Downsides of an export economy

[Victor Galis]

You're looking at a trade surplus as some sort of national savings account. It's not.

Saudi Arabia invests hundreds of billions in developed economies where the capital depth is much, much higher than in their own country. They are dooming their own citizenry to lower-paying jobs and higher unemployment to the benefit of massively more productive workers in the First World.

You're making the assumption that simply buying more capital would make their workers more productive. Suppose they actually need to develop human capital to achieve that, and suppose they're afraid of what might happen politically if they allowed their society to liberalize.

[KrazyHorse]

P.S. KH lay off the name calling

Eat me.

[KrazyHorse]

You're making the assumption that simply buying more capital would make their workers more productive. Suppose they actually need to develop human capital to achieve that, and suppose they're afraid of what might happen politically if they allowed their society to liberalize.

First off, I'm putting things in terms of machinery to give the ignorant something tangible to lock onto. Secondly, I didn't say that it didn't make sense from the perspective of the people holding the money in SA. I said that ceteris parebus investing in your own country is preferable (in terms of national welfare) to investing in foreign countries, despite the fact that such an investment choice detracts from the balance of trade.

a) Duh, if there are political considerations then some subset of SA might have good reason to not do so

b) There might be situations where the return on capital (human and physical) is much higher elsewhere, in which case the national welfare might actually be served better by foreign investments

c) I'm not really defending making a conscious choice to invest more at home and less abroad. I am explaining to NYE (and to you?) that dependence on primary production has little to nothing to do with the natural balance of trade; that natural resources are simply one element of the means of production and that the consequences of having a lot of natural resources and (say) low physical and human capital are mainly distributive in nature and do not necessarily pass through to macro aggregates like current account balance. That they do so in SA is more indicative of a sick political system and social reality than it is of extractive wealth (though the extractive wealth does of course make it possible to fund the corruption and religious navel-gazing without liberalising education etc). Distributionally, Canada resembles the US much more than it does SA. The concentrations of mineral wealth are not much different than the concentrations of other forms of wealth in the US. Both require the active participation of high-skill, high-pay workers to harness them. Importing foreign technology and workers to run the economy while we eat lotuses all day is no more realistic for Canada than it is for the US.

d) I'm also explaining that a positive trade balance is a sum of two different balances: the flow of consumer goods and the flow of capital goods. Cheering because your country imports less than it exports is silly

[Victor Galis]

I said that ceteris parebus investing in your own country is preferable (in terms of national welfare) to investing in foreign countries, despite the fact that such an investment choice detracts from the balance of trade.

...

c) I'm not really defending making a conscious choice to invest more at home and less abroad.

Thanks for clearing that up, in several posts you made it sound as if this were a choice made by a central planner, and not millions of individuals who apparently prefer to invest abroad.

I am explaining to NYE (and to you?) that dependence on primary production has little to nothing to do with the natural balance of trade; that natural resources are simply one element of the means of production and that the consequences of having a lot of natural resources and (say) low physical and human capital are mainly distributive in nature and do not necessarily pass through to macro aggregates like current account balance.

I'm the one that pointed out that Canada was pretty unusual in that it became rich off exporting raw materials.

I could see the following argument constructed (I'm not sure how empirically valid it is; maybe that would make an interesting PhD thesis, if true):

Natural resource extraction doesn't require a lot of capital or human capital (Relative to other industries, of course; is this still true? I suspect it may not be for some resources.)

This allows a small elite to control the profits, while keeping their populace poor (see a whole bunch of resource-rich 3rd world countries).

The elite who control the resources have no interest in developing their own country. (Alternatively, the elite fear revolution and believe their ill-gotten gains are safer abroad.) They also don't consume very much because they are a small group of people. The masses don't have access to lots of imports.

As I said, I'm not sure how valid it is. I just came up with it, but I could see this argument being true. (I would also not be surprised if it isn't.) Obviously, a country where a small elite can't control the resource wealth won't fit this model.

[chequita guevara]

That's mostly correct, Victor, and what isn't correct isn't worth correcting. The only point I'd make is that Canada didn't become rich off of exporting resources. Canada was already wealthy. Since it already had a developed capitalist class, the export of energy of resources didn't become a trap like it has been for so many Third World countries.

[KrazyHorse]

Thanks for clearing that up, in several posts you made it sound as if this were a choice made by a central planner, and not millions of individuals who apparently prefer to invest abroad.

That's because I am trying to explain things in the simplest possible way.

Natural resource extraction doesn't require a lot of capital or human capital (Relative to other industries, of course; is this still true? I suspect it may not be for some resources.)

This is most emphatically NOT true.

SOMETIMES natural resource extraction does not require much in the way of capital. Sometimes (TAR SANDS!) it does.

Saudi Arabia's oil is sitting near the surface, so it can get away with not doing much. It has high "natural resource capital".

As for the rest of it, I agree with it. But natural resources are not the only kind of highly asymmetric exploitative situation there can be. Imagine a world where the returns on human capital and intelligence/hard work are minute, while the returns to physical capital are large. How does this resemble the world of the early industrial revolution? Why was the situation different in America? Why did the situation start to change (think capital depth in both cases)?

Natural resource extraction is simply the easiest situation to imagine. The elites own the rights to the land and can pay coolies to do the minor amount of gruntwork it takes to exploit it.

Either way, the sector of activity is tangential.

[KrazyHorse]

The only point I'd make is that Canada didn't become rich off of exporting resources. Canada was already wealthy.

No. Canada imported capital like nobody's ****ing business during its development. Foreigners basically owned the country during the early part of the 20th century. What Canada had was a level of social capital (trust, confidence in the future) and some significant human capital which did not exist in the non-white colonies. The importance of this cannot be overstated. But as far as physical capital, Canada was far poorer, for instance, than the US for a very long time (and still is, actually).

[Az]

NYE in this thread

[Victor Galis]

That's mostly correct, Victor, and what isn't correct isn't worth correcting. The only point I'd make is that Canada didn't become rich off of exporting resources. Canada was already wealthy. Since it already had a developed capitalist class, the export of energy of resources didn't become a trap like it has been for so many Third World countries.

No, I mean historically.

SOMETIMES natural resource extraction does not require much in the way of capital. Sometimes (TAR SANDS!) it does.

Saudi Arabia's oil is sitting near the surface, so it can get away with not doing much. It has high "natural resource capital".

I'm also thinking of diamonds in Africa, but yeah. Basically some, but not all natural resources meet the criteria.

How does this resemble the world of the early industrial revolution? Why was the situation different in America? Why did the situation start to change (think capital depth in both cases)?

I'll need to think about that.

Either way, the sector of activity is tangential.

Not at all. Activities that might have been highly profitable at the dawn of the industrial revolution are not anymore due to international competition. No one's getting really rich off of shoddy manufactured products (mildly rich, maybe), but the quality of some (but not all) natural resources is determined by their state in the ground. (Others like the tar sands require processing, which if done poorly could degrade quality considerably.)

[KrazyHorse]

No one's getting really rich off of shoddy manufactured products (mildly rich, maybe)

China, Mainland 739.6

http://www.ustreas.gov/tic/mfh.txt

???

SA land use rights are highly concentrated. Far more so than are the owners of physical capital in almost all countries.

Dude, there is a lot of physical capital around nowadays. And easy to reach oil is relatively scarce. It's the degree of concentration and independence from the more democratic forms of capital that matters. Whether it's factories in the early industrial period, silkworms in China during the Renaissance or cocaine plantations in Columbia. When you've got exclusive rights to something that costs almost nothing to exploit and which other people prize highly you see gross amounts of capital accumulation and highly exploitative relationships.

SA is a third world country grafted onto the biggest ATM on the planet. That's the problem. It has nothing to do with the fact that the ATM is resource extraction.

[TCO]

We should have let AIG, et al go tits up. Most stupid thing in the world to bail out stuff with overseas counterparties. Should instead do like we did with Chryslier getting baught by Daimler and then being awful. Or with Japanese buying overpriced real estate in the 90s. Let the other countries have some false Roland style triumph. But end up fvcking them.

[TCO]

I've always thought simple balance of trade to be an outdated idea now that monetary systems are not based on gold reserves. Under a gold reserve system currency is very much a zero-sum gain, one country gains wealth only if another losses it because the gold quantities change very little. But under modern Fiat money systems which are continually growing its meaningless to look at look at a simple trade balance without taking into account how much the money supply and GDP of the countries in question are related.

P.S. KH lay off the name calling

Mercantilism is a fallacy under a gold system as well.

Kitty is allowed to name call. Take it like a man.

[Victor Galis]

No one's getting really rich off of shoddy manufactured products (mildly rich, maybe)

...

SA is a third world country grafted onto the biggest ATM on the planet. That's the problem. It has nothing to do with the fact that the ATM is resource extraction.

My point was that at present, resource extraction is that ATM, while I agree that in the past other things worked just as well. Well, the illicit drugs and other illegal stuff works on a smaller scale for non-state actors.

Some of the things in the past like physical capital, silkworms, etc. were inherently more mobile than natural resources, even if their owners had a great interest in limiting that mobility. I seem to recall the Brits (unsuccessfully) trying to prevent designs for machinery from leaking out. It's considerably harder to steal someone's oil deposits without establishing a medium- or long-term presence there.

[KrazyHorse]

Mercantilism is a fallacy under a gold system as well.

Kitty is allowed to name call. Take it like a man.

There is a lower bound under gold system. Cannot run deficits indefinitely. Run out of reserves. Same with countries which have dollarized.

[Victor Galis]

Mercantilism is a fallacy under a gold system as well.

Not quite. Under a gold standard, being forced to export your gold means your monetary base shrinks. Running a trade deficit imposes contractionary monetary policy on your country.