The Intangible Wealth of Nations

The Intangible Wealth of Nations

Moscow

Ronald Bailey

September 2011

Paul Klebnikov Editor Forbes Russia Friend and colleague -murdered July 9, 2004 Ulitsa Dokukina, Moscow

Abject poverty is humanity’s natural state

Levels of per capita GDP Year 1 – 2030

(1990 dollars, Angus Maddison)

Growth of Per Capita Income

Income Growth selected countries from 1500 to 1950

Regional Economic Growth 1 – 1998 (1990 dollars)

Three Institutions of Liberty

- Democracy - how we determine who gets to wield legitimate coercive force

- Capitalism - how we determine who gets what

- Liberal science - how we determine what is true.

Liberal Science – “Nullius in Verba”

- Liberal science embodies the principle that the “checking of each by each through public criticism is the only legitimate way to decide who is right.”

- Broadest conception of free speech

“Liberalism and science are methods, not ideologies.”

Both liberalism and sciences embody the freedom to explore and experiment, enabling people to more systematically seek truths about the physical and social worlds.

The Constitution of Liberty

“Human reason can neither predict nor deliberately shape its own future. Its advances consist in finding out where it has been wrong.” It is through a continual process of trial and error that science and liberalism ultimately yield better ways of doing things.

World Bank Reports

The Value of Intangible Wealth(World Bank)

RUSSIA 2005 UNITED STATES 2005

-- Natural Capital - $31,000

-- Produced Capital - $18,000

-- Intangible Capital - $24,000

Total capital per capita -- $73,000

GDP per capita - $5,000Implies 7 % annual return

-- Natural Capital - $14,000

-- Produced Capital - $100,000

-- Intangible Capital - $627,000

Total Capital per capita -- $734,000

GDP per capita - $43,000Implies 6 % annual return

How Much Intangible Capital Do Fast Growing Economies Have?

CHINA 2005 RUSSIA 2005

--Natural Capital - $4,000--Produced Capital -

$6,000-- Intangible Capital -

$9,000Total capital per capita -

$19,000GDP per capita - $1,800 Implies 9% annual

return

-- Natural Capital - $31,000

-- Produced Capital - $18,000

-- Intangible Capital - $24,000

Total capital per capita -- $73,000

GDP per capita - $5,000Implies 7 % annual return

Beware the Resource Curse

SAUDI ARABIA 2005 RUSSIA 2005

-- Natural capital - $87,000-- Produced Capital -

$33,000-- Intangible Capital -

$5,000Total Capital per capita --

$146,000GDP per capita - $14,000 Implies 10% annual return

-- Natural Capital - $31,000

-- Produced Capital - $18,000

-- Intangible Capital - $24,000

Total capital per capita -- $73,000

GDP per capita - $5,000Implies 7 % annual return

Human Capital and the Costs of Bad Governance

RUSSIA 1995 – 2005 USA 1995 – 2005 Human Capital per capita

-- $343,000Total intangible capital --

$14,000Costs of bad governance

-(negative) $347,000Bad governance

completely offsets Russia’s high human capital

Human Capital per capita -- $464,000

Total intangible capital -- $563,000

Benefits of good governance – (positive) $99,000

Good governance maximizes the returns to human capital

What is Governance? Governance consists of the traditions

and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them.

World Bank Governance Indicators

Voice and Accountability Political Stability and Absence of

Violence Government Effectiveness Regulatory Quality Rule of Law Control of Corruption

Voice and Accountability

The extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.

Political Stability and Absence of Violence/Terrorism

The likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.

Government Effectiveness

The quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.

Regulatory Quality

The ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

Rule of Law

The extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

Rule of Law Index 2011 (World Justice Project)

Control of Corruption

The extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

Corruption 2010 – Transparency International

Corruption vs. IncomeCORRUPTION GDP PER CAPITA

Russia Governance Indicators 2009, 2004, 1998 (top to bottom)

United States Governance Indicators 2009, 2004, 1998 (top to bottom)

Germany Governance Indicators 2009, 2004, 1998 (top to bottom)

China Governance Indicators 2009, 2004, 1998 (top to bottom)

Russia v. China Governance

RUSSIA CHINA

Russia v. Germany Governance

RUSSIA GERMANY

Nigeria Governance Indicators 2009, 2004, 1998 (top to bottom)

Freedom in the World 2011(Freedom House)

Nominal GDP per capita 2010

Freedom Correlates with GDP per capita

FREEDOM GDP PER CAPITA

Maintaining the Miracle of PovertyAdvice for KIeptocrats

-- Make sure your country’s money is no good – inflate its value away and make it non-convertible

-- Nationalize all your major industries -- Stifle free trade – impose high tariffs and

give business monopolies to your political friends

-- Make it hard to open a new business -- Make sure that no one has a clear title to

property --Impose confiscatory taxes on the “rich” –

especially those who don’t support you

Violence and Social Orders

The Natural State

“The essence of a natural state is personal relationships.”

All natural states limit access to organizational forms – no organizations outside of the state – no civil society

All natural states control trade

Transition from “Natural states” to Open Access Orders

Rule of law for elites

Perpetually lived forms of public and private elite organizations, including the state itself

Consolidated political control of the military

Characteristics of Open Access Orders

Belief in equality of all citizens

Entry into all economic, political, religious, and educational activities is open to all

Support for organizational forms is open to all (contract enforcement)

Rule of law enforced impartially

Impersonal exchange

Competition is key – creative destruction.

Thomas Jefferson on Free Speech

“Were it left to me to decide whether we should have a government without newspapers, or newspapers without a government, I should not hesitate a moment to prefer the latter.”