Piergiuseppe Fortunato

Piergiuseppe Fortunato Development in Natural Resource Rich Countries: Theory and Facts Dar es Salaam, 15 July 2010

Economic growth and natural capital 1960-2000 -0.67 Natural capital share and growth are inversely related Does resource abundance leads to lower growth? The most striking aspect is not the average performance of resource rich countries but the huge variation

Open questions • Discern between correlation and casuality • Why do some resource abundant countries succed while others not? • What distinguish resource-winners from resource-loosers? What policies should be put in place to harness natural resources for developmet?

The sources • Ragnar Torvik (2009) • Thorvaldur Gylfason (2006, 2008) • Cervellati, Fortunato and Sunde (2008, 2010)

Correlation and Casuality • Why are they different? • Measurement problems • Policy issues (and endogeneity) • The figure can tell us nothing about whether low growth leads to a high measure of resource abundance, or if resource abundance leads to low growth, or if there is a third factor, for instance policy, that correlates with both resource abundance and growth. • We must control for other factors and not look to the two variable in isolation (initial income, policy framework….)

Growth Regressions Mehulm and Mohene, 1965-2000

Correlation and Casuality • The robustness of the correlationbetweenresourceabundance and growthisconfirmedusingPanel data with country fixed effects confirm the results • Aslaksen (2006, 2009) and Goderis (2007)

Winners and Losers • The results so far give us an indication that there may be a causal effect from resources to Natural resources ? Economic growth • When does resource abundance breed success and when does it breed failure? Understand the variation!

Five main channels of transmission • 1. The Dutch disease • Exchange rates, inflation • Hurts level or composition of exports and FDI and reduce liquidity • 2. Rent seeking • Protectionism, corruption, … • 3. False sense of security (here) • Poor quality of policies and institutions • 4. Neglect of education • 5.Neglect of investment Social capital

Crowding out • Hence, natural capital may crowd out • Foreigncapital • Social capital • Human capital • Real capital • Financial capital

First, we will let the data do the talking and inspect cross-country patterns in the data through a sequence of bivariate correlations among growth and determinants of growth Then, set up a simple multiple regression model where growth depends on the usual suspects plus natural resources Do natural resources help or hurt growth? Are the natural resource variables robust? Do they survive the introduction of other determinants of growth? Empirical Evidence

Education and Natural Capital, 2000-2005 Natural capital crowds out human capital -0.82

Education and Growth, 1960-2005 0.69 Education is good for growth An increase in school life expectancy by 3 years goes along with an increase in per capita growth by one percentage point per year

Interpretation of results Growth Growth Education = + Resources Resources Education

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

Corruption and Natural Capital, 1960-2000 -0.74 Natural capital crowds out social capital

Economic Growth and Corruption, 1960-2000 0.75 Corruption hurts growth An increase in the corruption perceptions index (i.e., decrease in corruption) by 2 points goes along with an increase in per capita growth by more than one percentage point per year

Interpretation of results Growth Growth Corruption = + Resources Resources Corruption

Democracy and Natural Capital, 1960-2000 Natural capital crowds out social capital -0.67

Economic Growth and Democracy, 1960-2000 Democracy is good for growth 0.51 A rise in democracy index by 7 points goes along with an increase in per capita growth by one percentage point per year

Human capital and social capital go together 0.62

Different aspects of social capital go together 0.60

Real capital and growth r = -0.38 Lesotho r = rank correlation Japan Natural capital crowds out real capital Guinea Bissau Niger Chad 86 counries

Real capital and growth r = 0.65 Botswana China Quantity and quality Investment is good for growth 1% 4% Jordan An increase in investment by 4% of GDP goes along with an increase in per capita growth by 1% per year Niger Nicaragua

r = -0.24 Foreign capital and growth Botswana UK New Zealand Natural capital crowds out foreign capital Sierra Leone Guinea Bissau

Foreign capital and growth r = 0.44 Botswana China Korea Foreign direct investment is good for growth Panama Nicaragua

In sum, natural capital tends to crowd out • Real capital via blunted incentives to save and invest • Human capitalthrough neglect of education • Social capital through rent seeking, corruption, inequality, civil and political oppression, etc. • Foreign capitalthrough protectionism

-0.67

Cross-sectional evidence based on 164 countries from 1960 to 2000 Relate per capita economic growth to its main determinants: i.e., measures of the accumulation of different kinds of capital Look for evidence of a linkage between resource dependence, resource abundance, and growth How robust is natural capital? Do the natural capital variables survive the introduction of other determinants of growth?

The Model Economic growth depends on buildup of capital and efficiency with which it is used Six kinds of capital, of which we include four • Natural capital • Social capital: democracy • Real capital: investment • Human capital: education, fertility • Financial capital: low inflation -- ignore • Foreign capital: openness -- ignore

Growth Regressions Gylfason, 1960-2000

Abundance vs. dependence Dependence hurts growth, even if abundance may help Result: 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

Problem is not the existence of natural wealth Rather, it is the failureto avert the dangers that accompany the gifts of nature There are success stories! Norway is, so far, a success story Government absorbs 80% of oil rent and invests it mostly in foreign securities The purpose of the oil fund Share the wealth fairly: Pension fund Shield domestic economy from overheating and waste Fund is huge: USD 300 billion (USD 65K per person) Norwegians have resisted the temptation to use too much of the money to meet current needs Policy Implications

Piergiuseppe Fortunato