Countries are not rich in proportion to their natural resources. If you took a map of the world, put on it all the natural resources in each country, and thought that would give you a guide to the wealth of each country, you’d get it wrong—because if you look at natural resources, the wealthiest country in the world in terms of natural resources is Russia … But it had a government that did not allow the people to produce prosperity but instead planned them into poverty. You look at some other countries with no natural resources: Japan, Sweden, Taiwan, Hong Kong, Singapore. They have governments that encourage the talents and abilities of the people.

—Margaret Thatcher. Speech given at Brigham Young University, March 5, 1996.

The island nation of Nauru, the planet’s smallest independent republic, once had enormous reserves of phosphate. The wealth created by mining the phosphate was so great that in the 1980s Nauru’s per capita GDP was the second highest in the world. Then the phosphate ran out, and today Nauru is one of the poorest countries in the world. The royalties earned during the good times were paid out in welfare, and its ‘sovereign wealth fund’ was mismanaged, embezzled and dissipated. The welfare bred a culture of laziness that left the nation without the ability to generate wealth or create jobs—unemployment in Nauru currently stands at 90 percent.

This is the fate that awaits Middle Eastern countries currently living off oil revenues. Once demand for oil dries up or their reserves are exhausted, they will be left impoverished. Their authoritarian governments are attempting to address the problem through sovereign wealth funds. These will be quickly dissipated, by corruption and mismanagement, as they were in Nauru. Their only chance for prosperity is for their people to develop the habits of self-reliance before the oil market dries up.

A country or state with royalty revenues should not spend the money on welfare or subsidies—these only make the recipients lazy and apathetic. Instead, they should be utilized for:

  1. Reducing but not eliminating taxes—this will encourage commerce to flourish, teach the people to despise a high tax burden, and teach them that the basic responsibilities of government cannot be provided free of charge;
  2. Creating a contingency fund;
  3. Investing in infrastructure such as roads, bridges, ports, bog draining, pest extermination, land clearance, and industrial and residential subdivisions;
  4. Investing in institutions such as hospitals, schools, universities, and prisons before wrapping them into self-sustaining trusts or selling them off.

Although most investment is best initiated and carried out by the private sector, something must be done with royalties. It is only proper that the people who own the resources should benefit from them. The most important rule is not to give away money. By putting it into roads, by draining of bogs and drilling tunnels, the investment mimics infrastructure investments made by previous generations. Unlike being born into a welfare-dependent family, being born into an industrialized country, which has laid down vast amounts of capital in the form of bridges, dams and roads over multiple generations, is not debilitating. Rather, such capital acts as a trellis for future growth.

This article is an extract from the book ‘Principles of Good Government’ by Matthew Bransgrove