The Rich Get Richer

by | August 1, 2007

"There are no sustainable diamond mines," writes Kirk Hamilton, an environmental economist for the World Bank, "but there are sustainable diamond-mining countries."

Hamilton is the author of a hot new economic development book, Where Is the Wealth of Nations? Measuring Capital for the 21st Century. It's a book aimed mostly at the question of how poor countries with lots of natural resources can use those resources to create long-term prosperity. But these same lessons are equally relevant here -- especially as the so-called "Big Sort" increasingly divides states and metropolitan areas into winners and losers.

The idea is simple: Exploitation of natural resources can create some wealth, but it can't create sustainable wealth because sooner or later the mines or the forests will be played out. In today's economy, the same is true for factories and other footloose businesses that rely on semi-skilled jobs. When the cost of labor gets too high, they'll move somewhere else -- and that means a factory, like a mine, can be "played out."

The bottom line? Exploitation of natural resources accounts for only 5 percent of the nation's wealth. Production of goods accounts for another 18 percent. The remaining 77 percent is "intangible" capital -- laws, education, ingenuity and so on.

The trick is to capture the wealth when and where it's created and put it to long-term use locally. Part of the reason that California is a wealthy state is that it's been doing this consistently for a century and a half. Wealth from the Gold Rush was plowed into the transcontinental railroad, which created more wealth, which endowed Stanford University, which in turn spawned Silicon Valley, which has generated vast amounts of investment capital and philanthropic wealth that is stimulating the next generation of economic growth. No matter how crowded or expensive California gets, it still draws entrepreneurs -- because the wealth has been captured and invested so effectively time after time.

I'm betting that we will see this same phenomenon in the future economic prosperity of Native American tribes. All over the country, the tribes have deftly used their sovereignty to gain a competitive advantage in the gaming industry, and in the process they are accumulating wealth. Gaming may or may not be a sustainable business for the tribes in the long run, but they could recycle the current wealth into future business or economic enterprises that could create further wealth for both investment and philanthropic use. Gaming may be a short-term economic development strategy that is part of a long-term foundation for prosperity for the tribes.

The flip side of this approach is what might be called the "colonial" strategy. Investors in the centers of finance put money into natural resources and production in other parts of the world but then remove the wealth and take it back to the financial center. A century ago, British investors took advantage of the colonial relationship to extract natural resources from Africa but then took the wealth back to England with them. This is one of the reasons that London is rich and Africa is poor.

Both financial and intellectual capital accumulate in a few places -- Boston, New York, Washington, Los Angeles, Silicon Valley -- based partly on production and natural resource exploitation elsewhere. When the factories in these other locations are "played out," production moves elsewhere. The losers in the Big Sort are left without jobs and without wealth.

Corporate mergers have been exacerbating this problem. A century ago, even small factory towns in the Northeast and Midwest had local owners, who were both investors and philanthropists in the towns where they were located. The endowment of civic buildings and institutions from that era in such towns is impressive even today. Now, however, even if a small factory town keeps the doors open, the wealth it creates quickly flows to the other side of the Big Sort.

For the losers in the Big Sort, the solution -- if there is one -- lies in strengthening the place-based institutions that can't easily leave. Universities, hospitals and other such organizations are necessarily committed to a geographical area. At their best, they can both create local wealth -- by serving as a base for research that could be coupled with production capacity to create innovative products -- and then act as the recipient of resulting philanthropy, which can fund the next round of innovative research. In this way, even the Big Sort losers can focus on creating enough wealth so that they are Silicon Valley in a small way, rather than Africa in a big way.

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