Inequality and Economic Growth: Do Natural Resources Matter?

1. Inequalityand EconomicGrowth: Do Natural Resources Matter? Thorvaldur Gylfason and Gylfi Zoega

2. Sources of Growth Endogenous growth: X can be almost anything! + + ? Arthur Lewis: X is trade, stable politics, good weather

3. Sources of Growth Dutch disease Rent seeking Conditional convergence + + – ? – + – – Natural capital crowds out human and physical capital

4. Natural capital tends to crowd out Recent Literature But Norway is, so far at least, an exception Five main linkages: • Dutch disease Adversely affects level, composition, or volatility of trade and investment • Rent seeking Protectionism, corruption • Education • False sense of security Poor quality of policies and institutions 5. Investment Foreign capital Social capital Human capital Physical capital

5. Natural Resource Abundanceversus Dependence Hypothesis: Dependence hurts growth, even if abundance may help Resource poor, resource dependent (Chad, Mali) Resource rich, resource dependent (OPEC) Resource dependence Resource poor, resource free (Jordan, Panama) Resource rich, resource free (Canada, USA) Resource abundance

6. Inequality and Growth X = inequality – + + – – – + – – + Inequality and growth are both endogenous, and depend on natural resources

7. Theory Two sectors Primary sector with unequal distribution of earnings Manufacturing sector with opportunities for learning and innovation Large primary sector means • Greater inequality • Slower economic growth

8. Empirical Analysis • Explore relationship between natural resource intensity, inequality, and economic growth across countries since 1965 • Hypothesis: Natural resource dependence hurts growththrough increased inequality, inter alia • Study 87 industrial and developing countries from 1965 to 1998

9. Distribution of Income and Land r = rank correlation Land is less equally distributed than income r = 0.57 45 50 countries

10. Inequality and Natural Capital Increased natural resource dependence goes along with increased inequality Notice cluster 7 African countries where saving is 5% of GDP and per capita growth is -1% per year Inequality of access to education and land: Same pattern Increase in natural capital by 3% of national wealth goes along with an increase in Gini by 1 point. r = 0.41 75 countries

11. Natural Capitaland Economic Growth What is the empirical evidence? An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year. 8 Asian countries S/Y = 0.32 Notice two clusters 8 African countries S/Y = 0.05 r = -0.64 85 countries

12. What do the data say? Growth and Inequality, 1965-98 75 countries An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year Korea No discernible sign that equality stands in the way of economic growth France Brazil South Africa Sweden r = -0.50 Sierra Leone

13. One Possible Interpretation Inequality Growth Growth = + Resources Resources Inequality

14. Another Possible Interpretation Inequality Growth Growth = + Inequality Resources Resources

15. Education and Inequality: Another Link? Now consider the relationship between inequality and three different measures of education inputs, outcomes, and participation: 1. Public expenditure on education 2. Expected years of schooling for girls 3. Secondary-school enrolment

16. Secondary Enrolment and Inequality An increase in the secondary-school enrolment rate by five percentage point goes along with a decrease of almost one point on the Gini scale. Expenditure on education and years of schooling: Same pattern r = -0.54 75 countries

17. Secondary Enrolment and Growth An 25 point increase in secondary-school enrolment goes along with an increase in per capita growth by 1% per year. r = 0.72 Positive but diminishing returns to education 87 countries

18. One Possible Interpretation Growth Growth Inequality = + Education Education Inequality

19. Another Possible Interpretation Growth Growth Inequality = + Education Inequality Education

20. Investment and Natural Capital An increase in natural capital by 5% of national wealth goes along with a reduction in investment by almost 1% of GDP. Increased natural resource dependence discourages investment and growth r = -0.38 86 countries

21. Education and Natural Capital An increase in natural capital by 10% of national wealth goes along with a reduction in secondary enrolment by almost 15% of cohort. Increased natural resource dependence discourages education and growth r = -0.63 87 countries

22. Conclusion Diversification away from natural resources may spur economic growth 1. by increasing and improving human capital ... 2. ... as well as social capital, by reducing inequality ... 3. ... and also real capital This may be one reason why inequality and growth are inversely related across countries: an equilibrium outcome

23. Conclusion These slides can be viewed on my website: www.hi.is/~gylfason Other possible reasons 1. More and better education reduces inequality and encourages growth 2. Excessive inequality triggers demand for more and better education that reduces inequality and speeds up growth 3. Excessive inequality reduces social cohesion, efficiency, and growth Many possibilities! The End