Why are resource-rich countries so poor?
“All that glitters is not gold,” Shakespeare wrote. And it’s true: countries endowed with abundant natural resources–like gold, oil, or diamonds—grow more slowly than countries that don’t seem to have these natural gifts.
There are three reasons. First, a commodity-based economy is tied to a boom-and-bust cycle. We’re seeing that now, with oil. In the flush years, extra cash leads to malinvestment, 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. 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. This is sometimes called “the Dutch disease.” It afflicted Holland in the 1960s, after discovery of large natural gas fields elevated the value of the Guilder. This depressed the rest of their economy.
And the third and perhaps most important aspect of the resource curse is governance. All that cash 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–only thrive over the long haul if they nurture the potential of their people: their minds, spirits, and creative energy. That, as Shakespeare says, is the greatest resource.
Douglas R. Tengdin, CFA
Chief Investment Officer