Why people earn more in developed countries: Intangible Wealth

Why is a factory worker from Kulai (Johor) more productive by crossing the causeway everyday to work in a factory in Tuas or Woodlands instead of staying in Kulai? The answer, surprisingly, is not the obvious (higher exchange rate / better tools etc.):

The World Bank reports [The Secrets of Intangible Wealth by Ronald Bailey].

Quick Extract: On average, 80% of the wealth of developed economies vs. 60% of under-developed economies are intangible. By summing up all natural capital (nonrenewable resources, crop and pasture land, forested and protected areas) and produced capital (machinery, equipment, structures, urban land), we arrive at only the economy’s tangible wealth. The gap between tangible and total income is that of intangible wealth (trust among people in a society, efficient judicial system, clear property rights, effective government). In other words, human capital and value of institutions (rule of law) constitute the largest share of wealth in virtually all countries. Highest on world bank’s rule of law indicators: Switzerland: 99.5/100, US: 91.8, lowest Burundi 4.3/100. You can see all these indicators on Governance Matters 2007, Worldwide Governance Indicators 1996-2006.

There’s something about intangible wealth that’s inherently hard to argue – businesses and governments don’t see the numbers for these, moreover, we don’t know if the hundreds of parameters chosen by the World Bank will accurately measure such intangible wealth. All we can do is to acknowledge that it’s there, fairly obvious (like dark matter in the universe, can’t see it, but you can sense its gravitational pull), and hope you don’t have to deal with it (the P&L is already too overwhelming!).

Malaysia’s rule of law index is 65.7/100, vs Singapore, which is at 95.2. Here’s a summary of a few countries I picked from the indicator website:

So the next time you think about efficient rule of law, maybe think about wealth, which is something most people can relate better. All the cynical remarks aside (there are plenty on the reason.com article site), we’re all better off having a better enforced social contract, whichever type it is (depending on your political affiliation). Once you can argue your way through at least one example, you’ll probably start cringing about governance and dreaming of reform 🙂

For the budding economists, here’s the full report: Where is the Wealth of Nations? (PDF 1.09MB)