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January 26, 2004

The Curse of Resources

Steven Den Beste wrote another beautiful piece today, and I'd like to expand on one point.

Many people worry that too many resources, such as oil, can be incompatible with movement toward democracy. This may not actually be true, since the US used to be the largest oil producer, still produces an immense amount of oil, and remains firmly democratic. This also doesn't hold in the North Sea or Canada. Yet the problem is real, and its effects can be very damaging to many countries.

There's a flip side to this problem that spurred some interesting thoughts and helped solve one of the most puzzling problems in geology. Why are immense reserves of natural resources almost always found in unstable countries, with the notable exceptions of the Anglo-American nations? The geologists puzzled over this one for a very long time, since mineral and petroleum deposits should be distributed randomly, at least with respect to the political maps. Yet this didn't appear to be the case. Finally they concluded that the question was backwards. The question became "why do the countries which suddenly find immense mineral wealth become politically unstable?" A more important question would be "Why didn't this happen in America, Canada, or Australia?" It has to do with freedom, property rights, guns, and in some ways a lack of socialist philosophy.

Pick some small country and give it a major find of gold, silver, diamonds, or now days oil. What do the people do? Well, if it's a gold or diamond find the first thing many of them do is head off to strike it rich, abandoning whatever productive enterprise they'd previously been pursuing. Shops, businesses, and farms get abandoned as masses of people set out to lay a claim. However, there's a niggling little problem in most countries that don't have clear and transferable property rights, specifically to land. Somebody's going to show up with a deed from a long dead king, or else some tribal leader will hold forth that the find is on tribal lands. Someone else will use their power and influence to assert that the land is theirs. Others bribe judges to have those claims thrown out. It's not just a free for all among the miners in the pit. It's a free for all either in the corridors of power or the tents and yurts of the tribal chieftains. The winner will generally be whoever is the most clever, ruthless, bold or calculating. But in the end it's going to come down to force, either physical force or social coercion, calling upon armed thugs, tribal militias, the army, or whoever is at hand.

The initial winner of this struggle suddenly has an immense amount of money, which in an unstable social environment translates into an immense amount of power, since the early profits can easily be plowed back into more soldiers, more guns, more bribes, and more kickbacks. This is extremely common in Africa, where diamonds and other minerals tend to fund all the armed conflict, and even to cause it. A concentrated find of immense wealth can easily convert into a concentration of immense political power. In this situation you can get chaos like in Africa, where each mine must be defended from other militias bent on takeover, with each mine also funding a militia bent on taking over someone else's mines. In short, anarchy and war spurred by wealth and the desire to control it.

America is not immune to these influences, but was much better able to contain them. One of the reasons is our system of property lights, developed over time, in which the person who's actually on the ground and making improvements to a piece of land was considered the rightful owner, regardless of bizarre land grants from the King of Spain and tortured deeds from the Revolutionary War. The brilliant economist Hernando De Soto discusses this at length in his book "The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else". He relates how the property law on the ground, the common law of the people, the miners as it were, kept the California Gold Rush from fueling some form of dictatorship as occurred so often in many other countries. By using legal principles they'd been brought up with, other principles common in the area, and anything else they could think of, the miners developed a system of property laws whereby a man could own as little as one square foot of land, and the rights to all the gold in that square foot were his. They had methods of resolving disputes, handling claim jumpers, and the free buying and selling of claims.

But there was still quite a bit of chaos, and we are certainly not immune to the effect of everyone abandoning their productive enterprises to strike it rich, as this passage relates.

What did get their attention was Sam Brannan arriving in town a few weeks later, waving a quinine bottle full of gold in the air, and shouting, “Gold! Gold! Gold from the American River!” He was quickly surrounded as people rushed to see the gold and hear the news. Gold fever struck and within days the city was nearly empty. Mr. Buckelew, publisher of the Californian, suspended publication on May 29 as there were no readers left in town. In his last, curtailed issue he states: “The majority of our subscribers and many of our advertisers have closed their doors and places of business and left town....The whole country, from San Francisco to Los Angeles and from the seashore to the Sierra Nevada, resounds with the sordid cry of ‘gold! Gold!! GOLD!!!’ while the field is left half planted, the house half built, and everything neglected but the manufacture of shovels and pickaxes.” Mr. Buckelew thence went upon the mountain to have a look around for his own prospecting self.

Of course, total pandemonium followed, but was kept in check by enacting and enforcement of laws by the people involved.
This passage on the history of the claims relates some of it.

One of the most significant political innovations in California mining communities was the development of the office of the alcalde. This office was a transformation of the old Mexican alcaide who governed in lay cities. Each mining district elected a person to record deeds, thus an alcalde's primary duties were to register claims and settle disputes over mining and land deeds. The alcalde also acted as a judge and jury, but many times he selected a panel of local citizens who acted as arbiters to aid in deciding mining claims. The alcaide system was an example of Spanish and Mexican influences permeating the American mining community. In mining communities the alcalde was a combination mayor, court system, and city government. While an alcalde system worked very well as a means of deciding American land claims, Spanish and Mexican mining claims were generally ignored, and this led to the first ethnic tensions in the gold fields. Despite these crude attempts at justice, however, lynchings and vigilantism continued to predominate. The hostile racial oppression toward Mexicans, Californios, and Indians created a vexing problem for early American settlers. Often extralegal means were used to punish individuals, and this created a law and order problem in gold country. Consequently, one of the side effects of the gold rush was to create a disregard for the law and a lack of respect for established institutions. It was difficult to fully develop Californian civilization because of ethnic conflict and law and order problems.

But note that neither our president nor anyone else tried to seize the wealth for the government or for "the greater good".

In December, 1848, President James Knox Polk's annual State of the Union message explored the changes in the United States due to the recent gold discovery. President Polk used statements from Governor Mason to urge Americans to explore and exploit California's new-found mineral wealth.

He basically just said "Go forth. Get rich." The money went to the miners. Not some president, potentate, or governor. Not to vast social welfare programs for the poor working class people. Not to building a giant bureaucratic infrastructure. Nor could anyone enforce such a program. All the miners were so numerous and well armed that no conceivable army or band of thugs could've taken them on, anyway. It really was power and wealth to the little people, whose traditional property rights and rights to bear arms bore fruit. But the key was that the wealth would only go to those who worked for it, or provided some service. They didn't just hand out gold to new arrivals. And who was the big winner? A young Jewish merchant from the east named Levi Strauss whose tent business failed, leading him to make pants out of the denim tent fabric. You never know where the interesting business spin offs will come from. The end result of this seemingly chaotic, yet very innovative experiment in free enterprise and property rights, was California, which doesn't strike anyone as being as third world disaster area, banana republic, or failed state, Gray Davis excepted.

In comparison to Africa the difference is striking. No great wars. No bloodshed, except for some occasional shoot outs resulting from disputed claims, cards, and drinking. Why the difference? One likely key is that since nobody could conceivably claim all this wealth for themselves or their tribe, nobody tried. It wasn't in the nature of the mindset back then, by and large. One military officer suggested that soldiers should be sent in, but what soldiers there were out there had already deserted to work the mines, and a headcount of the size of the force that would be required, given the number and arms of the miners, compared to the forces available showed any such attempt to be the purest folly. No great powers needed to compete over the resources because no power could conceivably seize them.

In short, the state didn't have the resources to seize the resources, nor did it see the need to. The people on the ground were armed and enforcing their own individual claims, and the only organized actions they took were to limit foreign miners from coming in. The exercised power, but that power was distributed, not concentrated. This is often not the situation in other countries, and part of the reason American mines aren't armed camps is that they don't need to be. The confluence of money and physical force that occurs in so many other countries is pointless here. A person who starts up a gold mine doesn't end up with an army because he doesn't need one to protect his claim. Hiring soldiers would be a complete waste of money. In other countries the soldiers are often required, and thus starts the cycle of money funding ever larger armies until the local potentate's army can take on any local contenders in a battle for power.

With oil wealth there are some key differences to this situation, however. Anyone can pan for gold, but not everyone can drill for oil. It takes capital and technology to prospect and pump oil, and the technology and know how is often not present in countries where oil is found. You don't need a large army to protect an oil well from bandits, because oil can't be easily looted by a band of passing thugs. A pocketful of gold or diamonds may be worth a fortune, but a pocketful of oil is worth less than a pocketful of pennies. The key part of oil wealth is maintaining profitable production on world markets, while covering all the costs of overhead, maintenance, and equipment. So how does oil wealth destabilize a country?

Somewhat similar to the situation with African diamon minds, in many areas of the Middle East whoever established themselves as the local potentate to deal with in negotiations over oil reserves catapulted themselves into a leadership position, using the money to establish their rule. A socialist might argue that by having the state step in and fairly distribute the oil revenues this can all be avoided. It doesn't seem to work that way in practice, however. In either case, you have a potentate or government receiving, controlling, and distributing vast amounts of money. The state is dependent on one chief source of revenue, and control of this revenue stream is power. Maintaining control of it and using the wealth to maintain power can become the primary pursuit of the state. Whether that state was the existing enlightened government or one established purely on the basis of the new found wealth doesn't change the truth of the situation. When the mineral find is a vast percentage of the state's wealth, the man who controls that wealth controls the state. Even if you have a democracy, you're in effect electing the new chairman of the board of the state run mine or oil company.

If the revenues from this wealth are used to provide for the people, whether they work or not, you'll end up with lots of people who aren't doing anything but drawing a paycheck. If they're not productively employeed, then nobody is making anything, but just buying imported products from other countries. If nobody is making anything then local industries aren't being built. Jobs aren't being created. You have the economic equivalent of a nation of retirees drawing Social Security checks. Instead of fueling the next California, the system of distributing the wealth to everyone likely just builds the next Yemen or Nigeria. Many have wrestled with this conundrum. You take a moderately successful state, add money, and watch it go to ruin. The problem isn't the money, but how it is distributed, and how it can feed a bad power structure and bad economics. The new found hard currency wealth might be better used to back small business loans and pay for some basic infrastructure that will help the oil sector function more efficiently. California didn't devote all the money from the gold rush to new roads. It just let the people who had the money spend the money, building houses and businesses instead of roads. It was the revenue from the businesses thus built that paid for the rest of the infrastructure, just as it does today. As the examples of Japan, Israel, Switzerland, and countless other places attest, you can build your infrastructure and a thriving economy without any real wealth flowing in from mineral and oil resources.

So the question of oil wealth gets more interesting. Who should get the money? How about splitting it between the person who owns the land, which can be difficult to truly ascertain in failed third world states, and the people pumping, refining, and selling the oil? Why should a nations oil sector somehow be treated differently from any other business, other than people wanting to use the wealth for often bizarre social ends, whether funding a police state, a weapons program, or free mud brick housing for everyone? One thing an African thug or any potentate does to secure his power is to both build up his personal or national army, while basically buying everyone off with his immense wealth to assure their assent to his rule. When the left suggests that oil revenues be distributed to everyone, how is this different than when the dictator is doing it for his own aggrandizement and power? The result is the same. People dependent on the whims of their government for their well being, and a system where everybody is afraid to upset the system. Basically, you get the Middle East or any one of numerous third world countries.

What may be better is to completely separate oil wealth from political power, by having a vast number of property owners receiving money for their oil rights from a substantial number of different oil companies, many locally owned. The government can make money off the tax revenues, the bulk money flows into the private sector, and you don't feed a social welfare state, which is a recipe for failure. What these countries often need is one Levi Strauss after another, with the mineral wealth flowing into the marketplace to those who work, innovate, and produce, not distributed evenly as social welfare payments. Put another way, if Iraq is producing 2.5 million barrels per day, that still comes to barely over $1000 per citizen. Why is this miniscule amount Iraq's chief source of revenue? In a thriving economy, shouldn't each oil dollar be swamped by about $20 from other sectors of the economy? Maybe the way that oil money is being used in the economy is the main problem, as it most certainly was in the past, propping up one of the most brutal dictators imaginable.

How can an entire nation be so totally dependent on oil revenues? The Iraqis are fairly well educated, industrious, and situated in what used to be the bread basket of the Middle East, before Saddam ran it in to the ground. But maybe Saddam is also the result of the Arab problem with absolute rule, like neighboring Syria, and of what happens when a country suddenly finds a huge reserve of mineral wealth, which only feeds the beast. Perhaps Iraqi oil revenues shouldn't flow through the hands of the Iraqi government directly, but through more normal channels. Prior to Saddam and the sanctions, there were many private companies that made the money off of Iraq's oil. Maybe such a system is more politically and socially stable, such as you find in the oil industry in the US, a country that has immense amounts of oil, but doesn't even have an Oil Ministry. After all, New York is very rich and prosperous, but pumps less than 500 barrels a day of oil.

Maybe a new course in Iraq, and many other oil rich countries, is called for.

January 26, 2004 in Current Affairs | Permalink


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Tracked on Apr 14, 2004 1:36:30 AM


We do indeed need to suggest means of more equitable distribution of a nation's wealth. A start might be to deny banking secrecy to government officials so they cannot squirrel away unearned wealth.

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