Real Wealth

Apr 12, 2009 Editorial

The financial crisis roiling through the world’s economies has plunged them into what the World Bank predicts will be at best a cessation of growth and at worst a full-blown depression. The reported fall of “wealth” in countries, reported to be in the trillions of dollars, is understandably causing more than a little apprehension about where it will all end. If a billion is one thousand million and a trillion is a thousand billion, this represents a whole lot of assets disappearing down the tube – and we are talking about US dollars here, not our currency. More pointedly, the question arises as to what we might do to ensure that we do not end up going down the tubes with the dollars.

Now this downturn, severe as it is, is not entirely unprecedented. There is almost universal acceptance of the once radical Marxist notion that such crises are constitutionally endemic to economies premised on markets and the profit motive. The experiments to do away with those two factors have all crumbled into dust, so it looks as if we will just have to do the best with ameliorating the vagaries of what is dubbed “capitalism” and rebuild periodically from where the last tide dumped us. We can do worse that look at the historical record and observe what might have helped prior rebuilding efforts.

What we immediately notice is that each ebb of the cycle leaves more countries on higher ground than before – including those that were wealthy to begin with. This long-term upward movement is obviously what encourages most to stick with the old model – and possibly lulls them into a false sense of security in the interregnum between the rise and fall. Another standout factor – surprising to most – is that there is no correlation between what we in Guyana think of as national wealth or assets and the rise of economies into higher levels of performance and output.
We in Guyana are always boasting about our rich resources – what is called “natural capital”— gold, diamonds, forests, bauxite, cropland and pasturelands and now possibly petroleum. But it is a fact that many of the rich countries, and those that were able to build and rebuild from past crises are not necessarily richer in these resources.

We complain about our lack of what we think of as “real capital” that will catapult us upwards – machinery, equipment, structures (including infrastructure). But studies have shown that while necessary, the latter “produced capital” does not guarantee success.
So what is the secret ingredient that is the real wealth of nations? According to most informed analysts, it is “intangible capital”. This encompasses raw labour; human capital, which includes the sum of a population’s knowledge and skills; and the level of trust in a society and the quality of its formal and informal institutions.

One study, funded by the World Bank, found that, “natural capital accounts for five percent of total wealth, produced capital for 18 percent, and intangible capital 77 percent.” Social institutions are the most crucial component of intangible capital. The World Bank has devised a “rule of law” index that measures the extent to which people have confidence in, and abide by, the rules of their society. An economy with a very efficient judicial system, clear and enforceable property rights, and an effective and un-corrupt government will produce higher total wealth.

“Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity,” the WB study concluded.
Education is the means to build intangible capital, situated reality its yardstick and praxis its guiding light. In the schools it cannot be the old rote learning exemplified by the just concluded Sixth Grade Assessment Exam that, for instance, parsed the difference between “cashier” and “teller” in banks. In the outside world it cannot be “do as I say and not as I do”. If our policy makers are serious about ensuring that we emerge on higher ground after this crisis, let us increase our real wealth – intangible capital.

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