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WHY RICH COUNTRIES GET RICHER, AND WHY POOR COUNTRIES SOMETIMES GET POORER

The World Bank has done some excellent research on this subject.

I know that many are skeptical that anything wise can come out of the World Bank, but there has been some excellent research done by some economists there.  These individuals…"presumably with green eyeshades pulled low’’ have done some thorough and groundbreaking research which corroborates what a lot of us already intuitively think.

They did a report entitled "Where is the Wealth of Nations: Measuring Capital for the 21st Century."  A dry title to be sure, but a report full of great insights.  A few main points from the report follow:

1. An immigrant worker to a developed country, like the U.S., from an undeveloped one, like say…from Mexico…is actually five times more productive as a Mexican worker who stays home.
2. Why?  It is not only because he has more machinery, more tools or natural resources. These are a small part of the reason.  The main reason is that a Mexican who travels to the U.S. to work has access to $418,000 in intangible wealth versus just $34,000 if he stays in Mexico.
3. What is intangible wealth and how does one measure it?  The World Bank research defines it as intangible factors, for example: an efficient judicial system, effective government, clear property rights and the trust between people in a society.
4. Don’t other kinds of wealth like natural capital (non renewable resources like oil, natural gas, minerals, coal, etc.) and produced or built capital (like buildings, infrastructure, equipment, machinery and urban land) also count?  Sure…but they are not as big an influence as the intangible wealth of a nation.
To quote the World Bank:
"HUMAN CAPITAL AND THE VALUE OF INSTITUTIONS (AS MEASURED BY THE RULE OF LAW) CONSTITUTE THE LARGEST SHARE OF WEALTH IN VIRTUALLY ALL COUNTRIES"

This is a long study, well summarized in Reason Magazine article written October 5, 2007 entitled "The Secrets of Intangible Wealth".
More main points:

The two most important considerations to allow development of success for the developed country are:
1. The rule of law
2. A good system of education
This corroborates research by a several good development economists who have stated in the past that if the other conditions for development (a good school system, honest government, trust, property rights, strong legal system) are present, then ‘tangible’ capital will arrive, which is necessary to develop the nation.

If instead, a corrupt legal system, poor schools, a corrupt political system…no matter how much capital is sent to the country it will not create an environment for development.

For much of the underdeveloped world, corruption and theft on the part of government officials remains the biggest impediment to development.

If you are reading this email, chances are you live in one of the fortunate countries with a strong educational system and fairly honest institutions…And I am sure you hope that it stays that way.

Thanks for listening


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