Transcript Principles of Economic Growth

Lessons from
the Dutch
Disease:
Causes,
Treatment,
and Cures
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. The special case of 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

Faroes, 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
50
40
30
Norway
20
Netherlands
10
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
64
19
60
0
19
Norway’s oil
exports have
crowded out
non-oil
exports krone
for krone
relative to
GDP
60
Foreign direct investment
1975-1998 (% of GDP, ppp)
25
Netherlands
15
10
5
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
0
19
In 1998,
Norway
attracted less
FDI than the
Netherlands,
and also less
than Sweden
(23%) and
Finland (36%)
Norway
20
Manufacturing exports 19801998 (% of total exports)
80
60
50
40
30
Norway
20
Netherlands
10
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
19
No growth in
Norway’s
manufacturing
exports
relative to
total exports
since 1980
70
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. Too little 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.”
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 let’s be careful:
Norway stands out
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 (more on this later)
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
What is the
empirical
evidence?
Economic growth and
r = rank
natural capital
correlation
A new
measure of
natural
resource
abundance
Confirms
results based
on other
measures
85 countries
Growth of GNP per capita 1965-98, adjusted for initial
income (%)
6
A ten percentage point
increase in the natural
capital share goes along
Norway
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
Share of natural capital in national wealth 1994 (%)
60
Education and natural
capital
Now consider the relationship
between natural resource
abundance and two different
measures of national commitment
to education:
1. Public expenditure on education as
percentage of GNP
2. Secondary-school enrolment as
percentage of each cohort
Norway is
close to the
top of the list
of countries
ranked by
public
expenditure
on education
Public expenditure on education 1980-97 (% of GNP)
Expenditure on education
and natural capital
9
8
An 18 percentage point
increase in the natural
capital share is associated
with a decrease in public
expenditure on education
by 1% of GNP.
7
6
5
4
3
2
1
0
0
90 countries
r = -0.32
Norway
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
Public expenditure on education 1980-97 (% of GNP)
Expenditure on education
and natural capital
9
r = -0.32
Norway
8
An 18 percentage point
increase in the natural
capital share is associated
with a decrease in public
expenditure on education
by 1% of GNP.
7
6
5
4
3
2
1
0
0
90 countries
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
Secondary enrolment
and natural capital
College
enrolment
has risen
from 26%
in 1980 to
62% in
1997
Gross secondary-school enrolment 1980-97 (%)
140
r = -0.66
Norway
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 (%)
Secondary enrolment
and natural capital
Gross secondary-school enrolment 1980-97 (%)
140
r = -0.66
Norway
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
Norway
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
Investment and
natural capital
Gross domestic investment 1965-98 (% of GNP)
35
Norway
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
Norway
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
5
The special case of
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