The paradox of plenty

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The New York Times reports on Russia's struggle with 'the paradox of bounty':

As the world's second-largest oil exporter, behind only Saudi Arabia, Russia is taking in $500 million a day from crude oil exports and the cash is gushing faster than the nation can absorb it without causing inflation.

Russia is still a relatively poor developing country, and with obvious needs to fix decades of accumulated infrastructure problems and pull an estimated 25 million Russians out of poverty, it has no dearth of things to spend money on.

If it does not manage smartly, however, Russia's embarrassment of new riches can turn into a classic paradox of good times, one that economists call the Dutch disease, afflicting energy-exporting countries.

The New York Times focus on the macroeconomic problems caused by big inflows of cash; they are behind one theory, by Raghu Rajan and Arvind Subramanian, of the problems of foreign aid. An alternative theory is that inflows of cash - whether aid or oil - damage institutions in a scramble for the rents. Some inflows of cash presumably cause more damage to institutions than others. See more here and here.

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