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 adopt 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.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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