All that is gold does not glitter, the rhyme says. Now we have proof.
Economists have been studying the “resource curse” for years. Why is it, they ask, that countries endowed with abundant natural resources–like gold, oil, or minerals—grow more slowly than resource-poor countries?
They’ve come up with three reasons. First, a commodity-based economy is inevitably tied to the boom-and-bust cycle of that good. In the flush years, extra cash leads to overinvestment, wasteful spending, and too much debt. In the bust years, financial crises and budget-cuts overwhelm the economy
Second, the massive trade surplus that a resource-rich economy enjoys leads to an elevated exchange rate for the currency. This depresses the domestic economy because imports are so cheap. Protecting domestic industries paradoxically weakens them further, because those tariffs become items of political patronage.
Which leads us to the third and perhaps most important aspect of the resource curse: governance. All that cash derived from the commodity tends to corrupt the political system. It’s been shown that authoritarian resource-rich countries are far less likely to move towards democracy than resource-poor authoritarian regimes. And democratic institutions like education and a robust meritocracy are the surest ways to develop a country’s true source of wealth: the labor, management, and innovation of its own people.
Resource rich countries (and families) can only thrive if they assiduously nurture the potential of their people. That, as the rhyme says, is the greatest resource.
Douglas R. Tengdin, CFA
Chief Investment Officer
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