The political economy of the resource curse in Russia

Demokratizatsiya

Volumn 14, Issue 4, 2006, Pages 601-611

  Goorha, Prateek ^a  

^a DEAKIN UNIVERSITY   (Australia)

Author keywords

Development; Natural resources; Oil; Regulation; Resource curse

Indexed keywords

ECONOMIC DEVELOPMENT; ECONOMIC IMPACT; HYDROCARBON RESOURCE; POLITICAL ECONOMY; RESOURCE DEVELOPMENT; RISK ASSESSMENT;

EURASIA; RUSSIAN FEDERATION;

EID: 34250801518     PISSN: 10746846     EISSN: None     Source Type: Journal    
DOI: 10.3200/DEMO.14.4.601-611     Document Type: Article

References (36)

1. Richard M. Auty, "Industrial Policy, Sectoral Maturation, and Postwar Economic Growth in Brazil: The Resource Curse Thesis," Economic Geography 71, no. 3 (1995): 257-72.
2. Auty uses this idea in conjunction with Brazil by suggesting that the resource sector finances autarkic development but is unable spur reform due to resistance by vested interests. Jeffrey D. Sachs and Andrew M. Warner provide a cross-country empirical investigation in "Natural Resource Abundance and Economic Growth, Development," NBER Discussion Paper no. 5398 (1995). NBER. http://www.nber.org/papers/w5398 (accessed on July, 30, 2006).
3. Michael L. Ross, "Does Oil Hinder Democracy?" World Politics 53 (2001): 325-61.
4. Ross provides a comprehensive assessment of the relationship between FNRs and democracy using some simple empirical work that also considers the concomitant impact of cultural history, income levels, and religion. He draws much of his causal argument from work done on the Middle East. For a survey of six countries that fail to convert oil discoveries into sustained economic growth due primarily to ill-conceived investment of oil revenue and macroeconomic mismanagement. Alan Gelb, Oil Windfalls: Blessing or Curse? (Oxford: Oxford University Press for the World Bank, 1988).
5. Peter Rutland, "Russia's Oily Economic Growth," Eurasia Daily Monitor 2, no. 158 (2005). Rutland cites Hokkadido University's Shinchiro Tabata, who suggests that a dollar increase in the price of oil contributes $1.86 billion to the Russian federal budget.
6. For a comprehensive review of petroleum output estimates for the future including the IEA and official Russian and private sector estimates, see Sadek Boussena and Catherine Locatelli, "Towards a More Coherent Oil Policy in Russia?" OPEC Review: Energy Economics & Related Issues 29, no. 2 (2005): 85-105. By most estimates cited by these authors, Russia is unlikely to exceed the 1987 figure even by 2020.
7. It is moderate, especially when compared to China or India, where these figures are closer to 10 percent.
8. Broadly, this is the logic behind the idea of a "Dutch disease."
9. See Hazem Beblawi and Giacomo Luciani, The Rentier State (London: Croom Helm, 1987).
10. See Seymour Martin Lipset, "Some Social Requisites of Democracy: Economic Development and Political Legitimacy," American Political Science Review 53 (1959): 69-105;
11. and the literature on the modernization theory generally. For an analysis on the effect of increasing specialization of the labor force as a contributory factor in explaining why oil-based states fail to democratize, see Ross.
12. Jan Winiecki, The Distorted World of Soviet Type Economies (Pittsburgh: University of Pittsburgh Press, 1988).
13. See Clifford G. Gaddy and Barry W. Ickes, "Russia's Virtual Economy," Foreign Affairs 77, no. 5 (1998): 53-67; and other papers by the same authors on the subject of the virtual economy.
14. For an elaboration on this view, see Andrei Shleifer and Daniel Treisman, Without a Map: Political Tactics and Economic Reform in Russia (Cambridge: MIT Press, 2000),
15. and Prateek Goorha, "Opening the Black Box: Understanding the Russian Economy," Communist and Post-Communist Studies 34 (2001): 401-22.
16. Barnes makes the interesting observation that FNR-related sectors in 2002 are pre-dominantly characterized by vertical integration (or what he terms deep business groups). His explanation is that such organization serves as a defense mechanism against takeovers from creditors along the production process. Of course, vertical integration also rids the virtual nature of the production process by internalizing the flow of credit to a single business group. Andrew Barnes, "Russia's New Business Groups and State Power," Post-Soviet Affairs 19, no. 2 (2003): 154-86.
17. This forced involvement of upstream resource industries by the government created, in essence, a case of excessive "virtual integration" in the production processes where-by upstream resources come at higher marginal cost than they would with purely market-directed outcomes.
18. For the interested reader, a seminal contribution to this vast body of literature is Benjamin Klein, Robert Crawford and Armen Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics 21 (1978): 297-326.
19. As a representative article in this area, see J. J. Laffont and J. Tirole, "Access Pricing and Competition," European Economic Review 38 (1994): 1672-1710.
20. Interestingly, the Federal Antimonopoly Commission brought the Federal Energy Commission, along with Gazprom, to court in 2003 for not following access pricing practices, per Russian competition law.
21. The idea, though similar in logic, is independent from the credible commitments literature in development economics that suggests how some developing countries experience a vicious circle of poor economic performance due to macroeconomic mismanagement by the government, which results in investors losing confidence.
22. A review of this literature can be found in Kevin M. Murphy, Andrei Shleifer, and Robert W. Vishny, "Industrialization and the Big Push," Journal of Political Economy 97, no. 5 (1989): 1003-26.
23. The 2005 AT Kearney FDI Confidence Index report suggests an improvement of Russia's attractiveness as an FDI location. However, it also notes that the bulk of investment has been in energy as well as automobiles and retail.
24. See, for example, Fiona Hill, "Energy Empire: Oil, Gas and Russia's Revival," (published in 2004 by the Brooking Institution's Foreign Policy Center) http://www.brookings. edu/views/articles/hillf/ 20040930.htm (accessed on July 30, 2006). Hill also mentions that the performance of other major FNRs, such as steel, is correlated to the health of the oil sector.
25. For a brief synopsis on a generously objective view on the state of the Russian economy and its private sector, see Andrei Shleifer and Daniel Treisman, "A Normal Country: Russia after Communism," Journal of Economic Perspectives 19, no. 1 (2005): 151-74.
26. For an excellent development of this argument, see Sachs and Warner.
27. Interestingly, this was the intended purpose of Norway's Government Petroleum Fund established in 1990 with the explicit purpose of using oil revenue to help achieve long-term objectives for the economy. The fund also invests abroad to help create exchange-rate stability and prevent the mechanism behind the Dutch disease.
28. For example see Sweder van Wijnbergen, "The 'Dutch Disease': A Disease After All?" Economic Journal 94, no. 373 (1984): 41-55.
29. Richard M. Auty, "The Economic Stimulus from Resource-Based Industry in Developing Countries: Saudi Arabia and Bahrain," Economic Geography 64, no. 3 (1988): 209-25.
30. Balzer has discussed Vladimir Putin's thesis on the issue of the role of the resource sector in the Russian economy. While modernization of the sector and investment in it is a theme that recurs so does the theme of the principal role of the energy sector in the development of the Russian economy for the foreseeable future. He advocates the creation of vertically integrated firms and firms that are integrated with financial institutions that are closely managed by the state and that provide the engine for the economy's growth. He suggests better and closer regulation of the industries by the state but reiterates that purely market-based governance of the sector is unadvisable for Russia. Harley Balzer, "The Putin Thesis and Russian Energy Policy," Post Soviet Affairs 21, no. 3 (2005): 210-25.
31. See Joseph Schumpter, Capitalism, Socialism and Democracy (New York: Harper and Row, 1942).
32. See William H. Riker, The Art of Political Manipulation (New Haven: Yale University Press, 1986).
33. For a rigorous and insightful presentation of this logic in a democratic state see A. Wuffle, Scott Feld, Guillermo Owen, and Bernard Grofman, "Finagle's Law and the Finagle Point, a New Solution Concept for Two-Candidate Competition in Spatial Voting Games without a Core," American Journal of Political Science 33, no. 2 (1989): 348-75.
34. In the context of Russia's experience see Lilia Shevtsova, "Russia's Hybrid Regime," Journal of Democracy 12, no. 4 (2001): 64-70. This article suggests Russia's bureaucratic quasi-authoritarian regime is willing to make reforms that further empower the executive rather than the society.
35. For an elaborate treatment of this effect, see Joel S. Hellman, "Winners Take All: The Politics of Partial Reform in Postcommunist Transitions," World Politics 50, no. 2 (1998): 203-34.
36. Interestingly, Acemoglu suggests that if taxes under democracy are higher and the distortions caused by entry barriers in the market are low then oligarchy can be more efficient than democracy. However, he notes that as the comparative advantage in entrepreneurial ability shifts from the incumbents to rivals its performance falls behind that of a democratic society," Daron Acemoglu, "The Form of Property Rights: Oligarchic vs. Democratic Societies," NBER Working Paper no. 10037, (2003). NBER. http://www.nber.org/papers/w10037 (accessed on July 30, 2006).