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Economy

Why Resource Rich Countries Grow Slowly?

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Why do countries face “The resource curse phenomenon” and how can countries having large natural resource reserves can break the curse to benefit from the natural resources?

Countries such as Venezuela, Nigeria and the Democratic Republic of Congo have some of the largest natural resource deposits in the world, and yet their economy suffers tremendously when compared with countries having fewer or very little natural resources.

 

The phenomenon baffled researchers when countries such as Korea, Taiwan, Singapore, Hong Kong and other extremely resource poor nations emerged as world star players, while nations such as Venezuela suffered. 97 developing nations were studied over a 20 year period and the results would amaze you. The more natural resources they had and exported, the lower was their economic growth. Countries with less or no natural resources surprisingly grew the fastest. How is this possible?

During the 18th century, Germany, Britain and the United States developed tremendously as a result of their natural resource reserves. Back then, transportation costs were very high and so having your own resources gave you an edge. Today, however, due to revolutions in global transport and energy, countries can easily import these commodities. We see countries like Japan and Korea become world class steel producers despite their complete dependence on iron ore imports. So if having natural resources does not give countries a significant advantage today, is it actually disadvantageous? Well yes. Let us see why.

A common aspect that plagues these nations is the lack of entrepreneurship. With a booming natural resource – sector wages tend to go up in this sector. With high wages to be earned, people now prefer to work instead of taking a risk and starting their own business. This eventually leads to the death of innovation and hence overall development. Nauru is an island country in the central pacific. Nauruans during the 70’s were amongst the richest people on earth, thanks to their large phosphate deposits. A majority of individuals were happily employed in the phosphate industry and did not see the need to innovate. Over time, their reserves ran out and the citizens had nothing to fall back on. The country today suffers with a staggering unemployment rate of over 90%.

Another aspect is that the Dutch Disease sets in. If we look at Venezuela, oil was discovered in the early 1900’s and the country soon became the largest oil exporter in the world. As a result, the value of their currency increased tremendously. Exports of other industries such as agriculture and manufacturing began to die as countries now found it very expensive to import from Venezuela. With 96% of export earnings coming from oil, the economy became very vulnerable to smallest changes in oil prices. A small increase spread cheer, while a small decline signaled doom. Today, with falling oil prices, bad economic policy and rampant corruption the country faces the largest economic, social and political crisis in the world.

If we board a ferry from Venezuela and travel for a couple of hours we reach the small nation of Trinidad and Tobago, a country rich in oil reserves as well. As a result of the oil boom, wages in the oil sector here are much higher than that of manufacturing or agriculture. Everyone wants to work in oil and industries like agriculture are looked down upon as a place to work if you “haven’t made it in life”. The country currently imports close to 1 billion dollars worth of food products a year and the manufacturing sector continues to shrink.

A few countries have managed to keep the curse at bay. Norway had the foresight to set up a wealth fund in 1990 and is worth 900 billion dollars today. During times of low oil prices, the fund is used as a cushion to balance trade deficits.

A rare phenomenon is seen in Iran. In spite of being extremely resource rich, manufacturing exports have actually gone up. This is due to the fact that the government kept energy prices such as electricity cheap. This provided companies with a competitive advantage in foreign markets.

In the absence of strong strategy, forward looking policies and exploring alternate sources of revenue, many more nations may be headed towards disaster.

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2 Comments

2 Comments

  1. BlueFishh

    July 15, 2017 at 6:57 am

    Reblogged this on BlueFishh and commented:

    I was actually looking to write a post concerning the issue addressed in this post, but now I don’t feel the need to do so as this post explains it perfectly! I would highly recommend reading it as I find this topic utterly fasinating.

  2. Zinni

    July 15, 2017 at 7:01 am

    Well, this true for Asian developing nations as well. The fact that they are developing lies in the fact that they lack good entrepreneurship. Enlightening post. 🙂

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Economy

One Belt One Road Explained

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China plans to revive the ancient Silk Road. Where does India and the rest of the world stand?

With the US and Britain, pioneers of free trade, slowly retreating from their commitment to globalization, China has announced its intentions to stimulate and boost trade through a trillion dollar project called the “Belt and Road” initiative that aims at building a modern day version of the ancient Silk Road. The plan consists of developing 2 trade routes: one through land and the other through sea, linking over 60 countries. While some countries love it, others are skeptical. India has been its most vocal opponent and has boycotted the move.

 

While China continues to make friends across the world, including India’s neighbors, should India be worried? Or has the country taken the right decision by wanting no part in the initiative? To help answer this lets go back in time to when the ancient Silk Route emerged.

Sometime around 2700 BCE, the Chinese discovered the art of making silk and its production was kept a fiercely guarded secret for over 3000 years. The Chinese had monopoly over the silk trade, and demand for the precious fabric spread far and wide ultimately reaching the Roman Empire. As a result, a series of trade routes emerged across central Asia. Caravans and ships carved out these routes, from the west coast of Japan to the Mediterranean spanning more than 15000 kilometers over both land and sea.

For the first time in history, East and West came together. Merchants now had to learn new languages and traditions in order to sell their goods, and in turn passed on valuable knowledge themselves. Science, art, literature, religion and politics were discussed and ideas were shared. Travel inns and guesthouses sprung up all along the way providing travelers a respite from their journey. Ports emerged along sea routes, and business flourished. Religions crossed borders, cities developed and the world progressed. Plague, which devastated Europe, is also believed to have spread through these routes. However, over time the Silk Road began to lose its significance due to the ever changing political environment, fragmented empires and local power struggles.

Xi Jinping, now plans to reopen a modernized trillion dollar version of the Silk Road with massive projects lined up for the next 10 years, foremost among them is the $62 billion China-Pakistan economic corridor (Cpec) that would include motorways, power plants, wind farms, factories and railways. Supporters say this will spark an “economic revolution” and create up to one million jobs in Pakistan alone.

India however isn’t convinced and finds it difficult to believe that China would be willing to spend trillions of dollars merely as a gift to the world and is worried that the project would result in tremendous debt burdens for various countries. Also, the proposed route passes through a Pakistan administered area: Gilgit-Baltistan, that has long been claimed by India. The Modi government, unclear on what the actual price tag for this vision would be and the environmental impact such projects would have, has decided to have no part in this. Along with India,  leaders of most major western powers, including Donald Trump, Angela Merkel and Theresa May, skipped the event as well.

China claims that the fears are unwarranted and all that they wish for is for the world to stick together like a flock of geese.  Numerous TV advertisements have been aired to reassure both supporters and critics

On paper, the Belt and road initiative is the largest project the world has ever seen, but it could take years before things actually take off.

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Economy

Why Are the Top Ten Richest Countries Small?

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What is common between the top ten richest countries in the world?

Looking at the richest countries in the world today, we observe similar traits present in those that dominate the list. For one, a majority of them are small nations in terms of population as well as geographic size, but the average income per person here is the highest in the world. They are even richer than the United States, The UK as well as Germany.

A country present on this list is Singapore. In 1965, the country had a GDP per capita of just $500, the same as Ghana and today is one of the wealthiest nations in the world. Its strategic location and natural harbor at the mouth of the Malacca strait, coupled with an honest government, lots of foreign trade and its small size have all contributed to its immense success. Why does size matter?

If we look at large countries, they are often harder to govern due to the vast differences in ideology, ethnicity, race and language of their people. Smaller countries are more homogeneous, having smaller, centralized governments that tend to be more efficient and accountable. Luxembourg, Netherlands, Singapore, Switzerland and Norway are some of the least corrupt nations in the World.

Being small also allows nations to collect more in taxes. The population is small, and leakages can be avoided to a greater extent. This allows them to keep relatively low tax rates and in-spite of this collect more tax as a percentage of GDP when compared with larger nations. Luxembourg has one of the lowest tax rates in Europe and as a result given rise to a booming banking and financial sector. Its citizens enjoy some of the highest standards of living in the world.

Ireland has been the go to destination for large multinationals such as Facebook, Apple and IBM due to its favourable tax environment along with a highly educated workforce. The Irish government played a huge part in this, by focussing on educating its citizens, even providing secondary education for free. There is almost no unemployment here.

Having a smaller population results in better distribution of wealth. Qatar has the third largest natural gas reserves in the world and a very small population. If you divide that large a resource among that small a population, you soon become the richest country in the world. Qatar was hit by falling oil prices, yet managed to retain the top spot by strategically diversifying into other sectors as well.

Many Smaller countries act as city-states, having a completely urban population. As a result there is no urban-rural or city-countryside divide that is observed in larger nations, hence they are richer. If we assume cities such as Beijing, London, or San Francisco as independent countries, the top 10 table would look a lot different.

Another reason why these smaller countries have done better is that they need to spend much less on their infrastructure such as roads, railways or bridges. Also, they spend very little on their military. Luxembourg has an army of just 1000 soldiers. San Marino has no military. This provides smaller countries with more money to spend and invest in things like education and healthcare, creating a healthier and highly skilled society.

Smaller countries can afford to focus on just one or two things and do them perfectly Take Macao for instance; it developed into a hot-spot for leisure and gambling, and has long eclipsed Las Vegas in earnings.

We must point out that a majority of these nations have a large immigrant workforce who are not citizens but contribute towards their economy. While calculating GDP per capita these individuals are not factored in, leading to slightly inflated figures. Also, large countries benefit from economies of scale and practically dominate manufacturing and agriculture. Every nation is unique and has its own strengths, but we cannot deny that smaller nations do enjoy the sweeter slice of the pie.

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Economy

The Venezuelan Crisis Explained

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Venezuela is home to the largest oil reserves in the world, even more than Saudi Arabia, but is still facing the largest social and political crisis in the world today. Let us understand why.

[youtube https://www.youtube.com/watch?v=9uha4yezakw&w=560&h=315]

Around the 10th century in ancient Venezuela, indigenous tribes discovered oil seeping through the land. The thick black fluid was used as medicine and to light lamps. Actual extraction however began much later. In 1922, a huge oil well was discovered. When they drilled inside, oil came gushing out in a jet rising more than 40 meters high and it took them 9 days to contain it. Foreign oil companies rushed to the country to be part of all the action. The oil industry developed massively since then and soon began to overshadow the other sectors in the country. By 1928 Venezuela became the largest oil exporter in the world.

The value of the Venezuelan currency increased rapidly, riding on the back of a single product, oil. But what about the other industries like agriculture? Their exports suffered as countries now found it expensive to import from Venezuela.

Global demand for oil kept on increasing, and during the Second World War, Venezuela was producing close to 1 million barrels per day.

By 1950, the Middle East began exporting large amounts of oil as well. Soon, supply overshot demand and oil prices began to fall. In response, the oil producing nations of Venezuela, Iran, Saudi Arabia, Iraq and Kuwait met to decide on a future strategy. They formed OPEC in 1960, whose main aim was to bring oil prices back up to reasonable levels by regulating the supply. Export quotas were placed on member countries to keep checks on overproduction.

Oil prices continued to fall and in 1970 had reached a price of $3.4 per barrel. War and international turmoil the following decade changed this. The 1973 Arab Israeli war led to Arab OPEC countries stopping trade with the United States and other nations in response to their support for Israel. Global oil prices shot up to $37 per barrel by 1980 and the Venezuelans quadrupled their revenues. The oil industry was nationalized and people rejoiced, but sadly not for long. OPEC members began breaking their production quota promises and produced more oil to take advantage of the high prices, but demand was decreasing as the world economy was slowing down. This led to an immense oversupply, or an oil glut and prices crashed yet again. By 1986 oil prices had a reached a low of $14 per barrel and did not see a significant recovery until 1999.

In 1999, Hugo Chavez came to power and luck was on his side. Huge demand from developing nations such as India and China boosted global oil prices and gave him the funds needed to pursue his economic strategy. However, these strategies proved to be unproductive in the long run. He began funding social programs with oil money which led to overspending. When he fell short he borrowed heavily. His successor, Nicolas Maduro followed in his footsteps. Government regulations, takeovers, corruption and restriction on imports led to a hostile business environment and the death of private companies here.

Oil prices have been falling since 2014 and Venezuela is facing the largest social crisis in the world today. The inflation rate here is the highest in the world and the country is heavily debt ridden. People have money but stores remain empty. There is a huge shortage of Food, medicine and other daily supplies making many resort to looting. Crime rates have gone up and the country is notorious for its homicides. The boon of the 20’s has turned into a bane today.

In the face of fluctuating oil prices, should the country shift its focus to other industries as well?

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