Abundance is Nothing

Many of the world's developing countries are among the world's richest. They often have the most people, and to top it off, they have the most resources too. They want nothing when it comes to human resources, and they certainly don't need anything more than the oil/diamond/forest reserves they've been blessed with.

So why are these countries all so poor? Why are some of the world's worst basket cases also some of the world's richest, in the sense that they have such great potential for development and growth? Because natural resources are a crutch.

This might seem odd to you. After all, the orthodox understanding of economics is that the market is a great mover and shaper of progress. If we unleash the market system on a country, any country, the thinking goes, we will see progress. Unfortunately, this isn't true.

People are shaped by incentives. Most of them time, the market sends the right signals and thus creates incentives for progress. The fellow who builds the better mousetrap gets more mice, and thus has an incentive to move forward.

But what incentive does the diamond miner have to progress? What incentives do they have? All they are geared towards doing is extracting more material from their country's natural resources, and maybe processing it. That's not real progress — it's just the illusion of progress.

True progress is when you add value. True progress is building a better mousetrap and growing the potential for mice-catching, rather than building more of the same old mousetraps. In the short run, you may be able to catch more mice, but in the long run, you haven't progressed at all.

Many developing countries, especially in Africa, have fallen prey to the trap of abundance. They have the most diamonds in the world, and some of them such as Nigeria are also powerful players in the oil markets because of their immense supply. Yet they remain some of the world's worst basket cases.

This is because they haven't had an incentive to add value. They haven't had an incentive to come up with new uses for diamonds, or to find ways to better use petroleum, or to otherwise actually grow the potential of their economy.

The only incentive they've had is to mine more diamonds, drill for more oil, and slash and burn more forests. In the short run, this has led to obscene amounts of wealth concentrated in the hands of those lucky few who owned the right parcels of land. (Or, in many cases, those lucky few who confiscated the right parcels of land from their former owners.)

Because the rewards are apportioned according to luck, rather than skill or ability to add value, it's not surprising that developing economies with abundant natural resources have been unable to see real progress. They have the illusion and trappings of progress, but not the reality. There's no incentive to really move forward.

An over-reliance on natural resources, then, is often fatal to an economy. Indeed, abundance is often suicide because it drives complacency, not progress. Countries traditionally scarce in resources have often been more successful in developing — Japan and Singapore are just two examples.

It's obviously not easy to generalise, because each country has a different economic situation. But in many cases, it does not seem unreasonable to believe that abundance is nothing. What matters are incentives to add value and grow the economic pie, and abundance often turns out to be a disincentive for such progress.