13. Economic Capital
Economic capital includes both produced (man-made) and financial assets. While the OECD average situation since 2010 has improved slightly for several (but not all) Economic Capital indicators, large disparities persist across OECD countries, and have in some cases widened. The OECD average stock of produced fixed assets increased by 11%, cumulatively, between 2010 and 2018, and intellectual property assets by 16%. However, annual growth in gross fixed capital formation in 2018 was lower than in 2010 for around one-third of OECD countries, and rates of R&D investment have only increased in around half. OECD countries’ net financial positions have diverged further since 2010, and the gap between the top and bottom OECD countries has widened for the financial net worth of the general government sector. Household debt levels across OECD countries range from 200% of disposable income to less than 50%.
Note: The snapshot depicts data for 2018, or the latest available year, for each indicator. The colour of the circle indicates the direction of change, relative to 2010, or the closest available year: improvement is shown in blue, deterioration in orange, and no clear or consistent change in grey, and insufficient time series to determine trends in white. For each indicator, the OECD country with the lowest (on the left) and highest (on the right) well-being level are labelled, along with the OECD average. For full details of the methodology, see the Reader’s Guide.
Source: OECD National Accounts Statistics (database), https://doi.org/10.1787/na-data-en and OECD Wealth Distribution (database), https://stats.oecd.org/Index.aspx?DataSetCode=WEALTH.
Produced fixed assets, such as buildings, machinery and infrastructure, play an important role in a country’s capacity to produce goods and services. In 2018, the OECD average of stock of produced fixed assets per person was close to USD 119 000 (Figure 13.2). The stock of produced fixed assets per capita is highest (over USD 189 000) in Norway, Luxembourg and Ireland, and lowest (below USD 76 000) in Poland, Chile, Israel, Lithuania and Greece. Between 2010 and 2018, the OECD average value of produced fixed assets increased by nearly 11%, cumulatively (up from around USD 107 000 per capita in 2010). The largest increases occurred in Ireland (up 78.6%), Chile (37.4%) and Lithuania (22.5%), with the largest falls in Greece (-12.0%), Portugal (-5.5%) and the Netherlands (-5.4%).
Note: The latest available year is 2018 for Canada, Chile, the Czech Republic, France and Israel; 2016 for Estonia, Greece, Hungary, Latvia, Lithuania, Norway, Poland and Portugal; 2015 for the Russian Federation; and 2017 for the other countries. The earliest available year is 2011 for the Russian Federation. The OECD average excludes Colombia, Iceland, Mexico, Spain, Switzerland and Turkey, due to a lack of data.
Source: OECD National Accounts Statistics (database): 9B. Balance sheets for non-financial assets, http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE9B.
Knowledge capital can play an important role in productivity growth, and contribute to improvements in future quality of life, including through a more efficient use of resources than at present. In 2018, the OECD average stock of intellectual property assets was worth USD 5 556 per capita (Figure 13.3). Levels were highest in the United States, Sweden, Denmark, Norway and Japan (at over USD 10 000 per capita) and lowest in Mexico, Poland, Latvia and Greece (below USD 1 300 per capita, i.e. less than one-seventh that of the highest group). Between 2010 and 2018, the average stock of intellectual property assets across 31 OECD countries rose by 16.2% in real terms. It went up by more than 50% in Mexico, Lithuania, Estonia and Poland, but fell by 10% or more in Greece, Finland and the United Kingdom.
Note: The latest available year is 2018 for Canada, the Czech Republic, France and Israel; 2016 for Estonia, Greece, Hungary, Latvia, Lithuania, Mexico, Norway, Poland and Portugal; 2014 for Ireland; and 2017 for the other countries. The OECD average excludes Chile, Colombia, Iceland, Spain, Switzerland and Turkey, due to a lack of data.
Source: OECD National Accounts Statistics (database): 9B. Balance sheets for non-financial assets, http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE9B.
Gross fixed capital formation (GFCF) indicates the level of investment in produced fixed assets. In 2018, the annual growth of GFCF in OECD countries was 3.3%, on average (Figure 13.4). At the top end, countries such as Hungary, Latvia and Slovenia had annual growth rates of more than 10%, while in Ireland, Greece and Luxembourg, GFCF contracted (with rates of -21.1%, -12.2% and -2.7%, respectively). For OECD countries on average, GFCF has recovered from a state of zero growth in 2010, to an annual growth rate just above 3% in 2018. Nevertheless, growth rates are lower than in 2010 for around one-third of OECD countries. Particularly large falls have occurred in Turkey (-23.1 percentage points), Canada (-10.3) and Chile (-8.5).
Investment in research and development (R&D) is a key driver of changes in the stock of intellectual property assets. In 2018, the OECD average rate of investment in R&D was 2.5% of GDP (Figure 13.5), and around half of OECD countries have a rate below 2%. The highest rates were in Ireland (21.4%), Korea (4.2%), Japan (3.4%) and Sweden (3.0%), while the lowest rates (all below 1% of GDP) were in Lithuania, Latvia, the Slovak Republic, Luxembourg, Poland and Greece. Between 2010 and 2018, the rate of R&D investment increased by 0.6 percentage points or more in Ireland, Korea and Belgium, but fell by 0.3 percentage points or more in Finland, Sweden and Australia.
Note: The latest available year is 2017 for Australia, Colombia, Israel, Japan, Korea, Mexico and New Zealand.
Source: OECD National Accounts Statistics (database): 1. Gross domestic product, http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE1.
Note: The latest available year is 2018 for the Czech Republic, Finland and France; 2016 for Estonia, Ireland, Latvia, New Zealand, Norway, Portugal and Sweden; 2015 for Denmark and Poland; and 2017 for the other countries. The OECD average excludes Chile, Colombia, Iceland, Mexico, Spain, Switzerland and Turkey, due to a lack of data.
Source: OECD National Accounts Statistics (database): 8A. Capital formation by activity ISIC rev4, http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE8A.
A country’s net financial position indicates both its exposure to overseas risk, and its stores of financial wealth and sources of future revenue. For the 35 OECD countries with available data, nearly two-thirds had a negative net worth in 2018 (Figure 13.6), meaning their stock of financial liabilities exceeded their financial claims on the rest of the world. Net debts were in excess of USD 30 000 per capita in Ireland, Greece, Portugal and Spain. By contrast, Norway had the highest net worth (just under USD 131 000 per capita), followed by Switzerland (just over USD 77 000). OECD countries’ net financial positions have diverged further since 2010, with large gains in several countries already enjoying a relatively high net worth, while net debts deepened at the tail end.
Note: The latest available year is 2017 for Colombia, Israel, Japan, Switzerland and Turkey. The OECD average excludes Mexico and New Zealand, due to a lack of data.
Source: OECD National Accounts Statistics (database): 720. Financial accounts (non-consolidated, SNA 2008), http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE720R; except for Australia and Israel: 710. Financial accounts (consolidated, SNA 2008), http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE710R.
The financial net worth of general government can also imply risks to financial and economic sustainability. In 2018, across OECD countries, government financial liabilities exceeded financial assets to the tune of 27 percentage points of GDP (Figure 13.7). This share ranges from positive values in Norway (280.5%), Finland (52.7%) and Luxembourg (50.0%) to negative values in Greece (-142.6%), Japan (-123.7%), Italy (-120.3%), the United States (-112.7%) and Portugal (-104.4%). Between 2010 and 2018, the financial net worth of government fell by 4 percentage points for the average OECD country, and the gap between the top and bottom OECD countries widened further. The largest deteriorations occurred in those countries already well below the OECD average, including Greece (-49.8 percentage points), Spain (-40.0) and Portugal (-33.4). The largest improvements were in Norway (116.7 percentage points) and Switzerland (18.3).
Note: The latest available year is 2017 for Austria, Estonia, France, Germany, Ireland, Israel, Japan, Latvia, Luxembourg, New Zealand, the Slovak Republic, Switzerland and Turkey; 2016 for Colombia, Iceland and the Russian Federation; and 2015 for Brazil. The earliest available year is 2015 for Colombia and 2011 for the Russian Federation. The OECD average excludes Mexico, due to a lack of data.
Source: OECD Financial Indicators – Stocks (database), http://stats.oecd.org/Index.aspx?DataSetCode=FIN_IND_FBS.
High household debt can place a heavy burden on families, both financially and psychologically, and may pose risks for the wider economic system when defaults on repayments increase the instability of financial markets. In 2018, the OECD average household debt was 126% of household net disposable income (Figure 13.8). This ranged from below 50% in Hungary, Lithuania, Colombia and Latvia, to over 200% in Denmark, the Netherlands, Norway, Australia and Switzerland. Between 2010 and 2018, the OECD average household debt fell by roughly 3 percentage points (from 129% to 126%). However, this masks divergent patterns across countries: in Ireland, household debt fell by 75 percentage points, while falls or more than 35 percentage points occurred in Denmark, the Netherlands, Latvia and Hungary. By contrast, household debt levels increased by more than 25 percentage points in the Slovak Republic, Korea, Luxembourg, Australia and Norway.
High leverage of the banking sector (measured here by the ratio between its financial assets and its equities) can increase the financial system’s exposure to risk and cyclical downturns. In 2018, the OECD average banking sector leverage was about 16 (Figure 13.9), ranging from 28 or more in (in Japan, the United Kingdom, Italy and Greece), to 8 or less (in the United States, Australia, Chile, Hungary and Estonia). Since 2010, ratios have fallen in some of the countries that had among the highest leverage rates previously, including the United Kingdom, Slovak Republic and Norway, while the largest increases in leverage occurred in Turkey, Lithuania and Poland.
Note: The latest available year is 2018 for Canada, Denmark, Finland, Italy, the Netherlands, Norway, Portugal and Sweden; 2016 for Colombia and Switzerland; 2015 for Brazil and the Russian Federation; and 2017 for the other countries. The earliest available year is 2015 for Colombia and 2011 for the Russian Federation. The OECD average excludes Iceland, Israel, Mexico and Turkey due to a lack of data.
Source: OECD Financial Indicators – Stocks (database), http://stats.oecd.org/Index.aspx?DataSetCode=FIN_IND_FBS.
Note: The latest available year is 2017 for France, Israel, Japan, Switzerland and Turkey and 2016 for Colombia and the Czech Republic. The earliest available year is 2015 for Colombia and 2014 for Switzerland. The OECD average excludes Iceland, Mexico and New Zealand, due to a lack of data.
Source: OECD Financial Indicators – Stocks (database), http://stats.oecd.org/Index.aspx?DataSetCode=FIN_IND_FBS.
Economic Capital consists of produced and financial capital. Produced capital refers to man-made tangible assets such as roads, railways, buildings and machinery; intellectual property such as R&D expenditure, computer software and art works; and inventories of final and intermediate goods. Financial capital includes financial assets such as currency and deposits, equity, securities and derivatives, and liabilities in the form of loans and debt securities. Economic Capital plays a crucial role in supporting material living standards (e.g. housing, jobs, wealth and incomes) and in producing goods and services that people consume in pursuit of their well-being today and in the future (OECD, 2013[1]). The indicators in this chapter (Table 13.1) include stocks (of produced fixed assets, intellectual property assets, and the financial net worth of the total economy), flows (investments in gross fixed capital formation and R&D), and risk factors that pertain to specific subsectors of the economy, but that can have implications for the sustainability of the whole economic system (the financial net worth of government, household debt and the leverage of the banking sector).
Produced fixed assets refers to the value of a country’s stock of produced economic assets, including dwellings, buildings, structures, machinery and equipment; cultivated assets such as livestock for breeding and vineyards; intangible assets such as computer software and entertainment, literary or artistic originals; and inventories. It reflects the reduction in their value due to physical deterioration, normal obsolescence or normal accidental damage. Data are expressed in US dollars per capita at 2010 PPPs, and are sourced from the OECD National Accounts database.
Intellectual property assets refers to a country’s knowledge capital (e.g. research and development, software and databases, mineral exploration and evaluation, and entertainment, artistic and literary originals). ICT equipment is included in Korea, while ownership costs are excluded in Australia, and artistic originals are excluded in Canada. Data are expressed in US dollars per capita at 2010 PPPs, and are sourced from the OECD National Accounts database.
Gross fixed capital formation refers to the investment in both produced fixed assets (such as dwellings, buildings and other structures, transport equipment, other machinery and equipment, cultivated assets) and intangible fixed assets (such as intellectual property, computer software and art works) within a country. Data are expressed as annual growth rates at constant prices, and are sourced from the OECD National Accounts database.
Investment in R&D refers to the expenditure undertaken by resident producers on creative work carried out on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications. Data are expressed as a percentage of GDP, and are sourced from the OECD National Accounts database.
Financial net worth of the total economy captures the net foreign asset position of a country with respect to the rest of the world. The financial assets include currency, deposits, debt securities, loans, equity and investment fund shares/units, financial derivatives and employment stock options, and other accounts receivable. Data are expressed as US dollars per capita at current PPPs, and are sourced from the OECD National Accounts database.
Financial net worth of the general government refers to the total value of financial assets held by the general government (i.e. central, state and local governments, as well as social security funds), less the total value of its outstanding liabilities. Data are expressed as a percentage of GDP, and are sourced from the Financial Dashboard of the OECD National Accounts database.
Household debt refers to the total outstanding debt of households (including non-profit institutions serving households), which includes loans (primarily mortgage loans and consumer credit) and other accounts payable. Data are expressed as a share of household net disposable income, and are sourced from the Financial Dashboard of the OECD National Accounts database.
Banking sector leverage (also known as equity multiplier ratio or financial leverage) is the ratio between the total financial assets of the banking sector and the market value of its equity (excluding investment fund shares). The banking sector includes the central bank and monetary financial institutions. Data are sourced from the Financial Dashboard of the OECD National Accounts database.
Correlations among Economic Capital indicators
Across OECD countries, stocks of produced fixed assets are positively correlated with intellectual property assets (0.7) and investment in R&D (0.4) (Table 13.2). Countries with higher levels of household debt tend to have more produced fixed assets (0.6), more intellectual property assets (0.6), and a greater financial net worth of the total economy (0.4). A higher leverage in the banking sector is weakly associated with a lower financial net worth of the general government sector (0.4).
Statistical agenda ahead
The Economic Capital indicators used in this chapter encompass measures of the stocks held by the country as a whole or by different economic sectors (households, general government, financial corporations), as well as flows of investment and risk factors. The majority of these indicators are well defined and measured in the System of National Accounts. However, they offer only a high-level perspective on the state of Economic Capital in a country. A fuller understanding of economic resilience and financial stability, for example, requires more detailed dashboards (Financial Stability Board and International Monetary Fund, 2019[2]; Röhn et al., 2015[3]).
Within the indicators of Economic Capital shown here, some challenges still remain:
Available measures do not always allow disaggregating balance sheet data by institutional sectors and asset distribution across different groups at a more granular level.
Asset price bubbles can affect the interpretation of financial net worth over time: change in net worth from one year to the next can occur not only due to financial transactions, but also due to price changes in financial assets and liabilities. Thus, growth in financial capital can give a misleading impression of future risks and financial conditions.
Banking sector leverage is not straightforward to interpret as it is a measure of volatility and risk, but at the same time reflects regulations on banks’ capital requirements. It is unclear which ratio is ideal from a well-being production perspective, and this is also likely to vary with country circumstances.
Household wealth is considered as part of the Income and Wealth dimension of well-being, and thus not duplicated here. Several international and national well-being frameworks (e.g. UNEP’s Inclusive Wealth Framework, Australia, Austria, Japan, Latvia, New Zealand, Scotland and Wales) also include productivity as an important element of the production process, and, indirectly, of economic sustainability as well.
References
[2] Financial Stability Board and International Monetary Fund (2019), G20 Data Gaps Initiative (DGI-2): The Fourth Progress Report — Countdown to 2021, Financial Stability Board, Basel, http://fsb.org/2019/10/g20-data-gaps-initiative-dgi-2-the-fourth-progress-report-countdown-to-2021/.
[1] OECD (2013), How’s Life?: Measuring Well-being, OECD Publishing, Paris, https://doi.org/10.1787/9789264201392-en.
[3] Röhn, O. et al. (2015), “Economic resilience: A new set of vulnerability indicators for OECD countries”, OECD Economics Department Working Papers, No. 1249, OECD Publishing, Paris, https://doi.org/10.1787/5jrxhgjw54r8-en.