How do nations become wealthy? The question could be regarded as the cornerstone of the art or, some might say science, of economics.
It was no accident that Adam Smith, arguably the father of modern economics, chose “The Wealth of Nations” as the title of his seminal treatise on the subject.
However, Smith knew that a nation’s poverty or prosperity could not be fully explained in economic terms alone.
This is why in 1759 he published his “Theory of Moral Sentiments” in which he probed the role of conscience, moral judgement and virtues in shaping human history.
Ever since, the role of culture in creating and sustaining national economies has been a major topic for research and public debate. A simplistic understating of Marx persuaded many that the economic “infrastructure” determined the cultural “superstructure”. At the other end of the spectrum, Max Weber, among others, equated prosperity with capitalism and capitalism with Protestantism. Only Lutheran virtues of frugality, self-reliance and hard work would enable nations to develop genuine capitalist systems that, in turn, would make them prosperous.
With the current recession in the West, the role of culture in determining economic outcomes is the topic of hot debates once again. One could caricaturise this as a Punch and Judy dispute in which a wise and frugal Germany is asked to save a profligate and reckless Greece from drowning in debt.
Germans, we are told, are wealthy because they pay their taxes and do not borrow to overspend. In contrast, the Greeks are in the soup because they cheat their government and are cheated by their government in a frenzy of borrowing and spending.
Outgoing French President Nicolas Sarkozy made much of his late discovery of the “German model”. His successor, Francois Hollande appears to nurture similar illusions.
“Southern Europe is different from northern Europe,” we are told.
A number of new books extend that theory beyond Europe and claim that the further south we move the fewer the nations that might achieve prosperity.
Should we call this new trend “geographical racism”?
Are those who advocate it trying to hide their real beliefs about the superiority of a certain ethnic identity and/or religious persuasion?
Since we don’t know the answer, let us not dwell on the question.
What matters are the flaws in the theory itself.
To start with, a nation’s geographical location is no guarantee of its economic behaviour.
Iceland and Ireland are far to the north of Greece, and for that matter to the north of Germany as well, and yet both went bankrupt. If we go for Protestantism, the people of Iceland are more credible members of the club than Germans of whom at least a third are Catholics. And that is not to mention the fact that 20 percent of German industrial workers happen to be Muslims.
What about the charge, harshly formulated by the Director of the International Monetary Fund (IMF) Christine Lagarde, that Greeks cheat on taxes?
Of course, they do.
But Greek cheating is on a small scale while tax evasion in Germany is big business.
The German government estimates that 1.2 million of its citizens maintain illegal bank accounts in tax havens.
Scores of German companies avoid paying tax through subsidiaries all over the world.
Interestingly, neither Germany nor Greece figure among the top 20 richest countries in terms of income per head per annum.
In the top 20, fifteen are located to the south of both Germany and Greece. They are: Qatar, Bermuda, Singapore, Jersey, Falklands-Malvinas, Brunei, Hong Kong, The United Arab Emirates, Guernsey, Cayman Islands, Gibraltar, Brunei, the United States, Australia and Kuwait.
Qatar, the UAE, Kuwait, Brunei and Falklands-Malvinas owe their high income per head to oil and gas resources. One could add Norway, also an oil-rich country, in eighth place.
The country top of the list, Liechtenstein, leads a group of nations or “territories” that owe their wealth to “foreign deposits”, a polite term for money-laundering.
The list includes Luxembourg, Switzerland, Bermuda, Singapore, Jersey, Guernsey, Cayman Islands, and Gibraltar. What do the 25,000 inhabitants of Liechtenstein produce and export that could earn them almost $141,000 per head per annum, making them the world’s richest? The answer: secret bank accounts for outsiders.
Sixteen of the 20 “richest” depend on either energy exports or “banking facilities.”
Only four countries on the list could boast a normal economic mix.
They are the United States, Netherlands, Austria and Australia.
Even then, reality may be more complicated. For example, how much of the American prosperity depends on the fact that scores of other countries, notably China, are prepared to buy US government bonds at ridiculously low, or even non-existent, interest rates?
To be rich, a country has to be small. Of the top 20 “richest” 12 have populations of below one million.
Of the 30 most populous nations only one, the United States, has a place in the top 20 richest list. Being an island, or at least a peninsula, also helps, as 10 out of the top 20 are.
More importantly, perhaps, one does not get rich by paying taxes. Of the top 20 “richest” no fewer than 12 are tax-free territories. With the exception of Norway, all the others are among low tax countries. None of the top 30 high tax countries has a place in the “richest” list.
Thus, the current plight of the Greeks may not be entirely due to their alleged cheating on taxes.
To sum up, a nation becomes rich by being an island or peninsula, having a small population, running a money laundering racket, having lots of oil and/or gas, and paying little or no taxes.
In other words something as far from the so-called “German model” as possible.
Even then, having lots of money does not mean that you are wealthy in the sense that Adam Smith intended. Being “moneyed” is not the same as being rich.
You may have lots of money but little of those intangibles, including the uncertainty of the human condition, without which we cannot taste the sweet and sour of life to the full.
Would you rather live in Liechtenstein than Greece?