Transcript here

Natural
Resources and
Economic
Growth: What
Is the
Connection?
Thorvaldur Gylfason
Overview of
presentation
1. Origins and symptoms of the
Dutch disease
2. Thinking about natural resources
and economic growth
3. Interlude on OPEC
4. Empirical evidence on resources
and growth around the world
5. Lessons from Norway
1
Neither Dutch
nor a disease
Discovery of off-shore oil and gas in
late 1950s, early 1960s
 Resulting upswing in exports of
natural gas led to appreciation of
Dutch guilder

This hurt other exports for a while


Threat of de-industrialization
The problem proved short-lived

But the name stuck
The Dutch disease:
Some symptoms
Overvaluation of the currency
 Exchange rate volatility
 Excessive wages

Greenland
Centralized wage bargaining

All this hurts the level or skews the
composition of exports
May also hurt FDI
What does
experience
show?
Exports of goods and services
1960-1997 (% of GDP)
70
60
50
40
30
Norway
Netherlands
20
Ukraine
10
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
64
19
60
0
19
Ukraine’s
exports have
fluctuated
considerably
since 1989,
but even so
they have
been fairly
high
Foreign direct investment
1975-1998 (% of GDP, ppp)
25
Norway
Netherlands
20
Ukraine
15
10
5
97
19
95
19
93
19
91
19
89
19
87
85
19
19
83
19
81
19
79
19
77
19
75
0
19
Since 1994,
Ukraine has
attracted less
gross FDI
than the
Netherlands
or Norway
Manufacturing exports 19801998 (% of total exports)
80
70
60
50
40
30
Norway
20
Netherlands
10
Ukraine
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
19
There was
growth in
Ukraine’s
manufacturing
exports in the
mid-1990s,
but thereafter
they
stagnated
Why these things may
be important
Exports and FDI are good for growth
Openness to trade and investment
stimulates imports of goods and
services, technology, ideas, know-how
Too much primary export dependence
and too little manufacturing may
hurt growth
So, economic growth is key
2
Thinking about natural
resources and growth
Natural
resources
x
Economic
growth
Thinking about natural
resources and growth
Natural
resources
x
Economic
growth
What is x ?
Five channels of
transmission
1. The Dutch disease
Exchange rates, wages, volatility
Hurts level or composition of exports
2. Rent seeking
Social
capital
Protectionism, cronyism, corruption
3. Overconfidence
Poor quality of policies and institutions
4. Neglect of education
5. Not enough investment
Crowding out
Put differently, natural capital may
crowd out
Social capital
Human capital
Physical capital
Matter of taste whether these
mechanisms are viewed as additional
symptoms of the Dutch disease or as
separate channels of transmission
3
Interlude: A quick look
at OPEC
Nigeria has been stagnant since
independence in 1960: No growth
Per capita growth 1965-1998
Iran and Venezuela: -1% per year
Libya: -2%
Iraq and Kuwait: -3%
Qatar: -6%
Why?
Background: A quick
look at OPEC
King Faisal of Saudi Arabia (19641975) would hardly have been
surprised:
“In one generation we went from
riding camels to riding Cadillacs.
The way we are wasting money, I
fear the next generation will be
riding camels again.”
Background: A quick
look at OPEC
Lee Kwan Yew, founding father of
Singapore (1959-1991), would not
have been surprised either:
“I thought then that wealth depended mainly on
the possession of territory and natural
resources, whether fertile land ..., or valuable
minerals, or oil and gas. It was only after I had
been in office for some years that I recognized
... that the decisive factors were the people,
their natural abilities, education and training.”
Is OPEC an exception?
No, this seems to be a general pattern.
Of 65 natural resource abundant
countries 1970-1998, only four had
Investment of more than 25% of GDP
Per capita GNP growth of more than
4% per year
They are:
Botswana, Indonesia, Malaysia, Thailand
But there is an
exception: Norway
The problem is not the existence of
natural wealth as such ...
but rather the failure to avert the dangers
that accompany the gifts of nature
Norway is, so far, a success story
Government takes in 80% of oil rent and
invests it mostly in foreign securities
No signs of damage to growth potential,
at least not yet (but some worry!)
4
Natural capital and
growth: The evidence
Review a few of the empirical findings
of the new literature on natural
resource abundance and growth
Present cross-country evidence
Individual historical case studies support
the results
Stress linkages between natural capital
and various determinants of growth
as well as growth itself
Corruption and natural
r = rank
capital
correlation
12
A new
measure of
natural
resource
dependence
Confirms
results based
on other
measures
60 countries
Corruption perceptions index 2000
r = -0.52
10
A ten percentage point
increase in the natural
capital share goes along
with an increase in
corruption by 1.3 points
8
6
4
2
0
0
10
20
30
Share of natural capital in national wealth 1994 (%)
40
Corruption and natural
capital
12
Corruption perceptions index 2000
r = -0.52
10
A ten percentage point
increase in the natural
capital share goes along
with an increase in
corruption by 1.3 points
8
6
4
2
0
0
60 countries
10
20
30
Share of natural capital in national wealth 1994 (%)
40
Corruption and natural
capital, again
A 22 percentage point
increase in the primary
labor share goes along
with an increase in
corruption by 1.3 points
Another
measure of
natural
resource
dependence
More
countries
Same pattern
Corruption perceptions index 2000
12
10
Denmark
Finland
New Zealand
Iceland
8
Chile
r = -0.68
Botswana
6
Malawi
4
2
Yugoslavia
Ukraine
Azerbaijan
Indonesia Angola
Nigeria
0
0
83 countries
20
40
60
80
Share of primary sector in labor force 1965-1990 (%)
100
Corruption and
economic growth
Annual growth of GNP per capita 1965-98, adjusted
for initial income (%)
4
r = 0.78
2
0
0
2
4
6
8
-2
-4
-6
-8
A one-point increase in
the corruption index
goes along with an
increase in per capita
growth by 1% per year
-10
64 countries
10
Corruption perceptions index 2000
12
Summary of results on
corruption
Growth
Corruption
=
+
Resources
Growth
Corruption
Resources
Education and natural
capital
Comparable
figures for
Ukraine are
not available
But public
spending on
education is
high
Gross secondary-school enrolment 1980-97 (%)
140
r = -0.66
120
A five percentage point
increase in the natural
capital share goes
along with a decrease
in secondary-school
enrolment by almost
10 percentage points.
100
80
60
40
20
0
-20
0
10
20
30
40
50
60
-40
91 countries
Share of natural capital in national wealth 1994 (%)
Education and natural
capital
Gross secondary-school enrolment 1980-97 (%)
140
r = -0.66
120
A five percentage point
increase in the natural
capital share goes
along with a decrease
in secondary-school
enrolment by almost
10 percentage points.
100
80
60
40
20
0
-20
0
10
20
30
40
50
60
-40
91 countries
Share of natural capital in national wealth 1994 (%)
Economic growth and
education
Annual growth of GNP per capita 1965-98, adjusted for
initial income (%)
6
r = 0.69
4
2
0
0
-2
-4
20
40
60
80
100
A 30 point increase in the
secondary enrolment rate
goes along with an
increase in per capita
growth by 1% per year.
-6
87 countries
120
Gross secondary-school enrolment 1980-97 (%)
Summary of results on
education
Growth
Education
=
+
Resources
Growth
Education
Resources
Summary of results
on education
We have seen that, across countries:
1. Secondary-school enrolment is
inversely related to natural resource
abundance
2. Economic growth varies directly with
education
3. Economic growth varies inversely
with natural resource abundance
Interpretation of
results
Natural-resource-based industries are
generally less high-skill labor
intensive and less high-quality
capital intensive than others, and so
confer few external benefits
distort comparative advantage
impede learning by doing, technical
advance, and economic growth
Investment and
natural capital
Gross domestic investment 1965-98 (% of GNP)
35
30
A ten point increase in the
natural capital share goes
along with a decrease in
investment by 2% of GDP.
25
20
15
10
5
r = -0.38
0
0
85 countries
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
Economic growth and
investment
Growth of GNP per capita 1965-98, adjusted for initial
income (%)
6
A five point increase in
the natural capital
share goes along with
an increase in per
capita growth by 1%.
4
2
0
0
5
10
15
20
25
30
-2
-4
-6
r = 0.65
-8
85 countries
Gross domestic investment 1965-1998 (% of GNP)
35
Summary of results
on investment
Growth
Investment
=
+
Resources
Growth
Investment
Resources
Summary of results
on investment
We have seen that, across countries:
1. Investment is inversely related to
natural resource abundance
2. Economic growth varies directly with
investment
3. Economic growth varies inversely
with natural resource abundance
What is the
empirical
evidence?
Economic growth and
natural capital
Growth of GNP per capita 1965-98, adjusted for initial
income (%)
6
A ten percentage point
increase in the natural
capital share goes along
with a decrease in per
capita growth by 1%
per year
r = -0.64
4
2
0
0
10
20
30
40
50
-2
-4
-6
-8
85 countries,
but no transition countries
Share of natural capital in national wealth 1994 (%)
60
Economic growth and
natural capital, again
Another
measure of
natural
resource
dependence
More
countries
Same pattern
Growth of GNP per capita 1965-98, adjusted for initial
income (%)
4
r = -0.85
Singapore
2
Hong Kong
Korea
0
0
20
40
-2
60
80
Poland
Latvia
-4
Bulgaria
-6
-8
-10
-12
Romania
Georgia
An 11-12 percentage
point increase in the
primary labor share
goes along with a
decrease in per capita
growth by 1% per year
Share of primary sector in labor force 1965-90 (%)
105 countries,
including 7 transition countries
100
5
Lessons from Norway

Large petroleum sector
 Contributes 25% of GNP and almost 50% of
exports (2000)

Second largest oil exporter in the world
 Oil wealth is estimated at 50-250% of GNP

State takes in about 80% of oil rent
 Mostly through taxes and fees
 The oil is a common property resource by law

Oil revenue is deposited in oil fund
 Invested in foreign securities
The oil fund: A fair
and efficient strategy

The purpose of the oil fund
To share the wealth fairly across
generations
To shield domestic economy from
overheating and possible waste

Fund will become huge ...
if Norwegians resist the temptation to
use too much of the money to meet
current needs
Why Norway has succeeded
where OPEC failed

Long tradition of democracy and
market economy in Norway since
before the advent of oil
 Large-scale rent seeking was averted
 Adequate investment performance
 Excellent education record

Even so, Norway faces challenges
 Some (weak) signs of Dutch disease
 Stagnant exports, sluggish FDI
One last point

Perhaps the main challenge is to
make sure that the oil fund does not
instill a false sense of security
May need to immunize the fund from
political interference -- like the courts,
media, even central banks
This may require privatization
But private sector is not infallible either
So, best to adopt a mixed strategy
Good times demand
strong discipline

Natural resources bring risks
A
false sense of security leads people to
underrate or overlook the need for good
policies and institutions, good
education, and good investment
 Awash in easy cash, they may find that
hard choices perhaps can be avoided
 Awareness of these risks is perhaps the
best insurance policy against them