8:34 am
Fri February 10, 2012

Foreign Policy: Embarrassment Of Riches

Originally published on Fri February 10, 2012 8:31 am

Peter Passell, the Economics Editor of Democracy Lab, is a Senior Fellow at the Milken Institute.

Note that Dutch disease may or may not hurt an economy as a whole; not every country needs a healthy manufacturing sector to thrive. But there's a case to be made (especially in the case of poor countries) that manufactured exports generate all sorts of positive spillovers that spur development. For example, large-scale manufacturing creates a demand for sophisticated finance and management, both of which are foundations to economic growth.

Nonetheless, the pernicious effects of Dutch disease are pretty clearly visible in contemporary Russia, which exports little besides oil, gas, and minerals. (The main exception is weapons, but that's a whole other story). Russian industry, much of which was beyond repair in the last, dark days of the Soviet Union, lost all its foreign markets once its former satellites were free to look to the decadent West to buy tractors that started on cold mornings and airplanes that rarely crashed. Today, Russia can't attract investment to build a competitive industrial base for a whole bunch of reasons — not least of them the fact that revenues from natural resource exports prop up the exchange rate of the ruble.

These arguments hardly seem adequate, though, as an explanation for, say, the Dickensian poverty of oil-rich Nigeria or the vertigo-inducing imbalance of the Saudi Arabian economy, where two young men in five are unemployed and there's an 18-year waiting list for home mortgages. In such cases, the link between resources and stagnation is institutional development (or, rather, the lack thereof).

In very poor countries like Nigeria (or Gabon, Equatorial Guinea, or the Democratic Republic of Congo), resource wealth leads to corruption, which in turn leads to dysfunctional government. Oil and mineral wealth, as opposed to wealth linked to the production of low-margin good and services, makes corruption overwhelmingly tempting. A manufacturer that operates in a competitive global market may credibly threaten to leave (or never show up in the first place) if officials stick their hands out at every opportunity. By contrast, an oil company that can extract crude for, say, just one-tenth of what it's worth on the market has a far greater incentive to pay bribes in order to keep on pumping.

Corruption allows government to build and lock-in authority through patronage rather than through the efficient delivery of services. Indeed, it creates (or at least perpetuates) a zero-sum economic culture in which the most realistic path to success is to skim the cream rather than to make something people actually value. And corruption, it's worth remembering, is a communicable disease, typically infecting everybody from traffic cops to tax collectors if it's understood that the Big Men are on the take, too.

Consider Nigeria, which ranks 133rd out of 183 countries on the World Bank's Ease of Doing Business Index — largely because its business environment is so hobbled by corruption. It takes the better part of a year and fees equal to ten times the per capita income to obtain an electricity connection. Bureaucracy run amok, you say? Sure, but there's method to the madness, since every bottleneck creates a profit opportunity for the bureaucrat who can grease the wheels of the creaky government machinery.

But even where the result of easy resource wealth is not blatant corruption, it can inhibit growth by reducing the pressure for change. In Saudi Arabia, just 12 percent of working-age women are in the work force — a culturally driven waste of productive capacity that is perpetuated because oil generates enough income to make it tolerable. Saudi men refuse to do drudge work (or much work at all), and get away with it because the state can afford to keep them on the dole, paying Pakistanis or Palestinians to keep the coffee hot and the streets repaired. Here, merit gives way to family, tribal connection, and feudal order. The process of natural selection broadly writ, in which institutions that encourage productive activity trump unproductive institutions, is blunted.

Continued At Foreign Policy

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