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Natural Resources and Economic Growth : What Is the Connection?. 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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Presentation Transcript
slide2

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

Lessons from Norway

slide3

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
slide4

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
slide5

Exports of goods and services 1960-1997 (% of GDP)

What does experience show?

Ukraine’s exports have fluctuated considerably since 1989, but even so they have been fairly high

slide6

Foreign direct investment 1975-1998 (% of GDP, ppp)

Since 1994, Ukraine has attracted less gross FDI than the Netherlands or Norway

slide7

Manufacturing exports 1980-1998 (% of total exports)

There was growth in Ukraine’s manufacturing exports in the mid-1990s, but thereafter they stagnated

slide8

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

slide9

2

Thinking about natural resources and growth

Natural

resources

x

Economic

growth

slide10

Thinking about natural resources and growth

Natural

resources

x

Economic

growth

What is x?

slide11

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

Social

capital

slide12

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

slide13

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?

slide14

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.”

slide15

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.”

slide16

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

slide17

But there is an exception: Norway

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 (but some worry!)

slide18

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

slide19

Corruption and natural capital

r = rank correlation

r = -0.52

  • A new measure of natural resource dependence
  • Confirms results based on other measures

A ten percentage point increase in the natural capital share goes along with an increase in corruption by 1.3 points

60 countries

slide20

Corruption and natural capital

r = -0.52

A ten percentage point increase in the natural capital share goes along with an increase in corruption by 1.3 points

Natural capital

crowds out

social capital

60 countries

slide21

Corruption and natural capital, again

A 22 percentage point increase in the primary labor share goes along with an increase in corruption by 1.3 points

  • Another measure of natural resource dependence
  • More countries
  • Same pattern

r = -0.68

83 countries

slide22

Corruption and economic growth

r = 0.78

Corruption inhibits growth

A one-point increase in the corruption index goes along with an increase in per capita growth by 1% per year

64 countries

slide23

Summary of results on corruption

Growth

Growth

Corruption

=

+

Resources

Corruption

Resources

slide24

Education and natural capital

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.

  • Comparable figures for Ukraine are not available
  • But public spending on education is high

91 countries

slide25

Education and natural capital

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

slide26

Economic growth and education

r = 0.69

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

slide27

Summary of results on education

Growth

Growth

Education

=

+

Resources

Education

Resources

slide28

Summary of results on education

We have seen that, across countries:

  • Secondary-school enrolment is inversely related to natural resource abundance
  • Economic growth varies directly with education
  • Economic growth varies inversely with natural resource abundance
slide29

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
slide30

Investment and natural capital

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

slide31

Economic growth and investment

A five point increase in the natural capital share goes along with an increase in per capita growth by 1%.

Investment is

good for growth

and vice versa

r = 0.65

85 countries

slide32

Summary of results on investment

Growth

Growth

Investment

=

+

Resources

Investment

Resources

slide33

Summary of results on investment

We have seen that, across countries:

  • Investment is inversely related to natural resource abundance
  • Economic growth varies directly with investment
  • Economic growth varies inversely with natural resource abundance
slide34

Economic growth and natural capital

What is the empirical evidence?

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

85 countries,

but no transition countries

slide35

Economic growth and natural capital, again

r = -0.85

  • Another measure of natural resource dependence
  • More countries
  • Same pattern

An 11-12 percentage point increase in the primary labor share goes along with a decrease in per capita growth by 1% per year

105 countries,

including 7 transition countries

slide36

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
slide37

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

slide38

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
slide39

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
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