Natural Resources and Economic Growth : The Role of Investment

1. Natural Resources and EconomicGrowth: The Role of Investment Thorvaldur Gylfason and Gylfi Zoega

2. Sources of growth: Investment and education + + denotes a positive effect in the direction shown +

3. Sources of growth: Investment and education Adam Smith knew this, and more, as did Arthur Lewis Nelson and Phelps on education Solow raised doubts on long-run linkages + + denotes a positive effect in the direction shown +

4. More sources of growth Arthur Lewis: x is trade, stable politics, good weather But Solow carried the day: long-run growth was exogenous + + + denotes a positive effect in the direction shown +

5. Enter initial income Conditional convergence + + – ? + denotes a positive effect in the direction shown + denotes a negative effect in the direction shown –

6. Enter initial income Conditional convergence + + – ? + denotes a positive effect in the direction shown + denotes a negative effect in the direction shown –

7. Do poor countries catch up? Absolute convergence? r = rank correlation r = -0.09 Botswana No sign that poor countries grow faster than rich China Korea Thailand Indonesia Nicaragua 85 countries

8. Enter natural resources Endogenous growth: x can be almost anything! Dutch disease and rent seeking + + – ? – + denotes a positive effect in the direction shown + denotes a negative effect in the direction shown –

9. More onnatural resources + + – ? – + – Recent papers: Natural resource abundance reduces high-skill labor intensity, thus hurting growth

10. More onnatural resources + + – ? – + – – This paper: Natural resource abundance reduces investment and hence also growth

11. Aims and overview • Explore the relationship between natural resource intensity, saving, and investment in theory as well as empirically across countries since 1965 • Explore also the linkages among saving, investment, and economic growth across countries since 1965 • Hypothesis: Resource abundance reduces growthvia investment

12. Outline Introduction Preview Literature Norway Theory Correlations Regressions Conclusion

13. Natural resource abundanceand economic structure Hypothesis: Dependence hurts growth, even if abundance may help Resource poor, resource dependent (Chad, Mali) Resource rich, resource dependent (OPEC) Resource dependence, b Resource poor, resource free (Jordan, Panama) Resource rich, resource free (Canada, USA) Resource abundance, N

14. Natural capital and economic growth What is the empirical evidence? r = rank correlation 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 • A new measure of natural resource abundance • Confirms results based on other measures Australia 8 African countries S/Y = 0.05 Notice two clusters Venezuela r = -0.64 85 countries

15. Natural capital tends to crowd out Recent literature, again But Norway is, so far at least, an exception Four main linkages: • Dutch disease Hurts level, composition, or volatility of exports • Rent seeking Protectionism, corruption • Education • False sense of security Poor quality of policies and institutions 5.Investment Foreign capital Social capital Human capital Real capital

16. Golden Rule Theory: Optimal saving Ramsey

17. Implications for optimal saving An increase in the share of natural resources in national output reduces the marginal productivity of capital and the real interest rate, and reduces thereby also the optimal saving rate and economic growth Natural capital crowds out physical capital An increase in the natural capital share may also hamper financial development

18. More theory: Endogenous growth Ramsey rule

19. Dependence effect Abundance effect More theory: Endogenous growth Privately optimal Socially optimal Discrepancy between privately and socially optimal growth varies directly with the share of natural resources in national income Extent of market failure varies directly with the share of natural resources in national income

20. Empirical research strategy Study 85 industrial and developing countries from 1965 to 1998 Look for cross-country patterns in data from the World Bank • Investment and natural resources • Investment, genuine saving, gross saving • Investment and growth • Financial depth Dig deeper through regression analysis

21. Natural capital and investment An increase in the natural capital share by 10% is associated with a decrease in investment by 2% of GDP. Congo Mali Sierra Leone r = -0.38 85 countries

22. Investment and economic growth An increase in investment by 4% of GDP is associated with an increase in per capita growth by 1% per year. Congo Chad Nicaragua r = 0.65 85 countries

23. From gross investment to genuine saving Gross investment does not take quality into account Genuine domestic saving is adjusted for quality, and is defined as Gross domestic saving minus Depreciation of physical capital plus Expenditure on education minus Depreciation of natural capital Energy, minerals, forests, carbon dioxide

24. Natural capital and genuine saving Japan An increase in the natural capital share by 10% is associated with a decrease in genuine saving by 4% of GDP. Botswana Mauritania r = -0.53 85 countries

25. Genuine saving and economic growth An increase in genuine saving by 6% of GDP goes along with an increase in per capita growth by 1% per year. China Mozambique Cote d’Ivoire Mauritania r = 0.72 85 countries

26. Natural capital and gross saving Botswana An increase in the natural capital share by 10% is associated with a decrease in gross saving by 4% of GDP. China Zambia Niger r = -0.40 85 countries

27. Gross saving and economic growth An increase in gross saving by 6-7% of GDP goes along with an increase in per capita growth by 1% per year. Thailand Mozambique Venezuela Zambia r = 0.73 85 countries

28. Summary of results We have seen that, across countries: • Economic growth varies directly with three different measures of saving and investment • The three measures of saving and investment are all inversely related to natural capital • Economic growth varies inversely with natural capital

29. Summary of results Growth Growth Investment = + Resources Investment Resources

30. Financial depth Resource-abundant nations may feel they have less need for finance Smooth out consumption over time by adjusting the pace of resource extraction If so, a high natural capital share may go along with limited financial depth, low investment, and slow growth

31. Natural capital and financial depth r = -0.68 Portugal Italy New Zealand 85 countries

32. Financial depth and economic growth Indonesia Japan Switzerland Jordan r = 0.66 85 countries

33. Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

34. Investment is good for growth Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

35. Education is good for growth Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

36. Conditional convergence: 2% per year Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

37. Abundance is good for growth Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

38. Dependence hurts growth Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

39. Dependence hurts growth Regression results Direct effect of natural capital on growth is -0.09 Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

40. Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

41. Regression results Indirect effect through education is -0.89·0.04 -0.04 Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

42. Regression results Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

43. Regression results Indirect effect through investment is -0.21·0.09 -0.02 Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

44. Regression results Total effect is -0.09 + (-0.89)·0.04 + (-0.21)·0.09 -0.15 Recursive system Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

45. What if abundance is not given? Regression results Total effect is -0.15 + [0.05 + (0.66)·0.04 + (0.13)·0.09  0.88]·wealth per person Total effect of natural capital on growth is negative as long as wealth per head is below $170K African dummy adds nothing Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

46. Summary of results For given abundance, an increase in the natural capital share by 10 percentage points • reduces growth directly by 0.9 points • reduces enrolment by 9 points, lowering the growth rate further by 0.4 points • reduces investment by 2% of GDP, lowering growth further by 0.2 points • So, the total effect on growth is -1.5 percentage points – not small at all!

47. More regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

48. More regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

49. More regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

50. More regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.