Why are some nations richer than others?
Some countries get rich and stay rich, while others always seem to struggle struggle. Economists have looked at this question and believe that three critical ingredients matter most of all: capital, technology, and well-trained workers. Not raw materials –l just look at Japan. They don’t have oil, minerals, or precious metals. Not access to a major port – consider Switzerland, a land-locked series of mountain ranges. And not any specific culture — there are wealthy countries in Europe, Asia, Africa, and America.
The key to Solow’s three factors are social institutions: the rule of law, protection of intellectual property, and education. The rule of law is necessary for the accumulation of capital. If someone is going to invest in a factory or in themselvs, they need to be confident that their investment isn’t going to be taken away by the next thug who wants it. When hard work and success gets punished, people are less hard working and successful.
Intellectual property is what technology is all about. When a new invention can be patented, inventors get to work. This was behind the industrial revolution of the 18th and 19th centuries. Inventors enjoyed the fruits of their labor as they applied the steam engine and mechanical power to formerly manual processes. There was no magic to that economy. People simply profited from their own brain-power.
The last key is a well-trained workforce that can use these inputs. That requires an effective educational system and enlightened immigration policies. One of the things that has held the developing world back is nationalistic restrictions that they often put in place. It’s really, really hard to move to a developing country and find legitimate work. So much of their economies stays underground, where thugs punish success and intellectual property can be stolen.
Understanding this helps us when we evaluate different markets as investors. If they have a stable political system, these institutions can grow. If not, their wealth will be here today and be gone tomorrow.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”