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Of Dark Matter and Domesday

Kirk Hamilton's picture

As surprising as it may seem, there is a deep dark secret at the core of the System of National Accounts (SNA) – the accounts used by Finance ministries worldwide to measure economic performance. The numbers don’t add up. We can see this in the table below, showing the net worth of Brazil and its composition in 2005. The final two lines in the table report a measure of Brazil’s net national income and the implicit rate of return on wealth (the ratio of income to net worth). The return to Brazil’s produced and natural capital is over 18%! As good economists, we should all be investing our pension funds in Brazil. Why? Because financial market data tell us that the long run real rate of return across the broad range of assets averages only about 5% a year.
 

Table – Net worth and net national
Income (NNI) in Brazil, 2005, $million
Produced capital  1,909,259
Natural capital 1,713,939
Net financial assets -117,221
   
Net worth 3,505,978
   
Adjusted NNI 636,356
Implicit rate of return 18.2%
Source: The Changing Wealth of Nations
World Bank (2011)

 

The solution to this puzzle, of course, is that enormously important assets are not measured in the SNA balance sheet. If you, like me, spent 20 years of your life in school, then you know a big part of the answer – the SNA does not measure human capital. But there are also other missing, equally intangible, assets which might broadly be termed ‘social capital’ – rule of law, government efficiency and effectiveness, and the social relations which can help or hinder economic activity. These assets are very closely related to what economists, with typical flair for terminology, call ‘total factor productivity.’

A new World Bank publication, The Changing Wealth of Nations, estimates the ‘missing’ wealth of Brazil to be about $8.1 trillion in 2005. If we add that to the net worth reported in the table, we see that Brazil’s comprehensive wealth is $11.7 trillion, and a little math leads us to conclude that the implicit rate of return on assets is actually 5.2%, while the missing ‘intangible’ wealth constitutes 70% of total wealth – a typical figure for middle income countries.

Another key message from the table is that the value of natural capital in Brazil is very nearly as large as produced capital. This is consistent with the body of evidence presented in The Changing Wealth of Nations: natural capital is as important as produced capital in middle income countries and, at 30% of the total, is over twice as large as produced capital in low income countries.

As the title suggests, the new book is about change, and the figure tells an interesting story: natural wealth increased by nearly $2 trillion in both East Asia and the Pacific (EAP) and Latin America and the Caribbean (LAC) from 1995 to 2005; virtually 100% of the growth in wealth in Europe and Central Asia and in Sub-Saharan Africa was in the form of intangible capital; intangible wealth is also the component which grew the most in South Asia, EAP and LAC; in EAP produced capital grew by nearly $8 trillion over the decade, a reflection of China’s burgeoning growth.

 

Figure – Change in total wealth by type of asset, 1995-2005
Source: The Changing Wealth of Nations, World Bank (2011)

 

Finally, why the title for this post? Well, as those of you who read astrophysics and cosmology journals for relaxation know, the only way physicists can square astronomical observations with the standard cosmological model – the Big Bang – is to hypothesize a mass of material that cannot be observed through emission or scattering of radiation: dark matter. As luck would have it, dark matter is estimated to make up about 80% of the mass of the universe, not very far from the 70% share of intangible wealth that we see in Brazil and other middle income countries. And Domesday? The Domesday Book was commissioned by William the Conqueror in 1085-86 to value the land and property of England, as a prelude to property taxation – the first comprehensive accounting of the wealth of a nation, and a precursor (sans taxes, it should be emphasized) to The Changing Wealth of Nations.

The title of this post has a logic, therefore, but its somber tone is deceptive. The figure is telling us that we are making strong progress in building the wealth of nations, and that intangible, natural and produced capital each have their role to play in building a better future.

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Also see,  World Bank's Global Partnership for Ecosystem Services Valuation and Wealth Accounting, now known as Wealth Accounting and Valuation for Ecosystem Services (WAVES). 

Comments

A colleague has sent me a paper I was looking for but didn't find in the rush up to our book launch: Ricardo Hausmann and Federico Sturzenegger, 2006. "Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations." Center for International Development working paper no. 124, January 2006. Harvard University. A lucid discussion of some aspects of the intangible wealth of the United States. Definitely worth reading.