Transition and Reform: What Effect Does Resource Abundance Have?

The transition experience in Russia in the 1990s has produced benefits for some people, but it has not generally been a happy one. The level of GDP is well below what it was at the beginning of the period, inequality has increased very sharply, and other indicators of well being, such as crime and human health, have deteriorated significantly. Much of this is not unique to Russia; many of the other transition countries have faced similar problems. Although Russia was not the worst performer for many of the indicators, one might have expected better given its initial advantages, especially the immense natural resource wealth. In this paper we seek to understand why the transition process has been difficult in Russia, and in particular to what extent these difficulties arise from its resource-rich status. Three hypotheses are analysed. First is the view that resource-abundant countries are slow to make reforms as they have a cushion of rents to rely on. The second explanatory factor is the impact of resource abundance on the real exchange rate. The last factor is a social one. Resource abundance creates social conflict, as the benefits from this are unequally distributed. Although all three factors have played some part in explaining the relatively poor performance of Russia during the transition period, in our view the last explanation is the most potent. For the future, the government must pay the highest attention to reducing the social conflict. This requires a crackdown on corruption and criminal activity. Furthermore, when reforms are introduced, the government must ensure that these are not used as a vehicle for a few people to extract more rents from the system. A more careful accounting of the rents from natural resources, allocating them to the highest value uses in a transparent way, would clearly be beneficial.