Russia's 'Curse'

In a seminal 1995 paper, Jeffrey Sachs and Andrew Warner demonstrated that the more a country is dependent on the export of natural resources, the lower its economic growth -- by examining the performance of a large number of countries between 1970 and 1990. The obvious conclusion was that a large resource endowment leads to poor economic policies and the so-called Dutch disease, when abundant resource exports boost the exchange rate excessively, rendering other industries uncompetitive.

The thesis that natural resources are a curse has become an axiom in the current Russian economic debate, but is it really true? The statistical evidence supporting it is overwhelming. OPEC members dominated world oil exports between 1970 and 1990, and their domestic economic policies were miserable, leading to low economic growth. Another common view is that rents fr om natural resources promote authoritarian rule. Correlation, however, is not the same as causality.

Barry Eichengreen, the Berkeley economic historian, has argued that America's economic history teaches the opposite. The abundance of natural resources in the United States is seen as a factor promoting both free-market economic policies and democracy. The American frontier mentality, predicated on free resources, generated a society of free individuals (even holding social democracy at bay).

Some of the foremost industrialized countries of our time such as Australia, Canada, Sweden, Finland and the United States based their economic development on the export of resources. There is no fundamental difference between resources such as gold, other metals, lumber and oil. The real question is why some resource-rich countries have pursued good policies and become rich, while others have stayed poor.

The U.S. example is the most illustrative history of economic success in a resource-rich country. First, immediately after their discovery, natural resources became private property. Second, private property rights, once established, were treated as sacrosanct. Third, no monopolies were tolerated (in the famous standoff between John D. Rockefeller and President Theodore Roosevelt, the tycoon was forced to sell off parts of Standard Oil, but he was fully compensated). Fourth, prices and wages were kept free and could fall just as easily as they rose.

The contrast with OPEC countries could not be greater. Between the early 1950s and 1970, the OPEC members nationalized their oil companies, and virtually all of them have state-owned monopolies running their oil sectors. It is well known that state monopolies with their bureaucratic culture kill entrepreneurship. Not surprisingly, most OPEC countries have developed heavily regulated economic systems with little ability to adjust by reducing wages or social transfers when oil prices fall.

It does not have to be so. The Anglo-American countries (the United States, Britain, Canada and Australia) stick to their free and private enterprise model, and they seem to thrive wh ere others fail.

In recent years, one country followed in their footsteps: Russia. Two major oil companies, namely Surgut and LUKoil, were privatized by their management. Later, three major state oil companies that had been utter disasters -- Yukos, Sibneft and Sidanco -- were sold to outsiders. Yukos and Sibneft became the greatest success stories of Russian oil, while Sidanco was taken over by TNK, which had been privatized in a decently honest auction. Only Rosneft is left as a relatively large -- and characteristically mismanaged -- state-owned oil company.

By 1999, Russia had acquired an almost ideal industrial structure with a handful of big private oil companies, which naturally became competitive. Oil production has risen by about 10 percent per year as the companies have improved in all conceivable ways, ranging from transparency and auditing to management and production. The revival of Russian oil has been the most positive news in the global oil industry since North Sea oil came on stream.

But what is happening to these achievements now? Yukos is being slaughtered by the authorities for purely political reasons, while Sibneft appears to be up for sale.

Some blame everything on the so-called loans-for-shares privatizations of late 1995. The amounts paid were allegedly too small, and the competition too limited. But does anyone know how much the owners of LUKoil or Surgut paid for their companies? The real problem with the loans-for-shares privatizations is that they were comparatively transparent, as a result of which we actually know the numbers involved. The core owners of Yukos probably paid more than the core owners of LUKoil.

Many argue that private ownership has a much more solid foundation in Europe and America than in Russia, but property rights in the West were not formed in a more ethical fashion, only slightly earlier. Half of the American robber barons made their fortunes on the railways, and the secret of their success was getting huge quantities of land from the state for free. Doesn't this sound like the loans-for-shares deals? European aristocratic fiefdoms were gifts from the king, and until recently many of them were even exempt from taxes -- something which Russian oligarchs can only dream of nowadays.

The essence of successful capitalism is to accept existing property rights and declare them sacrosanct -- no matter how they arose in the first place. There is nothing moral about historical property rights, but a society that accepts them tends to generate more economic growth and nurture democracy better than societies that persistently question their inheritance.

Few would contend that a new round of confiscations in Russia will lead to a more equitable distribution of property. If President Vladimir Putin is to attain his goal of doubling Russia's GDP in 10 years, he needs sound economic policy, which can only be built on secure property rights.