Why are some countries successful while others aren’t? Many will point to natural resources or climate when discussing why a country may or may not succeed. Surely states with more plentiful natural resources will do better than those without. After all, these resources can be used to sustain a population, as well as trade with other states.
Do natural resources determine success?
One can look at much of Africa and South America to see issues with this theory. These two continents are very resource dense. Forests, fresh water sources, mines, and plenty of space for agriculture mean these areas should flourish if the theory were correct.
Unfortunately, this is largely not the case. With some exceptions, like Chile in South America and Botswana or Rwanda in Africa, these continents are home to nations with consistently sluggish GDP growth and below-average standards of living.
Some then point to international forces, or a history of occupation by colonial powers. This idea has some merit, but it does not tell the whole story.
How big a factor is colonialism?
It is true that some colonial powers prepared their colonies better for independence than others. For instance, while King Leopold II of Belgium was solely concerned with short-term economic gain in the Belgian Congo, the British introduced important concepts such as the rule of law, property rights, and trade economy to their colonies.
That isn’t to say that some colonialism was justified, or that the British were always more humane, but we can see that the British generally showed planning which reflected a lower time preference than was the case with some other colonial powers.
There is an international aspect to all of this as well. Indeed, larger powers usually seek hegemony in their region of influence. China has undoubtedly tried to dominate geopolitics in the Asia-Pacific region — just as the United States dominates Atlantic geopolitics — and to an extent world affairs. But this, again, is not the only factor.
While sanctions, trade embargoes, and tariffs can prove harmful, states with freer economic systems can often rely on their own economies, and specialization to keep them relevant. International affairs, previous colonial treatment, and natural resources all play a part, but none of these factors are conclusive in determining why some countries succeed.
The importance of time preference, property rights, and a free economy
The primary factors in national and community success are time preference, property rights, and a free/investor-friendly economy. Members of said government and community must value future success and progress over short-term reward. Many corruption-related issues stem from this occurrence. Rather than directing foreign aid, or tax profits back to the private sector for long-term investment, many governments focus instead on proving their own necessity.
Even if a government is not embezzling funds, it may still use them toward public investments or projects. These projects are naturally unable to compete with the private ones in terms of efficiency, but dominate nonetheless. They do that primarily because the state inflates its importance or success to the public.
The negative effects of government regulation
The state also usually takes steps to push out competition with regulation, or in some cases, will outlaw the activity of its competition. This type of arbitrary governance means that those who are best at resource allocation (private business owners) are left out of many important industries and services.
As the state over-regulates the private sector, it is showing a trend toward high-time preference thinking. The private sector must seek to satisfy its customers and shareholders over a long period of time; the state has only to satisfy its own appetite.
As the state seeks to insert itself into every aspect of life and business, it creates an environment which is increasingly less friendly to investment. The countries of Haiti and The Dominican Republic occupy the same island. Resources are basically identical. Haiti even obtained independence from the French before The Dominican Republic was freed from Spanish control. There are some international aspects here, but a lot of their differences stem from how corrupt and controlling Haiti’s government has been.
Over-regulation and a lack of secure property rights have made it so that foreign investment is almost non-existent in Haiti. Haiti is overrun with poverty and violent gang activity, with the lowest GDP per capita in the Caribbean, while the Dominican Republic’s GDP per capita is roughly 500 percent higher.
The Cato Institute’s Human Freedom Index ranks The Dominican Republic at 52 and Haiti at 82. Haiti will not begin to flourish until members of its government start to value future growth over short-term reward, and until property rights and business investments are secured.
Property rights are crucial to economic growth
Private property rights are invaluable to a growing economy. They ensure that members of the community have a vested interest in the well-being of that economy. Almost every person would want their country’s economy to be profitable, but few know what makes an economy strong. Even fewer have the initiative to personally contribute to an economy’s success without some sort of direct personal gain.
Since this desire to seek what is in one’s personal interest is innate in most humans, it makes sense that property rights would be beneficial for most societies. The phenomenon known as the “tragedy of the commons” occurs when publicly-owned property is not cared for or invested properly in because the public has no direct interest in that property. When a company or person owns this piece of property, it has a higher chance of being well cared for.
The person or company which owns a piece of land or resource has a direct interest in ensuring that the land is taken care of in the future. This is typically for profit or to ensure that the property is beneficial to their next of kin. Even if the property is meant for sale, the owner would still want to earn a profit from the sale. Logically an economy which is largely controlled by the state will run into issues related to a lack of private incentive and investment.
The state does not create wealth. Business does
The state does not create wealth or value, and outside investors are unlikely to be active in a market where they are unlikely to be able to expand or earn long-term profit. This is especially the case when the nation’s government has a history of seizing industry whenever a surge of left-wing populism is injected into society, as is not uncommon in the developing world.
Businesses create wealth and value for consumers and workers. They are important for societies to grow and flourish. Ultimately the business owners who are best at resource management will succeed more than others. Resource management often (and sometimes accidentally) translates to conservation.
This is not the case with the state. The state can mismanage an economy but will still assert itself as the authority of said economy. The state has profit motives just as the private sector does. However, one major difference is that the state has virtually no competition, and can thus seek profit with little regard to how members of a society are ultimately affected.
Ultimately, the economy which has the least amount of government interference will flourish. The state involves itself in economic and monetary policy for its own ends. This typically discourages business and personal investment and encourages people to seek short-term satisfaction.
Once an economy begins to release itself from excessive state control, it can begin to advance. While previous colonial powers, international pressures, and a lack of natural resources can affect a nation’s economy, they are not the only, or even the largest determining factors.
For more content on related issues, be sure to check out our Free Markets video playlist by clicking on the button below.
This piece solely expresses the opinion of the author and not necessarily the organization as a whole. Students For Liberty is committed to facilitating a broad dialogue for liberty, representing a variety of opinions.