Emerging and Submerging Markets in the Third World

Source: Forbes | By Jerry Bowyer

Reprinted with permission of the author.

A couple of months ago I was shown a report published by a major Wall Street firm that placed Egypt at the top of a list of countries with attractive bond yields. Part of my job is to sit on investment committees for financial management firms and help them evaluate investment valuations, and I was helping my client analyze a report that had placed Egypt in a “must have” position. “Look what’s at the top of the list,” said my client. “Egypt,” I said. “Why would they do that?” he asked. “Natural resources,” I said.

That was their mistake. Economists call the presence of a monopoly of resources, or of choke points in the shipping of resources, the “commodity curse.” Oil, gold, diamonds, uranium and so forth in large quantities correlate with poverty, not wealth; with stagnation, not growth. Two centuries ago, Adam Smith looked across the Atlantic and saw two Americas, North and South. He said that the south had far more natural resources, more gold, more silver, richer and larger timber lands, more sun and consequently longer growing seasons. The north, while blessed, was less blessed with natural resources. And yet, Smith reasoned, the North would over time vastly outperform the South, because the North had inherited a political culture of natural liberties and the South had inherited a political culture of state power.

Nations endowed with excessive amounts of natural resources are tempted to neglect the development of their unnatural resource–human beings. Humans shape nature into things nature does not want to be shaped into: gardens, farms, factories, hospitals, schools, homes, stores, generators, bridges, canals. Humans disrupt nature; that’s our job. Nature resists; that’s her job. But when humans are granted freedom, we win. We ennoble and develop nature into something greater than it would be without us. This is why nature worshipping societies languish in poverty and misery.

I have a friend who did some relief work in India. He was asked to visit a village that had been devastated by floods. He saw the sad remnants of mud huts half washed away into the river. Only two edifices remained intact: a stone temple built in the middle of the river on foundations sunk beneath the water, and on a hill a stone palace in which resided the priests who served in that temple. My friend saw that these villagers, at least at one point, had the technology to build stable structures. Why hadn’t they built any stone houses for the people, or built dams and canals to regulate the flooding? Why had all their energies gone into a river temple? Because, they said, when the river became angry, she flooded, so they needed to worship her properly so that she would not flood again. To build a set of canals or dams would be to offend the goddess. So every generation built a village and every generation had its village destroyed by flood. No long-term accumulation of capital was possible.

Ancient Egypt worshipped the Nile. She flooded annually and the flood waters receded, leaving rich alluvial silt behind, on which grew much of the bread of the ancient world. Ancient stories from the Torah show the children of Israel again and again going to Egypt in time of famine. Caesar conquered Egypt in order to feed the urban mobs on whom his rule depended. Cleopatra seduced Julius and Antony as much with the fertility of her land as with fertility of her body. Rome depended on Egypt. And Egypt depended on the river. Historians describe Egypt as the quintessential “hydraulic civilization.” This means that a nation that depends particularly on one or two mighty rivers was far more likely to end up with a highly centralized state power than one with dispersed resources. All one needed in order to control the lives of the people was control of access to the river, and armies could do that. Whoever controlled the armies controlled the riverbanks, and whoever controlled the river banks controlled the food, and whoever controlled the food controlled the people. Ancient Babylon, Mesopotamia (literally ‘between the rivers’), illustrates the same pattern.

It’s not the Nile anymore for Egypt: It’s the artificial river cut by the boldness and ingenuity of British engineers, the Suez canal, which is the source of central power, but the principle is the same. And it’s not just water: Oil fields are as apt to lead to hydraulic civilizations as rivers previously were. In sub-Saharan Africa, the solid rivers of gold, diamonds and uranium ore lock the people into the commodity curse.

Jon Stewart of the Daily Show once complained, “Why did God put all the oil under crazy people?” I offer the following theodicy: He didn’t. It’s the oil that made them crazy. All they needed were enough machine guns to control the oil and they could buy Rolls Royces to their heart’s content without developing a diversified entrepreneurial culture.

As recently as two weeks ago, the Wall Street Journal reported that a major private equity firm was marketing private placement investments in Egypt and other similar countries. They even dreamed up an acronym, SANE. South African, Algeria, Nigeria and Egypt. I suppose the idea was similar to the people who dreamed up BRIC: Brazil, Russian, India and China. SANE was built on natural resources. BRIC seemed built on high yields. Ironically, SANE in retrospect seems kind of nuts, and BRIC has turned out to be rather soft.

What matters is the nature of the society. During a global inflationary boom, natural resources can look like the key to success. But the same devaluation which leads to high oil prices and high tolls through the Suez Canal leads to bread riots and destabilization. Desert kingdoms like Egypt and Saudi Arabia live off of one trade: They send fuel to the rest of the world and the rest of the world sends back food in return. The regimes use the food to buy the loyalty of the mob, filling their bellies with carbohydrates and their brains with serotonin, but inflation disrupts that symbiosis.

It’s time to throw out the idea of emerging markets. Capitalist countries are emerging. Socialist countries are submerging. Inflation masks that for time, driving commodity states like Brazil into temporary boom status. But when the flood comes, only the states which give free play to the ultimate resource, human creativity, prosper. The statist desert kingdoms, appropriately enough, are built on sand


Mr. Bowyer is the author of “Free Market Capitalists Survival Guide,” published by HarperCollins, and a columnist for Forbes.com.


  1. An economic fact beyond all political adenda labels operates: government workers/program recipeints are supported by everyone else’s work.

    In Egypt one person in three works for the government (whether directly or indirectly). In Turkey, many ways comparable to Egypt, it’s about half that and everybody sees more prosperity and growth in Turkey- a lot more.

    Anyone can see that it will take nearly everything two people have left over after their own needs to work hard enough to produce enough to carry and pay for one government worker/program-recipient in those ‘big government ruled however you wanna call it’ states, and not at too high a pay at that. Once you get to that level, who has any energy left to pay any attention to what the worker writes on paper? The regimes fall– and in real terms that means the government workers/program recipients go find something else to do for money– in no small part the real engine of the ‘early success’ of whatever regime comes next. Hire them back– and repeat…..

  2. Jon Stewart of the Daily Show once complained, “Why did God put all the oil under crazy people?” I offer the following theodicy: He didn’t. It’s the oil that made them crazy. All they needed were enough machine guns to control the oil and they could buy Rolls Royces to their heart’s content without developing a diversified entrepreneurial culture.


  3. Machine guns, or political rhetoric that creates a chlling effect on it’s use. If only we can get through to people, the number one resource, the “human spirit” never runs out, then we can convince them to give people their freedom back in order to innovate. The solution to our economies will be found in basements and garages by creative people, not Washington DC.

  4. But what directs the spirit of the people? The Indian village did not lack human spirit, they lacked truthful religion. Same goes for Islamic nations.

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