The resource curse
For many years, economists have been puzzled at the way things have
gone wrong in countries where natural resources were discovered. In
1993, the economist Richard M. Auty coined the phrase `Resource
curse' to convey the extent to which natural resource finds are a
curse and not a blessing. But the idea had been kicking around well
before that. I suppose it was an obvious conjecture after watching
the failures of the Middle East, where trillions of dollars of oil
revenues were squandered by not one but many countries.
In the 1970s, when oil was discovered in Venezuela, former Oil
Minister and OPEC co-founder Juan Pablo Perez
Alfonzo said:
"Ten years from now, 20 years from now, you will see, oil will bring
us ruin." His phrase for oil was: "the devil's excrement."
Why are resources a curse? In a country blessed with no natural
resources (think Japan), the only way forward for the ruling elite
is the slow hard work of building public goods, so that GDP builds
up, which then feeds back into the power and importance and utility
of the ruling elite. When the ruling elite gets their wealth for
free, without having to do the hard work of building public goods
and thus GDP of the country, the rulers emphasise the wrong
issues. That's how Venezuela ended up with Hugo Chavez.
On one hand, rulers get focused on finding ways to maximise their
rent from the underlying resource flow, without developing the
knowledge about how to build a State that delivers public goods. In
parallel, competition between politicians becomes an unpleasant
process of trying to grab the riches by means fair or foul, rather
than a process of competing in doing better on public goods. If
there are XX billion dollars to be grabbed by becoming head of
state, fairly unpleasant tactics get used by rivals aiming for that
job.
Bombay's resource curse
I just
read Maharashtra's
Audacious Chief Ministers by Ashok Malik and it is a
chilling story. It made me think: Why did governance in Bombay go
wrong so comprehensively?
Maybe the story runs like this. Winning elections in Maharashtra
does not require serving the citizens of Bombay. A party can do
various things in trying to win seats in the legislature across
Maharashtra. Once this is done, the ruling party gets the rents
that come from control of Bombay.
The wealth and prosperity of Bombay is like an oil well which is
gushing out cash for the ruling party in Maharashtra. They did not
earn it. The slow, long, hard work of learning how to run a State,
of building public goods: these things do not matter for the ruling
party in Maharashtra. They get a rental cashflow from Bombay for
free.
In (say) Jaipur, the Chief Minister and his ilk do not have an oil
well gushing cash at them. Their incentives are to worry about
public goods, and grow the GDP of Rajasthan. The importance and
rental cashflow of the leadership in Rajasthan are primarily about
the GDP of Rajasthan. Their hard work in improving public goods in
Rajasthan feeds back to them as a higher rental cashflow.
People often compare the problems with Bombay with the decline of
Calcutta after the Left took charge. The two stories are similar in
that parties which won rural votes got to run a great city into the
ground. But the Left did not take rents from Calcutta on this
scale. That was an age where the GDP of Calcutta, while impressive
by Indian standards, was still small change. Bombay of the last 20
years is in a different league altogether. This connects with the
middle
income trap meme: when capitalism first bloomed in India, some
governance problems got worse and not better.
Implications
I think this suggests that the right to govern a prosperous city
should not be based on elections taking place somewhere else. If
Bombay were a full fledged state, as Delhi is and as
the four
big cities of China are, then elections to control Bombay would
require persuading voters in Bombay.
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