I. Introduction
What is the wealth of a nation? One way of looking at it is that it consists of the total assets owned by citizens, businesses and government of a particular country minus all the liabilities of these parties. The net financial claims such as shares, bonds, commodities owned by the nation are certainly part of a nation’s net wealth, provided one is careful to net out government bonds owned by own citizens. From an
accounting point of view, the year-to-year change in net financial claims must correspond to the current account of the nation.
Hence, if the nation produces more than it consumes or exports more than it imports and earns interest income from abroad, its current account will be positive and the nation will be getting richer in terms of the net financial claims held on the rest of the world. We will refer to this as the net financial wealth held overseas.
But this is not all what determines the wealth of the nation. The wealth of the nation also consists of physical capital, natural capital, human capital, and its creative wealth. Physical capital consists of factories including machineries and transport vehicles, but also the physical infrastructure (irrespective of whether it is provided publically or privately) of a country. Human capital is defined as the earning power of the working population of a nation and corresponds to the present discounted value of all future wageincome that can be earned in future years by the working population (Hamilton and Liu, this issue).
Income before taxes should be used because the present discounted value of taxes to be paid by the working population is netted out by the corresponding future claims of the government. Of course, this is difficult to assess since one has to make an assessment of the expected future productivity growth and earnings of the nation as well as of the number of unemployed, disabled persons and pensioners in the future as well as the expected lifetimes of the working population.
Natural capital (see Obst and Vardon, this issue, and Helm, this issue) consists of the value of all under-the-ground resources such as oil, gas, diamonds, minerals and water but also of the value of the various types of land including waste lands,forests, agricultural land, wetlands, and land to build on and of the value of the fish in territorial waters.
As shown by the detailed endeavours of the World Bank (2006) to create a cross-country database, these require heroic assumptions about matters such as how to price natural assets, what interest rates to use, what extraction or harvesting costs to employ and what to assume about sustainable harvesting of forests and fisheries (e.g., van der Ploeg and Poelhekke, 2010). Nevertheless, an impressive database has been developed which can be used to better understand what constitutes the wealth of a nation and how to best manage it.
The World Bank supposes that the present value of consumption corresponds to total wealth. In that case, the residual between this and the sum of financial wealth held abroad, physical capital, human wealth, and natural resource wealth is the unmeasured portion of total wealth which includes institutional, social and other forms of intangible capital. Hamilton and Liu (this issue) refer to this as in intangible capital.
It is the stock equivalent of the Solow residual in growth accounting and shows how much additional intangible capital is created by making efficient use of the other more tangible components of national wealth. The World Bank data suggest that the rich OECD countries have actually in absolute terms more natural resources that are exploited than poorer sub-Saharan countries, but natural resource wealth for the latter countries is often a much greater share of the nation’s wealth. The reason is that the rich countries have a huge share of intangible wealth in the nations’ wealth (as well as more physical capital).
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