Can Russia escape the resources curse?

Most people believe that rich natural resources make a country rich. Fertile lands and abundant mineral wealth are seen as a natural endowment, available to support an abundant life. They also give a ready-made advantage in trade, since food, timber, metals, and energy are universal means to life. Even today many countries prohibit private ownership (as opposed to private exploitation) of their natural resources: in Russia oil and minerals are still owned by the state, though private companies are given leases of various lengths to turn them into usable commodities.

Yet the theory that countries with plentiful natural resources enjoy a head-start in the race for prosperity is not born out by experience. Historically, it has been countries with relatively poor natural endowments which have developed faster, leading economists to talk about a ‘resource curse’. Great Britain, the pioneer of the Industrial Revolution, had plenty of coal and iron, but not much else in the way of natural resources. More recently, the ‘miracle’ countries of East Asia have been relatively or absolutely-resource poor. Hong Kong, a barren rock off the coast of China, is the best example, but Japan, the pioneer ‘miracle’ economy, was poorly endowed. East Asia’s spectacular growth has been fuelled by the export of labour-intensive manufactures, not by the export of commodities. Data on real GDP per head show that developing countries with few natural resources grew two to three times faster between 1960 and 1990 than countries with abundant natural resources. Nigeria and Venezuela are examples of countries ruined by an abundance of oil.

Why should this be so? In an important recent book*, Martin Wolf explains why. Natural resources tend to corrupt politics, turning it into a battle to seize control over the incomes produced by the resources. This has been true of much of Latin America and sub-Saharan Africa. They generate unstable terms of trade, because the prices of natural resources or agricultural commodities fluctuate widely. They produce a high real exchange rate that hinders development of internationally competitive manufacturing.

By contrast, a country which exports manufactures is less likely to face protectionist pressures. Manufactures also offer a natural ladder up the chain of comparative advantage, whereas countries specializing in natural-resource exports will find it harder to shift to higher value-added products. This brings out the fundamental point that countries with few natural resources have more incentive to develop their human capital and the institutions and practices of a market economy. Making things requires, and generates, more skill than extracting them.

Can Russia escape the ‘resource curse’? The Soviets were basically right in their perception that the path to development lay through manufacturing and not natural resources. But their development strategies were designed to serve the needs of their own command economy not the world market. The result was a tragedy of industrial mis-development which has thrown post-Communist Russia back on its natural resource base. Today it has a second chance for a balanced development.

In this it has two advantages over other resource-rich countries. First, the Kremlin is not controlled by the oligarchs. If it did nothing else, the prosecution of Yukos has made this clear. This gives a chance of avoiding the destructive, redistributionist politics of most resource-rich countries, which alternate between rule by corrupt landlords and business elites and populist uprisings against them.

Secondly, a crucial inheritance from Communist times is a high level of scientific and technical education. The challenge is to apply this human capital to the production of goods and services for the world market. This was the burden of Economics Minister German Gref’s address to the annual conference of Renaissance Capital in Moscow earlier this week. If this can be done, there is no reason why Russia should not be able to follow in the economic footsteps of West.

*Martin Wolf, Why Globalization Works, Yale University Press, 2004