Why it’s Bad Luck to be a Lucky Country

Commentary, Globalization, Owen McShane (historic), Uncategorized

Australia is “the lucky country”. Mineral rich Australians bask in the glow of their God-given place in the sun. Whenever the Australian economy has been in deep strife with a dreadful current account and a collapsing currency, the reformers were girding their loins and proposing major structural changes to get the economy back on the rails. Then prospects of healthy global growth attracted a wave of overseas investment into Australia’s resource sector. Everyone relaxed. Ironically the collapsing currency has boosted the profits of the commodities companies who step forward as the saviours of the share-market. It seems that what is good for BHP (a major mining company) is good for Australia – and that a weaker currency is a better currency.

But a weakening currency makes all Australians poorer. Could this be a clue that natural resources are bad for your wealth?

Immediately after World War II Canada, Australia and New Zealand were among the wealthiest nations in the world – and were confident of their future while the Asian tigers were tiny cubs. And yet by the nineties Singapore, Hong Kong, Taiwan and South Korea have succeeded beyond their own wildest dreams. The irony is that these countries which have moved so rapidly up the rankings in per capita GDP have all been resource poor. On the other hand Australia, Canada and New Zealand, who have slid down the scale, have been resource rich.

How can this be?

Peter Drucker and others point out that in the modern economy knowledge is the key “factor of production”. Hence a nation’s most valuable “natural resource” is found between its citizens’ ears. The human brain can be produced with little capital investment and has a remarkable ability to add to its own value. The new knowledge economy particularly suits the Confucian culture. The Confucian mandarins were repelled by the economy of the 19th century which was built by engineers, mechanics and tradesmen. This same Confucian culture has no problems with the modern knowledge economy which is driven by civilized and educated managers rather than a bunch of grease-monkeys.

These factors may explain why the Asian Tigers have done well; but why have the resource rich nations done relatively badly?

The wealth of the nineteenth century colonial economies was built on natural resources which is reflected in their cultures. “Dinkum Aussies” farm the land and pan for gold. Kiwi farmers are the “Backbone of the Country”. “Real” Canadians harvest the forests, trap the furs and catch the fish. These he-man myths make great movies but sustain a culture of nostalgia and conservatism.

Then we find that the natural resource landscape supports the belief that producing wealth is a zero-sum game. Anyone growing up in Canada, Australia or New Zealand has lived in a world in which foresters cut down all the forests, miners work out the gold-mines, and oil companies pump the oil-wells dry. Not surprisingly their citizens tend to believe that making money depends on exploitation – of nature or of other people’s opportunity. Wealthy people have “struck it rich” by being in the right place at the right time. They are the lucky people.

The citizens of Singapore, Hong Kong and Taiwan have grown up in a different world. They have seen no evidence that wealth creation is a zero sum game. Hong Kong was barren rock. Economic growth has not used the harbour up. Everyone recognises that education and hard work are the keys to success and these “resources” can never “run out”. They don’t even need to be recycled. When did anyone living in Singapore, Taiwan, South Korea, Hong Kong, or Japan ever expect to find riches lying in some hole in the ground?

Furthermore resource based economies require massive capital investment to extract and process forestry, minerals and fuels. Governments promote the formation of major companies who in turn are only too willing to advise government on how to run the economy.

In resource rich countries a rising currency depresses the profits of these massive commodity exporters who are quick to complain. (Commodity producers account for about 33% of Australia’s stock-market capitalisation compared with about 5% in most developed nations) It is no accident that Australia, Canada and New Zealand have all had strong lobbies for weak currency.

A company starting out in the early days of the Asian Tigers took advantage of a weak currency to offer competitive prices in the rich markets. Imported plant and equipment was expensive but local labour was cheap. As the economies developed their currencies strengthened. But this reduced imported costs. Companies which add value and who can source their materials on world markets have nothing to fear from strong currencies. Such companies enjoy the benefits of increased profits within an economy in which all the citizens are getting richer. The Tigers have been playing a win-win game. Their currencies have all strengthened dramatically since the War and their citizens now consume imported goods and enjoy foreign travel. So who would want a weak currency?

The resource rich nations of the Commonwealth and South America had to choose between promoting the profitability of their commodity traders and producer boards and promoting the wealth of their citizens. Most times the commodity traders won.

So when the UK struck North Sea Oil the British celebrated their new found “natural wealth”. The result was that the UK economy sank into resource based decline until the Thatcher government came to the rescue with the reminder that there was no free lunch.

The message to the citizens of Hong Kong, Singapore and Taiwan is that they should never cast their eyes wistfully towards the natural wealth of China, the Philippines, Indonesia or Siberia. Just remember if they had ever been so “rich” their people might still be just as poor.

A CONTRARIAN VIEW: RESOURCES AND THE ENVIRONMENT

Natural physical resources (other than living species) can never run out because they are human inventions. If they were running out they would be getting more expensive and of course they get cheaper every decade, and have been doing so since 1800 when reliable records began.

Furthermore, reserves continue to increase. For example, the known reserves of fossil fuels – sufficient to last about seven hundred years at present prices and rates of consumption – are now sufficient to last a millennium. We have discovered even more reserves of fossil fuels and most are oil. The Caspian Sea and Siberia and new finds in Indonesia and even New Zealand now move the known reserves as sufficient to last a millenium at present rates of consumption and pricing. This just makes the point. The longer we wait the more reserves we seem to find. Supply is increasing and discovery and processing technologies are becoming more effective and cheaper. The end result is a fall in prices at the pump over the long term. We have abberations like the present one but these are glitches rather than a reversal of the trend. The price at the pump over the long term naturally continues to fall.

The one resource which continues becomes increasingly costly is humanity itself. The price of human skill in the open developed economies increases every year. Even though there are billions of people out there we cannot get enough of them and their price increases every year. Those countries and towns which believe that we can promote wealth by limiting population growth have got it completely wrong. We often hear claims that the average American uses ten times as many resources as the average African tribesman. That simply means that the average American produces ten times as much wealth as the average African. And we see the effect of this on both the natural and human environments with monotonous regularity on the television news.

At a time when these natural resources have diminishing value we are squandering human resources in mindlessly protecting them from any human impact as though such a policy will build a better tomorrow. As we get richer we demand a higher quality of environment and we are right to attempt to protect ourselves and our landscapes from pollution and degradation. But if we make ourselves poor in the process then environmental quality will decline rather than improve.