Transcript Natural Resources and Economic Growth

Natural
Resources and
Economic
Growth: From
Dependence to
Diversification
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 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
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
Arab countries: Exports
1960-1999 (% of GDP)
80
70
60
50
40
30
20
10
Six nonoil-producing Arab countries
Six oil-producing Arab countries
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
0
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
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
Education and
natural capital
Gross secondary-school enrolment 1980-97 (%)
140
91 countries
A new
measure of
natural
resource
dependence
Confirms
results
based on
other
measures
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
Share of natural capital in national wealth 1994 (%)
r = rank
correlation
Economic growth and
education
87 countries
Annual growth of GNP per capita 1965-98,
adjusted for initial income (%)
6
r = 0.62
4
2
0
0
20
40
60
80
100
120
-2
-4
-6
-8
A 30 point increase in the
secondary enrolment rate
goes along with an
increase in per capita
growth by 1% per year.
Gross secondary-school enrolm ent 1980-97 (%)
Diminishing returns to education
Summary of results on
education
Growth
Education
=
+
Resources
Growth
Education
Resources
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
85 countries
Gross domestic investment 1965-98 (% of GDP)
35
A ten point increase in the
natural capital share goes
along with a decrease in
investment by 2% of GDP.
30
25
20
15
10
5
r = -0.38
0
0
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
Economic growth and
investment
85 countries
Annual growth of GNP per capita 1965-98, adjusted
for initial income (%)
6
A four point increase in
the investment rate
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
Gross dom estic investm ent 1965-98 (% of GDP)
35
Summary of results on
investment
Growth
Investment
=
+
Resources
Growth
Investment
Resources
Openness and natural
capital
91 countries
Actual less predicted exports 1965-98 (% of GDP)
40
A 2,5 point increase in the
natural capital share goes
along with a decrease in
openness by 2% of GDP.
30
20
10
0
0
10
20
30
40
50
-10
-20
-30
r = -0.33
-40
Share of natural capital in national wealth 1994 (%)
60
Economic growth and
openness
87 countries
An increase in openness by
14% of GDP is associated
with an increase in per capita
growth by 1% per year.
Annual growth of GNP per capita 1965-98, adjusted for
initial income (%)
6
4
2
0
-40
-20
0
20
-2
-4
r = 0.40
-6
-8
Actual less predicted exports 1965-98 (% of GDP)
40
Summary of results on
openness
Growth
Openness
=
+
Resources
Growth
Openness
Resources
Economic growth and
85 countries
natural capital
6
Growth of GNP per capita 1965-98, adjusted for initial
income (%)
What is the
empirical
evidence?
r = -0.64
A ten percentage point
increase in the natural
capital share goes along
with a decrease in per
capita growth by 1%
per year
4
2
0
0
10
20
30
40
50
-2
-4
-6
-8
Share of natural capital in national wealth 1994 (%)
60
Sources of Growth
Growth
+
–
Investment
Openness
–
Initial Income
+
–
–
+
+ –
+
Education
–
Natural Capital
denotes a positive effect in the direction shown
denotes a negative effect in the direction shown
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, openness, 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