What Makes A Country Wealthy?

Have you ever asked how a country becomes wealthy?

National rulers and politicians are primarily put into power to make life better for their citizens and increase the nation’s wealth.

While some are exceedingly successful at it, others are failing woefully.

What makes certain countries wealthy while others are impoverished?

Why are most European countries so advanced while the majority of African countries remain in poverty?

Is geography the deciding factor?

If so, why are certain countries with good climates and vast natural resources still so destitute?

What is preventing countries from making the transition to a brighter future?

First, let us understand what wealth is.

The wealth of a person, community, company, or country is defined as the total value of all their valuable assets.

The total market worth of all physical and intangible assets owned is calculated, and then all debts are subtracted.

In its most basic form, wealth is the accumulation of limited resources.

When individuals, businesses, or nations can collect many valuable resources or goods, they are said to be wealthy.

Wealth differs from income in that wealth is a stock, whereas income is a flow, and both can be measured in absolute or relative terms.

How Can A Country Build Wealth?

Those who have studied economics understand that any country’s growth is based on labour, capital, and productivity.

As a result, the country can become wealthier by having a growing labour population.

That is, more hands to produce goods and services.

The country can also become wealthy by attracting capital and investments or manufacturing things more efficiently through technological advancements.

That approach explains the growth in the medium and short term quite well.

However, it does not address why certain countries have been successful and wealthy while others have struggled and failed throughout history.

Many studies have been done on the growth of nations over lengthy periods, and the results are usually remarkably similar.

Read: Why is Gold Widely Considered True Money?

Institutional Structure

The strength and quality of a country’s institutions are the most essential factors in determining its long-term prospects.

Ideologies, culture, personalities, geography, and luck are all essential aspects of the institutional structure.

They all play a role, but none can be completely attributed to long-term success.

Institutions determine whether activities that foster long-term growth for many people or rent-seeking activities that benefit only a few individuals or groups are promoted in any given society.

The correct “environment” is created by strong and stable institutions which support growth.

They protect property rights so that people and businesses are confident in their ability to work and invest.

Competition is encouraged as equal game rules are established for everyone and ensure everyone follows the rules with a predictable and stable legal system.

They lower the costs of market transactions (open economy).

They also provide the necessary framework by offering education and social support, ensuring that most people in society have a fair opportunity to achieve.

How technological change and innovation are promoted and adopted is also dependent on the institutions.

Furthermore, technological advancements and innovation have a direct impact on product development.

Read: How to Create a Budget for Your New Business

Why haven’t all countries adopted policies that build good institutions?

When choosing an institutional structure, countries typically confront two issues.

First, good institutions are frequently in opposition to the interests of powerful groups.

Consider authoritarian regimes and their opposition to democratic elections and freedom of expression.

Even in democratic regimes, why would corrupt politicians in any country seek open markets and strong competition?

Or those who have preferential access to resources.

If it’s not oppression and a complete disregard for the rule of law, it’s corruption and embezzlement.

Second, even if good institutions are established, maintaining them is difficult.

Any organisation is only as good as the people who run it. Social norms and culture play a significant role in this.

That is why, if they are not suited to local circumstances, foreign-induced organisations rarely survive the test of time.

Former colonies provide an example of institutions that did not survive when the authorities who established them left.

Read: Digital Money: Is Money Now Just Numbers on a Screen?

Why are some countries successful in building strong institutions and others fail?

According to the World Population Review, 77 nations and territories are classed as high-income.

Two things set them apart from the rest of the world.

First, they are all democracies (well, maybe except Singapore).

Democracy ideally depicts political power distribution.

It enables citizens to participate in politics, debate, and express themselves.

It gives people the impression that they are in charge of their own lives.

Above all, it ensures that everyone has the same rights and powers.

It helps to make society more inclusive.

Second, they have low or moderate inequality levels (as measured by the Gini coefficient), which shows income and wealth distribution.

For these successful, high-income 77 nations and territories, these characteristics seem to work out for them.

However, there are so many other countries that operate on democracy that are still wallowing in poverty.

In African democracies especially, the sheer amount of corrupt leaders makes it virtually impossible for the people and economy to reap the benefits of democracy.

The leaders redirect national funds and resources into their own pockets and use nepotism to keep their families in power so the embezzlement cycle never stops.

While there could be many factors contributing to the poverty of underdeveloped countries, it is clear to see that bad leadership is the biggest of their issues, and it is likely the toughest issue to deal with.

Read: How Do Banks Make Money?

So what makes some countries wealthy and others poor?

The answer, it turns out, is rather straightforward.

Institutions that encourage long-term growth have been developed in successful countries.

However, constructing a stable and dependent institutional framework that can withstand the test of time is a considerably more difficult challenge.

People in wealthy countries participate actively in political systems.

Many people benefit from economic growth.

They live in inclusive communities where people make their own decisions and share the advantages of development.

If the country’s system and institutions are to be preserved, widespread wealth distribution is also required.

Too much money and power concentration can quickly undermine democracy and jeopardise its survival.

Economic inequity frequently fuels populism.

It runs the risk of sliding toward authoritarian regulations and worsening economic inequities.

As a result, there are increasing concerns these days.

More and more people are calling for addressing global income and wealth disparities.

It’s important to remember that massive imbalances are rarely rectified peacefully.

Conclusion

Wealth and poverty among nations often hinge on the strength and stability of their institutions.

Countries that have nurtured robust, inclusive systems tend to prosper, ensuring long-term growth and shared benefits for their citizens.

However, establishing and maintaining such institutions is challenging, especially when powerful groups resist change.

For nations to break free from poverty, it’s crucial to address these systemic issues, foster democratic participation, and promote equitable wealth distribution.

Only then can they build a brighter future for all their people rather than just a privileged few.

The path to national wealth lies in strong institutions and inclusive governance.

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