productivity (TFP) – i.e. the intangible capital residual remaining in the measure of comprehensive wealth after accounting for human, produced and natural capital. The estimates in this paper suggest that this intangible capital residual is large, on the order of 25% of comprehensive wealth for the sample of the richest countries considered here, indicating that our measures of the component elements of the wealth of nations are still substantially incomplete.<sup>3</sup> The rest of the paper is organized as follows. Section 2 discusses the possible ways for comprehensive national wealth accounting and provides some of the key findings from the World Bank’s work by means of the top-down approach. The detailed theoretical backing for the top-down approach is provided in Annex I. In Section 3, a brief overview is given of the lifetime income approach applied by the OECD project for measuring the value of human capital. The detailed implementation procedure of the lifetime income approach is presented in Annex II. Section 4 presents the adjustments made in this paper to align the OECD human capital estimates with the World Bank total wealth estimates. Section 5 presents the results of the wealth decomposition with human capital included and discusses the findings. Section 6 concludes.

# **2. Estimating total wealth**

As noted in the Introduction, two of the main motivations for the analysis in this paper are to estimate the share of human capital in a comprehensive measure of total wealth, and to estimate the ‘residual of the residual’ – i.e. the unmeasured portion of total wealth which includes institutional, social and other forms of intangible capital. Combined, these estimates can provide a deeper insight into the composition of wealth than has been available to date in the separate work of the OECD and of the World Bank.

There are two broad ways to measure total wealth for a country – from the bottom up, i.e. asset by asset, and from the top down, i.e. relying on guidance from economic theory. If the accounting for assets from the bottom up is complete (no omitted assets), then the two measures of wealth will coincide. A recent example of bottom-up estimation is provided by Arrow _et al._ (2012), a study which is commendably comprehensive in its approach, but the approach raises important questions<sup>4</sup> about the measurement of intangible wealth, in particular ‘health capital’. _The Changing Wealth of Nations_ (World Bank 2011) builds on the top-down approach, with total wealth measured as the present value of future consumption, as theory would suggest under the assumption of constant returns to scale. In this work, as in World Bank (2006), there is a gap between total wealth and the sum of produced capital, natural capital and net foreign assets owing to the necessarily incomplete measurement of assets; as noted above, this gap is labeled the intangible capital residual.

This paper takes the World Bank (2011) estimates of total wealth as the point of departure. Annex I provides the theoretical backing for this approach. The intuition behind measuring total wealth as the present value of future consumption can be provided by thinking of the household level: if a household suddenly and permanently lost all capacity to earn income, then its future consumption would be

> 3 . Note that, in common with World Bank (2006, 2011), we refer to the ‘intangible capital residual’ or ‘intangible wealth residual’ in this paper. This usage differs from the definitions of intangible fixed assets and intangible non-produced assets in the SNA. Intangible fixed assets in the SNA (and in the work of the OECD) include the value of knowledge.

> 4 . These questions are explored in the _Environment and Development Economics_ symposium for which the Arrow _et al._ paper is the centrepiece.

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