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4.2 The wealth and growth potential of nations Alari Purju If the economic success of states is usually characterised by gross domestic product (GDP), the UN Human Development Report, as well as the latest analyses from the World Bank, use gross national income (GNI) as the point of departure. When comparing states, it is also natural to view per capita data (see Table 4.2.1). Per capita GDP is used to measure income levels in two different ways. Nominal per capita GDP is based on the gross domestic product of the state and the population, and is a simple quotient of the two amounts. However, when evaluating the actual standard of living, the purchasing power of the corresponding income unit is important, i.e. the amount of goods or services that can be purchased in various countries for the same income unit. Generally, the price levels in the wealthier states are higher than in the poorer states, and therefore, the same income unit will, on average, buy more goods and services in the poorer states. To account for this, per capita GDP, based on purchasing power parity (PPP) is used, in which the nominal indicators are adjusted to reflect the differences in price levels in the various states. There are large differences in price levels in the sectors closed to international trading (for example, the prices of utility services or public transportation). Usually, the average aggregate of the states is used as the basis for comparison, for example, the average price level of the 27 Member States of the European Union (EU 27) is equated with 100% as a conditional reference basis. In 2011, Estonia’s GDP per capita adjusted for PPP was 67% of the EU 27 average, while the nominal GDP was only 38.9% (Statistics Estonia 2013). The national income differs from the gross domestic product primarily due to the calculation of cross-border economic activities. GDP is territory-based, while national income is residence-based. In the case of the former, it includes all the income that is created on the territory of the state; in the second case, only the income of the people living in that state, regardless of where it is created, is included. National income is measured in two basic ways – as gross and net national income, which differ based on the calculation of depreciation. Net national income can be equated with gross national product (GNP). However, when examining the success and sustainability of states, other aspects, besides just production results, also need to be examined. The UN Human Table 4.2.1 States with the largest national income per capita in 2011 1 No. Country GNI (USD) 1 Norway 88,890 2 Qatar 80,440 3 Luxembourg 77,580 4 Switzerland 76,400 5 Denmark 60,120 6 Sweden 53,150 7 Netherlands 49,650 8 Australia 49,130 9 Kuwait 48,900 10 USA 48,620 11 Austria 48,190 12 Finland 47,770 13 Belgium 45,990 14 Canada 45,560 15 Japan 44,900 16 Germany 44,270 17 Singapore 42,930 18 France 42,420 19 United Arab Emirates 40,760 20 Ireland 39,930 No. Country GNI (USD) 21 Great Britain 37,840 22 Italy 35,290 23 Iceland 34,820 24 Brunei 31,800 25 Spain 30,890 26 Cyprus 29,450 27 New Zealand 29,140 28 Israel 28,930 29 Greece 24,480 30 Slovenia 23,610 31 Bahamas 21,970 32 Portugal 21,210 33 South Korea 20,870 34 Oman 19,260 35 Malta 18,620 36 Czech Republic 18,620 37 Saudi Arabia 17,820 38 Puerto Rico 16,560 39 Slovakia 16,070 40 Bahrain 15,920 No. Country GNI (USD) 41 Trinidad and Tobago 15,840 42 Equatorial Guinea 15,670 43 Estonia 15,260 44 Croatia 13530 45 Hungary 12,730 46 Barbados 12,660 47 Saint Kitts and Nevis 12,610 48 Poland 12,480 49 Latvia 12,350 50 Libya 12,320 51 Lithuania 12,280 52 Chile 12,280 53 Antigua and Barbuda 11,940 54 Uruguay 11,860 55 Venezuela 11,820 56 Seychelles 11,130 57 Russia 10,730 58 Brazil 10,720 59 Turkey 10,410 60 Argentina 9,740 World 9,511 Source: World Bank 158 Estonian Human Development Report 2012/2013
Development Report employs generalising measurements of the indicators that characterise synthetic human development in various ways. However, the World Bank has undertaken the measurement of the wealth of nations, or their total wealth, and the examination of the possibilities for its sustainable preservation. The wealth of nations, or total wealth, approach is based on the system implemented by the World Bank. 2 According to this method of assessing the wealth of nations, wealth is comprised of produced capital, as well as human and institutional capital. An essential generalising method for dealing with various types of capital is the relationship that is applied in the theoretical framework of economics, i.e. the value of capital is equal to the future income flow created by the capital. Also, based on this point of departure, present net savings are equal to the future changes in well-being, or more precisely, the net changes brought about by future consumption (growth or decline) (Hamilton and Hartwick, 2005). The concept of genuine net savings has come into use, which is defined as savings from which negative external influences and the costs of creating and using the assets have been subtracted. For instance, in the case of tangible capital, the value of the capital is the sum of the additions made in time, the net value of which is calculated by adding up all the investments made during the entire period, and by subtracting the depreciation that has occurred in the various years of the period. In the case of natural resources, this means that the depletion of the capital, by utilising mining or other means of extraction, have been subtracted from the assets. The utilisation of natural resources reduces a society’s wealth, unless it is accompanied by investments into other capital, such as human capital. Hamilton and Clemens (1999) have shown that genuine savings, which take into consideration the depletion of natural resources, the accumulation of pollutants (representing negative savings) and the accumulation of human capital (positive savings that increase the value of the total wealth), are equivalent to the changes in social welfare measured in money. These authors have also shown that, if genuine savings are negative, the well-being provided to society, in the future, by economic activities, will be reduced. The last fact is important in determining a longterm sustainable development path -- consumption can be maintained at the same level, and this with finite resources and pre-determined technological opportunities, only if the genuine savings during every time period are nil (i.e. do not become negative). Generally, this means that the depletion of natural resources must be compensated by traditional net savings in other fields of activity. Positive genuine savings are a precondition for the growth of consumption possibilities. These facts provide the basis, for instance, for defining sustainable development -- a development path is sustainable if the social welfare does not decrease at any point in this developmental path. In this case, social welfare is defined as the beneficial present value of future utility over the time horizon. (Dasgupta 2001). 4.2.1 Value and structure of capital There are two methods for measuring the value of capital. • The value of capital is derived from the sum of the additions made over time (investments from which depreciation has been subtracted); • Capital can be valued as the net present value (NPV) of future income, i.e. the income that this capital will produce in the future. The World Bank Report generally uses both of these methods, but various capital groups are usually assessed by using one of these two methods. Capital is divided into tangible and intangible capital (Figure 4.2.1). Tangible capital is in turn divided between produced and natural capital; intangible capital, on the other hand, between human capital, institutions (the governance of which represents the informal side of formal and social capital) and net foreign assets (financial assets, from which the state either receives or pays interest). In the case of produced capital, the value of the capital is derived from the value of the net investments. This means that, in the case of this capital, it is presumed that there is an average period of use, and the capital, for a definite year, is treated as the sum of the investments made during the average period of use, from which depreciation has been subtracted. 3 Urban land, as one type of capital, is differentiated from agriculture land. Since the value of urban land varies from area to area, and also by the type of asset involved, in comparisons that include different countries, the value of urban land is assessed in a simplified way as an agreed-upon percentage of the value of the structures and equipment. 4 1 The date in Table 1 is based on the indicator for the nominal total income per capita. 2 Where is the Wealth of Nations? Measuring Capital for the 21st Century, 2006, The Changing Wealth of Nations, 2011. The Mystery of Capital. Why Capitalism Triumphs in the West and Fails Everywhere Else (de Soto, 2000), which was written by Peruvian economist Hernando de Soto, and generated a lot of feedback, preceded the World Bank report. De Soto considers one of the development inhibitors on the road to capitalism to be the difficulties encountered in changing assets into capital, which were revealed in the lack of the corresponding institutions in the developing states, which, in turn, caused the lack of economic information, the lack of opportunities to use assets in economic relations without changing into capital (for instance, a residence that is not entered in the land registry cannot be used as security to obtain a bank loan, etc.). On the one hand, De Soto stressed the lack of political will, and, on the other hand, the occurrence of various possible violent regulatory incidents by the government and other economic agents, if the legal protection provided for property is lacking or defective. The World Bank’s methodical approach to the topic of the wealth of nations places itself into the same row as the analytical and comparative studies of the business environment that the World Bank has produced within the framework of its Doing Business reports (see p.3.2). 3 In the World Bank’s approach, the average period of use for assets is estimated to be 20 years, and, assuming the use of a linear depreciation method, the annual depreciation rate is 5%. 4 Kunte et al. (1998) used a constant size of 0.24, and based thereon, the value of urban land in the year t is U t = 0,24 K t , whereas Kt is the residual value of structures and equipment in the year t. Estonian Human Development Report 2012/2013 159
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ESTONIAN HUMAN DEVELOPMENT REPORT 2
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Table of Contents 1 Human Capital /
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Dear Reader Since the moment when E
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1Human Capital Estonian Human Devel
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the HDI’s content has also been h
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Figure 1.1.1 The human development
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Figure 1.1.7 The income sub-index:
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The results of the Princeton Projec
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the hypothetical generation. The to
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Figure 1.2.3 Life expectancy. Eston
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Table 1.2.2 also presents the most
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The new trends that are appearing i
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Figure 1.2.8 Components of populati
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New features were introduced into E
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Initiation of Voluntary Birth Contr
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Table 1.3.1 Best-known educational
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(OECD 2012b). Therefore a certain r
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The reciprocal dependence of the pr
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Figure 1.3.8 Percentage of students
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Table 1.3.4 The quality of educatio
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1.4 Health Raul-Allan Kiivet Change
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Table 1.4.1 Usage of prescription m
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allude to the fact that approximate
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promote healthy lifestyles among th
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Figure 1.5.1 The World Values Surve
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Table 1.5.2 Estonia’s participati
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Figure 1.5.3 The percentage of the
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Figure 1.5.5 Percentage of the Esto
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The fact that Estonia’s position
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Summary Mati Heidmets The global vi
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2People and Society Estonian Human
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Table 2.1.1 Structure of the Bertel
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tioning market economies (15 states
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2.2 Freedom and democracy Martin M
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Table 2.2.1 Democracy indicators Po
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Figure 2.2.2 The distribution of th
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would be something that none of the
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political participation are general
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strongest, while a very small perce
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is concerned, Estonia is one of the
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Figure 2.4.2 Average circulation of
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2.5 Corruption Jüri Saar In accord
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Lithuania, 61%; and in Russia, 69%.
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2.6.2 Intentional homicides in Esto
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crime. And thirdly, there was a wis
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References 1. Ahven, A. & Tabur, L.
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states included in the EU Kids Onli
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2.8 Public assessments of the state
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Figure 2.8.4 Changes releated to tr
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of the state’s development are en
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Table 2.9.1 The positions of Estoni
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3. IEP (2011). Structures of Peace.
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3Welfare and the Quality of Life Es
Page 109 and 110: choices made, not what people say t
Page 111 and 112: Figure 3.1.5 Public social spending
Page 113 and 114: tion agreed upon the social contrac
Page 115 and 116: References 1. Aidukaite, J. (2006).
Page 117 and 118: hand, to the “inequality of acces
Page 119 and 120: and explanations of the extent of i
Page 121 and 122: 5- much more than I deserve. Some d
Page 123 and 124: people in Estonia consider the inco
Page 125 and 126: Table 3.3.1 Experienced Well-Being
Page 127 and 128: at about 70%. In Latvia and Lithuan
Page 129 and 130: sign. It seems that the usual view
Page 131 and 132: 3.4 Quality of life Anu Toots 3.4.1
Page 133 and 134: a uniform composite indicator has n
Page 135 and 136: 3.4.6 The components of life qualit
Page 137 and 138: Figure 3.4.4c Perceived quality of
Page 139 and 140: Figure 3.4.5 Changes in the depriva
Page 141 and 142: 3.5 Environment dimension of well-b
Page 143 and 144: Figure 3.5.1.b Estonia’s position
Page 145 and 146: 3.5.4 Energy intensity The energy i
Page 147 and 148: productivity, which is defined as t
Page 149 and 150: perceive themselves as worse off th
Page 151 and 152: 4The Economy Estonian Human Develop
Page 153 and 154: vide a valuable connection for maki
Page 155 and 156: Figure 4.1.3 Components of economic
Page 157 and 158: ule of law, the sub-indicators for
Page 159: References 1. Acemoglu, D.; Robinso
Page 163 and 164: and pasture land, and this was capi
Page 165 and 166: Basing the total and net savings re
Page 167 and 168: 4.3 Labour market Reelika Leetmaa,
Page 169 and 170: The problems include the very limit
Page 171 and 172: • Expenditures for active labour
Page 173 and 174: who lose their jobs. These ensure i
Page 175 and 176: 4.4 Productivity and the economic s
Page 177 and 178: labour costs at the company level r
Page 179 and 180: Table 4.4.4 Comparison of the produ
Page 181 and 182: Figure 4.4.1 Annual average increas
Page 183 and 184: 4.5 Innovation Erik Terk, Katrin M
Page 185 and 186: Table 4.5.2 Comparison of innovatio
Page 187 and 188: Table 4.5.4 Comparison of the indic
Page 189 and 190: in order to make the R&D potential
Page 191 and 192: It is characteristic of the South K
Page 193 and 194: mechanisms for increasing their sta
Page 195 and 196: Globalisation and Policy Patterns 5
Page 197 and 198: When Estonia regained its independe
Page 199 and 200: 5.2 The impacts of globalisation an
Page 201 and 202: Table 5.2.2 Support of the differen
Page 203 and 204: 5.3 Development policies Erik Terk,
Page 205 and 206: • C -the “Estonia-centred” su
Page 207 and 208: Figure 5.4.1 Support for the possib
Page 209: Summary Erik Terk Estonia is part o
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ehavioural patterns. Therefore, it
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EDR 2012/2013 authors Clemens Buche
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EDR 2012/2013 authors Alari Purju i
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Editor-in-Chief: Mati Heidmets Prod
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