wiser today

A man should never be ashamed to own that he is wrong, which is but saying in other words that he is wiser today than he was yesterday.

Peter Marber

Money Changes Everything

There's a big difference between generating income by pumping oil out of the ground versus cultivating prosperity through the three wealth catalysts of human capital, trade, and finance. In fact, it has been suggested that natural resources are actually an impediment in developing countries, smothering democratic trends and collective prosperity, what author Amity Shlaes calls 'the commodity curse.' This seems particularly true of oil-rich countries in the Gulf, along with some countries in Latin America (Venezuela, Ecuador, Colombia), Africa (Angola, Nigeria), and other assorted places in Asia and the former Soviet Union. It also pertains to almost any country that depends on one or two export commodities for most of its economy.

The idea of Shlaes' 'commodity curse' may be economically counterintuitive, given that valuable natural resources can be the basis for some of the wealth creation concepts discussed, that is, free trade and comparative advantage. However, commodity wealth manifests itself differently in nations where democracy, education, and private property have yet to be valued widely. Think of it this way: Whoever controls the oil field or the gold mine in a developing country often controls the nation. In developing non-democratic countries, commodities are often under state rule. Historically, this has led to centralized, insular policies (including import substitution, tariffs, etc.) versus diffused democracy and market-driven economics. In this respect, nationalized assets have a way of stunting economic, political, and cultural maturation. In some ways, they embody Foster's 'peasant culture' and Grondona's 'resistant' tendencies because the dependence on commodity prices almost always precludes the effort to develop human capital, a key ingredient to successful comparative advantage and free trade.

Corruption is often prevalent where a country's cash flow is controlled by the state. Why, for example, should a government in control of a cash cow ever develop competitive sectors? That would simply undermine its power. For regimes dependent on
commodities, a few good 'bumper crop' years are enough to suppress the implementation of serious reforms. Indeed, such regimes have little interest in raising living standards, boosting education, or cultivating any optimistic, wealth-oriented values. As Shlaes notes, this may be at the root of peasant culture: 'The commodity curse thesis does a lot to explain why so many Middle Easterners do not seem eager to hammer swords into ploughshares, or trade Kalashnikovs for Windows XP. Subjects of Saudi Arabia or the youth in Iran have little hope of collecting huge material rewards in their own lifetime. That is why some embrace Islam's paradise, Koran school and suicide hijacking.'

The economic success stories of the last 50 years—Japan, Hong Kong, Taiwan, Singapore, and South Korea, and now China and India—have fairly small endowments of natural resources and so have been forced to rely on literate, skilled labor to raise living standards. They've realized the importance of stable, unlimited human wealth versus limited commodities under the ground. As Shlaes adds, 'It is no accident that Israel, with not much more than Dead Sea salt to sell, has turned out to be the Middle East's only democracy and a technology exporter.' And some developing economies that do have resources, such as Mexico, have made strides to diversify income away from one source. Since the early 1980s, Mexico has shifted its economy from approximatly two-thirds oil-related, one-third diversified, to two-thirds diversified, one-third oil.

Commodities may be a start to help modernize an economy, but an overdependence on them often leads to a failure to develop the greatest long-term asset for a country: human capital. This is a resource that can increase every year, and will not dwindle with use.