Transcript Natural capital and growth

Structural
Adjustment, Export
Specialization, and
Growth in
Diversified Resource
Based Economies:
The Case of Norway
Thorvaldur Gylfason
Outline of presentation
1.
2.
3.
4.
Norway and the Dutch disease
The macroeconomics of oil
A brief digression on OPEC
Empirical cross-country evidence
on natural resources and growth
5. But, Norway is different
1
Neither Dutch
nor a disease
Discovery of oil and natural gas offshore round 1960
Ensuing upswing in exports of
natural gas led to appreciation of
Dutch guilder
Hurt manufacturing exports
Raised concerns about de-industrialization
Problem proved short-lived
But name stuck
The Dutch disease:
Some symptoms
Overvaluation of currency
Exchange rate volatility
Excessive wages
Greenland
Centralized wage bargaining
Hurts level or skews composition of
exports away from manufacturing
May also hurt foreign direct investment
What does
experience
show?
Exports of goods and services
1960-2000 (% of GDP)
80
Norway
60
50
40
30
20
10
0
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
Norway’s
exports have
hovered
around 40%
of GDP since
1960, with
only a weak
tendency to
rise over time
Netherlands
70
Foreign direct investment
1967-2000 (gross, % of GDP)
40
Norway
30
25
20
15
10
5
0
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
Since 1970s,
Norway has
attracted less
gross FDI
than the
Netherlands
Netherlands
35
Manufacturing exports 19622001 (% of total exports)
80
70
60
50
40
30
20
10
Netherlands
Norway
0
19
62
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
In Norway, oil
exports have
crowded out
other exports
krone for
krone relative
to GDP since
the mid-1970s
Why these things may
matter
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 for
export may hurt growth
But Norway has done very well
Unemployment 1980-2000
(% of labor force)
16
14
Norway
12
10
8
6
4
2
0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
In Norway,
stabilization
policy has
been well
managed and
joblessness
has been low
by European
standards
Netherlands
Government consumption
1960-2000 (% GDP)
30
25
20
15
10
5
Netherlands
Norway
0
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
In Norway,
general
government
consumption
has increased,
but not to
extravagant
levels, at least
not yet
GNP per capita 1962-2001
(current USD, Atlas method
40.000
Norway
30.000
25.000
20.000
15.000
10.000
5.000
0
19
62
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
Since mid1970s,
Norway has
grown faster
than the
Netherlands
Netherlands
35.000
2
Macroeconomics of oil
and other resources
Natural
resources
x
Economic
growth
Macroeconomics of oil
and other resources
Natural
resources
x
Economic
growth
What is x ?
Five main channels of
transmission
1. The Dutch disease
Exchange rates, wages, volatility
Hurts level or composition of exports and FDI
2. Rent seeking
Protectionism, cronyism, corruption
3. False sense of security
Poor quality of policies and institutions
4. Neglect of education
5. Not enough investment
Crowding out
Hence, natural capital may crowd out
Foreign capital
Social capital
Human capital
Real capital
Matter of taste whether these
mechanisms are viewed as additional
symptoms of the Dutch disease or as
separate channels of transmission
Natural resource abundance
and economic structure
Resource dependence, b
Dependence hurts growth, even if abundance may help
Resource poor,
resource dependent
(Chad, Mali)
Resource rich,
resource dependent
(OPEC)
Resource poor,
resource free
(Jordan, Panama)
Resource rich,
resource free
(Canada, USA)
Resource abundance, N
3
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.”
Increasing awareness
that oil brings risks
If ... oil revenue is managed well, it can
educate, heal and provide jobs for ... the
people. But oil brings risks as well as benefits.
Rarely have developing countries used oil
money to improve the lives of the majority of
citizens or bring steady economic growth. More
often, oil revenues have caused crippling
economic distortions and been spent on showy
projects, weapons and Paris shopping trips for
government officials.
New York Times, 1 August 2000.
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
resources and economic growth
Present cross-country evidence
Individual historical case studies support
the results
Stress linkages among natural capital
and other kinds of capital as well as
growth
Different Kinds of Capital and Growth
Foreign capital
3
Financial capital
+
4
+
Growth
+
Real capital
1
+
+
5
2
Social capital
Human capital
Different Kinds of Capital and Growth
Foreign capital
11
–
3
Financial capital
+
4
+
– 10
Growth
+
1
Real capital
–
–
6
+
+
5
2
Social capital
Human capital
9
8
Natural capital
–
–
7
45
r = -0.38
Lesotho
Investment 1965-98 (% of GDP)
40
35
30
Guinea Bissau
25
20
15
Niger
10
Chad
5
0
0
20
40
Share of natural capital in national w ealth
1994 (%)
60
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = 0.65
Botswana
4
China
2
1%
0
0
5
10
15
-2
20
25
30
4%
-4
-6
Niger
Nicaragua
-8
Investm ent 1965-98 (% of GDP)
35
Interpretation of results
Growth
Investment
=
+
Resources
Growth
Investment
Resources
Secondary-school enrolment 1980-97 (%)
120
r = -0.63
Finland
100
New Zealand
80
Uruguay
60
40
Saudi Arabia
20
0
0
20
40
-20
-40
Share of natural capital in national w ealth
1994 (%)
60
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = 0.72
4
Thailand
2
Finland
0
0
20
40
60
80
100
120
New Zealand
-2
Jamaica
-4
-6
-8
Secondary enrolm ent 1980-97 (% of cohort)
Interpretation of results
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
Money and quasi-money 1965-98 (% of GDP)
120
r = -0.68
Switzerland
100
Japan
80
China
60
New Zealand
40
20
0
0
10
20
30
40
50
Share of natural capital in national w ealth
1994 (%)
60
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = 0.66
4
2
Japan
Indonesia
Switzerland
0
0
20
40
60
80
100
120
-2
Jordan
-4
-6
-8
Money and quasi-m oney 1965-98 (% of GDP)
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = 0.66
4
2
Japan
Indonesia
Switzerland
0
0
20
40
60
80
100
120
-2
Jordan
-4
-6
-8
Money and quasi-m oney 1965-98 (% of GDP)
Interpretation of results
Financial depth
+
Resources
Growth
Growth
=
Financial depth
Resources
Actual less predicted FDI 1975-98 (% of GDP)
7
r = -0.32
Netherlands
6
Switzerland
5
Botswana
4
Sweden
3
2
1
0
-1
-2
0
10
20
30
40
50
Guinea Bissau
-3
Share of natural capital in national w ealth
1994 (%)
60
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = 0.62
4
2
Norway
Netherlands
0
-4
-2
0
-2
2
4
6
8
Papua New Guinea
-4
Madagascar
-6
-8
Actual less predicted FDI 1975-98 (% of GDP)
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = 0.42
4
Korea
2
Malaysia
0
-40
-20
0
20
Belgium
40
-2
Guinea Bissau
-4
-6
-8
Actual less predicted exports 1965-98 (% of
GDP)
Interpretation of results
Growth
FDI
=
+
Resources
Growth
FDI
Resources
70
Brazil
7 African countries
where saving is 5% of GDP
and per capita growth
is -1% per year
Gini index of inequality
60
50
40
30
20
Increase in natural capital
by 3% of national wealth
goes along with an increase
in Gini by 1 point.
10
0
0
10
20
30
r = 0.41
40
50
Share of natural capital in national w ealth
1994 (%)
60
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = -0.50
4
Korea
2
China
Norway
Brazil
0
0
10
20
30
40
50
60
70
South Africa
-2
-4
Sierra Leone
-6
Gini index of inequality
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = -0.50
4
Korea
2
China
Norway
Brazil
0
0
10
20
30
40
50
60
70
South Africa
-2
-4
Sierra Leone
-6
Gini index of inequality
Interpretation of results
Growth
Inequality
=
+
Resources
Growth
Inequality
Resources
12
r = -0.42
Finland
Corruption index 2000
10
New Zealand
8
6
4
Zambia
2
Indonesia
0
0
10
20
30
Share of natural capital in national w ealth
1994 (%)
40
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = 0.40
Botswana
4
2
Norway
Indonesia
0
0
-2
1
2
3
4
5
6
7
8
9
New Zealand
Kenya
-4
-6
Corruption index 2000
10
Interpretation of results
Growth
Corruption
=
+
Resources
Growth
Corruption
Resources
Index of political liberties 1972-90
9
8
7
6
5
4
r = 0.48
3
2
1
0
0
20
40
Share of natural capital in national w ealth
1994 (%)
60
Growth of GNP per capita 1965-98, adjusted
for initial income (% per year)
6
r = -0.62
4
2
0
0
2
4
6
-2
-4
-6
-8
Index of political liberties 1972-90
8
Interpretation of results
Growth
Oppression
=
+
Resources
Growth
Oppression
Resources
Summary
Natural capital tends to crowd out
1. Real capital
via blunted incentives to save
2. Human capital
through neglect of education
3. Social capital
through rent seeking, corruption, inequality,
civil and political oppression, etc.
4. Financial capital
5. Foreign capital
5
But, to repeat:
Norway is different
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
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 clearly become huge ...
if Norwegians resist the temptation to
use too much of the money to meet
current needs
Why Norway has succeeded
where OPEC and others failed
Long tradition of democracy and
market economy in Norway since
before the advent of oil
Large-scale rent seeking was averted
as oil was defined as a commonproperty resource from the beginning
Adequate investment performance
Excellent education record
Why Norway has succeeded
where OPEC and others failed
Even so, Norway faces challenges
 Some (weak) signs of Dutch disease
 Stagnant exports, sluggish FDI
 Limited interest in EU and EMU
 Some signs also of unwillingness to
undertake difficult reforms
 Health care provision
 Pensions
Management of oil fund transferred from
Ministry of Finance to Central Bank 1999
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
Old story:
The risks are real
David Landes (1998) tells the story
of Spain following the colonization
of South and Central America
which made Spain rich in gold
and other natural resources:
“Easy money is bad for you. It represents
short-run gain that will be paid for in
immediate distortions and later
regrets.”