Friday Interview: Russia’s ‘Curse’ of Abundant Natural Resources | Eastern North Carolina Now

    Publisher's note: The author of this post is AUTHOR NAME, who AUTHOR ROLE for the Carolina Journal, John Hood Publisher.

    Former top Gorbachev economic adviser explains 'paradox of plenty'

    RALEIGH  -  Russia has witnessed massive changes over the past two decades. Not all of them have been good. Yuri Maltsev, professor of economics at Carthage College, served as a top economics adviser to Mikhail Gorbachev, the last leader of the former Soviet Union, before Maltsev defected to the United States in 1989. Earlier this year, Maltsev addressed the John Locke Foundation's Shaftesbury Society on the topic "Russia, Hydrocarbons, Autocracy, and Power Politics." He shared some key themes from that presentation during an interview with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

    Kokai: It is an interesting thing when you look at Russia, the Russian economy, all kinds of access to natural resources, but still an economy that trails many of the other developed countries. And you said that there is a definite reason why this is true.

    Maltsev: Well, I would say John Locke, as well as Adam Smith, they believed that the only source of wealth is freedom - human freedom. And in economics we use a special term called the "curse of natural resources," or "paradox of plenty." And this paradox of plenty [is] that Russia is awash with natural resources. They have second-in-the-world deposits of oil, first-in-the-world deposits of natural gas. They have platinum. They have gold. They have diamonds.

    They have almost everything possible and impossible, and the country is still poor. It's still poor. What's the reason? Because usually natural resources owned by a government help to perpetuate bad governance, because government, amazingly enough, does not depend on its own people, even for tax revenue. Eighty-five percent of all revenue of the Russian treasury comes from natural resources. They sell oil, they sell gold, they sell other natural resources, and they keep an inefficient, corrupt, and, I would say, autocratic government of Mr. [Vladimir] Putin in place. So that's what it is. When you don't need to keep a chicken laying golden eggs, you can eat the chicken and eggs at the same time.

    Kokai: When a society has that problem, like Russia, or some have made the same argument about the Middle Eastern countries with their large oil deposits, what sorts of long-term problems does that create for the people in society who aren't getting those dollars?

    Maltsev: Yes, it creates a lot of problems. One problem is something called Dutch disease. Dutch disease means that the mining industries, the industries like the oil industry and other mining industries, would crowd out any other industries because of the exchange rate. Because Russia is selling so much of its natural resources, the ruble exchange rate is getting higher and higher and higher, making - it's easier for Russians to buy everything in other countries. So that means that any business you start outside of the mining industry in Russia will either become unprofitable or would be under such a competitive pressure because of the very high exchange rate of the ruble, because the ruble is overvalued. So this is Dutch disease in economics. So the whole development of the country would be one-sided, based on the natural resources.

    Another thing is that natural resources perpetuate bad government. [Vladimir] Lenin, in his letter to [Leon] Trotsky in 1922, he wrote, "Dear Leon, I think if our revolution would win in Belgium, we would be done in a week." Here [in Russia] we have 11 time zones. So he didn't try to loot, but that's exactly what happened. You have a lot of natural resources - then, if you remember, there was a movie "Blood Diamond," that's a very good illustration of what natural resources can do to people. Or look at Venezuela, at oil in Venezuela, and many other countries like that, especially countries where government controls and owns natural resources.

    We have a lot of natural resources in the United States, in Canada, in Australia, and these countries are doing well. For what reason? Because natural resources are owned privately, and governments just take a cut in taxes. In Africa there is a well-kept secret of Botswana. That's a country which is doing better than any other country in Africa because they are free, because natural resources are privately owned, and the people of Botswana, they have a standard of living about three times higher than in South Africa, the most developed country in Africa.

    I just happened to be in Africa a month ago, and it was amazing to see how economic freedom, whether it is in North America or Europe or Africa, what miracles it produces.

    Kokai: Just to make it clear for folks, the problem is not necessarily the fact that they have the natural resources in Russia, but it is the fact that it's being used in the wrong way and the government controls it. What do you think would be the situation in Russia if all of these valuable natural resources were privately owned and private investment was taking advantage of them?

    Maltsev: Well, in Russia, at first, that was the case. Natural resources were at first privatized. They were spontaneously privatized. That means just stolen from the people. However, the so-called oligarchs who got them, they, at a certain point, they became, I would say, pretty good citizens. Mikhail Khodorkovsky, who was the richest man in Russia, he became like the Bill Gates of Russia. He started something called the Open Russia Foundation. He was concerned with the Internet. He would be putting free Internet in remote Siberian villages, in post offices, in libraries, in schools, elementary schools, high schools, everywhere. And I think that people like him. He had the best-managed company in Russia.

    And then, sure enough, he made a mistake. In 2003, he declared that maybe he will run for the Russian presidency against Mr. Putin. And now he is on trumped-up charges, was sent by the kangaroo court into eastern Siberia, and now he is rotting in an eastern Siberian dungeon with roaches and rats.

    Kokai: So not just private ownership, but also a strong rule of law would be needed?

    Maltsev: Absolutely. Absolutely. Rule of law makes all the difference because without rule of law, the Russian economy is doomed to be corrupt, based on corruption, doomed to be inefficient and not competitive, except again, except mining industries, except oil, except other natural resources, where they are just pumping everything, depriving future generations of Russians to enjoy even the same standard of living that they do have today.

    Kokai: ... Knowing what you know about the history of the area, the former Soviet Union, current Russia, do you see any signs that we're likely to see improvement any time soon, or is this path sort of leading to a bad outcome?

    Maltsev: Yes, I would say that the great Austrian economist Friedrich August von Hayek, he wrote a book, Road to Serfdom. And Russia, unfortunately, is still on this road. However, some other countries of the former Soviet Union, especially Baltic states - Lithuania, Latvia, Estonia - they made a very resolute U-turn on this road, and they became free, and they became prosperous. And those countries do not have any natural resources, except maybe good yearround ports in the Baltic Sea. But they already enjoy the standard of living of Europe. They became members of [the European Union] and NATO and of the Western community, and they're doing very well. They are free. Freedom is the source of prosperity.