Sunday, May 22, 2011

A Guest Blog: Best and Worst World Economies

(While Angus is out...Uganda Africa Again?....I'm accepting guest blogs, even those with opposing views on globalization. So, here you go!)

Comparing the Best and Worst World Economies (by Jeremy Fordham)

Economies thrive when a country has something to sell that the rest of the world wants. Whether it's animal, vegetable or mineral, or in the case of a service economy, human, trade creates wealth. One would think that the richest nations would be the ones with the most natural resources, but it's not necessarily true. For example, Botswana is the world's largest producer of diamonds, but has a GDP per capita of only $6,000.

Once a country identifies its resources, it must have the infrastructure to develop them and the political will to build that infrastructure. This can be done in two ways. One is to use public money for building roads, rails and ports to transport resources to market. The other way countries can grow their infrastructure is by creating trade and tax policies, which foster respect for human rights and the rule of law and will attract businesses to invest and develop the resources, creating wealth for both the companies and the host countries.

The U.S. has been enormously successful by all of these methods, with a public infrastructure that supports business, trade policies that attract foreign investment and one of the world's best human rights records. On the other hand, the Democratic Republic Congo, which is the poorest country on earth, has failed miserably at all three. The country has almost no infrastructure for developing and transporting resources. Likewise, it repels foreign business investment with one of the worst, most violent strings of mass human rights violations on the planet.

As anyone who has studied economics will tell you, there are similarities and differences between the richest and poorest economies. However the differences are stark when viewed statistically. According to the International Monetary Fund, the United States still leads the top ten economies in the world, with a 2010 GDP per capita of $47,400. At the other end of the spectrum, the Democratic Republic of Congo has a GDP per capita of $332. Yet both are republics. Both are rich in natural resources. The U.S. sits on vast deposits of coal, oil, natural gas and minerals. The Congo has oil, natural gas, gold and magnesium in abundance. Why then is the U.S. so rich and the Congo so poor?

One of the major reasons may be that the Congo's $24 trillion in mineral resources also fuels political corruption, and with no infrastructure to speak of, there is no support for industry. Violence prevents businesses from investing and extracting the resources that would make the country rich. This is a problem for many poorer economies in Africa, from Rwanda to Niger.

However countries that have no resources to sell, are small in geographical area, and isolated from the rest of the world have the worst lot of all. Though Nepal is home to Mt. Everest, its people live on an average of less than two dollars a day. Somalia, riven by political violence and with 73 percent of its population living in poverty, has found an unlikely source of income: piracy.

Yet Japan, which is also isolated, geographically small and resource-poor has the third best economy in the world, according to the CIA. Though Japan is a small island, it has invested all over the world in developing resources far from its shores. Technological innovation, a strong work ethic, high educational standards and research and development by industry led it to topple the U.S. "big three" car companies when it developed economy cars during the gas crisis of the 1970s. Following the market, Japanese car companies built factories in the U.S. to accommodate demand.

Undoubtedly geography and environment play an important role in shaping an economy, no matter what the level of natural resources and human determination. Siberia has untold mineral wealth beneath its frozen tundra. Yet it's the frozen tundra that makes them difficult to extract. On the other hand, the United Arab Emirates has vast oceans of oil under its sands that are extremely easy to access. As a result, the UAE has soaring skyscrapers and hotels shaped like sailboats, while Siberia has, well, snow and an economy that ranks 51st in the world.

As climate change progresses, weather and accessibility to clean water will have important impacts on economies. Climate change is one of the great levelers among countries. All countries need to be able to grow food and ship goods. The increasing severity and frequency of floods and storms may wipe out crops and destroy roads and bridges. Likewise, a lack of water for growing populations in some areas will also become a problem that nearly every country will have to face.

In the meantime, trade policy has had a great effect on both poor and rich economies, and not always for the better. When the push for "globalization" began in the 1980s, American businesses shipped jobs and then entire industries overseas into low-priced labor markets. The result of outsourcing has been that the economies of China and India have surged, while the U.S. economy has stagnated and wages have dropped.

Last but not least, the level of education and accessibility of health care affect the vibrancy of a nation's economy, which cannot thrive in the long term without a healthy and intelligent workforce. Here the U.S. suffers, as its education rankings have sunk to 36th in the world, right next to Poland and Estonia. Similarly, Although the U.S. has the most expensive health care in the world, the World Health Organization ranks it 37th for effectiveness, which is about as effective as Costa Rica's health system (which is not near as costly).

It appears that gaps between some of the richest and poorest economies are gradually closing. China was once a fountain of cheap goods for America's insatiable consumers, yet now the country owns much of America's debt. Countries with high populations of young people like India are surging in economic power, while America's aging infrastructure, high deficits and continued outsourcing drain its buying power. It will be interesting to see what country will be the economic "superpower" in another ten years.


Tom said...

"Economies thrive when a country has something to sell..." So much wrongness in just nine words. Is "economy" an attribute of "country"? It might be, if your country has strong border controls, but it surely does not have to be and is better when not. The nine words seem to suggest causality: cross border trade causes thriving. This is then quickly denied; also Cuba has great cigars. More personally, the U.S. sells great software to the world yet Cleveland still stagnates.

"Once a country identifies its resources..." WTF? A country, not being a sentient entity is going have a lot of trouble identifying. I guess he means the political rulers have to know the market. They don't. They can provide means of settling disputes and for pursuing thieves. They can try not to waste too many resources on their Grand Schemes. And they DON'T have to build ports with "public money". They might have to empower the builders.

Thriving is not a collectivist activity.

Brandon Berg said...

Similarly, Although the U.S. has the most expensive health care in the world, the World Health Organization ranks it 37th for effectiveness...

No it doesn't. The rankings you're thinking of aren't based on effectiveness. They're based largely on how well a health care system conforms to the authors' left-wing ideals. For example, 25% of the score is how "fair" the financing is--i.e., how much of a subsidy low-income households get.

Glen Whitman has a good write-up of the problems with the rankings here. Part 2 explains the scoring.

Also, the editor-in-chief of that report is on record as stating that the rankings are spurious and that people should stop citing them.

Small Business said...

I must say I'm thrilled with this article.