affected by the 2009 financial crisis. Declining per capita wealth implies that assets critical for generating future income may be depleted, and the rents generated from natural assets depletion are not invested properly, a fact often not reflected in national GDP growth figures.
- Human capital is the largest component of global wealth, accounting for two thirds of total wealth globally. This points to the need to invest in people for wealth creation and future income generation.
- While natural capital accounts for 9 percent of wealth globally, it makes up nearly half (47 percent) of the wealth in low income countries. More efficient, long-term management of natural resources is key to sustainable development while these countries build their infrastructure and human capital.
10. How did you calculate human capital in your research?
Human capital is computed as the present value of future earnings for the labor force. This factors in education and skills as well as experience and the likelihood of labor force participation at various ages. The estimate follows an approach developed by Jorgenson and Fraumeni. Estimates rely on household surveys from the World Bank’s International Income Distribution Database and are based on several assumptions and they rely on regression analysis to compute expected earnings for the labor force. This means that estimates have margins of error. This also applies to some extent to other types of wealth estimates in the report apart from human capital. Finally, for most Gulf countries, due to lack of publicly available household surveys, human capital is imputed based on GDP per capita and educational attainment.
11. Are you missing some “intangible” capital that is not captured by the current calculations of wealth?
We do not estimate the intrinsic value of institutions, governance, and policies, nor their effect on the value of other assets. For example, `social capital’ often refers to the trust that promotes cooperative behavior and can facilitate economic activity and increase well-being. In that sense, we are indeed not measuring some forms of “intangible” capital.
12. How did you decide which data to include?
Wealth accounts are compiled by using publicly available data, drawn from globally-recognized data sources, with a methodology that is consistent across all countries. Consequently, the wealth accounts for any country are likely to be less accurate than the accounts that the country might construct using its own, more comprehensive data sources. This methodology is constantly being refined and new categories will be added over time.
13. What is the difference between human capital estimates in this report and the recently-announced Human Capital Project by the World Bank?
This report is part of key evidence that makes the case for investing in human capital. It shows that human capital is about 70 percent of the wealth in high-income countries and only 40 percent in low income countries. To help countries overcome this gap, the World Bank together with partners is developing the Human Capital Project with comprehensive components on more analytics, results-based investments, catalytic financing platforms, and partnerships. Measures of country progress on human capital will be developed as part of this accelerated effort to encourage investment in people--a critical step to boosting inclusive economic growth and ending extreme poverty.
14. Are any countries currently doing wealth accounting?
We are not aware of any countries currently calculating comprehensive wealth as measured in this report. However, several countries are estimating components of their wealth – especially produced capital and parts of natural capital and some Net Foreign Assets. According to the United Nations, 23 countries are calculating natural capital. Zambia, for example, is in the process of doing accounts for forests and water which will help the government as it makes policy decisions on how best to use natural resources for now and generations to come. Colombia has shown leadership on natural capital accounting and is one of the first countries in the world to have a dedicated unit in its statistics department to calculate the value of forests, water and minerals. Progress has been made on natural capital with the adoption of the System of Environmental Economic Accounting (SEEA), which is a UN-approved standard for calculating natural capital.
15. What are the policy implications of this work?
This report shows how to estimate wealth to assess a country’s prospects for long-term growth. The report does not have explicit policy recommendations but it provides the data for further analytics, cost-benefit analysis, for example, on questions such as whether natural capital contributes to productivity or what the economic costs are for gender inequality. Policymakers can use this information to design strategies to ensure that their economic growth is sustained in the long run and that they can make corrections when needed.
16. What are the policy and methodological issues that could be addressed in future work
- Expand coverage for missing natural capital: In our current work, natural capital includes fossil fuels and minerals, agricultural land (crop and pasture land), forests (timber and some non-timber forest products, and terrestrial protected areas. Going forward, we would like to include renewable energy sources (hydro, wind, solar), water, fisheries, and critical ecosystem services.
- Estimates of human capital: Human capital has been included for the first time in the report. Disaggregation by gender is based on data from household surveys. Disaggregation by employment (employed versus self-employed) is based on data from the Penn World Table, except for China where the average for the income group was used. We are constantly working to strengthen the methodology for all our data, including human capital. We are conducting more detailed analysis of human capital by gender and type of employment and will refine those estimates for future publication.
- Gender equity and sectoral work: Building on the data from The Changing Wealth of Nations 2018, the World Bank is preparing an analysis of the cost of gender inequality and the benefits of gender equality globally. The World Bank is also preparing a companion volume to analyze some of the drivers of human capital. In addition, the volume will provide estimates of the wealth benefits that could result from policies aiming to improve outcomes in various areas such as (i) a reduction in stunting for children under the age of five; (ii) an improvement in educational attainment for youth; or (iii) ending the practice of child marriage.
- Using Purchasing Power Parity assessments (PPP) of wealth: We provide measures of wealth that are comparable across countries by using a common metric, market exchange rates (based on US dollar exchange rates). But it has long been recognized that market exchange rates do not reflect the relative purchasing power in different countries. PPP is often applied to GDP figures to provide a better indication of the relative well-being of countries than market exchange rates would provide. However, the application and interpretation of PPP exchange rates for wealth is not as straightforward and is on our list for next steps.