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Experiences on the EU Periphery

This text explores Norway and Iceland's relationship with the EU, their economic management, natural resources, and the effects of natural resource abundance on growth. It also discusses the Dutch disease, corruption, and the connection between openness and growth in transition economies.

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Experiences on the EU Periphery

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  1. Experiences on the EU Periphery Norway and Iceland Thorvaldur Gylfason

  2. Norway, Iceland, and the EU • With Switzerland, Norway and Iceland are the sole European nations that have no intention of joining the EU any time soon • Switzerland is a special case • Joined UN only this year • Norway and Iceland are affluent • Norway: Ppp-adjusted GNP per capita: $30K • Iceland: $29K • Switzerland: $30K; US: $34K (2000)

  3. GNP per capita, 2000 (USD, ppp-adjusted)

  4. Norway and Iceland: GNP per capita, 1962-2000 Current US$, Atlas method

  5. Ireland and Greece: GNP per capita, 1962-2000 Current US$, Atlas method

  6. Iceland, Norway, Ireland, & Greece: GNP per capita, 1962-2000 Current US$, Atlas method

  7. Background • Two rich countries, but in different ways • Norwayhas been well managed • Low inflation, stable growth, low unemployment, no external debt, efficient oil-wealth management • Iceland has been less well managed • High inflation, uneven growth, low unemployment, high external debt, overfishing

  8. Natural Resources Norway • Small fisheries sector 1% of GNP and employment • Huge oil sector Oil wealth: 50-250% of GNP Oil revenue: 5-25% of GNP Iceland • Large fisheries sector 10% of GNP, 40% of exports

  9. Exports Stagnant exports for a long time • Unique among industrial countries Norway’s exports • Equivalent to about 43% of GNP since before the oil discoveries • Oil exports have crowded out nonoil exports Iceland’s exports • Equivalent to about a third of GNP since 1945 (in fact, since 1870)

  10. Iceland, Norway, Ireland, & Greece: FDI 1975-2000 (% of GDP)

  11. Norway: Background Rejected membership twice 1972 and 1994 Political leadership wanted to join the EU ... • In 1994, all major political parties and interest organizations advocated membership ... but the people said No! Strongest objections came from rural areas • Fishing and farming communities along the coast, especially up north

  12. Iceland: Background Never held a referendum Political leadership does not want to join ... • One of two main opposition parties wants to join, all other political parties, including present government, and most interest organizations are against EU membership, or at least ambivalent ... but, polls indicate, the people want to join Strongest objections come from rural areas • Fishing and farming communities around the coast are overrepresented in the political arena

  13. Dutch Disease Symptoms Most often, overvaluation and volatility of currency • Rural subsidies distort real exchange rate Sluggish exports and FDI Lack of interest in full participation in European integration Natural wealth: Mixed blessing?

  14. Natural wealth and economic growth, 1965-1998 An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year. 85 countries r = -0.64

  15. Sources of growth Sir Arthur Lewis: x is mainly trade, stable politics, good weather Growth is endogenous + + + denotes a positive effect in the direction shown +

  16. Sourcesof growth Recent research: x is natural resource abundance or intensity, inter alia + + - denotes a positive effect in the direction shown + denotes a negative effect in the direction shown -

  17. How Natural Resource Intensity Affects Growth • Four main channels of transmission from natural resources to growth • Dutch disease (incl. foreign capital) • Rent seeking (social capital) • Corruption • Protectionism • Lack of democracy • Education (human capital) • Investment (physical capital)

  18. Natural capital tends to crowd out Channels of Transmission, Again But Norway is, so far at least, an exception Four main linkages: • Dutch disease Hurts level or composition of exports • Rent seeking Protectionism, corruption • Education • Investment Foreign capital Social capital Human capital Real capital

  19. Transition Economies: Economic Growth and Agriculture, 1990-1997 r = -0.57

  20. Transition Economies: Natural Resource Abundance and Corruption r = -0.72

  21. Transition Economies: Corruption and Economic Growth, 1990-1997 Strong connection between corruption and growth in transition countries r = 0.64

  22. One Possible Interpretation Corruption Growth Growth = + Corruption Resources Resources

  23. Another Possible Interpretation Corruption Growth Growth = + Resources Resources Corruption

  24. Transition Economies: Openness and Agriculture, 1990-1997 r = -0.48

  25. Transition Economies: Economic Growth and Openness, 1990-1997 Weak and insignificantconnection between openness and growth in transition countries r = 0.05

  26. One Possible Interpretation Openness Growth Growth = + Openness Resources Resources

  27. Another Possible Interpretation Openness Growth Growth = + Resources Resources Openness

  28. Transition Economies: Openness and Corruption, 1990-1997 Estonia Belarus Czech Rep. Moldova Latvia Slovak Rep. Slovenia Uzbekistan Russia Kazakhstan Lithuania Ukraine Bulgaria Hungary Romania Poland Azerbaijan Georgia Significant connection between corruption and openness in transition countries Kyrgiz Rep. r = 0.47 Albania

  29. Classroom discussion

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