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Changing Wealth of Nations

 

Factoring nature, good governance and
human skills into how we calculate wealth

Photo: Panel at launch of Changing Wealth of Nations

January 28, 2011  Botswana, in southern Africa, stands as a model around the world for the careful management of its natural resource base. Over the last two decades, the country's economy has grown by an average of about 7.8 percent—the highest across the region—and between 1995 and 2005 it managed to increase its per capita wealth by an astounding 35 percent. How it has done this and why it stands out as a beacon in Africa for leveraging its “natural capital” for development, is a key case study in a new World Bank book.

The Changing Wealth of Nations—launched in Washington in late January 2011 to a packed auditorium—shows a clear link between careful management of natural capital—forests, protected areas, minerals, energy and agricultural land—with increasing levels of wealth and economic well-being.

Photo: BirdsIt takes a comprehensive look at the wealth of over 150 countries between 1995 and 2005. And by “wealth”—the authors take their definition well beyond what is traditionally measured in the Gross Domestic Product of a nation. It includes natural capital, produced or manufactured capital and “intangible wealth” assets like strong institutions, human skills, education, innovation and new technologies.

A key finding of the book is that in low-income countries, where natural capital averages between 30 and 50 percent of total wealth, development is about leveraging natural capital for growth. When a country has strong institutions that reaffirm the rule of law, ensure government accountability and help control corruption, investment follows and grows.

It's this mix of carefully managing its natural resource base with strong governance and accountability that explains much of Botswana's success. Besides being recognized by Transparency International for consistently having the best ranking in Africa on its Corruption Perception Index, Botswana has had a long-time commitment to ensuring that income from its mining sector is re-invested in the country's development—especially in education and health. Since the 1990s, the government has had a Sustainable Budget Index in place which monitors the extent to which revenues from mining are put back into the government's budget. An environmental accounting program provides the proof that mining income is indeed benefiting Botswana's long-term development.

Photo: Girls in SchoolAs a result, the people of Botswana have seen a steady improvement in their household incomes and access to essential social services is high. It has managed to achieve this while many neighboring, resource-rich countries saw declines in their growth and per capita wealth over the same period.

At the launch event in Washington, Glenn-Marie Lange, co-author of the report and Team Leader for Policy and Economics in the World Bank's Environment Department, said countries with weak institutions often do not have the means for turning their natural capital into wealth. This is especially true for low-income countries with mineral assets.

“The challenge here is how you transform non-renewable capital into other assets,” she said. “It requires efficient extraction of resources but you also have to have mechanisms for recovering the resource rent and making sure it’s invested for long-term economic growth. This is a challenge that many countries have met but unfortunately others have not.”

Co-author and a Lead Environmental Economist at the Bank’s Development Research Group, Kirk Hamilton, added that “strong institutions are essential for managing wealth”. “Countries need solid, reliable institutions in order to track how their assets are being used in the long term.”

Photo: Peter Seligman, CEO of Conservation InternationalAlso at the launch event was Peter Seligmann, founder and Chief Executive Officer of Conservational International, who said it was time that ministries of finance looked at forests as potential “water factories” rather than as a resource for short-term exploitation.

“Understanding the contributions ecosystems play in human well-being is essential for our future and for our survival, and has been historically greatly under-appreciated,” he said. “We are truly a reflection of where we live, and it is time we start mainstreaming the notion of natural wealth and environmental accounting in economics if we want to be able to sustain this planet for future generations. This book is a first step in an important shift in thinking.”

The World Bank is, in fact, taking a lead in making wealth accounting a reality in a number of countries. Last year, President Robert B. Zoellick launched an initiative called the Global Partnership for Ecosystem Valuation and Wealth Accounting (now called Global Partnership for Wealth Accounting and the Valuation of Ecosystem Services [WAVES]). This partnership, made up of developed and developing nations, will soon be piloting programs that incorporate the value of ecosystem services into national accounts.

The approach would see a country factoring more than just the potential income from a new property development into its decision-making about clearing a mangrove forest. Deducting the likely losses to the ecosystem from damaged fish populations and compromised coastal protection are likely to outweigh the benefits from the short-term income.

Photo: Otaviano Canuto, World Bank President for Poverty Reduction and Economic ManagmentAlso at the launch, Otaviano Canuto, World Bank Vice President for Poverty Reduction and Economic Management said, “The use of natural resources is very much the business of national finance ministries. There is still much work to be done, but we are up to the challenge.” He said The Changing Wealth of Nations provides a sound framework to help integrate sustainability with national accounting.

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Last updated: 2011-02-03




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