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Resources == the gutter



This came in from the econ-dev list. It is also not precisely off topic
since it shows a basic economic fact, first described by Schumpeter as
creative destruction and later documented among others by Julian Simon:
i.e., the continuing 'cheapening' of commodities, including, as you are
aware, energy resources: e.g., oil is so cheap here in the USA that it
costs less, in relation to wage size, to drive 1000 miles, than it ever
did in the history of the world.

This also shows why commodity rich states like Bihar and Assam are
destined to CONTINUE to go into the gutter if they stick to promotion of
commodities. They MUST move away into value addition of a serious nature.

>From Chris (the guy on econ-dev list who wrote this post)

Fortune (Oct 12, 1998) COMMODITY TRAP by Thomas Stewart

"First, the new economy was never about the market's irrational exuberance
... Instead the new economy is about the growing value of knowledge as an
input and output, making it the most important ingredient of what people
buy and sell.  It is about he rise in the relative weight of intellectual
capital vis-a-vis real estate, plant and equipment and financial
capital....

"Second, and more important, the Saint Vitus' dance of world markets is
in fact another manisfestation of the emergence and the workings of the
new economy.  The financial chorea carries at least one significant
lesson about this new world, not only for economies but also for
companies and managers.  The lesson is called the "commododity trap...."

He goes on to tell the story of how the Brazilian city of Manaus boomed
and busted (is that a word?) with the discovery that rubber could be
vulcanized. Today, rubber is produced cheaper elsewhere and the word in
Manaus is that a conspiracy exists to keep it from being grown and used
there.

"But the really dangerous fantasy, because it has condemned hundreds of
millions to poverty, is mundande:  the all-too-common dream that wealth
can be found in commodities.  Money doesn't grow on trees, and never
did, not even in the rubber boom.  The money made by Dunlop and Michelin
and Goodyear dwarfs what the world's rubber growers made."

"The reason: over time all commodities decline in price.  They always
have; they always will.  To build you economic house on commodities is
to build it on an inexorably sinking foundation."

"Yet nations rich in natural resouces still fall into the commodity
trap, the belief that their mines, rather than their minds, are the
source of their propserity.  Litttle do they understand that a wealth of
natural resources will be exploited by people with a wealth of knowlege;
that it represents value extracted from a place, rather than value
created in a place."

"Notice that Asia's most successful postwar economies and the ones that
have hung toughest in this crises -- Japan, Hong Kong and Singapore --
boast nary a smidgen of natural "wealth."  By contrast, Russia and
Indonesia are rolling resources, and in the gutter."

"The global markets' fits have more to do with the senescence of the old
economy than the nascence of the new."

"In the past ten years, services prices have risen three times faster
than durables.  Goods producers' compensation has been rising at 2.6%
annual rate, vs 4% for service producers'.  Why do you think Jack JWelch
and Lou Gerstner have pushed their companies into services?"

"And in the service sector, which includes everything from short-sellers
to short-order cooks, the price winners are -- you guessed it -- the
intellectual capitalists, companies that offer knowledge intensive
services such as consulting, legal counsel, medical care, research, and
financial services.  High-brainpower activities produce knowledge
products for which people pay a premium."

It's what Paul Romer said a long time ago -- wealth comes from thinking
and innovating.  That factor of production  far outweighs the other
factors in the new economy.

If you want your company, community, country to grow, you've got to
start building the infrastructure for thinking:  schools, training,
community colleges, information flows, connections, etc.

My comment: let us as a nation move to the HEAD of technology, and stop
bothering about what we think are our 'great' national resources. The poor
nations will always supply us the resources we need, like we supply Japan
with the ore which it uses to make steel and sell back to us. Let us be a
Japan, not an India, or worse, a Bihar/Assam.


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