As wealth gushes from the ground, thrift vanishes, the work ethic shrinks, and policy grows more erratic and extreme.
By: DANIEL LAZARE
If Saudi Arabia is acting a bit unhinged of late, it’s easy to see why: the Kingdom has all the troubles of Ayyub, as Job is known in the Qur’an. Its economy is in recession due to a 50 percent drop in oil prices. It’s on bad terms with nearly all its neighbors after bombing Yemen, sending troops into Bahrain to crush democratic protests, financing Sunni terrorism in Syria and Iraq, blockading Qatar, and arresting the prime minister of Lebanon. While seeking to lure foreign investors, Crown Prince Muhammad bin Salman has rounded up hundreds of princes and local businessmen in a reported attempt to shake them down for $100 billion or more, hardly a confidence-boosting measure.
“Half my Rolodex is in the Ritz right now,” one Western investor said of the Riyadh luxury hotel that in November was converted into a makeshift prison. “And they want me to invest there now? No way.” Added Richard Parsons, former Time Warner CEO and ex-Citigroup chairman: “It is unclear why or what the rationale is. If you’re an investor or a businessperson, you’re going to take a step back from the starting line and say, ‘I’m just going to keep my money in my pocket.’” Instead of attracting capital, Prince Muhammad is encouraging it to flee.
So what’s it all about? The media seem confused. But for those with a sense of history, there’s a growing sense of having seen it before. And indeed we have—in Spain in the 1500s when that country’s power was at its height. What Spain had in common with today’s Saudi Arabia is mineral wealth—lots of it, not oil but precious metals from its new colonies in Mexico and Peru. Gold and silver made Spain rich for a time. But then they made it poor by plunging it into war and debt, turning it from a globe-straddling power to the sick man of Europe in the span of just three or four generations.
The “resource curse,” as economists call it, has touched down in other places as well—in Holland where a major natural gas find in the late 1950s led to a significant downturn in manufacturing; in Equatorial Guinea, a Massachusetts-sized country in West Africa that is now one of the most corrupt and inequitable societies on earth thanks to a massive oil strike in the mid-1990s; and so on.
But Spain and Saudi Arabia, one at the beginning of the modern era and the other at the end, remain the paradigmatic examples. Essentially, the resource curse describes the perverse effects of a gold or silver strike or other such windfall. While sudden riches may solve problems in the short term, they ultimately create many more by detaching labor from wealth creation and fueling the illusion that the nation stumbled into money not because of luck but because of God’s will or some special attribute. As wealth rains down seemingly from heaven, thrift vanishes, the work ethic shrinks, and policy grows more erratic and extreme.
“The mines of Potosí brought to the country untold wealth,” summed up one historian, referring to the famous “mountain of silver” in what is now Bolivia:
If money was short today, it would be abundant again tomorrow when the treasure fleet reached Seville. Why plan, why save, why work? Around the corner would be the miracle—or perhaps the disaster. Prices might rise, savings be lost, the crops fail. There seemed little point in demeaning oneself with manual labour, when, as so often happened, the idle prospered and the toilers were left without reward.
Historians have traced the process in Spain in minute detail. Not unlike Tudor England, the newly joined kingdoms of Aragon and Castile were caught up in a tug of war between parliamentary institutions and the crown. But where England’s House of Commons was able to use its control of taxation to impose its will, the Spanish Cortes fell short. In 1519, it tried to rein in a headstrong young King Charles V by refusing him funds to travel to Germany to claim the title of Holy Roman Emperor as heir to the Habsburg dynasty. But Charles was able to use treasure that his conquistadors had seized from the Aztecs to get around the restriction and foot the bill himself.
It was a victory for Spanish absolutism, the first of many. As the silver influx grew, the young king threw himself into one military adventure after another. He went to war with France for control of northern Italy in 1521 and 1526. He attacked Tunis in 1535, plunged back into war in Italy in 1536, and then did battle with German Protestants in 1546-47.
Financial difficulties in the 1550s threatened to cut such activities short. But when a Mexican settler named Bartolomé de Medina developed a cheap way of using mercury to extract silver from ore, output rose and imperial ambitions again took flight. By the 1580s, when silver imports were at their peak, Charles’s son Philip II had 40,000 troops attempting to crush a major Protestant rebellion in the Netherlands and was outfitting a 130-ship armada with which to invade Protestant England. When the fleet limped home after a thorough thrashing at the hands of Sir Francis Drake, he plunged into yet another war, this time with France’s Henry IV. But then, following financial crises in 1557 and 1575, bankruptcy struck again in 1596, 1607, 1627, and 1647.
The effects were ruinous. The arrival of unprecedented amounts of gold and silver triggered an inflationary wave that quadrupled grain prices and brought much of Spain to the brink of starvation. Plague struck a weakened population in 1599-1600, carrying off as many as one person in three. The colonies were hit even harder. Mexico’s population may have fallen by as much as 80 percent following outbreaks of plague in 1545-46 and 1576-79, while Latin America as a whole entered into a century of depression as the economy contracted and immigration tailed off.
Instead of rolling up their sleeves and going back to work, Spaniards sank deeper into despondency. Vagabondage and begging increased as people flocked to the Church in search of either positions or alms. An anonymous picaresque novel known as Lazarillo de Tormes observed in the 1550s that “any no-good wretch would die of hunger before he would take up a trade,” while a prominent reformer named González de Cellorigo complained in 1600 that Castile contained “thirty parasites for every one man who did an honest day’s work.” It was a morality tale that especially appealed to the Calvinist Adam Smith. “Spain and Portugal were manufacturing countries before they had any considerable colonies,” he wrote in The Wealth of Nations, published in the auspicious year of 1776. But since acquiring the richest colonies in the world, he said, “they have both ceased to be so.” Spain had gone broke on gold and silver while Britain had gotten rich off colonies containing little more than timber, cod, and furs. One country forgot how to work while the other—at least the portion that managed to remain aloof from the slave trade—learned how to work not only harder but more effectively.
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