The Foreign Service Journal, December 2003

investors. Privatization has been a big part of the devel- opment agenda pushed by the IMF and the World Bank over the last two decades. The argument is that it pro- motes productive efficiency by restoring the profit motive. It also resonates with political agendas aimed at shrinking state economic involvement. In practice, however, the history of large-scale privatiza- tion has been fraught with failure. In many instances, the majority of the assets end up in the hands of multinational oil companies. This is particularly evident in the former Soviet Union, where the selling-off of industries created a new oligarchy, and the state failed to get its money’s worth. Even if the privatization process is conducted legiti- mately at fair market prices, there still remains the problem of what to do with the revenues. If handled properly, pri- vatization sale proceeds should equal the net present value of all future profits. In effect, privatization converts future profits into a lump sum. But this conversion gives klepto- cratic governments an even larger sum to spend and steal — a case of jumping from the frying pan into the fire. For this reason, as with oil stabilization funds, privati- zation works best in countries where governance is strong. This limits the usefulness of privatization. Economic Oxygen The natural resource curse represents an enormous impediment to development. Yet it is important to realize that it is not natural resources per se that are the problem; rather, it is lack of good governance and democracy. Remedying this institutional failure requires changes of law and practice but does not require huge resource invest- ments. The measures discussed in this article involve min- imal cost but promise enormous productivity gains. From this perspective, the rate of return payoff is astronomical. Lifting the natural resource curse would be like eco- nomic oxygen for developing countries. It would help ensure that existing resources are used efficiently, and the resulting improvement in the economic atmosphere would attract additional resources, making for better growth prospects. ■ F O C U S D E C E M B E R 2 0 0 3 / F O R E I G N S E R V I C E J O U R N A L 61