RSS

To Reach Millennium Goals, Think About Human Capital

The conclusions made in the World Bank report Where Is the Wealth of Nations?, first published in 2006, have been largely overlooked in the policy world and offer valuable information on how to evaluate the changing global economy. World Bank environmental economist Kirk Hamilton and his team have analyzed both natural and intangible capital estimates with the aim of deepening understanding of the connection between the composition of wealth and how this affects prospects for development.

The Intangible Addition
The World Bank authors claim that while it is true that natural resources contribute to a large part of total wealth, that it is human capital and the value of institutions that constitute the largest share of wealth in virtually all countries. The chapter of the reporton “Explaining the Intangible Capital Residual: The Role of Human Capital and Institutions,” summarized here, presents the relevant research findings.

Key Terms
Human capital embodies the skills and know-how of the labor force and can be increased through education expenditure and training as well as investments in health and nutrition. Social capital relates to the degree of trust among people in society and their ability to work together for common purposes. Both types of capital play a key role in measuring wealth and can contribute significantly to a country’s development. It is known, for example, that high levels of education result in high levels of output. The correlation between generalized trust and rule of law is high, which has also been found to considerably boost intangible capital. Furthermore, governance elements such as an effective government, an efficient judicial system, and clear property rights can also have a positive impact on total wealth.

More Than GDP
It is valuable therefore to consider these factors when investigating a country’s total wealth and reject old methods of merely looking at GDP and GNP. Analyzing human and social capital can highlight where a country’s strengths lie, but also where improvement is necessary. For example, in Turkey, the rule of law is the greatest contributor to intangible capital; whereas in Peru, education is the largest element of intangible capital, but levels of trust are much lower, creating a negative impact on the value of the rule of law.

Such information indicates that different policy options are needed. In Turkey, for example, education should be a major priority. Increasing per-capita education in Turkey by one year would raise the residual by nearly 10 percent. In Peru, on the other hand, improving the judicial system would increase the residual by 25 percent. A country can benefit greatly from investing in human and social capital, which is why these factors should not be ignored when considering and measuring total wealth. If developing countries are to meet the Millennium Development Goals by 2015, all assets upon which growth depends need to be managed. Growth cannot be foreseen if it is simply based on diminishing fisheries and forests.

• Where is the Wealth of Nations? Measuring Capital for the 21st Century
  
• Interview with Kirk Hamilton, author of Where is the Wealth of Nations?

• All Gain, No Pain With Sustainable Banking
• The Economist: Progress Towards UN Millennium Development Goals Varies Widely
• More Health, Less Talk: Horton Stresses Prioritizing Human Security in Foreign Policy

Prepared by Charlotte Everitt