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Lessons from the Dutch Disease : Causes, Treatment, and Cures

Lessons from the Dutch Disease : Causes, Treatment, and Cures. Thorvaldur Gylfason. Overview of presentation. Origins and symptoms of the Dutch disease Thinking about natural resources and economic growth Interlude on OPEC Empirical evidence on resources and growth around the world

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Lessons from the Dutch Disease : Causes, Treatment, and Cures

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  1. Lessons from the Dutch Disease: Causes, Treatment, and Cures Thorvaldur Gylfason

  2. Overview of presentation Origins and symptoms of the Dutch disease Thinking about natural resources and economic growth Interlude on OPEC Empirical evidence on resources and growth around the world The special case of Norway

  3. 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

  4. 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

  5. Exports of goods and services 1960-1997 (% of GDP) What does experience show? Norway’s oil exports have crowded out non-oil exports krone for krone relative to GDP

  6. Foreign direct investment 1975-1998 (% of GDP, ppp) In 1998, Norway attracted less FDI than the Netherlands, and also less than Sweden (23%) and Finland (36%)

  7. Manufacturing exports 1980-1998 (% of total exports) No growth in Norway’s manufacturing exports relative to total exports since 1980

  8. 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

  9. 2 Thinking about natural resources and growth Natural resources x Economic growth

  10. Thinking about natural resources and growth Natural resources x Economic growth What is x?

  11. 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.Too little investment Social capital

  12. 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

  13. 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?

  14. Background: A quick look at OPEC King Faisal of Saudi Arabia (1964-1975) 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.”

  15. 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

  16. But let’s be careful: Norway stands out The problem is not the existence of natural wealth as such ... but rather the failureto avert the dangers that accompany the gifts of nature Norway is, so far, a success story Government takes in 80% of oilrent and invests it mostly in foreign securities No signs of damage to growth potential, at least not yet (more on this later)

  17. 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

  18. Economic growth and natural capital What is the empirical evidence? r = rank correlation A ten percentage point increase in the natural capital share goes along with a decrease in per capita growth by 1% per year. r = -0.64 • A new measure of natural resource abundance • Confirms results based on other measures Norway 85 countries

  19. 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

  20. Expenditure on education and natural capital r = -0.32 Norway An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP. Norway is close to the top of the list of countries ranked by public expenditure on education 90 countries

  21. Expenditure on education and natural capital r = -0.32 Norway An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP. Natural capital crowds out human capital 90 countries

  22. Secondary enrolment and natural capital Norway r = -0.66 A five percentage point increase in the natural capital share goes along with a decrease in secondary-school enrolment by almost 10 percentage points. College enrolment has risen from 26% in 1980 to 62% in 1997 91 countries

  23. Secondary enrolment and natural capital Norway r = -0.66 A five percentage point increase in the natural capital share goes along with a decrease in secondary-school enrolment by almost 10 percentage points. Natural capital crowds out human capital 91 countries

  24. Economic growth and education r = 0.69 Norway Education is good for growth and vice versa A 30 point increase in the secondary enrolment rate goes along with an increase in per capita growth by 1% per year. 87 countries

  25. Summary of results on education Growth Growth Education = + Resources Education Resources

  26. Investment and natural capital Norway A ten point increase in the natural capital share goes along with a decrease in investment by 2% of GDP. Natural capital crowds out physical capital r = -0.38 85 countries

  27. Economic growth and investment A five point increase in the natural capital share goes along with an increase in per capita growth by 1%. Norway Investment is good for growth and vice versa r = 0.65 85 countries

  28. Summary of results on investment Growth Growth Investment = + Resources Investment Resources

  29. 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

  30. 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

  31. 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

  32. 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

  33. 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 The End

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