Podcast 8th January 2016
Take two individuals. One is hard working and is keen on building a good future for himself and his family. The other is not so hard working and dreams of winning lotteries. One fine day the latter wins a lottery and his dream comes true.
Now go into the future and look at both these individuals again. The hard working individual has built a good life for himself and his family and is economically well off. The lottery winner, who you would think is living the life of a millionaire, is actually worse off before he won the lottery. He spent the lottery money, lived well beyond his means and did nothing to make the money grow.
The lottery winner is the Oil economy that is floundering. Economies such as Venezuela are deep down the economic drain on oil price collapse while economies including Russia and Saudi Arabia are struggling with huge budget deficits. All these economies had the lottery win of oil and when oil prices were ruling at USD 100/ bbl, they started spending unproductively. Subsidies were doled out and expensive infrastructure was built without any economics behind it. The oil economies were living way beyond their means, as there was no highly productive asset in the economy apart from oil.
Oil price collapse from USD 100/bbl to USD 35/bbl has not brought about a fall in expenditure for the oil economies. Withdrawal of subsidies when there are no jobs around causes huge distress to households. Expensive infrastructure has to be maintained, which costs a lot. The economies have no other ways of creating productive assets as they have lived off the lottery and not skilled themselves.
The lottery winner could have done a lot with the money. He could have invested the money wisely or skilled himself to either climb the corporate ladder or to become a successful entrepreneur. Instead he chose to spend it unproductively. Similarly oil economies too could have done a lot with the riches. They could have skilled the population, encouraged entrepreneurship in the economy, created infrastructure for private enterprises to flourish, enable a highly competitive economy and created value for their citizens.
The lottery winner and the oil economies are lessons learnt for individuals, governments and corporates. Individuals coming into sudden wealth should step back and think about how to the use the wealth productively. Government’s living off natural resources should use the wealth to build a productive economy. Corporates generating extraordinary profits must constantly strive to innovate to continue to create shareholder wealth.
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