Russia, India and a tale of curse and blessing

The ramparts of a 17th century Portuguese fort. But the beach boasts one extra attraction, the remains of an old ore carrier, the S.V. River Princess, loom only 100 yards or so from shore. The Princess was one of many freighters bearing ore out of India. She ran aground years ago in a January storm.

Citizens and tourists worried that its spillage would despoil the golden beachline. Plans to remove the ship itself bogged down as the state of Goa, the Indian company that chartered the craft, and environmentalists wrangled. It all seemed just another sign of the trap of the Third World. Commodity exports are supposed to help developing countries grow, but they often dirty the landscape — literally, politically and economically. The country cannot move forward.

Instead, however something else happened. The relic became quaint, unimportant as much a part of the scenery as the brick walls of the fort. Paddling around the River Princess in kayaks has even become an afternoon activity for beachcombers. The tourism was what mattered.

The story of the River Princess is the story of perhaps our greatest modern challenge. All countries need natural resources to grow. And some do find that those same resources seem to curse them. Russia, with its oil, seems a good example. The consensus nowadays is that new oil, as well as the increase in the oil price, combined to corrupt the country. It has even — as improbable as this may once have sounded — transformed former president and now Prime Minister Vladimir Putin into a Latin-style petrocrat. It makes Russia bellicose, as the news from Georgia reminds us. Other countries, however, like the India of Goa, have no commodity windfall. Maybe India grows precisely because it has less oil, and therefore must learn to develop in other ways. Perhaps this is a blessing. India and Russia suggest that there are also foreign policy ramifications to the resource curse. Russia is turning out to be a country that creates geopolitical shocks, India a country that absorbs them.

The drama of the distinction becomes clear if you view Russia and India as part of an experiment that started around 1990. Had foreign policy hands sat together at a table over coffee in that year, they might have wagered that nuclear Russia and nuclear India had about the same odds of becoming a region of strong growth and a strong ally of the U.S.

Absent commodity windfalls, Indians were forced to develop intellectual capital if they wanted to progress at all. In the older days observers had considered 3.5% per annum to be the “Hindu rate of growth” — the rate that was natural for India due to its cultural and economic make up. But average real rates of 5.8% since 1981 have discredited the “Hindu rate” concept. Another commodity-short power, China, achieved a similar feat. It transcended its old “Confucian rate of growth” and began to boom.

Russia grew as well. But much of that growth had to do with oil. Watching the creation and privatisation of the great energy company, Yukos, observers took it to be a signal of Russia’s desire to go capitalist. The head of Yukos, Mikhail Khodorkovsky, personally symbolised that dream — a former Komsomol man who was now taking the lead in creating a new Russian tradition, that of the billionaire who spends on private charity.

But the temptation of oil was too great. Russia's politicians couldn't stand the thought of this resource remaining in the private sector. Russian authorities began to bully Khodorkovsky, though he had pledged fealty to the government in 1992. Yukos was renationalized. Today Khodorkovsky languishes in prison and his company’s revenues flow to the Kremlin.

The two countries developed vastly different profiles. 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 per cent of India's manufactured exports in 2000 and less than 1 per cent of gross domestic product. For Russia, by contrast, those shares were 63 per cent and 26 per cent, respectively — and that was before the oil price surge of recent years.

What do the locals make of it all? 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. 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. Mr. 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.

What about foreign policy? Today, the old problem child India is the great friend of the U.S. President Bush who may have hosted former president Putin at various points but the price of their “special relationship” keeps mounting.

Perhaps the curse-blessing analysis of these two countries is too slick. After all, scholars do rank countries by the strength of their entrepreneurial impulses. When the Council on Foreign Relations surveyed such rankings for India and Russia it found that India has a relatively low ranking for entrepreneurship, about level with that of Russia and lower than China. However, such meters overlook the extraordinary share of the Indian economy that is in the shadows — extra legal or informal businesses.

Looking at the divergence between India and Russia, one can also make the case that India's rise really is due to cultural temperament — knowledge of English, a millennium-old habit of trading, the colonial experience. India's half-century of democracy helps it too, just as Russia's century of dictatorship hurts it. Many nations, including the US, the UK, and Norway, have absorbed commodity windfalls without major damage. So it seems has the state of Alaska in the United States, with its give-back programme for energy revenues.

The Georgian news suggests it may be too late to help Russia. But for India, there is much hope. The idea would be to build up the rule of law and a sense of fair economic play so it is stable enough to handle any future windfalls.

Economists sometimes speak of “Chindia” — the imperative comparison between the two emerging powers, China and India. “Rindia” also matters. Post-Marxist or post-capitalist, developing regions may want to live by the Rindia rule: Try to avoid being spoiled by oil, and remember that less is better.

Amity Shlaes is senior fellow in economic history at the Council on Foreign Relations, and Gaurav Tiwari is a research associate for geoeconomics at the Council. This paper is part of a larger project on enterprise funded by the Kauffman Foundation