Wealth lies in institutional integrity and not resources
Posted by Alana Wilson on 4/30/2014 2:48:37 PM
By Alana Wilson
A commentary in the Globe by Brian Lee Crowley highlights the importance of the institutional framework, and not simply the presence of natural resources, as a key ingredient for wealth. In the commentary he provides a number of cases where jurisdictions remain poor, despite being endowed with valuable natural resources, while others prosper with no resources in what is often referred to as the ‘resource curse’.
Canada’s wealth, and the reason why the world beats a path to our resources, lies not in the resources themselves. What makes that endowment almost uniquely valuable in the world is that it exists within another vastly more important endowment of rules, institutions and behaviours.
My list of those institutions and behaviours include the rule of law; independent judges and reasonably speedy and reliable resolution of disputes; the enforcement of contract; the absence of corruption among government officials and the police; respect of private property; a moderate, predictable and stable taxation and regulatory burden; a stable currency that keeps its value; responsible public finances; freedom to trade both domestically and internationally; a well-developed work ethic; and a refusal to resort to violence to resolve political disagreements. That is the greatest endowment that we have.
Crowley’s list of institutions and behaviours overlaps considerably with public policy factors analyzed in the Annual Survey of Mining Companies and the conclusions are similar. Our survey consistently shows mining investors seek out jurisdictions with fair and sound legal systems, predictable and impartial enforcement of existing regulations, a competitive and stable taxation regime, and freedom to trade—the same things that go into sound institutions. Unsurprisingly then, the countries he highlights as having less favourable institutions—Venezuela, Russia, and Argentina—also do poorly in our survey. Venezuela ranked 110th of 112 jurisdictions in terms of its attractiveness to investment, Russia ranked 100th, and seven of Argentina’s 10 provinces ranked below 83rd in the 2013 survey.
Crowley also cites a number of Canadian examples where we have fallen “off the wagon of institutional virtue, which only gives us further evidence that it is the virtue, not the resources, that makes us a rich society.” He cites historical examples of the oil and gas industry shifting investment first to Saskatchewan, then to Alberta, then back to Saskatchewan in response to changing tax and regulatory burdens. More recently, this has occurred with Quebec’s mining sector which has seen its attractiveness to mining investment plummet. Quebec’s downward fall has also been traced in its falling ranking in the Survey of Mining Companies where it’s fallen from the top-ranked jurisdiction to 21st in only four years.
Crowley concludes by emphasizing the delicate equilibrium needed for institutions to enable the development of natural resources, warning that greedy upset it at their peril. This warning is worth considering by policy makers seeking to avoid missed opportunities, or even worse, being cursed by natural resources.