The growing value of sandy countries

Many centuries ago wealth mostly flowed from land, especially good agricultural land.  For Malthusian reasons the Earth’s population increased to roughly the maximum level that could be fed with existing technology and existing political institutions.  Most people lived in Eurasia, especially China, India and Europe. Sandy countries were not very important.

Because of improvements in technology, places like Arabia and Australia now have important resources that people didn’t care about back in 1500, such as oil, iron, and nice beaches.  But the world’s population distribution still pretty much reflects the distribution of 1500, except that the Americas gained a substantial inflow from Europe and to a lesser extent Africa and Asia.

The sandy countries naturally buy manufactured goods from places with a lot of people (China for low tech goods, and Europe from more sophisticated goods.)  In return they export oil, iron, coal and real estate.  The half dozen richest countries of the Arabian peninsula, and Australia, both have similar models, although there are important differences, such as the fact that the Aussie economy is more advanced and diversified.  But the similarities are what interest me; both export natural resources that once had little value, for manufactured goods produced in densely populated places. Both benefit from their small populations.  In the Middle East, oil output per capita is the best way of guessing living standards. It explains why Kuwait is much richer than Iran, despite similar aggregate oil output levels.

Maybe this is all obvious, but let me point out that many people treat these two areas very differently.  Australia has run current account deficits for many decades, often quite large ones. Many view these deficits as an example of a country “living beyond its means.”  In contrast, most of the Arabian countries run large CA surpluses, and many have accumulated large stocks of foreign assets.

However this is a very superficial difference, due to a quirk in the accounting techniques used by economists.  When Arabian countries sell oil to Europe it is treated as an export of goods.  When Australia sells real estate that is close to sandy beaches to the Chinese it’s not treated as an export of goods.  Rather it’s treated as if Australia was borrowing money from the Chinese.  It makes it seem like Australia is living beyond its means, when in fact it is simply benefiting from the increasing popularity of sandy places.  Arabia will run out of oil long before Australia will run out of desirable real estate to sell to Asian investors.

BTW, although I mentioned only two examples, there are many more.  In the 1800s, the eastern seaboard of the US was mostly settled, except south Florida, which was considered a wasteland. Sandy and thinly populated Inner Mongolia has recently gone from being poor to being one of China’s wealthiest provinces.  It’s not the sand that makes the Mongolians rich, it’s the fact that the sand kept their population low.

Why is Australia doing better than Saudi Arabia? Perhaps because Saudis were well adapted to life in the desert, and Australians are not.  The Aussies are European transplants who come from green agricultural societies.  The few people in Australia who are well adapted to life in the desert (aborigines), are quite poor. (See Walkabout.) Perhaps agricultural societies adapt better to the boring drudgery of modern industrial life.  Of course not all agricultural societies succeed, so there must be much more to it.

In any case, Australia is often called the lucky country.  Might it have something to do with the fact that it’s one of the few thinly populated sandy countries occupied by people who moved from developed and densely populated agricultural economies?  If Europe had understood this model in 1900 they would have occupied Libya and Arabia, and pushed aside the native population. Fortunately they did not.

PS.  Over at Econlog I have a critique of the White House defense of ARRA.


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46 Responses to “The growing value of sandy countries”

  1. Gravatar of Morgan Warstler Morgan Warstler
    18. February 2014 at 10:09

    Yes, American should be demanding Mexico sell Americans beachfront property.

    BTW:

    The Fideicomiso will continue, amendment to Article 27 of the Mexican Constitution has been Rejected

    http://www.theyucatantimes.com/2014/02/the-fideicomiso-will-continue-amendment-to-article-27-of-the-mexican-constitution-has-been-rejected/

    It passed lower house, exactly how much could it have cost the CIA to bribe the mexican senators to pass this?

    The quickest way to end the LS immigration debate in US is to get Americans to view Mexico as the new Florida.

  2. Gravatar of Bob dobalina Bob dobalina
    18. February 2014 at 10:11

    Australia exports real estate, and farmers grow Toyotas.

    Nice post, Scott– a reminder that sometimes we need to strip away the conventions of the discipline in order to think about things.

  3. Gravatar of Timothy Timothy
    18. February 2014 at 10:23

    Frozen countries are much the same as sandy ones. See Canada, Russia, Norway, Alaska.

    I’m not sure we (Australia) sell enough real estate to Asian investors to make much difference to our capital account. From memory, our net foreign liabilities minus assets are approaching 100% of GDP. Foreign owned real estate would only be a small fraction of that. Mining investment, including foreign borrowing by Australian companies and foreign ownership of publicly listed companies – from memory, about 40% of the ASX – would be much more important.

    My guess as to the differences between Oz and the Arabian oil exporters:
    1 – our mining is much more capital intensive than Middle Eastern oil extraction, in terms of dollars of capital expenditure per dollar of output, necessitating foreign investment.

    2 – sovereign wealth funds are set up to protect against fluctuations in the price of a single commodity, and exhaustion of the supply of that commodity. Australia exports a larger number of commodities, none of which we are likely to run out of, reducing price risk and thus reducing the need for a sovereign wealth fund.

    3 – our very high residential real estate prices. Almost all residential real estate is Australian owned, but much of the financing for our mortgages comes from overseas.

  4. Gravatar of ssumner ssumner
    18. February 2014 at 10:59

    Morgan, That’s worth a post.

    Thanks Bob.

    Timothy, Good points.

  5. Gravatar of ssumner ssumner
    18. February 2014 at 11:04

    Timothy, Keep in mind that foreign investors who purchase an equity stake in Austrialian mining companies are essentially buying Australian real estate, at least to some extent. Ditto for equity investment in some other types of Australian firms. Would that change the picture at all?

    Also Australia gets lot of immigrants. If an immigrant from Greece or South Africa immediately buys a new Australian house, with a mortgage financed by the Chinese, that counts as a CA deficit, but is certainly not a “country living beyond its means.”

  6. Gravatar of Jonathan Finegold Jonathan Finegold
    18. February 2014 at 11:22

    Do the income accounting techniques help differentiate between sales of assets that create liabilities and those that don’t? Or, does that matter? It seems to me that the “living beyond our means” argument makes sense if most of the capital account deficit goes towards the production of liabilities.

  7. Gravatar of Kevin Erdmann Kevin Erdmann
    18. February 2014 at 11:47

    This is a side note, but if you haven’t read Charles Mann’s “1491″ and “1493″, you would probably really enjoy them. According to Mann, the population of 1500 North America was much higher than 1800 North America, and probably much higher than you would think it was.

    European diseases traveled much more quickly than the actual Europeans did. That’s why so many of the empires fell so easily – they were in disarray before the Spanish soldiers even arrived.

  8. Gravatar of Morgan Warstler Morgan Warstler
    18. February 2014 at 12:06

    Scott, years ago, I pitched a more strenuous plan (like this) to the Breitbart crowd, it was something I came up with when I used to work with Bill Mundell:

    http://www.morganwarstler.com/post/35346903657/manifest-destiny-mexico

    Breitbart folk are seen as hard core anti-immigrant Tea Party, but the moment they start thinking about a New Florida it alters the conversation quickly.

    Land rushes and cowboys go hand and hand.

    Opening the border need not be contentious politically. We just need to increase demand to cross the other way.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. February 2014 at 12:08

    Don’t forget one big advantage Australians have; they speak the language of Shakespeare.

  10. Gravatar of Steve Steve
    18. February 2014 at 13:09

    “The few people in Australia who are well adapted to life in the desert (aborigines), are quite poor.”

    Amazing that you wrote this post and didn’t mention Phoenix, Las Vegas, So Cal, vs, say the Navajo.

  11. Gravatar of Petar Petar
    18. February 2014 at 13:27

    And the mediterranean countries… adapted to living well without much effort?

  12. Gravatar of Doug M Doug M
    18. February 2014 at 13:37

    Why do some countries with significant mineral resources do such a poor job distributing that wealth to the median citizen?

    To what extent are vast mineral resources controlled by the state turn into a crutch that allows those states to delay implementation of structural reforms that would have lead to greater prosperity. How many countries are economically poor because they are resource rich?

  13. Gravatar of benjamin cole benjamin cole
    18. February 2014 at 14:37

    Nice places to live…will have escalating land values from now on, if they allow migration and foreign ownership of land…global supplies of capital and disposable income will only increase in years ahead while cost of goods falls…

  14. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. February 2014 at 14:52

    Australia has imported British institutions. Compare Anglo America to Latin America. Compare Miami (city full of Hispanics but with British-originated institutions) with any city full of Hispanics south of the border.

    Australia started from a good institutional base. Which we have mostly managed pragmatically and well.

    Should have stopped importing before we imported Britain’s postwar land rationing system, but still way ahead in the institutional import stakes.

  15. Gravatar of John Becker John Becker
    18. February 2014 at 16:37

    I think sandy countries were also in vogue around 700-1200AD.

  16. Gravatar of ChrisA ChrisA
    18. February 2014 at 16:44

    Lorenzo
    The aborigines also operate under the same institutions as the immigrant Australians, yet are much much poorer. So I don’t think it is just a matter of institutions. Perhaps some groups are just more genetically suited to a technological civilization? This could include ability to use and fashion sophisticated tools, and also understand and develop abstract concepts. We have to accept that this capability is at least partly genetic, based on history. We just don’t see see any development in tool use until fairly recently. I don’t mean by this that any particular racial group is inferior, just different.

  17. Gravatar of ssumner ssumner
    18. February 2014 at 18:02

    Jonathan, In my view what matters is future expected consumption, which depends on net wealth, including natural resources, human capital and non-human assets owned by residents.

    Kevin, Those books are on my list, but India alone probably had more people than the entire New World in 1500, as it does today.

    Morgan, More Mexicans in the California Central Valley, with good US institutions boosting their productivity. Then more Anglos and Asians down the coast of Baja, creating more Lotus-eater paradises like Santa Barbara–a string a jewels. It’s win-win for both countries. I like your idea.

    Patrick, Good point. They chose their ancestors well.

    Steve, Good point.

    Petar, Yes, but the Greek model isn’t working so well right now. Long term you may be right however.

    Doug, That resource curse theory is endlessly debated, I don’t know the current consensus. There is no denying that Kuwaitis are better off with the oil.

    Lorenzo, As I was writing this post I thought to myself “Lorenzo could do a far better post here than I could.” I encourage my readers to look at your blog. Lot’s of fascinating insights.

    John, Yes, but look closely and I think you’ll find that until recently very few people lived in the sandy areas. At that time didn’t most Arabs live in fertile river valleys in Iraq and Egypt, or the fertile coast of Algeria? I admit to not being an expert here.

  18. Gravatar of John Becker John Becker
    18. February 2014 at 18:36

    Scott,

    The Arabs that conquered the Middle East, North Africa, and Southern Europe in the 7th century came from the Hejaz around Mecca and Medina. I have no idea about their population statistics but they easily defeated the Persians, Byzantines, and Egyptians in battle. I’m not sure they could have done that if they were badly outnumbered.

    You’re right that once the Middle East was conquered, most of the culture came from Mesopotamia, Persia, and Egypt as it always had from time immemorial.

  19. Gravatar of Ben J Ben J
    18. February 2014 at 18:54

    Timothy, Scott,

    Firstly, Australian *net* foreign liabilities are less than 60% of nominal GDP, as of the end of 2013. Secondly, the vast majority of *gross* foreign liabilities owed are denominated in Australian dollars.

    Furthermore, more than half of the foreign assets owned by Australians are denominated in foreign currency (and these foreign currency assets are worth much more than the foreign currency denominated liabilities), meaning the *net* foreign liabilities position is much ‘better’ than it first appears.

    See the RBA’s Balance of Payments chart pack, specifically the last two graphs:

    http://www.rba.gov.au/chart-pack/balance-payments.html

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. February 2014 at 23:48

    Scott: Thanks for the plug :)

    ChrisA: Being ruled by folk with a a set of institutions is not the same as being embedded in them. Australian historian Geoffrey Blainey points out that when European settlement started in Australia (1788) it was the Industrial Revolution meeting the Old Stone Age, meeting across the largest cultural gap in human history. The dislocations involved don’t just go away, even in 2 centuries. Particularly as indigenous Australians were not exactly opted in with open arms to the full institutional package.

    Indigenous people of hunter-gatherer backgrounds do generally poorly all around the world. (With some exceptions, such as the Sami aka Lapps.) Since all humans were originally people of hunter-gatherer backgrounds I doubt the problem is genetic. (13,000-10,000 years since the development of agriculture is a pretty short period for genetic selection.)

  21. Gravatar of Major_Freedom Major_Freedom
    19. February 2014 at 04:19

    “Both benefit from their small populations.”

    No. Small populations are only a benefit if each individual is a net consumer. If we had a free market, in which there would be an absence of mass exploitation, then each individual would either be a net zero producer/consumer, or they would be a net producer (because they saved). Here, larger populations would actually be a benefit, for there would be more output.

    Also, larger populations have an opportunity to greatly expand the division labor, which is Ricardo showed, is its own benefit, for it allows for more production as well.

    To assert the blanket statement that smaller populations are a benefit…period…implies that benefits for psychos can be had if they murdered or sterilized people. Environmentalists speak of such measures.

  22. Gravatar of John Becker John Becker
    19. February 2014 at 06:21

    Morgan,

    That’s absolutely amazing that Mexico has an amendment to their constitution that prevents ANY foreigners from owning beachfront property ANYWHERE in Mexico!! WTF.

  23. Gravatar of nickik nickik
    19. February 2014 at 06:26

    Is it not more about political institutions? Lets say Australia had immigration policy similar to the US (at the time). Australia could easily have many times the population it has now. They would probably still be rich however many people they have.

    Because of its institutions they could easy do something else when there resources run out, while some other countries would have a much harder time to transition.

  24. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2014 at 06:54

    John,

    It’s the reason so many people in Mexico are living in poverty and dying from drug cartels.

    The crazy thing is we’re down there running guns and doing who knows what else over the drug war.

    Meanwhile, competition from Mexico could quickly drive down the cost of US health care.

    And while we fight endlessly about 12M Mexicans living here, we could let our 10M of our Seniors not only reduce their cost of living, but make investments that pay dividends for them and their families for decades.

    —–

    And again the Mexican Senate is only 128 men, and if our CIA can’t figure out HOW TO DO THIS ONE GOD DAMN THING FOR US, then what frigging use is it to have the CIA?

  25. Gravatar of TravisV TravisV
    19. February 2014 at 07:32

    John Aziz and Chris Dillow have some disagreement with the sticky wage / musical chairs story:

    http://www.pieria.co.uk/articles/are_wages_sticky

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/02/the-macroeconomic-challenge.html

  26. Gravatar of TravisV TravisV
    19. February 2014 at 07:36

    Prof. Sumner,

    Ryan Avent just wrote a big-think article with a lot of material you could potentially write about…….

    http://www.economist.com/blogs/freeexchange/2014/02/labour-markets-0

  27. Gravatar of TravisV TravisV
    19. February 2014 at 07:40

    Prof. Sumner,

    I’m trying to link to Arnold Kling’s quick reaction to Avent’s article. However, for some strange reason, when I paste the link to http://www.arnoldkling.com, your blogging software refuses to publish my comment.

    Weird!

  28. Gravatar of TravisV TravisV
    19. February 2014 at 07:42

    Excuse me, it refuses to publish the link to Kling’s new post entitled “Recessions and Structural Change.” Weird!

  29. Gravatar of Chuck E Chuck E
    19. February 2014 at 07:58

    John,

    I’m not sure the Mexico only prohibits foreign ownership of beach front property. My Dad had a villa at Lake Chapala that was built on land that he could only lease for 99 years.

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. February 2014 at 09:15

    ‘Patrick, Good point. They chose their ancestors well.’

    And they were mostly criminals in exile, yet they managed to civilize the continent.

  31. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. February 2014 at 09:43

    Off topic, but Casey Mulligan takes on Sec’y Sebelius;

    http://video.foxbusiness.com/v/3223019970001/white-house-denying-obamacares-impact-on-jobs/#sp=show-clips

    She sounds like Clinton parsing the meaning of ‘is’.

  32. Gravatar of SG SG
    19. February 2014 at 10:12

    Ok, this is definitely the biggest monetary policy story that no one is talking about. Where are the 2008 fed transcripts?!

    http://www.slate.com/blogs/moneybox/2014/02/19/_2008_fomc_transcripts.html

  33. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2014 at 11:06

    Yes, Chuck E, it causes a big effect, its the land value is the underlying “beach front” thing.

    What’s more you don’t want to only let residents buy, you want to let US developers buy.

    Again, the real issue is why if we are all so concerned about our southern border sister and her people, why are we not treating Mexico as a land rush, why is this not our single greatest foreign policy concern?

    This is a far bigger deal economic deal than Hawaii or Alaska. This is bigger than NAFTA.

    Mexico is the Louisiana Purchase, and we should be buying off their willful adoption of US legal structures.

    Has no one ever heard of Realpolitik?

  34. Gravatar of Steven Kopits Steven Kopits
    19. February 2014 at 11:50

    Prosperity is mostly about the legacy of British rule.

    Argentina should be at least as wealthy as Australia, and it’s not.

    Hong Kong should be as poor as Shanghai, and it’s not (or hasn’t been).

    Singapore should be as poor as Indonesia, and it’s not.

    Yes, if you’re competing with China, there are only two killer strategies: very high quality manufactures, or commodity exports. Sandy places tend to have commodity exports.

    But culture is the ultimate determinant.

  35. Gravatar of Chuck E Chuck E
    19. February 2014 at 13:26

    Morgan,

    I often travel to Monterey for business. The US transplant factories all look like military bases… Concertina wire, fences, guard shacks; the whole nine yards! These “business” parks are surrounded by slums. The locals have a Spanish term for them; which literally translates to “fallen from the sky.” These slums are held together with extension cords and garden hoses for utilities. If I am not mistaken, Mexico has bad real property laws. My feeling is that they would benefit from American style property law. But the Mexican government is so worried about how it “would reduce Mexican heritage.” Blah, blah, blah…

  36. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2014 at 13:35

    Yep, we just need to bribe them. There are only 128. What is the CIA for if not expanding into Mexico?

  37. Gravatar of BC BC
    19. February 2014 at 14:14

    Steven Kopits: “Argentina should be at least as wealthy as Australia, and it’s not. ”

    It’s the weak institutions battered by different military dictatorships over the past eighty years, not the people.

  38. Gravatar of Lorenzo from Oz Lorenzo from Oz
    19. February 2014 at 15:12

    Steven Kopits: the successful cases in the dyads you list do not share a common culture, they share a common institutional heritage.

  39. Gravatar of TravisV TravisV
    19. February 2014 at 15:53

    SG,

    Thanks for this link:

    http://www.slate.com/blogs/moneybox/2014/02/19/_2008_fomc_transcripts.html

    Where are the 2008 fed transcripts? Why aren’t more people talking about this????

  40. Gravatar of ssumner ssumner
    19. February 2014 at 18:56

    John, You said;

    “I’m not sure they could have done that if they were badly outnumbered.”

    Tell that to Cortez and Pizarro.

    Ben, Thanks for the info.

    Thanks for all the links Travis.

  41. Gravatar of TravisV TravisV
    19. February 2014 at 19:06

    Marcus Nunes wrote a long reply to Avent’s post:

    http://thefaintofheart.wordpress.com/2014/02/19/ryan-avents-a-theory-of-troubles-from-a-mm-perspective

  42. Gravatar of Tom Brown Tom Brown
    19. February 2014 at 19:20

    “creating more Lotus-eater paradises like Santa Barbara” that’s where I’m from. And in fact one of my favorite places here is called “Lotus Land” Ha!

    http://www.lotusland.org/

  43. Gravatar of Alex Alex
    21. February 2014 at 11:51

    When it comes to explaining differences in economic development, I find Acemoglu and Robinson very persuasive. They argue that better institutions (that encourage growth and legal equality through property rights, dispersed power, lack of corruption, etc.) are the result of those in power having the incentives to enact them. This leads us to history, where we see that in economically advanced countries, there tends to have been a period when those who would prefer to extract and exploit we’re forced into building a more inclusive society (which includes extending access to free markets). Much of the failure in the Arab world to grow and/or distribute wealth from resources fairly can be linked to the exploitative nature of the Ottoman Empire’s institutions, as well as the institutions later installed by colonial powers.

  44. Gravatar of ssumner ssumner
    23. February 2014 at 13:38

    Alex, That sounds reasonable, but it’s like peeling an onion. Remove one layer of causality and you next have to deal with a more fundamental layer.

  45. Gravatar of Major_Freedom Major_Freedom
    23. February 2014 at 14:14

    “That sounds reasonable, but it’s like peeling an onion. Remove one layer of causality and you next have to deal with a more fundamental layer.”

    That is the job of an intellectual.

    Peel off the NGDP layer and ask why the demand for money holding would change the way it did 2008 such that NGDP fell so drastically.

  46. Gravatar of Danyzn Danyzn
    25. February 2014 at 14:26

    Not all of Australia is sandy, and it was the non-sandy parts that attracted the first European settlers. Wool and other agricultural products were the staple exports (as they still are in New Zealand) long before iron ore was mined. The luck (for the settlers and their descendants) was first finding wet green bits to live in, then stumbling on valuable resources in the empty sandy bits.

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