According to the new edition of the World Bank’s report The Wealth of Nations (a) released today, global wealth has grown, but at the expense of future prosperity and inequality has increased.
Countries that deplete their resources for short-term profits are undermining the sustainability of their economic development. Indeed, while indicators such as gross domestic product (GDP) are traditionally used to measure economic growth, the report shows that to determine whether growth is sustainable, natural capital, human capital and produced capital must all be taken into account.
The Evolution of the Wealth of Nations 2021 covers 146 countries and a period from 1995 to 2018. The authors measure the economic value of renewable natural capital (e.g., forests, croplands, and ocean resources), non-renewable natural capital (e.g., minerals and fossil fuels), human capital (a person’s lifetime earnings), produced capital (e.g., buildings, infrastructure), and net foreign assets. For the first time, the report includes “blue” natural capital, i.e. mangroves and marine fisheries resources.
A deeper and more nuanced understanding of wealth sustainability is critical to building a green, resilient and inclusive future,
It is essential that renewable natural capital and human capital are given the same importance as more traditional sources of economic growth, so that policymakers take action to ensure long-term prosperity.”Mari Pangestu, World Bank Managing Director for Development Policy and Partnerships.
According to the report, global wealth increased significantly between 1995 and 2018, with middle-income countries catching up with high-income countries. However, this greater prosperity has been accompanied by unsustainable management of some natural assets. Low-and middle-income countries saw their per capita wealth from forests decline by 8% between 1995 and 2018, a consequence of significant deforestation. Over the same period, the value of fish stocks collapsed by 83% due to poor management and overfishing. The projected effects of climate change could exacerbate these trends.
In addition, the mispricing of certain assets, such as carbon-intensive fossil fuels, can lead to overvaluation and overconsumption. However, development can be put on a more sustainable path by taking a holistic view of wealth and implementing policy measures such as carbon pricing to better value and maintain assets such as forests, mangroves and human capital.
The report also indicates that inequality is increasing. The share of low-income countries in global wealth changed very little between 1995 and 2018 and remains below 1%, even though they account for about 8% of the world’s population. Moreover, more than a third of them have seen their per capita wealth decline. Countries with declining wealth also tend to degrade their renewable natural asset base. For low-income countries, it is critical that the renewable natural capital that accounts for 23% of their wealth be properly managed.
Globally, renewable natural capital (forests, croplands and ocean resources) is declining as a share of total wealth and is increasingly threatened by climate change. At the same time, this capital is becoming more valuable because of the valuable ecosystem services it provides. For example, the value of mangroves as coastal flood protection has increased more than 2.5 times since 1995 to more than $547 billion in 2018, and the value of protected areas per square kilometre has also grown rapidly.
The Evolution of the Wealth of Nations provides the data and analysis needed to help governments adjust prices and policies for sustainable development,” said Karin Kemper, Global Director for Environment, Natural Resources and the Blue Economy at the World Bank. By failing to account for their effects on pollution and global warming, fossil fuel assets have historically been overvalued, while those that contribute to climate change mitigation, such as forests, are undervalued.”
The report shows that human capital, measured as the sum of lifetime earnings, accounted for 64% of global wealth in 2018, its largest component. Middle-income countries have increased their investment in their people and in turn have seen significant increases in the share of their wealth in human capital.
Although the long-term effects of the COVID-19 pandemic are not yet known, low-income countries are expected to suffer the most severe consequences, with an estimated 14% loss of human capital. In addition, human capital is constrained by gender gaps in all regions and income groups, and little progress has been made since 1995. Air quality also has serious consequences for human capital and climate change, and is responsible for more than six million premature deaths each year.
Non-renewable natural capital wealth (minerals, fossil fuels) has declined since 2014, mainly due to falling commodity prices. The report analyses the foreseeable effects of the decarbonisation transition and the introduction of border carbon taxes on fossil fuel wealth, and makes recommendations for fossil fuel dependent countries to manage the economic risks induced by these measures. Countries that are highly dependent on fossil fuel wealth have a lower share of human capital, accounting for only 34 per cent of their total wealth despite high income levels.
The report recommends several priority actions for policymakers to diversify and rebalance their national asset portfolios to make them more resilient and sustainable. These include active investment in public goods such as education, health and nature to avoid unsustainable resource depletion and to manage future risks. The recommendations also include policy and pricing measures that help reflect the social value of assets and direct private investment towards better outcomes for all: reallocating fisheries subsidies, putting a price on carbon and promoting renewable energy, for example.
Wealth trends in different regions
In sub-Saharan Africa, wealth per capita has increased overall over the past two decades, but at a lower rate than in other regions. Nevertheless, 11 countries experienced stagnation or even a decline in wealth per capita between 1995 and 2018, as population growth exceeded the net increase in asset value. Human capital in this region grew faster than any other asset, but this growth was uneven and the female share of human capital is only about one-third of
the total. Natural capital wealth has declined, and many countries in sub-Saharan Africa are heavily dependent on revenues from non-renewable natural resources, including fossil fuels.
In 2018, the East Asia and Pacific region now has the largest share of the world’s wealth, with an increase of 188% since 1995. Human capital accounts for more than half of national wealth, yet only about one-third of this capital was attributable to women. Natural capital accounts for 4% of regional wealth. The value of renewable natural capital is declining, due in part to the decline in marine fisheries resources. In addition, cultivated land wealth is expected to be particularly affected by climate change in East Asia and the Pacific.
In South Asia, although total wealth has increased since 1995, per capita wealth remains among the lowest in the world because of population growth over the same period. Human capital accounts for more than half of the region’s wealth, but it is extremely unbalanced: more than 80 per cent of it is held by men, and little has changed on this front in the past two decades. If gender parity were achieved in the region, human capital at the national level could increase by about 42 percentage points. Moreover, South Asia is also the region most affected by the estimated loss of human capital due to air pollution. Renewable natural capital, particularly cropland, is vital to South Asia, and the value of its blue natural capital has increased over the past two decades.
Wealth in Europe and Central Asia, which includes Western Europe, has increased by 45% since 1995. Wealth per capita, however, has grown more slowly than in many other regions. Human capital accounts for more than half of the region’s wealth, with steady growth relative to other assets. Non-timber forest products are gradually becoming the main renewable natural capital asset in Europe and Central Asia because of the value of the ecosystem services they provide, while the value of fisheries-related assets has declined considerably.
While total wealth has almost doubled in Latin America and the Caribbean over the past two decades, the trend in per capita wealth has been very mixed. Some countries have more than doubled their wealth since 1995, while total wealth per capita has declined in several Caribbean countries. Over time, non-renewable natural capital wealth has begun to decline due to price volatility, but renewable capital wealth is increasing. The value of protected areas has more than doubled, despite the reduction in the area occupied by forests. Finally, women’s participation in the labour market is higher than in any other region, but Latin America and the Caribbean has not yet achieved gender parity in its human capital.
Wealth in the MENA region has grown over the past two decades, but by less than regional GDP over the same period. Human capital accounts for the lowest share of total wealth compared to other regions, with a significant gender imbalance. Non-renewable natural capital constitutes a large share of the region’s wealth, which poses challenges for countries dependent on fossil resources due to price volatility. Fossil-fuel-dependent countries face unique challenges in the face of global efforts to achieve low-carbon development. Although cropland remains the region’s most important renewable natural asset, its share of per capita wealth has declined over the past two decades. The region will need to preserve and restore its renewable natural assets in order to promote greater diversification of its wealth.