Natural Resource Abundance and Economic Growth

1. Natural Resource Abundance and Economic Growth Some Lessons from Norway and Iceland Thorvaldur Gylfason

2. Natural Resources: A Mixed Blessing? • Consensus on foreign aid and assistance • It is good for growth if accompanied by sound economic policies • Guiding principle in IMF and World Bank dealings with member countries • Seems also to apply to natural resource abundance • Natural resources are good for growth if accompanied by sound economic policies

3. Why worry?What can go wrong? • Too much emphasis on natural resources • May be at the expense of human resources • Education may suffer • May draw resources available for investment away from other sectors • Domestic and foreign investment may suffer • May result in Dutch disease, resulting in overvaluation of the currency, thus hurting profitability in and exports from other sectors • Total exports may suffer

4. So what? • Education, investment, and exports are almost surely good for growth • Rent seeking, often associated with natural resources, may hurt growth • So, if natural resource abundance hurts education, investment, and exports and encourages rent seeking, … • … then it may reduce economic growth in the long run

5. Natural wealth and economic growth National economic output D F E C A natural resource boom makes a country better off at least for a while, but if it reduces growth, then, after a time, the country will be worse off than it would have been without the boom, other things being equal. B A Time

6. Empirical evidence: Education Same applies to primary and tertiary education A 3 percentage point increase in the share of natural capital in national wealth goes along with a 2 percentage point decrease in secondary-school enrolment from one country to another

7. Empirical evidence: Domestic investment How about foreign investment? A 5 percentage point increase in the natural capital share goes along with a decrease in the domestic investment rate by 1 percentage point

8. Foreign investment is export of capital. How about exports of goods and services? Empirical evidence: Foreign investment A 30 percentage point increase in the natural capital share goes along with a decrease in the foreign investment ratio by 1 percentage point

9. Empirical evidence: Exports A 3 percentage point increase in the natural capital share goes along with a 1 percentage point decrease in the export ratio

10. Empirical evidence: Rent seeking I How about corruption? A 4 percentage point increase in the natural capital share goes along with a 1 percentage point increase in the import tariff rate

11. Empirical evidence: Rent seeking II So what does all this mean for growth? A 6 percentage point increase in the natural capital share goes along with a 1 percentage point decrease in the honesty index, which means more corruption

12. Does this result hold for rich countries as well as poor? Empirical evidence: Growth I A 12 percentage point increase in the natural capital share goes along with a 1 percentage point decrease in the per capita growth rate from one country to another

13. Rich countries: Same story, but slightly weaker relationship Empirical evidence: Growth II

14. Poor countries: Same story, but stronger relationship Empirical evidence: Growth III

15. Challenges for Norway and Iceland • Norway’s fish • Tiny fishing industry • Employs less than 1% of labor force • Contributes less than 1% to GDP • All the resource rent, at roughly 20-25% of the value of the catch, is allowed to dissipate • Inefficient, used to be heavily subsidized • Costly also in other respects • Perhaps the single greatest obstacle to Norway’s EU membership in 1972 and 1994

16. Iceland’s Fish • Larger fishing industry than in Norway • Employs 11% of labor force • Account for 16% of GDP and 50% of exports • Rent from fisheries is approx. 5% of GNP • Permits (quotas) are given away for free • State gets nothing, even if the fish is a common property resource by law • Declared unconstitutional by Supreme Court • Arguments for fees, based on efficiency and equity • Education and health care in crisis

17. Norway’s Oil • Large petroleum sector • Second largest oil exporter in the world • Contributes 9-10% to GNP • Oil wealth is estimated at 50-250% of GNP • State takes in about 80% of the 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 • Will become huge in a few years if they can resist the temptation to use the money to meet current needs

18. But Norway Needs to Be Careful • Many other oil-producing countries have serious economic problems • Iran: -1% growth of per capita GDP since 1965 • Venezuela: -2% • Saudi Arabia: -3% • Norway is one of the few resource-abundant countries that has consistently performed well • Iceland’s economic performance has been mixed

19. Conclusion: What Iceland and Norway Need to Do • Sell oil drilling and fishing permits to domestic and foreign firms on a level playing field • OECD, IMF, and WTO recommend this • Use proceeds to improve the efficiency of tax collection • By lowering distortionary taxes (income tax, VAT) • In Iceland, also necessary to improve education and health care The End