Academic journal article Demokratizatsiya

The Political Economy of the Resource Curse in Russia

Academic journal article Demokratizatsiya

The Political Economy of the Resource Curse in Russia

Article excerpt

Abstract: The resource curse is a concept that is becoming increasingly relevant to describe the politico-economic risk that Russia's natural resource wealth poses to its development. This article discusses this adverse effect of the fundamental resource industries on the politico-economic development of a country. It explores the degree to which this logic is particularly applicable to Russia. It also discusses the counterargument to this logic and provides some comments on the possible extrication from this undesirable development outcome.

Key words: development, natural resources, oil, regulation, resource curse

Introduction

The idea of a resource curse is a well-visited concept in political economy. It suggests a causal link between the inability of an economy to grow and develop in accordance with classical economic growth theory and the abundance of the natural resources it possesses. The resource curse is used in conjunction with underdevelopment in the countries of sub-Saharan Africa and Latin America, among others. (1) In its generic formulation, the idea of a resource curse remains unpersuasive to some scholars due to its deterministic logic and, more important, its inability to cope with resource-rich countries that also have advanced economies. A particularization of the resource curse is the notion that the presence of petroleum and mineral wealth (fundamental natural resources [FNRs]) generally retards politico-economic development. Specifically, a state and economy dependent on these sources for its wealth is more likely to experience difficulties in developing both a democratic government and a market-based economy. This observation is true even when buttressed with anecdotal evidence from the Middle East, where there is an abundance of oil and few democratic regimes. (2)

This article explores this logic more carefully and assesses the extent to which this logic is applicable to Russia, as well as the degree to which this is a critical problem for Russian democracy. Russia is slightly different than other regions due to its unique transition from an industrialized command economy to a market-based one and from authoritarianism to democracy. Such transitions present unique challenges that can complicate the usual analysis.

There are some key economic indicators on the Russian economy that are rather illustrative (see table 1). If FNRs are defined as fuel, gas, oil, and metals, then the first line of table 1 suggests that between 1998 and 2005 the Russian economy increased its reliance on FNRs in exports from virtually two-thirds to more than three-quarters. This suggests that FNRs crowded out exports from other sectors of the economy. This is related, as would be expected, to the trends in the export price index and the price of Urals crude over this period. With export prices projected to increase markedly in the near future the incentive to curb the current composition of exports, or to increase earnings through increased efficiency, is further diminished.

There is also a strong correlation between petroleum production and the share of budget revenue from the gross domestic product (GDP). (3) While petroleum production continued to grow from 1998 to 2005, it must be remembered that the production level in 1992 (just over eight million barrels a day) was surpassed only in 2003. The record levels achieved in 1987 (more than eleven million barrels a day) are yet to be surpassed. By most estimates, Russia is unlikely to produce at that level before 2010. (4) Generally, the reason for this is the myopic and inefficient management of certain FNRs. The effect of insider privatization on the aggregate capital of stocks in privatized Russian firms is heavily debated. Such firms were often inefficiently large and thus a decline in capital stock may not imply that asset stripping and the tunneling of profits are necessarily to blame. Nonetheless, from 1998 to 2002, the capital stock growth in Russia was negative and is projected to be only moderately positive in the future. …

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