Natural Resources and Economic Growth: What Are the Issues? Thorvaldur Gylfason

Natural Natural Resources Resources and and Economic Economic GrowthGrowth: What : What Are the Are the Issues?Issues?

Thorvaldur Gylfason

Overview of Overview of presentationpresentation

1. Origins and symptoms of the Dutch disease

2. Thinking about natural resources and economic growth

3. Brief interlude on OPEC4. Empirical evidence on resources

and growth around the world5. Why Norway stands out

Neither Neither DutchDutch nor a nor a diseasedisease

Discovery of off-shore oil and gas in late 1950s, early 1960s

Resulting upswing in exports of natural gas led to appreciation of Dutch guilderThis hurt other exports for a while

Threat of de-industrialization

The problem proved short-lived But the name stuck

1

The The Dutch diseaseDutch disease: : Some symptomsSome symptoms

Overvaluation of the currency Exchange rate volatility Excessive wages

GreenlandCentralized wage bargaining

All this hurts the level or skews the composition of exportsMay also hurt FDI

Exports of goods and services 1960-2000 (% of GDP)

What does experience show?

Norway’s exports have hovered around 40% of GDP since 1960, with only a weak tendency to rise over time

0

10

20

30

40

50

60

70

80

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

Netherlands

Norway

Foreign direct investment 1967-2000 (gross, % of GDP)

Since 1970s, Norway has attracted less gross FDI than the Netherlands

0

5

10

15

20

25

30

35

40

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Netherlands

Norway

Manufacturing exports 1962-2001 (% of total exports)

In Norway, oil exports have crowded out other exports almost krone for krone since the mid-1970s

0

10

20

30

40

50

60

70

80

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

Netherlands

Norway

Why these things Why these things may be importantmay be important

Exports and FDI are good for growthOpennessOpenness to trade and investment to trade and investment

stimulates imports of goods and stimulates imports of goods and services, technology, ideas, know-services, technology, ideas, know-howhow

Too much primary export dependence and too little manufacturing may hurt growth

Economic growth is keygrowth is key

Thinking about Thinking about natural resources natural resources andand growth growth

NaturalNaturalresourcesresources

EconomicEconomicgrowthgrowth

xx

2

Thinking about Thinking about natural resources natural resources and growthand growth

NaturalNaturalresourcesresources

EconomicEconomicgrowthgrowth

xx

What is What is xx ??

Five channels of Five channels of transmissiontransmission1. The Dutch disease

Exchange rates, wages, volatilityHurts level or composition of exports and FDI

2. Rent seekingProtectionism, cronyism, corruption

3. False sense of securityPoor quality of policies and institutions

4. Neglect of educationeducation5. Not enough investment

SocialSocialcapitalcapital

Crowding outCrowding outPut differently, natural capital may

crowd outSocial capitalHuman capitalReal capital

Matter of taste whether these mechanisms are viewed as additional symptoms of the Dutch disease or as separate channels of transmission

Interlude: A quick Interlude: A quick look at OPEClook at OPEC

Nigeria has been stagnant since independence in 1960: No growth

Per capita growth 1965-1998Iran and Venezuela: -1% per yearLibya: -2%Iraq and Kuwait: -3%Qatar: -6%

Why?

3

Background: Background: A A quick look at OPECquick look at OPEC

King Faisal of Saudi Arabia (1964-1975) would hardly have been surprised:

““In one generation we went from In one generation we went from riding camels to riding Cadillacs. riding camels to riding Cadillacs. The way we are wasting money, I The way we are wasting money, I fear the next generation will be fear the next generation will be riding camels again.”riding camels again.”

Background: Background: A A quick look at OPECquick 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 Increasing awareness thatawareness that oil oil brings risksbrings 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 Is OPEC an exception?exception?

No, this seems to be a general pattern.

Of 65 natural resource abundant countries 1970-1998, only four hadInvestment of more than 25% of GDPPer capita GNP growth of more than

4% per year

They are:Botswana, Indonesia, Malaysia, Thailand

But there is an But there is an exception:exception: Norway 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 storyGovernment takes in 80% of oil rent and

invests it mostly in foreign securitiesNo signs of damage to growth potential,

at least not yet (but some worry!)

Natural capital and Natural capital and growth:growth: The The evidenceevidence

Review a few of the empirical findings of the new literature on natural resources and economic growth

Present cross-country evidenceIndividual historical case studies support

the results

Stress linkages among natural capital and other kinds of capital as well as growth

4

Different Kinds of Capital and Growth

Foreign capital

Financial capital

Human capitalSocial capital

Growth

Real capital

3

1

4

5

2

+

+

+

+

+

Different Kinds of Capital and Growth

Foreign capital

Financial capital


Growth

Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Growth

Real Capital and Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Human Capital and Growth

Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Financial Capital and Growth

Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Social Capital and Growth

Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Foreign Capital and Growth

Growth

Real Real capital capital and and growthgrowthNatural Natural capital capital crowds crowds out real out real capitalcapital

0

5

10

15

20

25

30

35

40

45

0 20 40 60

Share of natural capital in national wealth 1994 (%)

Inve

stm

ent

1965

-98

(% o

f G

DP

)

r = -0.38

Niger

Chad

Lesotho

Guinea Bissau

-8

-6

-4

-2

0

2

4

6

0 5 10 15 20 25 30 35

Investment 1965-98 (% of GDP)

Gro

wth

of

GN

P p

er c

apit

a 19

65-9

8, a

dju

sted

fo

r in

itia

l in

com

e (%

per

yea

r)

Real Real capital capital and and growthgrowth

Botswana

China

NicaraguaNiger

InvestmeInvestment is good nt is good

for growthfor growth

r = 0.65

An increase in An increase in

investment by investment by

4% of GDP goes 4% of GDP goes

along with an along with an

increase in per increase in per

capita growth by capita growth by

1% per year 1% per year

4%4%

1%1%

Quantity and quality

Interpretation of Interpretation of resultsresults

Growth

Investment

Growth

Resources

Investment

Resources

+ =

Human Human capital and capital and

growthgrowth

Natural Natural capital capital crowds crowds out out human human capitalcapital

-40

-20

0

20

40

60

80

100

120

0 20 40 60


Sec

on

dar

y-sc

ho

ol e

nro

lmen

t 19

80-9

7 (%

) r = -0.63

Uruguay

New Zealand

Saudi Arabia

Finland

Human Human capital and capital and

growthgrowth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Secondary enrolment 1980-97 (% of cohort)

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Finland

Thailand

New Zealand

Jamaica

EducatioEducation is good n is good

for for growthgrowth

r = 0.72


secondary-school secondary-school

enrolment by 25-enrolment by 25-

30% of each cohort 30% of each cohort

goes along with an goes along with an

increase in per increase in per

capita growth by capita growth by

1% per year1% per year

Notice diminishing

returns to education


Growth

Education

Growth

Resources

Education

Resources

+ =


Natural-resource-based industries are generally less high-skill laborhigh-skill labor intensive and less high-quality high-quality capitalcapital intensive than others, and soconfer few external benefits distort comparative advantageimpede learning by doing, technical

advance, and economic growth

Financial Financial

capital and capital and

growthgrowth

Natural Natural capital capital crowds out crowds out

financial financial

capitalcapital

0

20

40

60

80

100

120

0 10 20 30 40 50 60


Mo

ney

an

d q

uas

i-m

on

ey 1

965-

98 (

% o

f G

DP

)

r = -0.68

Japan

China

New Zealand

Switzerland

Financial Financial


growthgrowth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Money and quasi-money 1965-98 (% of GDP)

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Indonesia Japan

Switzerland

Jordan

Financial Financial

depth is depth is good for good for

growth: growth: Money Money greases the greases the

wheels of wheels of

commerce commerce

and and productionproduction

r = 0.66

Financial Financial


growthgrowth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Money and quasi-money 1965-98 (% of GDP)

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Indonesia Japan

Switzerland

Jordan

This helps This helps

explain why explain why

inflation inflation hurts growthhurts growth: :

Inflation Inflation reduces reduces financial financial

depth and depth and

thereby thereby inhibits inhibits growthgrowth

r = 0.66


Growth

Financial depth

Growth

Resources

Financial depth

Resources

+ =

Foreign Foreign capital and capital and

growthgrowth

Natural Natural capital capital crowds crowds out out foreign foreign capitalcapital

-3

-2

-1

0

1

2

3

4

5

6

7

0 10 20 30 40 50 60


Act

ual

less

pre

dic

ted

FD

I 197

5-98

(%

of

GD

P)

r = -0.32

Botswana

Sweden

Switzerland

Netherlands

Guinea Bissau

Foreign Foreign capital and capital and

growthgrowth

-8

-6

-4

-2

0

2

4

6

-4 -2 0 2 4 6 8

Actual less predicted FDI 1975-98 (% of GDP)

Gro

wth

of

GN

P p

er c

apit

a 19

65-9

8, a

dju

sted

fo

r in

itia

l in

com

e (%

per

yea

r)

Foreign Foreign direct direct investmeinvestment is good nt is good

for for growthgrowth

NetherlandsNorway

Papua New Guinea

Madagascar

r = 0.62

Foreign Foreign trade and trade and

growthgrowth

Foreign Foreign trade is trade is also also good good for for growthgrowth

-8

-6

-4

-2

0

2

4

6

-40 -20 0 20 40

Actual less predicted exports 1965-98 (% of GDP)

Gro

wth

of

GN

P p

er c

apit

a 19

65-9

8, a

dju

sted

fo

r in

itia

l in

com

e (%

per

yea

r)

Guinea Bissau

Belgium

Korea

Malaysia

r = 0.42


Growth

FDI

Growth

Resources

FDI

Resources

+ =

Social capital and

growth

Natural capital crowds out social capital

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60


Gin

i in

dex o

f in

eq

uality

Increase in natural capital by 3% of national wealth goes along with an increase in Gini by 1 point.

7 African countries where saving is 5% of GDP

and per capita growth is -1% per year

Notice cluster

r = 0.41

Inequality of

access to education and

land: Same

pattern

Brazil

Social Social capital and capital and

growthgrowth

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Equality Equality is good is good for for growth:growth:No sign No sign here that here that

too much too much

equality equality hurts hurts growthgrowth

Korea

Norway

China

Sierra Leone

r = -0.50

Brazil

South Africa


growthgrowth

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Equality Equality is good is good for for growthgrowth

Korea

Norway

China

Sierra Leone

r = -0.50


Gini index by Gini index by

12 points goes 12 points goes

along with a along with a

decrease in per decrease in per

capita growth capita growth

by almost 1% by almost 1%

per yearper year

Brazil

South Africa


Growth

Inequality

Growth

Resources

Inequality

Resources

+ =


growthgrowth

Again, Again, natural natural capital capital crowds crowds out out social social capitalcapital

0

2

4

6

8

10

12

0 10 20 30 40


Co

rru

pti

on

ind

ex 2

000

r = -0.42

Zambia

Indonesia

Finland

New Zealand


growthgrowth

Honesty Honesty is good is good for for growth growth because because

corruptiocorruption creates n creates

inefficieninefficiencycy

-6

-4

-2

0

2

4

6

0 1 2 3 4 5 6 7 8 9 10

Corruption index 2000

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Botswana

Kenya

Indonesia Norway

New Zealand

r = 0.40


Growth

Corruption

Growth

Resources

Corruption

Resources

+ =

0

1

2

3

4

5

6

7

8

9

0 20 40 60


Ind

ex o

f p

olit

ical

lib

erti

es 1

972-

90


growthgrowth

Once Once more, more, natural natural capital capital crowds crowds out out social social capitalcapital

r = 0.48

-8

-6

-4

-2

0

2

4

6

0 2 4 6 8

Index of political liberties 1972-90

Gro

wth

of

GN

P p

er c

apit

a 19

65-9

8, a

dju

sted

fo

r in

itia

l in

com

e (%

per

yea

r)


growthgrowth

Political Political liberty is liberty is

good for good for

growth growth because because

oppressiooppressio

n creates n creates

inefficieninefficiencycy

r = -0.62


Growth

Oppression

Growth

Resources

Oppression

Resources

+ =

SummarySummaryNatural capital tends to crowd out Natural capital tends to crowd out 1.1. Real capitalReal capital

via blunted incentives to savevia blunted incentives to save

2.2. Human capitalHuman capital through neglect of educationthrough neglect of education

3.3. Social capitalSocial capital through rent seeking, corruption, through rent seeking, corruption,

inequality, civil and political oppression, inequality, civil and political oppression, etc.etc.

4.4. Financial capitalFinancial capital5.5. Foreign capitalForeign capital

But, to repeat:But, to repeat: Norway stands outNorway stands outThe 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 storyGovernment takes in 80% of oil rent and

invests it mostly in foreign securitiesNo signs of damage to growth potential,

at least not yet

5

The oil fund: The oil fund: A fair A fair and efficient and efficient strategystrategy

The purpose of the oil fundThe purpose of the oil fundTo To shareshare the wealth fairly across the wealth fairly across

generationsgenerations

To To shieldshield domestic economy from domestic economy from overheating and possible wasteoverheating and possible waste

Fund will clearly become huge ...Fund will clearly become huge ...if Norwegians if Norwegians resist the temptationresist the temptation

to use too much of the money to to use too much of the money to meet current needsmeet current needs

Why Norway has Why Norway has succeeded where OPEC succeeded where OPEC and others failedand others failed

Long tradition of Long tradition of democracydemocracy and and market economymarket economy in Norway since in Norway since before the advent of oilbefore the advent of oilLarge-scale rent seeking was averted Large-scale rent seeking was averted Adequate investment performanceAdequate investment performanceExcellent education recordExcellent education record

Even so, Norway faces challengesEven so, Norway faces challengesSome (weak) signs of Dutch diseaseSome (weak) signs of Dutch diseaseStagnant exports, sluggish FDIStagnant exports, sluggish FDILimited interest in EU and EMULimited interest in EU and EMU

One last pointOne last pointPerhaps the main challenge is to Perhaps the main challenge is to

make sure that the oil fund does make sure that the oil fund does not instill a not instill a false sense of securityfalse sense of security May need to immunize the fund from May need to immunize the fund from

political interference – like the courts, political interference – like the courts, media, even central banksmedia, even central banks

This may require privatizationThis may require privatization

But private sector is not infallible eitherBut private sector is not infallible either

So, best to adopt a So, best to adopt a mixed strategymixed strategy

Good times demand Good times demand strong disciplinestrong discipline

Natural resources bring risksNatural resources bring risksA A false sense of securityfalse sense of security leads leads

people to underrate or overlook the people to underrate or overlook the need for good policies and need for good policies and institutions, good education, and institutions, good education, and good investmentgood investment

Awash in easy cash, they Awash in easy cash, they may find may find that hard choices perhaps can be that hard choices perhaps can be avoidedavoided

Awareness of these risks is perhaps Awareness of these risks is perhaps the best insurance policy against the best insurance policy against them them

Old story: Old story: The risks are realThe risks are real

These slides can be viewed on

my website:

www.hi.is/~gylfason

The EndThe End

David Landes David Landes (1998) (1998) tells the story tells the story of Spain following the of Spain following the colonization of South and colonization of South and Central America which Central America which made Spain rich in gold made Spain rich in gold and other natural resources:and other natural resources:

““Easy money is bad for you.Easy money is bad for you. It It represents short-run gain that will represents short-run gain that will

be paid for in immediate be paid for in immediate distortions anddistortions and later regrets.later regrets.””

Documents

Natural Resources and Economic Growth: What Are the Issues? Thorvaldur Gylfason