All That Glitters …

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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By |2014-09-05T13:17:12+00:00August 27th, 2009|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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