Authors: Apurva Sanghi and Glenn-Marie Lange Vedemosti (Russia)
Which would you rather be: rich or wealthy? And what exactly is the difference?
Being rich is related to your regular paycheck: the monthly income you receive from your employer or your business. The fatter the paycheck, the richer you are. Being wealthy, on the other hand, is the value of all your assets: how much you have in savings in your bank account, your house, your car, and so on. The more of these assets you have, the wealthier you are.
Now you can be rich without being wealthy. But that will not be sustainable if you do not keep adding to your stock of assets. So, your economic well-being is a function of both your income and wealth.
What applies to you as an individual applies to a nation as well. Focusing only on national income, i.e. GDP, can be misleading. Wars or disasters increase GDP because reconstruction counts towards GDP, but this is in an accounting sense. Common-sense tell us they do not improve welfare of those affected. Yet policymakers and economists are obsessed with GDP. Perhaps it is because GDP is a relatively easy thing to measure. In our latest semi-annual report, we upgrade Russia’s growth numbers (1.2% for 2019, 1.6% and 1.8% for 2020 and 2021), which no doubt will generate much public attention but as mentioned above, can be misleading. Changes in income need to be complemented with a measure that captures changes in wealth. But how do you measure the wealth of a nation – especially one as large and diverse as Russia?
Our report aims to answer the question: “How wealthy is Russia” by measuring, for the first time, the country’s wealth from 2000–2017. The analysis comprehensively measures four types of assets:
- Produced capital: Russia’s buildings, bridges and infrastructure;
- Human capital: the cumulative experience, knowledge and skills of Russians;
- Natural capital: the lakes, forests, soil, air, water, oil and gas from which Russians derive a range of services;
- Foreign capital: the net value of overseas assets owned by Russia.
The good news is that the typical Russian citizen was 1.8 times wealthier in 2017 than in 2000, with accumulated wealth of about 9 million rubles (or approximately US$ 153,000). The bad news is that this is only about a quarter of the wealth of a typical resident in member countries of the Organization for Economic Co-operation and Development (OECD).
Here is another question: which of the above four wealth components do you think comprises the largest share of overall wealth in Russia? It is not foreign capital; Russia simply does not own that many assets overseas. Is it natural capital? After all, Russia is blessed with abundant natural resources appropriately captured by the song in the famous 1936 Soviet film Circus: “Wide is my Motherland, Of her many forests, fields, and rivers!… From Moscow to the borders, From the southern mountains to the northern sea.” Or is it physical capital? From the shiny skyscrapers of Moscow to all the infrastructure spread around the world’s largest country — this surely must add up to a lot?
Well, the answer is neither of the above: rather, it is human capital – the cumulative experience, knowledge and skills of Russians – that comprises almost half of all Russia’s wealth, only then followed by physical capital (about a third), and natural capital (about a fifth). However, in comparison, the wealth composition of OECD countries on average is 70 percent human capital, 28 percent produced capital, 3 percent natural capital, and minus 1 percent net foreign assets (Figure 1).
Figure 1: Human capital comprises the largest share of wealth in Russia, but this is much lower than the OECD average
Here again, there is good news and bad news. The good news is that during 2000–2017, Russia’s per capita human capital grew massively at 80 percent, dwarfing growth in OECD countries and other commodity exporters. The bad news is that average annual growth has slowed from 4.7 percent in the 2000–2010 period to 1.8 percent during 2010–2017. Indeed, at this slower rate of 1.8 percent, it would take Russia almost 100 years to catch up with the OECD average. For Russia to grow wealthier, the policy focus is clear: increase both the returns to and share of human capital wealth.
Increasing returns to human capital, especially in education, ranges from improving the quality of vocational and college education throughout Russia’s regions to improving the 3 Cs of softer skills of Russian students: creativity, collaboration, and communication. One puzzle is why Russia’s human capital proportion of its total wealth (46 percent), is significantly lower than OECD’s (70 percent). After all, Russia’s education performance appears to be even better than the OECD’s in certain areas. For example, the proportion of the labor force with university degrees is higher in Russia than the OECD. And the quality of education as measured by certain global standardized tests is on par with the OECD. One possible explanation is that Russians are simply not earning adequate returns on their education.
Increasing the share of human capital would require a decrease in the share of something else. A good candidate for Russia would be natural capital; specifically, oil and gas related assets, which remain a significant part of Russia’s wealth. Russia’s large share of carbon-based wealth faces increased risk due to future price uncertainty and large-scale attempts at global decarbonization. Additionally, better managing Russia’s forests is an immediate priority and can also enhance Russia’s role as an “ecological donor” to the planet. As a rough estimate, Russia’s forests provide annual absorption of about 640 million tons of CO2 equivalent or around 30,000 billion rubles (over US$ 500 billion) over their lifetime.
After all, nothing lasts forever, so this abundance needs to be sustainably managed if Russia is indeed to be more than just a rich tale. Otherwise pursuing riches without building wealth would be a bit like building mansions on a foundation of sand.
Emerging Global Market: The Arctic on Sale
The Arctic Region has been on a journey of geographical transformation induced by Climate Change. There has been an unprecedented percentage of what can be called as ‘Arctic metamorphosis’, witnessed as deterioration of climate twice as rapidly as in any other parts of the globe. There has been a decline in permafrost, sea ice, icesheets on ocean and glaciers in Canada, Alaska and Greenland. There has been a notable decrease in the snow cover that earlier occupied the land. These alarming changes in the physiography were first recorded in the 1980s, and have been on a surge ever since. Around 1 million sq. miles of sea ice has shrunk over the past 50 years, halving the size of Arctic icecap. The transition has been so dramatic that it actually cut the turf to Asia, revealing the fabled North West Passage that European voyagers sought for shipping, for over centuries. As of now, it is not a matter of ‘if’ but ‘when’ will the Arctic Passageway open for regular marine transportation and when would the exploration of lucrative natural energy-resources deposits be possible.
The regressing ecosystem has been the least of the concerns of our capitalist, market-oriented, energy-hungry world economy. The melting ice caps and glaciers are paving way to access the 13% of globe’s undiscovered oil and 30% of globe’s undiscovered natural gas lying at the Arctic Ocean seabed, a home for world’s largest unexplored hydrocarbon resources. These percentages translate to 1,669 trillion cubic ft. of natural gas and 90 billion barrels of oil. The economic potential for these energy resources exceeds $2.7 trillion for Russian and American Arctic claims alone. Moreover, there are massive reserve potential for rare mineral resources also referred to as “strategic minerals” including palladium, nickel and iron-ore which might prove to be a greater economic driver than the energy resources. Apart from these, Arctic has tremendous new opportunities for high sea fisheries. The Ocean has vast stocks of marine resources including shrimp, pollock, crab, pacific salmon, squid, scallop and halibut. It would prove to be a new arena of industrial-scale commercial fisheries.
Whether the sought resources are hydrocarbon or mineral, they must procure their route via pipelines or shipping routes to the receptive markets. Along with the transitory passageways, there would be need for improved icebreakers, satellite and communication and navigation, deep water ports, double-hulled shipping vessels, operational search and aviation infrastructure development.
An even better incentive would be the inception of new sea-lanes initiated by the great Arctic melt. The shipping shortcuts of Northwest Passage and Northern Sea Route would reduce the nautical transit times by days, saving the shipping corporations thousands of miles. The sailing distance between Yokohama and Rotterdam on the Northern Route would be reduced from over 11,200 nautical miles to 6,500 nautical miles, in comparison with the current Suez Canal Route which would amount to the savings of up to 40 percent of shipping expenses. Likewise, the voyage from Rotterdam to Seattle would be trimmed by the North West Passage by over 2000 nautical miles, reducing the distance up to 25 percent in comparison with the current Panama route.
Taking into consideration the fuel costs, canal fees and various other miscellaneous charges that amount to lofty freight rates, these alternative passages will cutback the charges of a single voyage down to at least 20%, saving around $17.5 million, saving billions of dollars per annum for the shipping industry. These savings would be far greater for the megaships that have to sail all the way down to Cape Horn and Cape of Good Hope.
The world’s shipyard’s have already started building ice-capable ships, beginning with the groundwork for the navigation through these sea-lanes and for the transport of Arctic’s natural gas and oil. Billions of dollars are being invested by the private sector for the fleet of Arctic tankers. As of now, around 496 ice-class ships have been built worldwide. The gas and oil markets are investing in development of the avant-garde technology and assemblage of advanced ships, possessing double-acting tankers, that have the dual technology of steam bowing through open waters and proceed stern to smash through deep ice. These ships are capable of sailing unobstructed to Arctic’s burgeoning gas and oil fields independent of ice-breakers. These breakthroughs will turn previously unviable commercial projects into booming businesses.
Of all the Arctic States, the largest stakeholder with greatest intrinsic interests in the region is Russia. A significant 20% of Russia’s GDP comes of Russian North, and accounts for 22% of all exports. The resources of Arctic are of strategic importance for Russia; therefore, it has been so far the largest investor in the region. It has invested in the fleet of nuclear-icebreakers, the only of their kind in the world. Further, Russia is planning on increasing this fleet of 4 to 13 with a cost of over $1.5 billion. Moreover, Russia has endeavored to aim for 92.6 million ton of cargo by 2030. These hefty investments indicate the importance of Arctic as a market. Russia aims at charging for providing the sea-routes since it has the largest geographical proximity to the ocean as well as providing shipping and infrastructure in the region. The claims of oil and gas reserves are only an addition to the gains Russia has planned to make.
Considering the economic and strategic importance of Arctic and its potential to add to the world’s oil, gas, minerals, fisheries and shipping reserves makes it an alluring marketplace. The region itself has been divided among the ‘Arctic States’ that include Russia, Denmark, Iceland, Finland, Sweden, Norway, Iceland, and United States. Instead of making efforts to preserve the deteriorating environmental conditions and the physiographic challenges, these states are only in a race of dividing the resources among themselves and reaping as much assets as they can. All domains of Arctic are on sale; including the sea, land, sea-life, mineral resources, and fossil fuels. The world has turned a blind eye towards the environmental consequences for the region of the planet which will surely cost more than the gains. Putting nature’s commodities on sale have never worked in anyone’s favor.
Covid-19 and food crisis
COVID-19 has hit at a time when food crisis and malnutrition are on the rise. According to the most recent UN projections, the pandemic-induced economic slump would cause as many as 132 million people to be hungry. This would be in addition to the 690 million people going hungry now. At the same time, 135 million people suffer from acute food insecurity and in need of urgent humanitarian assistance. Although the pandemic’s transmission has slowed in certain countries and cases have decreased, COVID-19 has resurfaced or is spreading rapidly in others. This is still a global issue that needs a worldwide solution.
This epidemic threatens both lives and livelihoods. COVID-19 has had a wide-ranging and disruptive influence on the agriculture system. We fear a worldwide food crisis unless we act quickly, which may have long-term consequences for hundreds of millions of children and adults. This is mostly due to a lack of food availability — as wages decline, remittances decline, and in certain cases, food prices rise. Food insecurity is increasingly becoming a food production concern in nations that already have high levels of acute food insecurity.
Agriculture continues to serve a reliable and major part in world economy and stability, and it remains the primary source of food, income, and work for rural communities, even in the face of a pandemic. The impact of the COVID-19 pandemic on the agricultural system and sector has been wide-ranging, causing unprecedented uncertainty in global food supply chains, including potential bottlenecks in labor markets, input industries, agriculture production, food processing, transportation and logistics, as well as shifts in demand for food and food services.
The COVID-19 epidemic not only created a new sort of agricultural catastrophe, but it also occurred at a difficult moment for farmers. In most years during the last few years, global commodity output has exceeded demand, resulting in lower prices. In 2013, the Food and Agricultural Organization (FAO) predicted decreased global agricultural output growth due to limited agricultural land development, rising production costs, expanding resource restrictions, and increasing environmental concerns.
An expanding global population remains the main driver of demand growth, although the consumption patterns and projected trends vary across countries in line with their level of income and development. Average per capita food availability is projected to reach about 3,000 kcal and 85 g of protein per day by 2029. Due to the ongoing transition in global diets towards higher consumption of animal products, fats and other foods, the share of staples in the food basket is projected to decline by 2029 for all income groups. In particular, consumers in middle-income countries are expected to use their additional income to shift their diets away from staples towards higher value products. Meanwhile, environmental and health concerns in high-income countries are expected to support a transition from animal-based protein towards alternative sources of protein.
When people suffer from hunger or chronic undernourishment, it means that they are unable to meet their food requirements – consume enough calories to lead a normal, active life – over a prolonged period. This has long-term implications for their future, and continues to present a setback to global efforts to reach Zero Hunger. When people experience crisis-level, acute food insecurity, it means they have limited access to food in the short-term due to sporadic, sudden crises that may put their lives and livelihoods at risk.
However, if people facing crisis-level acute food insecurity get the assistance they need, they will not join the ranks of the hungry, and their situation will not become chronic
It is clear: although globally there is enough food for everyone, too many people are still suffering from hunger. Our food systems are failing, and the pandemic is making things worse.
How Bangladesh became Standout Star in South Asia Amidst Covid-19
Bangladesh, the shining model of development in South Asia, becomes everyone’s economic darling amidst Covid-19. The per capita income of Bangladesh in the fiscal year 2020-21 is higher than that of many neighbouring countries including India and Pakistan. Recently, Bangladesh has agreed to lend $200 million to debt-ridden Sri Lanka to bail out through currency swap. Bangladesh, once one of the most vulnerable economies, has now substantiated itself as the most successful economy of South Asia. How Bangladesh successfully managed Covid-19 and became top performing economy of South Asia?
In March 1971, Sheikh Mujibur Rahman declared their independence from richer and more powerful Pakistan. The country was born through war and famine. Shortly after the independence of Bangladesh, Henry Kissinger, then the U.S. national security advisor, derisively referred to the country as a “Basket Case of Misery.” But after fifty years, recently, Bangladesh’s Cabinet Secretary reported that per capita income has risen to $2,227. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. Pakistani economist Abid Hasan, former World Bank Adviser, stated that “If Pakistan continues its dismal performance, it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030,”. On the other hand, India, the economic superpower of South Asia, is also lagging behind Bangladesh in terms of per capita income worth of $1,947. This also elucidates that the economic decisions of Bangladesh are better than that of any other South Asian countries.
Bangladesh’s economic growth leans-on three pillars: exports competitiveness, social progress and fiscal prudence. Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. This godsend is substantially due to the country’s hard-hearted focus on products, such as apparel, in which it possesses a comparative advantage.
The variegated investment plans pursued by the Bangladesh government contributes to the escalation of the country’s per capita income. The government has attracted investments in education, health, connectivity and infrastructure both from home and abroad. As a long-term implication, investing in these sectors helped Bangladesh to facilitate space for businesses and created skilled manpower to run them swiftly. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP.
Bangladesh’s economy and industry management strategy during Covid-19 is also worth mentioning here since the country till now has successfully protected its economy from impact of pandemic. At the outset of pandemic, lockdowns and restrictions hampered the country’s overall productivity for a while. To tackle the pandemic effect, Bangladesh introduced improvised monetary policy and fiscal stimuli to bring them under the safety net which lifted the situation from worsening. Government introduced stimulus package which is equivalent to 4.3 percent of total GDP and covers all necessary sectors such as industry, SMEs and agriculture. These packages are not only a one-time deal, new packages are also being announced in course of time. For instance, in January 2021, government announced two new packages for small and medium entrepreneurs and grass roots populations. Apart from economic interventions, the government also chose the path of targeted interventions. The government, after first wave, abandoned widespread lockdown and adopted the policy of targeted intervention which is found to be effective as it allows socio-economic activities to carry on under certain protocols and helps the industries to fight back against the pandemic effect.
Another pivotal key to success was the management of migrant labor force and keeping the domestic production active amidst the pandemic. According to KNOMAD report, amidst the Covid-19, Bangladesh’s remittance grew by 18.4 percent crossing 21 billion per annum inflow where many remittance dependent countries experienced negative growth rate. Because of the massive inflow of remittance, the Forex reserve of Bangladesh reached at 45.1 billion US dollar.
Bangladesh’s success in managing COVID19 and its economy has been reflected in a recent report “Bangladesh Development Update- Moving Forward: Connectivity and Logistics to strengthen Competitiveness,” published by World Bank. Bangladesh’s economy is showing nascent signs of recovery backed by a rebound in exports, strong remittance inflows, and the ongoing vaccination program. Through financial assistance to Sri Lanka and Covid relief aid to India, Bangladesh is showcasing its rise as an emerging superpower in South Asia. That is why Mihir Sharma, Director of Centre for Economy and Growth Programme at the Observer Research Foundation, wrote in an article at Bloomberg that, “Today, the country’s 160 million-plus people, packed into a fertile delta that’s more densely populated than the Vatican City, seem destined to be South Asia’s standout success”. Back in 2017, PwC (PricewaterhouseCoopers) report also predicted the same that Bangladesh will become the largest economy by 2030 and an economic powerhouse in South Asia. And this is how Bangladesh, a development paragon, offers lessons for the other struggling countries of world after 50 years of its independence.
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