The OECD is the Organisation for Economic Cooperation and Development. Its stated mission is to expand market economies and democratic institutions. It is comprised of 36 members – governments funded by high income developed or mature economies – and it works with other governments of developing economies in Africa, Asia, and Latin America.
It was created in 1960 with 18 European governments, plus the United States and Canada, and now includes Chile in South America, Mexico in Central America, and Japan and South Korea in Asia. Australia belongs too, and the Near East is represented by Turkey and Israel. Ostensibly, the objective is to harness market forces that will ignite human flourishing. To that end, the OECD publishes lists of country by country economic performance.
Global Country Clubs Didn’t Build That
Two other widely recognized lists, ones maintained with private funds, are the Morgan Stanley EAFE (Europe, Australia, and the Far East) stock market index for mature economies, and the Morgan Stanley EM (Emerging Markets) index for developing economies. A cursory review of these three lists (OECD, EAFE, EM) reveal some interesting facts.
Two countries in the EAFE index are not members of the OECD – Hong Kong and Singapore, who happen to be tied for #1 on the Heritage Foundation 2017 Index Of Economic Growth. Also, the two countries with the most people, China and India, are not on either list. Why is that? After all, the primary wealth producing resource, and the jewel of human flourishing, is the individual human mind. In turn, creativity leads to specialization, division of labor, peaceful activity, and wealth creation. These are fundamental to mature economies, and when left alone, they expand geometrically. This suggests that large populations should have a great advantage.
David vs. Goliath Redux
The EAFE countries are the top 21 performing economies, yet more than half have populations between 5 and 11 million, or between 89th and 121st on Wikipedia’s national census compilation. So how are vastly less populated countries creating wealth per capita that outshines the behemoths? Common wisdom says that the richness of a country’s natural resources are also a major factor that determines its wealth. As such, it stands to reason that a very small country, and one particularly devoid of natural resources, would have zero chance of being considered a high income country, let alone be included among the EAFE heavyweights.
But included in the EAFE index is a country with a population of about 9 million. In fact, it is the world’s 32nd largest economy, yet rich only in the natural resources of sand, mud, and potash. To boot, their regional trading partners randomly lob live munitions into its population centers. Of course the country is Israel, and it has exceeded the average economic growth rate of other OECD countries by about double since 2004. According to BlueStar Global Investors, Israel also ranks in the top 5 worldwide in engineers per capita, research spending relative to GDP, quality scientific institutions, and patent applications. Today, “its technology ecosystem is second only to Silicon Valley.”
But it wasn’t always that way. In the early 1980’s Israel experienced hyper-inflation and unsustainable public debt levels. That is when Israeli politicians abandoned the socialist policies of their country’s founders. In addition, there was a massive inflow of immigrants from Russia in the early 1990’s that doubled the headcount of Israeli engineers and scientists. Economic freedom does that.
The Fallacy of Natural Resources
Israel is not the only example of a small country defying common wisdom. In 13th century Europe there was a principality known as Flanders, part of what is now western France and Belgium. Like Israel, it was very small, not rich in natural resources, and it was bordered by a violent enemy who was intellectually trapped in the past. To the medieval Franks, wealth was land, and it was to be acquired by the sword.
Flanders was to be conquered. After all, it had built a prosperous and sophisticated society through manufacturing and trade. But not only were they able to pursue arts and leisure, they had built a professional military force that repelled the cavalry of their Frankish invaders in the 1302 Battle of the Golden Spurs. This is one of many crucial events in the march of western civilization into the Renaissance, the Age of Reason, and the ensuing starburst of human achievement and prosperity we enjoy to this day.
Instead of cavalry, today’s version of the Franks surrounding Israel possess vast oil reserves. But these can only be exploited by geologists, engineers, and chemists who have the intellect to discover it, extract it, refine it, and distribute it. Oil is worthless without the human minds needed to make all this work. This is true of all so-called natural resources, and is precisely why Israel and Flanders were not limited in their ability to create a wealthy and peaceful society, and the professional army necessary to defend themselves from backwater insurgents.
Just Get Out of The Way
According to equity research analyst Joshua Kaplan, “Israel today represents the greatest concentration of innovation and entrepreneurship in the world.” However in 2003, Israel was again suffering economic recession, and newly appointed Finance Minister Benjamin Netanyahu quickly identified the root cause – a bloated public sector and stifling regulation.
His remedy was to cut the top marginal income tax rate by 20%, and the corporate rate in half. Netanyahu also took other controversial steps – he increased pension ages, capped government spending, and liberalized currency exchange laws. In other words, he got government out of the way of a generation of young professionals who are self-reliant problem solvers and risk-takers. The results were spectacular; it always works that way.
Statists Mind Your Business, Capitalists Mind Their Own
According to its website, OECD had a budget of 374 million euros in 2017, and a staff of 2500. It was also one of “the world’s largest publishers of books in the fields of economics and public affairs with more than 250 new books, 40 updated statistical databases, and thousands of new statistical tables, working papers, and journal articles each year.” And while the economic data sets have great value, how many of these books and journal articles are devoted to Israel’s policy of just getting out of the way?
But to statist bureaucracies, Israel is rogue state, and anyway, publishing that would just render the OECD irrelevant. Yet Israel is not the only role model, Switzerland is ranked 5th in the EAFE index, and Sweden (which is NOT a mythical Scandinavian socialist economy) is ranked 10th. They both have a population about the same size as Israel. No wonder economic powerhouses Singapore and Hong Kong have no use for the OECD.