Sunday, March 04, 2007

Rule of Law and Intangible Capital

One way to measure the missed opportunities of Gloria Arroyo's administration is to look at the World Bank's Rule of Law Governance indicator.

Philippines: Rule of Law Index
Year Estimate* Percentile Rank** Standard Error

*'Estimate' ranges from -2.5 to 2.5
**'Percentile Rank' ranges from 0 to 100
Source: World Bank

The significance of the above is that a one point increase in the Rule of Law index for a lower middle income country such as the Philippines would result in a 362 US Dollar increase in Intangible Capital per person. Source: Where is the Wealth of Nations: Measuring Capital for the 21st Century, World Bank

Arroyo's inability to improve the rule of law during her stay in Malacanang translates to foregone intangible capital. As an illustration of what might have been, if in 2005, she was able to bring back the rule of law index to its 1998 levels of '55.3' (instead of the actual value of '38.6'), then intangible capital would have been higher by 6,045.40 US Dollars per person, computed from (55.3-38.6) x 362 USD.

Note: Intangible Capital is component of the nation's total wealth. Total wealth is estimated as the net present value of sustainable future consumption. According to the authors of the referenced document: "the calculations require assumptions regarding the time horizon and the discount rate. Throughout the calculations, we assumed a time horizon of 25 years, which coincides roughly with a generation’s time span."

With 81.5 million Filipinos, that translates to almost 500 Billion US Dollars in what might have been Intangible Capital.

Update Nov-20-2007: John Nery links to a favorable review of the above book.

Update Dec-23-2007: Former SC Chief Justice Artemio Panganiban's Inquirer Online column on the above.

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