Streetwise Professor

November 2, 2007

Competitiveness Rankings, Russian Edition

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:48 am

Via RIA Novosti (and JRL) I found additional details about the evaluation of Russia in the recent competitiveness rankings I blogged about yesterday:

“Despite the country’s large market size and improving macroeconomic management, Russia places 58th below other large European countries,” the World Economic Forum’s Global Competitiveness Index said. The country’s low position is mainly due to “weaknesses in its institutional environment and business standards, lack of government efficiency, lack of independence of the judiciary in meting out justice, and more general concerns about government favoritism in its dealings with
the private sector,” the report said.

The report also said the “environment for the protection of property rights is extremely poor and worsening” in Russia.

As I noted yesterday, the Competitiveness Index touts Russia’s potential (and the potential of other countries with large endowments of oil and other natural resources) because the stimulus from high commodities prices enhances macroeconomic stability and flows. But, in the case of Russia particularly, all of the negative factors listed above have become progressively worse as oil and metal prices have skyrocketed. This is not surprising, and indeed expected to anyone familiar with the corrosive effect of resource rents and the associated rent seeking on institutions, and hence on growth prospects.

Thus, the commodity boom has not been an unmixed blessing for Russia, and given the resource curse, it would be wrong to expect such a result. Hence my skepticism about the WEF’s conclusions, and its methodology, which apparently evaluates its various categories in isolation. It is a major oversight to fail to connect the resource boom with the concomitant institutional deterioration in Russia. As a result of this oversight, I think the WEF’s evaluations of the prospects of resource rich nations are fundamentally flawed.

A few quotes from a new paper by Art Durnev and Sergei Guriev are apposite in this context:

Recent literature [cites omitted] demonstrates that the resource curse is related to the deterioration of economic and political institutions. In particular, if resources are discovered in an economy with immature institutions, the resulting rent-seeking slows down or even reverses institutional development, which in turn, negatively affects growth. . . .

Our results therefore support the emerging consensus that slower growth in resource-rich economies may be explained by the negative impact of resource endowments on the development of economic and political institutions, which in turn suppresses economic growth.

Thus, though the WEF is to be complimented for its increased awareness of the important impact of institutional factors on competitiveness and growth, it still has some ways to go to understand the factors that strengthen institutions, or cause them to atrophy. Without a better understanding of these issues, its Index will present an incomplete–and arguably misleading–picture of the relative economic prospects of the world’s nations.

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