Thursday

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 25 of 36 Production and Growth
Section 9 of 23
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This article here in chapter: “The Secrets of Intangible Wealth By Ronald Bailey, September 29, 2007.”
Grok summary:
The article discusses a World Bank study on the sources of national wealth, highlighting that most wealth in prosperous countries comes from intangible capital rather than natural resources or physical assets.
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Main Thesis
The article argues institutions, social trust, rule of law, property rights, effective governance, and human capital (skills, education, innovation) drive productivity and wealth far more than raw materials or factories.
Poor countries often fail to generate wealth not due to a lack of resources, but because weak institutions erode "intangible capital."
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Key Findings from the World Bank Study
The study breaks down per capita wealth into three categories:
Natural capital — including land, minerals, forests
Produced capital — including buildings, machinery, infrastructure
Intangible capital — including institutional quality, trust, education, rule of law
In rich OECD countries on average, per person:
Natural capital: ~$10,000.
Produced capital: ~$76,000
Intangible capital: ~$354,000
In low-income countries:
Natural capital: ~$2,075
Produced capital: ~$1,150
Intangible capital: ~$3,990
In the U.S. specifically per person, natural capital is about $15,000, produced capital $80,000, $418,000 intangibles.
The study shows rich countries extract far more value from limited natural resources because strong institutions — e.g., secure property rights, efficient courts — allow them to combine resources with machinery, technology, and skilled labor productively.
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Examples and Illustrations
A Mexican migrant to the U.S. becomes roughly five times more productive than one who stays home, largely due to better institutions and infrastructure in the U.S.
Cropland and forests in rich countries generate more value because they benefit from better governance and complementary (supporting) capital.
Some nations — e.g., Nigeria, Congo — have negative intangible capital due to corruption, weak rule of law, and failing education systems, which actively destroys potential wealth.
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Measuring Intangible Capital
The World Bank proxies intangible capital using indicators like the rule-of-law index (perceptions of governance quality), on scale of 100:
Switzerland: 99.5
United States: 91.8
OECD average: ~90
Sub-Saharan Africa average: ~28
Burundi: 4.3; Nigeria: 5.8; Ethiopia: 16.4.
Higher scores correlate strongly with greater overall wealth and productivity.
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What are the implications regarding foreign aid to countries with low amount of intangible capital?
Grok:
The dominance of intangible capital (human skills/education, social trust, and especially institutional quality such as rule of law, property rights, and low corruption) in explaining national wealth differences has major implications for foreign aid to countries with low levels of it.
Traditional large-scale government-to-government aid often proves limited or counterproductive in such settings because money alone cannot create or strengthen these deeply rooted "software" factors.
Large inflows can reduce incentives for domestic tax collection and accountability, prop up corrupt elites, fuel rent-seeking, and weaken the social contract needed for good governance — effects documented in studies showing aid dependence erodes bureaucratic quality and the rule of law.
As a result, aid frequently fails to generate sustained growth or wealth accumulation when institutions are weak, mirroring the "resource curse" where abundant natural capital yields little benefit without complementary intangibles.
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Targeted, modest interventions focused on human capital (e.g., basic education and health programs) can deliver short-term humanitarian value and modest productivity gains, but they rarely transform core institutional deficits.
Evidence from aid effectiveness literature, including critiques by economists like William Easterly and Dambisa Moyo, suggests better outcomes occur under "selectivity" — directing aid toward countries with already reasonable policies and governance — or through non-governmental channels that bypass weak states.
Overall, the World Bank wealth framework implies sustainable development in low-intangible settings relies more on domestic reforms (secure property rights, reduced corruption, openness to trade/investment) than on external transfers, which risk entrenching the very weaknesses that keep intangible capital low.
Humanitarian relief remains valuable, but expectations for broad economic transformation via aid should remain modest.
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negative intangible capital
fu no mukei shihon