Saturday, March 26, 2011

Rulers and resources

The rulers of a country would be expected to rule for the benefit of its people. Whether this happens or not is largely dependent on how far the rulers are held accountable.

The degree of accountability is dependent on the amount of information available to the public, the extent of the separation of powers (between legislature, executive and judiciary), the independence of its civil administration and the ability of the public to boot out bad rulers.

In a nutshell, how good a ruler is depends on how far he can be held in check, without proper control the ruler is likely to give into the temptation to enrich himself and his close associates rather than the population at large.

People used to think that wealth was dependent on resources. If one is lucky enough to be born in a resource rich nation, Australia for example, the original 'Lucky Country', then its people would prosper. Experience has taught us that unless a resource rich country has proper systems of governance its resources are likely to turn out to be a curse rather than a blessing; Nigeria, the Congo and Angola are examples of nations that have suffered the curse of natural resources.

All this is well known, but lets examine the plight of budding despot in a resource poor country. What is available for plunder?

The most obvious target is the treasury. Whatever taxes are collected from the people can be diverted to his own bank accounts. Even in poor countries this can amount to a fairly sizable sum, but this alone is unlikely to satisfy.

Looting funds received from aid agencies is possible but it is not easy because there is some attempt to assess the effectiveness of projects and nosy NGO workers asking too many questions are such a pain.

Far better then to borrow, either straightforward commercial loans or subsidised project finance, ostensibly for building infrastructure but divert the funds to the coffers of the ruler. With no particular obligation to account for the money other than repay it on time, this is an easier path to follow. Every so often debt default can be arranged, Argentina, Turkey and Russia have done so at various times which makes this even more lucrative in the long term. Ruling however is an expensive business and not even this will satiate appetites in the long term.

Once all these paths are exhausted the ruler is left with only one further option: land. Land has value and some poor countries have vast extents of it, but unlike other natural resources that can be exported to markets abroad land cannot be moved. Its value is dependent on what a developer can earn through its exploitation. Land can easily be expropriated and productive farmland or developed industrial land is a good place to start, but these will be quickly exhausted, which leaves only undeveloped land. This can also be exploited, but there is a catch.

Certain pieces of land, a location for a good harbour or airport, may derive a part of its value from its use to international trade but by and large it is the strength of the domestic economy or market that will determine the value of land, which is in turn dependent on the quality of governance. Also if the dictator has already expropriated farmland or industrial land, this is likely to give potential buyers pause for thought.

The colonial government in Hong Kong was able to balance its budget for years by selling off bits of bare land every so often to developers. Thanks to sound economic prospects, developers were quite willing to pay good prices for land. To an extent this happened in Singapore as well.

Therefore any ruler salivating at the prospect of getting rich through the sale of land would be advised to think again. The land will fetch some value but to command a premium, potential developers need to see some realistic prospect of recovering their investment, which is good news for its people, provided the despot understands the issue addresses the fundamental economic questions. Those who don't may well end up building another Burj Khalifa (Dubai, pictured above) a half mile high 'ghost' building, with many empty floors.

As for the ruled, its the governance, not the resources that count in the long run.

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