The wealth of nations

Books and columns devoted to trends in national income (mainly gross domestic product) are legion. But we have to remind ourselves that national income is a flow (typically per year) stemming from a nation’s underlying stock of productive wealth in all its forms. Yet, very rarely do we come across a book or article which focuses on national wealth. The last few months have been a refreshing exception. November 2017 saw the release of Surjit Bhalla’s thoroughly engaging and provocative the new wealth of nations”.

More recently, in January 2018, the World Bank published its The Changing Wealth of Nations 2018 (henceforth CWN), the bank’s third (and most comprehensive) attempt at estimating comparable national wealth accounts in a series dating back to 2006. This latest volume makes major advances in compiling estimates of human capital, which it finds to account for nearly two-thirds of the world’s total wealth in 2014 (Mr Bhalla would be pleased!). It is quite a treasure trove of data and their analysis. Surprisingly, there has been almost negligible commentary on its contents in India. This column attempts to rectify the lacuna by offering a few tid-bits.

It would be easy to raise methodological objections and question the quality of the underlying data used by the CWN. That said, it is the most recent and most comprehensive set of national wealth estimates for 141 countries. National wealth is composed of three main categories: “Produced capital and urban land” (machinery, buildings, equipment and residential and non-residential urban land); “Natural capital” (energy hydrocarbons), other major minerals, agricultural land and forests; and “Human capital” (measured as the estimated discounted value of earnings over a person’s lifetime as gleaned from some 1,500 household surveys). Note that important resources such as water and fisheries are excluded for want of data.

Tables 1 and 2 provide an overview of the estimates, which are also available by individual nations. Some broad patterns merit comment. First, the distribution of wealth across country groups is hugely skewed. Low-income countries (LIC), accounting for 8 per cent of global population, held only 1 per cent of global wealth in 2014 at market exchange rates, as compared to rich Organisation for Economic Co-operation and Development (OECD) nations having nearly two-thirds of global wealth with less than a sixth of world population. Per capita wealth in OECD countries was a hundred times higher than per capita wealth in LIC nations. An important caveat to these comparisons is the absence of any correction for variations in purchasing power parity across nations. Arguably, this is harder to do when comparing valuations of stocks (such as wealth), which reflect discounted flows of estimated incomes over time.

The skew is less but still large in the case of lower-middle-income countries (LMIC, the category where India dominates), which accounted for 40 per cent of world population but yet had only 6 per cent of the world’s wealth. Per capita wealth of OECD nations was nearly 30 times higher than for LMIC. Even in the case of upper-middle-income countries (UMIC, dominated by China), their share of global wealth was only 22 per cent (compared to 65 per cent for OECD), even though they had more than double the latter’s population.

Second, at a 47 per cent share, natural capital is the dominant form of wealth held by LIC, a share which drops steeply to a mere 3 per cent in OECD. In contrast, the share of human wealth is strongly correlated with the level of income, reaching a high of 70 per cent in OECD, compared to only 41 per cent in LIC. What is interesting is that the share of human capital in total is above half in LMIC and UMIC. All this is consistent with the importance of education in the story of development, though other factors clearly play a role.

Third, global wealth increased by 66 per cent (in constant 2014 US dollar) over the 20 years from 1995 to 2014; per capita growth of wealth was 1.3 per cent per year. Furthermore, in all income groupings, human capital contributed most to the growth of total wealth. Fourth, it is heartening to note that over the past two decades some convergence in wealth holdings has clearly occurred. OECD’s share of global wealth has dropped markedly from 75 to 65 per cent over this period. This share decline has accrued almost entirely to the UMIC, which has seen its share rise from 14 to 22 per cent, mostly reflecting the “China effect”. LIC’s share stagnated at its measly 1 per cent, while the LMIC’s rose slightly to 6 per cent, suggesting that the “India effect” was much less potent. At $108,172, China’s per capita wealth in 2014 was more than five times India’s. 

What are some implications for India? Whether measured by per capita income or wealth, India remains a populous poor country, the poorest among the G-20 nations. For India to catch up significantly with other large nations, faster expansion of wealth in all forms is necessary, especially in the form of human capital. Despite Mr Bhalla’s upbeat concluding remarks, India’s prospects for rapid increase in human capital are hobbled by the state of our education systems. One has only to look at the persistent low quality of learning outcomes recorded by the Annual State of Education Reports compiled by Pratham. Add to that the absence of any Indian institution in the list of the top 200 universities in the world as ranked by the Times Higher Education. The number rises from zero to three in the top 200 ranked by Quacquarelli Symonds (QS), all in the bottom 50. It’s a long, hard development road ahead.
The writer is honorary professor at ICRIER and former Chief Economic Advisor to the Government of India. Views are personal


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