Mineral Resources: Market Blessing, Government Curse (Institutions matter, per Peter Kaznacheev)

“It is no coincidence that a breakthrough in unconventional hydrocarbons (i.e., shale oil, shale gas, oil sands, and coalbed methane) should have taken place in some of the most economically free countries of the world, such as the United States, Canada, and Australia. The combination of secure property rights, transparent and efficient regulation, a favorable tax regime, and minimal red tape made it possible.”

“One of the main obstacles to economic growth and social development in many resource economies is rent-seeking. It is not a unique feature of resource economies, but it does appear to have a particularly strong effect on them and to produce institutional weaknesses.”

– Peter Kaznacheev, Curse or Blessing? How Institutions Determine Success in Resource-Rich Economies, Cato Policy Analysis No. 808 (January 11, 2017)

This new study by Peter Kaznacheev, who is Senior Research Fellow at the Russian Presidential Academy of National Economy and Public Administration (RANEPA) in Moscow, valuably interprets mineral resource theory in light of institutions (read: market versus government control). In market settings (as in Texas, and as much of the US), private property rights and rule-of-law free markets create private wealth and direct such private wealth to the social good (“as if led by an invisible hand”).

This post is taken verbatim from Curse or Blessing? How Institutions Determine Success in Resource-Rich Economies with permission from the Cato Institute.

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This paper argues that resource economies with better economic and political institutions manage their resource revenues better and can achieve superior results in economic growth and social development. Evidence presented here is at odds with the resource-curse hypothesis and with the idea that mineral-exporting countries are doomed to stagnation.

Instead of battling with various “curses” and “diseases,” governments might do a better job by looking inward and analyzing their own performance, along with the institutional conditions in the economies that they govern. It is the quality of institutions that essentially determines whether natural resource abundance is a blessing or a curse.

This paper reaches the following main conclusions:

• Natural resources themselves are not the root of the problems facing many mineral-exporting economies. It is possible to build a modern and prosperous economy that derives a significant share of income from the sale of minerals.
• In resource-exporting countries with better institutions and higher levels of economic freedom, both real per capita income and human development scores are higher, people live longer, and more investment and more civil rights exist. Higher economic freedom correlates with lower levels of crime, corruption, and illiteracy.
• One of the main obstacles to economic growth and social development in many resource economies is rent-seeking. It is not a unique feature of resource economies, but it does appear to have a particularly strong effect on them and to produce institutional weaknesses.
• Both the Dutch disease and the effect of commodity price volatility are first and foremost institutional rather than purely economic problems. Both become problems under specific circumstances, which are usually associated with the lack of strong and transparent institutions.
• If implemented properly with the right level of self-discipline, stabilization funds may be a useful economic policy tool for resource economies. Whether they are an optimal way to manage government income is still an open question.
• Innovation is one of the key drivers of growth and social development. The shale revolution is in essence a technological breakthrough of the highest caliber that helped undermine a common prejudice against extractive industries as being insufficiently innovative.
• It is no coincidence that a breakthrough in unconventional hydrocarbons (i.e., shale oil, shale gas, oil sands, and coalbed methane) should have taken place in some of the most economically free countries of the world, such as the United States, Canada, and Australia. The combination of secure property rights, transparent and efficient regulation, a favorable tax regime, and minimal red tape made it possible.
• Private oil companies generally perform more efficiently than state-owned firms: the average net income per barrel of the six largest privately owned oil companies is roughly 60 percent to 85 percent higher (depending on the year) than that of the six leading state-owned oil companies.
• Under certain conditions, and within the right policy framework, some state corporations manage to achieve impressive results (examples include Norway’s Statoil and Malaysia’s Petronas). What matters is the way a particular company is organized, and, even more important, the overall institutional environment in which it operates.
• Five oil exporters witnessed positive GDP growth during the oil price collapse in the 1980s. Those countries are Oman, Indonesia, Norway, Malaysia, and Canada. Their examples demonstrate that strong economic institutions can help weather the storm of low commodity prices.
• More government participation in resource economies does not increase growth. On balance, it generates a negative return by crowding out private investment, fueling rent-seeking and corruption, and decreasing overall productivity.
• A mineral-exporting country can catch up in its economic development if it strengthens its institutions. Even with relatively small improvements, the results are positive and quite significant.

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Peter Kaznacheev (PhD) is Senior Research Fellow at the Russian Presidential Academy of National Economy and Public Administration (RANEPA) in Moscow, where he teaches about public administration in resource economies. Previously, he worked as Business Development Advisor, British Petroleum (BP) where he focused on new business origination and project evaluation in exploration and production.

Between 2002 and 2005, he was Senior Advisor, Russian Presidential Administration, dealing with economic, energy, and environmental issues. Prior to that he worked at the Multilateral Investment Guarantee Agency of the World Bank in Washington; and before that (1999–2000) as Advisor to the Deputy Chairman of the Committee on Property of the Russian Parliament.

As founder of Khaznah Strategies, a UK-based consulting firm, he advises companies and government agencies on various natural resources projects. He received a Master’s degree in international economics from the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, DC; and a Bachelor’s degree and a PhD in political philosophy from Moscow State University. Since 2006, he has been teaching a course at RANEPA focusing on public administration in resource economies.