Where wealth comes from

Mexico, Bolivia and the Congo are rich in natural resources: mines, precious metals, timber -- even vast reserves of oil, in Mexico's case.

And you couldn't ask for more fertile cropland than is found in Nigeria, Burma or Bangladesh.

But Manhattan, Switzerland and Singapore lack all these things. So why does the average resident of rocky and barren Manhattan, Switzerland or Singapore appear fabulously wealthy when compared with someone who might have been born only a few miles from a gold or diamond mine, an oil derrick or a fertile agricultural belt anywhere in the Third World?

It used to be easy enough to assert that greedy, conquering Europeans had simply gone and stolen all the good stuff from those resource-rich lands. But virtually all have enjoyed self-rule for 60 years, now. Besides, Switzerland never had any foreign colonies, and Singapore used to be a foreign colony.

The World Bank set out to answer this puzzle in a new study, "Where is the Wealth of Nations? -- Measuring Capital for the 21st Century." Over two years, the authors managed to confirm what any free-market economist should have been able to tell them: so-called "natural capital" -- minerals, cropland and the like -- account for only a minor share of any nation's measurable wealth. Even when you add "produced capital" -- buildings, machinery, equipment -- you've still accounted for less than half of a nation's real wealth and income.

To account for the disparity in personal incomes, the World Bank's analyst's found, you have to factor in a value for "intangible wealth" -- the degree to which a nation is governed by an efficient judiciary and predictable rule of law which together protect property rights.

This makes sense. Why would anyone work hard to produce income -- why, especially, would anyone gather up capital and invest it to build factories and such -- if some roving gang or powerful despot were free to come seize or destroy it on a whim?

As Ronald Bailey of Reason magazine pointed out in The Wall Street Journal last weekend in his own coverage of this new World Bank report, the late development economist Peter Bauer foresaw just this result in his visionary 1972 book, "Dissent on Development." Mr. Bauer wrote, "If all conditions for development other than capital are present, capital will soon be generated locally or will be available ... from abroad. ... If, however, conditions for development are not present, then aid ... will be necessarily unproductive. ... Thus, if the mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, it will not occur even with aid."

This explains why the Third World is a bottomless rat hole.

Using regression analysis, the World Bank economists determine that the rule of law explains 57 percent of a country's "intangible capital," while the effectiveness of the education system accounts for 36 percent. Establishing a "rule-of-law index," the analysts scored Switzerland at the top with 99.5 on a scale of 100, while placing the United States at 91.8.

(That U.S. rating will continue to fall if the EPA and BLM continue to pursue their goal of shutting down our resource industries, and municipalities continue to misuse "eminent domain," while "creative" congressmen keep targeting various forms of earned wealth for "special" taxation.)

Ethiopia, by comparison, scores a pathetic 16.4. Nigeria -- 5.8 ... and dropping.

This means that despite Mexico's sizable natural wealth, it offers "intangible capital" of only $34,500 per capita, meaning an average Mexican lives in a nation where his share of his nation's total wealth is $62,000.

That's not to say the average worker can lay hands on all that, of course. Mexican GDP per capita is only $10,700. What it does mean is that people are simply less likely to invest there, because their property and earnings aren't very safe. So there's less infrastructure to multiply the value of his labor -- think of a worker laboriously hewing out a chair by hand, as opposed to one working in a modern factory that can turn out hundreds of chairs per hour.

In contrast, as soon as a Mexican walks across the border into the United States, he or she gains immediate access to capital -- including $418,000 in the "intangible wealth" of property rights and the rule of law -- which the World Bank values at a total of $513,000 per person. ("Natural capital" accounts for $15,000 per person in the United States.; "produced capital" like factory buildings for $80,000.)

The value of a Mexican migrant's labor once he arrives in the United States is immediately five times what it was at home, thanks to the assemblage of technological infrastructure here, which was put in place because investors felt confident that no one could loot their earnings with impunity.

"Who wouldn't walk across the border in such circumstances?" asks Mr. Bailey.

The bottom line? "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity," the World Bank concludes.

What should we do about this? For one, we must teach our children -- and especially newly arriving immigrants, lest they fall into the trap of "voting in" demagogues proposing the same kind of repressive taxation and economic restrictions they came here to escape -- where all this wealth really comes from.

Because wealth is a funny thing, as the communists found out. After you steal it, it doesn't grow back.