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Natural Wealth Can Pave the Road to Poverty
Daily Policy Digest

International Issues / Economic Stagnation

Wednesday, January 29, 2003
Examining how former East Bloc countries have thrived since the fall of communism, Filip Palda, a senior fellow with the Fraser Institute, concludes that natural resources --including forests, minerals and oil -- can be a bane to an economy.

  • Palda notes the central European countries that were poor in natural resources, such as Poland, the Czech Republic and Hungary, saw their economies grow in the 1990s.
  • In contrast, Russia, which gets 57 percent of its export revenue from natural resources, saw its economy shrink between 1990 and 1998, as did the resource-rich Central Asian countries.
Why should natural resources be a curse?

  • Palda says the revenues from natural resource abundance induces rent-seeking behavior and corruption across the bureaucracy and business elite.
  • This increased corruption slows down economic growth.
In the case of Russia, Palda says a few "oligarchs" bribed and threatened to nab a good chunk of Russia's wealth. Paraphrasing Paul Klebnikov, from his book "Godfather of the Kremlin," Palda says, "Natural resources were the obvious target for post-Soviet businessmen with flexible morals and dreams of quick riches. It does not take a genius to understand that a gold mine can make you rich."

The experience of the former East Bloc suggests that these barons seek to extend their power over labor and commerce in other sectors of the economy, with devastating consequences for their country's wealth. As a result, educated Russians are fleeing their country, as are the middle classes of almost every place cursed with oil and gold.

Palda cautions, "There is little room for humanity or civilized existence in a country where no one sees the advantage of working with his fellow man towards a common good."

Source: Filip Palda, "The High Price of Natural Wealth," Fraser Forum, January 2003, Fraser Institute.

For text
http://www.fraserinstitute.org/Commerce.Web/product_files/The%20High%20Price%20of%20Natural%20Wealth-Palda.pdf

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