How Regions Grow Rich
A discussion of geo-economics may not seem like a common topic for this blog, but I think it has important implications for those who minister in underdeveloped regions of the world. I’m deriving my thoughts on this from the time that I’ve spent in second and third-world countries, especially a relatively recent trip to Africa. On that trip, I was confronted with grinding poverty, lots of people trying to ‘help,’ and no clear or simple answer to the question of ‘how do regions grow rich?’
The last thing that I am is an economist, and this paper is hardly meant to give a scientific answer to the question. My only qualifications to write this paper are (1) a basic understanding of economic theory, (2) a fascination with geopolitics, history, and government, and (3) a brain that likes to put ideas together from lots of disparate fields. Without any other qualifications, I want to outline a few simple ideas that help us answer this question, ‘how do regions grow rich’?
My use of the term ‘region’ is intentional. By ‘region,’ I mean a relatively small geographic locale that is tightly economically integrated. Regions are (usually) far smaller than countries. Regions operate under uniform economic policies. If a locale is split between two different governments, it is operating under different economic policies. A single country can contain many different regions. For example, the United States contains hundreds of regions – every metropolitan area is a different region, and these regions are regulated by at least fifty different economic policies.
I use the terminology of ‘first,’ ‘second,’ and ‘third’ world countries, not to be offensive, but because most people understand these terms. I also use these terms to refer to the perceived economic development of these countries, not their previous political alignment (US v. Soviet).
The Three Stages of Development
From my observation, regions go through three stages of development. These stages are (1) subsistence/extraction, (2) prosperity/manufacturing, and (3) excess/information. I realize that this is a very simplified explanation, but that is what I’m trying to do – keep things simple, so that we can arrive at simple implications.
At the subsistence/extraction level, individuals try to make money by extracting raw resources from the environment. This normally involves farming (extracting nutrients from the ground to grow crops and livestock), but can involve lots of other things, like extracting timber, fish, minerals, etc. When a region is based on extraction, most people live at a subsistence level. Resources are cheap, and if you don’t have an economy that has advanced past this level, it’s hard to efficiently extract. For example, while advanced economies might extract resources efficiently, they do so because they have economies that can afford expensive tools (like tractors, combines, etc.) that allow the work to be massively up-scaled. These tools are too expensive for most people in an extraction economy. Because extraction is difficult without expensive technology, most people in these economies are trapped in a subsistence-level existence. Further, unable to afford education, these individuals don’t know how to create wealth except through extracting resources and selling them. If a region doesn’t have a good link to other economies, it won’t be able to exchange its raw extracts for finished products. That means that individuals have to know how to use raw extracts. Most regions throughout human history have existed at the extraction level. Most ‘third-world’ countries today still have large extraction economies. The symbol of the extraction economy is the plow.
Although it is difficult to gain wealth through extraction, it is certainly possible. Over time, an extraction economy can grow sufficiently wealthy that it can invest in education. When individuals have enough wealth to gain a basic level of education, and enough wealth to invest in more expensive tools, they soon find that the best way to create wealth is to stop extracting raw resources and to start modifying resources into consumer-end products. For example, it is much more lucrative (and enjoyable) to be a goldsmith who takes raw gold and melds it into beautiful jewelry, than to be someone who digs for gold with a pan and shovel. When the majority of wealth produced is coming from manufacturing (using raw resources to create finished products), the region has a manufacturing economy. The region can trade these manufactured products with other regions to receive sufficient raw resources. Because the profit margin on manufactured products is higher (and less work-intensive) than on raw resources, regions with a manufacturing economy are likely to grow wealthy much faster, which leads to prosperity. Unlike subsistence economies, prosperity economies have sufficient wealth that they can continue to invest and grow at increasingly faster rates. The most obvious example of an economy going from an extraction to a manufacturing economy is the Industrial Revolution in the early 19th century in England and America. The symbol of the manufacturing economy is the factory.
When a manufacturing economy has enough surplus wealth to buy the most advanced tools, great education, and still have more than enough wealth for its population to be comfortable, that economy enters the information stage. At this rate, raw resources are so abundant that they are taken for granted (unlike the extraction economies, where they can be difficult to obtain). Even manufactured goods are relatively plenteous. The excess of wealth means that individuals have the time and resources to try new ideas, maximize efficiency, and work even less to create even more value. These economies are characterized by excess. Because raw resources and manufactured products are so plentiful, they are no longer valuable. In order to create value, workers must produce knowledge: knowledge about new ways to extract or manufacture, knowledge about efficiency, etc. Less and less of the economy will be devoted to providing people with necessities, and an increasingly large part of the economy will provide luxuries, or at least unnecessaries. With so much wealth, individuals have extra money to spend and are willing to spend it on things that make their lives easier, rather than just the things that keep them alive. Information economies are easy to spot today: much of America and Western Europe have information economies. The symbol of the information economy is the computer.
It is important to recognize that there is a logical progression between these three economies. Economies don’t normally jump from stage one to stage three; it is a gradual process of innovation, investment, education, and wealth accumulation. This matters because lots of NGOs and government programs try to make the leap. But this doesn’t make sense. You can’t easily take illiterate farmers and teach them how to make websites. The bigger problem is that, even if you could, the economy couldn’t support them. People don’t have the excess capital to support these individuals.
Further, the amount of investment that it takes to educate someone for an information-economy job is significant. It would take years for a subsistence-level worker to amass enough wealth to fund that level of education. Remember, in extraction economies, surplus wealth is rare. It is a very valuable resource, because it is necessary in order for the economy to move to the next level when it is invested in appropriate tools and education.
Brain drain is the term that refers to the most educated members of a region leaving that region to find jobs in places where they can be adequately compensated. What is tragic is that brain drain represents a huge drain of not only intelligence, but also financial investment. Brain drain is most common in extraction economies, where only a few individuals have information-level educations. These individuals have been given the incredible gift of a huge investment in their education (something which requires wealth, which is very dear in an extraction economy), but because the economy isn’t able to support information-level jobs, the individual moves to an information economy. This means that all the invested wealth that was spent educating that person then moves out of the extraction economy, because it is represented in that person. The result? The wealth that could be invested to move the entire economy to a manufacturing level, now disappears with the individual. Brain drain, therefore, has a ruinous effect on economies that are trying to progress.
There are two simple implications that we need to realize. First, it is unhelpful to try to move an economy from stage one to stage three. The best thing is to move the economy through the stages. Don’t focus on making information-economy workers in an extraction economy; focus instead on helping that economy make the leap from extraction to manufacturing. How can you do this? Help their extraction economy to generate more profit. Teach them to be more efficient in their extraction. Teach them how to invest the profit that they get from their extraction. Building a factory and training factory workers probably won’t work, because the economy isn’t even able to support that level of education.
The second implication is that when you do educate information-economy workers in an extraction economy, it needs to be done at scale and cheaply. In today’s world, even extraction economies have a need for a few information-economy workers. Think about it – even the most impoverished nations on earth still have a few government jobs, a little wifi, etc. These places still need information workers, but they don’t need a lot. Create too many, and you are just extending the line at the unemployment office. But for the workers who are created, you don’t want to invest too much in their education. Let’s face it: an impoverished nation in Africa can’t compensate information-economy workers the same way that a Western country can. If a worker is highly qualified, he will try to make the most money he can – which means that he will move to the place that pays him more. This isn’t just greed – a highly-educated worker represents a huge investment, which often represents huge levels of debt. In order to pay off that huge debt (or provide for his family that suffered hardship in order to put him through school, a common method of getting through school in some parts of the world), the worker needs to move to a place where he can make sufficient profit for the investment. This just means that extraction-level economies aren’t able to retain cutting-edge information workers. Any program that is trying to create information workers for these regions needs to be simple enough and affordable enough that it produces workers who will stay in the region.
Production as the Basis of Development
It should be clear by now, but I’m basing this economic model on the idea that production of raw materials is the basis of development. Modern economics is complicated because the entire world economy is deeply interconnected, but we can simplify this by imagining that we live on a single island, disconnected from the rest of the world. Without the ability to trade abroad, this economy will only be able to grow if it creates its wealth from within.
This illustration shows, first of all, that the island has to go through the three stages. The island starts in the iron age. It won’t ‘jump’ from the extraction phase to the information phase. It needs the manufacturing phase, because the illiterate farmers aren’t yet ready for computers and wifi.
Where does the wealth come from that must be invested in order to move the economy from the extraction phase to the manufacturing phase? Without external trade, the only source of wealth is the raw materials themselves. The economy is wealthy to the extent that it can extract more resources than it consumes.
When the economy has an excess of raw materials, those raw materials become capital that can be invested. For example, assume that a farmer’s field is so productive that he doesn’t have to invest quite as much time in his fields next year, because his previous harvest last longer. With this extra time, the farmer can build irrigation ditches; this makes the following year’s harvest even more productive.
When enough profit accumulates that the economy as a whole (meaning, a large part of the population) is able to invest in technology and education, the economy transitions from an extraction economy to a manufacturing economy. The transition occurs because extraction is so efficient that sufficient excess is produced to ‘push’ the economy up.
I’ve already mentioned this above, but this reinforces the point: the most helpful way to improve the economic condition of a region is to improve extraction. Investment in the economy will be most helpful when it helps individuals to do more efficiently what they are already doing: extracting resources. So, don’t give a computer to a farmer, give him a sharper plow; lightbulbs are less important than knowledge of water irrigation.
Every Place Has Opportunity
There are some parts of the world that are naturally productive; other places seem barren. However, when wisely managed, every place has opportunity. In general, I am aware of three broad fields of economic potential: resources, labor, geographic advantage, and policies.
Resources have already been discussed under the concept of resource extraction economies. This is a very common form of economic potential, and most every place in the world has some form of resource that could be extracted. Many places have cropland or land for cattle. Other regions have oil, coal, iron, or rare earth minerals. Some places are near the oceans with access to fishing grounds. Sometimes, the resources are not as obvious, but still possible; people enjoy caterpillars in South Africa, and caribou meat is economically viable in the far north. The point is that almost every place can produce something.
Labor is another frequent benefit of some regions. Especially in densely populated places, labor is cheap. Someone, somewhere, needs their factory to be operated cheaply, and a region that has excess labor can certainly find a use for it. This is often a primary way that regions transition from extraction to manufacturing economies. The rise of China and Japan, since World War II, demonstrate how labor has been an effective source of economic potential.
Some places have geographic advantages. Every navigable river indicates economic advantage, since the cost to move goods is dramatically lower when it happens over water. (Ever wonder how bananas, grown in Central and South America, can still be purchased so cheaply? The answer is that they are transported on ships, which makes the transportation cost almost nonexistent). Some places hold geopolitical advantages, such as Djibouti (entrance to the Red Sea), Turkey (the Bosphorus), and Indonesia (Strait of Malacca). While these are major examples, there are many other places with geo-political advantage; historically, these regions have grown rich by charging tolls, or otherwise leveraging their geography for economic advantage. A third means of geographic advantage is tourism. Any place with historical sites, natural environments, or zoologic diversity has the opportunity to create a tourism industry.
Finally, even if a region doesn’t have any other means of economic potential, regions can generate wealth through economic policy. Create a tax haven, and businesses will spring up even if your country is in the desert or the arctic. Switzerland’s banking policies mean that it holds a vast proportion of the world’s wealth, simply because people trust its banks. Naturally, generating economic potential through economic policy is a contentious policy. The United States is currently on a campaign to force countries to accept a minimum tax rate, scuttling any opportunity for small nations to use economic policy to improve their position (https://taxfoundation.org/global-tax-agreement/). There are other ways as well. Certain countries are known for flagging ships because of their laws. Some countries essentially ‘sell’ citizenship for a certain amount. In these cases, the geographic situation is unimportant; non-tangible concepts can become extremely valuable ‘resources’ that the region holds.
So, as you consider a specific region and its economic potential, what does it have going for it? How can those potentials be turned into realities?
Big, Beautiful Government
Big government is beautiful…not. It is often the major reason why regions fail to grow wealthy. Without a stable government, economic development is very difficult. The more corruption there is, the more profit is skimmed out of the economy for a corrupt politician, rather than reinvested for the benefit of the community. If you face crippling taxes, why would you invest heavily in your own plot of farmland, knowing that you are just working harder for the government? Plus, it is extremely difficult to get companies to invest, to educate workers, or to build factories in unstable places. How do they know that the company won’t be nationalized in a few years? How do they know that a civil war won’t destroy the entire investment? Even if they like the present leadership, how do they know that a fractious election won’t sweep in ‘reformers’ who want to take away their investment? Corrupt governments, unstable governments, and socialist governments are all, alike, ruinous to economic development and investment.
One very common economic policy that is extremely detrimental is the import tariff. Let’s play out two situations. First of all, assume that you are moving to a country in order to work there, and you have a shipping container loaded with your home supplies. In order to deliver the shipping container to your new country, the government requires a tariff for importing these goods. So, do you pay $500 to get your goods in the country? The government of this country seems to make out well – they get a nice profit off of you. But in the long run, this is a ruinous policy. All of your possessions, in that shipping container, represent resources. You are voluntarily bringing your resources into their economy. Since production of resources (and an abundance of resources) is the foundation of economic growth, this represents an investment in the new economy, but the government is charging you to increase their own supply of resources. Your options are to (A) pay the tariff, which will help the government in the short term, but probably keep you from ever sending more shipping containers to the country, or (B) refuse to pay the tariff, which will keep resources out of the country.
Similar to this, imagine that country A that produces lots of cars. These cars are cheap, because country A has all the required resources, plus lots of skilled labor and factories to produce the cars. In fact, you can buy a car in country A for $1000. Country M has a small and struggling car industry. Cars are expensive because all the parts have to be shipped in, there are few skilled laborers, and there is no competition. Cars here cost $5000.
This is a situation where it only makes sense that Country A should sell cars in Country M. But, Country M imposes an import tariff – if you import a car, you have to pay a $4000 tax. The effect of this is that the car companies in Country M don’t have to deal with the competition. The struggling car industry is happy. But who loses out? Everyone else in Country M. By importing cars, Country M could be vastly increasing the amount of resources in the country. (Every car represents resources that have been extracted and then manufactured). The import tariff seems to help the country, because it is propping up the failing car industry, and it is providing government money – but it is actually harming everyone by preventing resources from flowing into the country.
Another way in which governments ruin economies is by providing payments to struggling indigenous communities. I’ve seen it all over the world, from refugee camps in Africa, to indigenous communities in Alaska, to remote tribes in the Amazon: when government starts supporting the population, the society falls apart. Of course, I realize that this sounds like I’m just repeating typical conservative political thought, but the difference is that I’ve seen it with my own eyes, time and again. There are a variety of reasons why this always happens, but I think that part of it can be traced back to two factors. (1) There is a distorting influence on how money works – it’s difficult to manage finances like a businessman when your income is guaranteed. You start to make stupid decisions that lose money, because you know that your income isn’t going away. (2) There is a failure to mature your financial thinking. Many individuals in low-income regions don’t understand how money works in the first place. The ideas of investing, saving, and budgeting are essential skills for information economies, but nonexistent among the lowest levels of extraction economies. Both populations and individuals need to progress through the three stages of economic growth, making mistakes along the way, until they learn how to manage money wisely. Most every economically-healthy American adult has made a dumb financial decision that they never made again. But handout to individuals who have never learned how to manage money ruins the learning curve of dumb decisions. Money is not something that has to be used wisely, with the potential for investment or growth; it is simply a necessary of life that is always present and neither grows nor diminishes, regardless of one’s decisions.
Conclusion
This paper only presents a few of many ideas that I’ve had while traveling in economically depressed areas around the globe. I’ve wanted to write down my ideas for a while, because I think they have some benefit for those who are trying to serve in these places. Further, as a Christian, I am often reminded of the blessings that are outlined in Psalm 41 for those who ‘consider the poor.’ Although our generosity ought to begin with individuals, it surely ought to also expand beyond individuals to include groups of people, and entire regions.
In place of comments, I would love to hear from you personally. Please reach out to me via the Contact Page to share your thoughts and perspectives on this post!
