5 Answers to Questions You May Have (Part 4): Economic Development, Oil, & "Culture"
How countries do more with less
Part 1 is here:
Part 2 is here:
#1 Which resources matter?
Countries can become wealthy through various means, one being ample oil and gas reserves per capita. These resources are highly traded commodities, ranking the top two globally.
Oil and natural gas are highly valuable natural resources due to their energy density, versatility, limited substitutes, and recyclability. They exhibit price inelasticity, meaning demand remains relatively stable even if prices rise. Unlike other resources that are more price elastic, meaning demand decreases with price increases due to substitutes or recycled goods. For instance, manufacturers may switch to substitutes like carbon-fiber instead of graphite if graphite prices rise, hurting graphite demand. France has the state-owned energy firms Orano & EDF occacionally recycle uranium instead of constantly purchasing uranium from Kazakhstan or Niger ..This is partly non oil cartels, like copper, tin, and etc. failed.
Demand for crude oil and gas has decreased from approximately $2 trillion to $1.3 trillion over the past decade due to renewable alternatives coming to the market, but oil & gas are still surpass the combined demand for other resources.
Regarding the Democratic Republic of Congo's resource wealth, the assumption that abundant resources guarantee wealth overlooks market dynamics and that not all resources are equally valuable. For example, despite Congo's reserves of cobalt and other minerals, from 2022 to Feb 2024, the price of cobalt per ton has been plummeting from $81K to under $30K.
Why? Because lithium iron phosphate (LIP) batteries have been surging in demand and don’t require cobalt. LIP batteries are also cheaper and firms avoid cobalt due to its association with deadly artisanal mining in Congo. Ultimately, there is a materials/chemical engineer or scientist who is working on substituting your mineral.
As a result of oil & gas, its pretty clear that nations that have the oil & gas per capita will end up richer.
#2 How strong is the predictive power of oil & gas exports per capita?
The graph below shows a quick comparison oil and gas exports per capita to income per person, revealing that many African petrostates are relatively resource poor compared to Gulf states, Brunei, or Norway. The R^2 value, indicating predictive accuracy, is 79% a strong result in economics. (Venezuela & Iran were excluded due to data limitations, as they are sanctioned and use shell companies to export oil to China).
For those unfamiliar with statistics, R^2 measures how well independent variables explain the variability of the dependent variable in a regression analysis. In this context, 79% of the variation in income per capita among petrostates can be attributed to the volume of oil and gas exports relative to their population.
*Note I only included crude oil & gas exports. I didn’t include refined petrol or petrochemicals. Bahrain doesn’t export much in crude oil or natural gas, but exports substantial refined petrol. That’s why Bahrain’s hydrocarbon exports aren’t that much in the graph.
To drive the point home. Qatar sells $72B in crude oil & natural gas per year. There’s only 2.7M people, so that’s ~$27K per person. Now only 300K people in Qatar are citizens, so if we divide their fossil fuel exports by their citizen population (who are the only people who have access to Qatari’s sovereign wealth fund and government benefits) then the average Qatari makes ~$220K per citizen through fossil fuel exports.
Nigeria sells roughly $51B in crude oil & natural gas, and substantial amounts of it are stolen. There’s roughly 220M people and almost all of them are citizens. That’s $232 per capita. In other words, due to Nigeria’s high population (which is still growing rapidly), Nigeria’s low oil exports per capita indicate relative resource scarcity. Even if 90% of Nigeria’s oil was stolen per year, Nigeria’s exports per capita would only be $2320, which is still losing to Libya or Saudi Arabia.
In my opinion, oil states like Libya and Qatar aren’t richer than Nigeria or Chad solely they manage their oil wealth better (although they are certainly perceived to be less corrupt), they also have orders of magnitude more oil to play with relative to their population sizes.
#3 Is Economic Development Cultural?
Some argue that economic development relies not only on policies but also on cultural factors. For instance, proponents suggest that nations like the U.S., Canada, Australia, and Europe prosper due to their Greco-Roman and Judeo-Christian cultural foundations, while countries such as Japan, South Korea, Taiwan, Hong Kong, Singapore, and Macau (and increasingly China and Vietnam) attribute their wealth to a Sino-Confucian cultural heritage.
This argument posits that culture serves as a reservoir for social capital, which in turn fosters the development of robust institutions.
Sometimes people may say this argument as a way to downplay other cultures like Southeast Asia, Black Africans, South Asian, and etc.
While there might be “better” cultures for a particular time period, we must remember that cultures are dynamic. Max Weber, a German Sociologist in the late 1800s, early 1900s argued that China was unlikely to industrialize because they had Confucius culture instead of the “Protestant Work Ethic” that Britain, America, and Germany had.
While China certainly was full of issues at that time, like the opium that Britain flooded it with, the idea that Confucius culture is incompatible with industrialization turned out to be false. Japan became the first Confucius culture to industrialize. By 1912, it was the first non-white, industrialized country that was able to dance over Russia in a war. By 1980s, China was industrializing as well. The China of Deng Xiaoping was not the same exact culture of the the Imperial Qing in the 19th century. The culture shifted. Chinese women were in the labor force, foot binding was abolished, the hierarchal nature of China changed somewhat, and China even did a “Cultural Revolution” during Mao in the 1960s-1970s.
In predicting outcomes, incentive structures are more reliable than cultural factors. In 30-50 years, if Kenya, Tanzania, and Uganda have massive economic growth and become the “Swahili Tigers”, we might be arguing that Swahili culture is a superior African culture than West African, Levantine Arab, or South Asian culture. People will be inventing “Just So” stories that Swahili culture is better than most of African culture due to the Persian & Arab influence in the East Africa coasts in the middle ages. What has happened throughout history is that when a nation gets their act together, people will come up with theories, make movies, and write books post-hoc saying that this was destined to happen.
Unfortunately, some political leaders in developing countries propagate self-defeating narratives like "We aren't like the West!" or "We can't compete with X!" This mindset ingrains an inferiority complex, potentially hindering progress.
#4 What are other ways of development besides having substantial oil & gas per capita?
United States and the former Soviet Union have produced an army of economists that have given developing countries a combination of good and awful advice. In the 1980s, economists from Washington D.C. and Moscow had a religious identity based on their policy prescriptions and some of them are atrocious. Moscow recommended collectivized farming which was caused famine in Soviet Ukraine & Soviet Kazakhstan, China, North Korea, and Ethiopia.
Washington D.C. advocated financial liberalization for countries that were not ready for it, and Indonesia, Thailand, Malaysia, and Philippines were damaged hard by the Asian financial crisis.
Generally capitalism better than communism/Marxist-Leninism/socialism, but the issue is a dogmatism to neoliberalism, instead of being flexible. There are countries that right now need to be 80%-20% neoliberal, and countries that should be the opposite.
For those who don’t know what neoliberalism means. It basically means taking the free market & free trade principles espoused by 18th & 19th century European economists like the French Physiocrats, Adam Smith & David Ricardo, while being ok with some government monopolization like the issuance of currency and patents. The general policy prescriptions are:
Sound money (obsession with low inflation - 2%)
Small government (limited or zero government ownership of enterprise, limited or zero government control of prices, limited or zero government laws to influence markets)
Domination of Private enterprise - most enterprise is private as opposed to a government owned firm
Free trade- the government does not try to influence markets to benefit domestic markets and punish foreign competition thru tariffs or import quotas
Friendliness to foreign investment (no joint owned enterprises or technology transfers required to invest in the country)
While rich countries should be focused on most of these policies, no country has followed these policy prescriptions to the letter when they were developing countries. The closest exceptions are Singapore & Hong Kong, and even they still had some state owned government monopolies. Countries like South Korea, were capitalist but not at all neoliberal at the start.
For example, North Korea started off richer than South Korea. People like Milton Friedman will tell you it’s because of “Free Market Capitalism”. While South Korea was certainly capitalist, it was definitely not free market. If you read about South Korean leaders like Syngman Rhee in the 1960s, he allowed private enterprise, but he turned all banks into government owned firms. This was because he wanted to make sure banks were lending cheaply to Chaebols (South Korean conglomerates) like LG, Hyundai, and Samsung to develop manufacturing so they can learn and compete with the West & Japan instead of banks lending to luxury for real estate.
Although I have minor critiques of the book, if you read “How Asia Works” by Joe Studwell he basically makes an incredibly convincing argument that for a country to get upper-middle income/rich, most countries need to do the following:
A government has 3 tools, and 1 is a prerequisite.
Land Reform to produce high yield household farming (pre-requisite)
Manufacturing focused in export discipline
Financial repression to give your country an advantage on international markets with artificially cheap loans & cheap prices to sell
You have to do 1 before part 2 or 3, because financial repression involves making your currency cheap and interest rates low to undercut Western manufacturing firms. If a country makes their currency artificially cheap and they depend on food imports, than the country will be artificially making food more expensive just to subsidize businesses. People would riot. This policy only makes sense once food security is ensured first because then you don’t depend on food imports.
The thesis is amazing since most countries neglect part 1. In fact, most African countries spent 80% of their time trying to build manufacturing and spent very little time boosting agricultural yields. This is called “urban bias”. The result was uncompetitive manufacturing firms that serve domestic markets and terrible food yields. In my parent’s home country Ghana, there is a Ghanaian car firm called Kantanka, Morocco has Laraki, Tunisia has Wallyscar, Kenya has Mobius, and in Nigeria there’s IVM. If you haven’t heard of these it goes to show you how uncompetitive they are on global markets. Japanese and German brands dominate internal combustion engine cars and America’s Tesla and Chinese’s BYD dominate global EV markets. The vast majority of African countries are outright abysmal at farming and some purposely overvalue their currencies to import food or fuel. The results are two fold. First is parallel market rates between the black market currency exchange (true market value of a currency) vs. the government set rate (the overvalued rate the government makes). Secondly, this makes the interest rates in some Africa nations are absurdly high, killing businesses’ ability to scale and learn to be more productive. Here are different interest rates in different African countries: Ghana (29%), Nigeria (19%), and Kenya (13%). Meanwhile, for countries that are growing in food security and don’t care about expensive imports, they are lowering interest rates to give their firms a fighting chance to compete with the West- China (3.5%), Bangladesh (6.5%) and Vietnam (4.5%).
All of this goes back to food yields. If you don’t need food imports, you can lower interest rates and lower the value of your currency. Below you will see the “Low Income Food Deficit Country” threshold, and you will see a list of African countries that are below the threshold.
The only African countries which know how to grow food above the threshold are Egypt & South Africa (which is why South Africa hasn’t pursued land reform yet).
In addition, Ethiopia has made tremendous gains, going from having among the worst food productivity on earth to on the cusp of exceeding the threshold. Selassie famously did not attempt land reform, and was so embarrassed that Ethiopians were starving he waited before letting the international community give aid to starving Ethiopians. The Derg Communists took over because of Selassie’s failure, but their collectivist farming failed them also. It wasn’t until the TPLF overthrew the communists, and did land reform, which started the agricultural boom in Ethiopia, which helped contribute to Ethiopia having robust Economic growth. If Ethiopia were able to resolve its internal issues: The Dam issue with Egypt, the internal conflicts with Tigray, Amhara, and Oromo, and Somalia issue with the Somaliland port deal, then Ethiopia could go even further.
If you asked me which African country I would bet on, it would be the country that became food secure first. Mauritius was that country African country that grew in the “How Asia Works” way. It is now one of the few upper middle income African countries (even though most of the people are South Asian) and it has a booming textile and developing biotech sector. Over the past 60 years, we have seen the failure of African countries to industrialize and still struggling to grow food.
#5 What are other ways of development besides having substantial oil & gas per capita & farming/financial repression/export manufacturing?
If you are an island state as we discussed in Seychelles - selling islands, tourism, flag of convivence are great ways to get wealthier. For Seychelles, tourism functions the same as oil does for Saudi Arabia. In addition to those methods, Mauritius, Hong Kong. Singapore, and Caribbean island states offer offshore financial centers are great ways to rake up immense foreign currency reserves relative to your population.
Conclusion:
In short there are different ways to develop, and a country can do more than one but generally the different poles are:
1. Resource lottery of oil & gas relative to population (Qatar, UAE, Kuwait)
2. Agriculture, Financial Repression, Protectionism + Export Manufacturing: (Germany, Japan, Taiwan, South Korea, China)
3. Foreign Direct Investment (Ireland, Singapore)
4. Tourism, Tax haven, flag of convivence, & Offshore Financial services: (Island nations in the Caribbean, Seychelles, Hong Kong)
Thank you for another well researched informative post.
Stop bingeing Sowelll videos on YouTube, Pete. Understand how causality works in social sciences first.