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The Russia Conundrum

From the new issue of the leftist journal Dissent, a highly debatable article from Frederico Varese.

THE GRAPH THAT provides the best explanation of the Russian conundrum consists of three lines: the world oil price, the degree of democracy in Russia (political and civil rights) as measured by Freedom House, and the rate of corruption as measured by Transparency International. Once this graph has been drawn, the reader immediately sees illuminating correlations: every time the oil price goes up, the level of democracy in Russia goes down and the level of corruption goes up. For decades, political scientists have studied the so-called “wealth paradox” (most recently, Michael Ross, Steve Fish, and Peter Rutland); namely, the fact that countries that are rich in natural resources do not appear to be able to prosper economically over the long term. The classic example is that of Spanish colonization in the New World, which brought fabulous riches to the crown treasury but in the end produced economic decline. In the Spanish case, the American gold only produced powerful inflationary pressures. There is very good reason to believe that political institutions also suffer a decline. The causal mechanism is as follows: large and unexpected profits from the export of raw materials erode the institutional barriers that separate government and the producers of primary resources. The executive has strong incentives to appropriate the profits and weaken the institutional structure that regulates the use of public funds. Various examples from the twentieth century demonstrate how the revenues are spent on ineffectual projects or simply pocketed by the political elite. A further effect of the wealth paradox is that the state can afford to reduce taxes, as has in fact occurred in Russia in recent years. The proceeds from gas and oil production are so high that tax extraction becomes a less important source of revenue. The reduction of tax pressure weakens the incentive among the population to participate in political affairs and so, paradoxically, it reduces the level of participation in the debate on how taxes should be spent.