Russia Is Spoiled by Oil, India Blessed With Less

Feb. 21 (Bloomberg) — Why is Russia so nasty, and India so nice?

This week, Russia is busy warning that Poland or the Czech Republic will be targeted by its missiles if they cooperate with the U.S. in missile defense. This action follows a threatening speech by Russian President Vladimir Putin in Munich.

India, by contrast, is emphatically assuring the world that the recent bombing of a Pakistan-bound train won't ruin relations with its Muslim neighbor.

In other words, Russia is turning out to be a country that creates geopolitical shocks, India a country that absorbs them. It may be that the Russia problem doesn't have so much to do with national temperament as with oil. New oil has corrupted the Russian people. It has even — improbable as this might have once sounded — transformed Putin into a Latin-style petrocrat.

There's a corollary to the blame-the-oil proposition. It is that India is a source of stability precisely because it has no oil or any comparable windfall. If natural resources are a curse, their absence is a blessing.

Economists have long thought about the first idea — the discovery of gold didn't help the Spanish Empire in the long run; postwar Japan turned to manufacturing in desperation because it had no wealth to mine.

The drama of the distinction becomes clear in the Russia-India story. Back in 1990, nuclear Russia and nuclear India seemed to have about the same odds of becoming a source of economic stability and a strong ally for the U.S.

Two Paths

Russia was so disillusioned with communism that it seemed possible it would readily westernize. It seemed equally possible that India would morph into a sort of non-aligned monster. After all, there was its terrifying balance-of-payments problem and the grinding poverty, not to mention an appalling record of pointless ethnic strife.

The strife is still there. But absent commodity windfalls, Indians were forced to develop intellectual capital. Shares of Indian companies may be priced too high today, but no one can deny that much of India's growth in the past decade was real and decisively different from Russia's.

Surjit Bhalla, a visiting fellow at the Peter G. Peterson Institute for International Economics in Washington, points out that commodities — oil, minerals, agricultural raw materials — were 8 percent of India's manufactured exports in 2000, and less than 1 percent of gross domestic product. For Russia, by contrast, those shares were 63 percent and 26 percent, respectively — and that was before the oil price surge of the past two years.

Power Figures

The presence or absence of new commodity resources had a strong political effect. Because the oil was there, Russia's politicians couldn't stand the thought of it remaining in the private sector, which is why Russian authorities continue to come up with new charges against the already jailed Mikhail Khodorkovsky, formerly of energy company OAO Yukos Oil Co.

Indian politicians, whatever their official political links, espied no such ready stream of cash. In order to get tax revenue, they had to create an environment in which innovators would thrive.

In resource economies, power figures tend to trump ideas. For every percentage point that Russian GDP rises, Putin takes up more of the air on the world stage. India's prime minister, a former International Monetary Fund economist, is as bold as former West German Chancellor Ludwig Erhard, the politician who launched the Economic Miracle. Yet the father of India's economic miracle remains so obscure that people outside India don't even know his name: Manmohan Singh.

Manna Falls

Indians note that the resource dichotomy also obtains within their country. States such as Bihar, known for coal, or Orissa, known for ore and steel, are poorer than others. Goa, the former Portuguese colony, has iron ore, but its future is a setting for vacation condos and software back offices. From their beach chairs, tourists on Goa's reddish beaches observe a symbol of the passing of old industry: an iron-ore freighter that ran aground years ago and now is stuck in a sandbar.

Many Indians also see the curse-or-blessing rule at work in other parts of the world. "In developing countries, politicians work in a system with insufficient checks and balances," Bhalla says. "And that means when manna from heaven falls they are ready to pocket it and their country be damned."

There is an inverse relationship between the presence of natural resources and entrepreneurialism, says Prajakt Raut, a cofounder of Indus Medinet, a health-care startup. Raut is also an affiliate of the Indus Entrepreneurs, or TIE, a network of Indian businessmen across the globe. "It is only when entrepreneurs are hungry that they innovate," he says.

Too Slick

Perhaps the curse-blessing analysis is too slick. One can make the case that India's rise really is due to something close to national temperament — knowledge of English, a millennium-old habit of trading. India's half-century of democracy helps it too, just as Russia's century of dictatorship hurts it. Many nations, including the U.S., the U.K. and Norway, have managed commodity windfalls without major damage.

Still, one could argue back that such countries went undamaged only because the rule of law was so firmly in place when discoveries came — and that there are places within these countries too where resources have been problematic. The coal of West Virginia hasn't helped that state, which ranks 48th in gross state product per capita.

Post-Marxist or post-capitalist, developing regions may want to live by two rules: Don't be spoiled by oil, and less is best.

(Amity Shlaes, a Bloomberg News columnist, is a visiting senior fellow at the Council on Foreign Relations. The opinions expressed are her own.)

© Copyright 2007 Bloomberg

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