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Natural Resources and Economic Growth : What Are the Issues?. Thorvaldur Gylfason. Overview of presentation. Origins and symptoms of the Dutch disease Thinking about natural resources and economic growth Brief interlude on OPEC Empirical evidence on resources and growth around the world
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Natural Resources and Economic Growth: What Are the Issues? Thorvaldur Gylfason
Overview of presentation Origins and symptoms of the Dutch disease Thinking about natural resources and economic growth Brief interlude on OPEC Empirical evidence on resources and growth around the world Why Norway stands out
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
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
Exports of goods and services 1960-2000 (% of GDP) What does experience show? Norway’s exports have hovered around 40% of GDP since 1960, with only a weak tendency to rise over time
Foreign direct investment 1967-2000 (gross, % of GDP) Since 1970s, Norway has attracted less gross FDI than the Netherlands
Manufacturing exports 1962-2001 (% of total exports) In Norway, oil exports have crowded out other exports almost krone for krone since the mid-1970s
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 Economic growth is key
2 Thinking about natural resources and growth Natural resources x Economic growth
Thinking about natural resources and growth Natural resources x Economic growth What is x?
Five channels of transmission 1. The Dutch disease Exchange rates, wages, volatility Hurts level or composition of exports and FDI 2. Rent seeking Protectionism, cronyism, corruption 3. False sense of security Poor quality of policies and institutions 4. Neglect of education 5.Not enough investment Social capital
Crowding out Put differently, natural capital may crowd out • Social capital • Human capital • Real capital Matter of taste whether these mechanisms are viewed as additional symptoms of the Dutch disease or as separate channels of transmission
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?
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.”
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.”
Increasing awareness that oil brings risks If ... oil revenue is managed well, it can educate, heal and provide jobs for ... the people. But oil brings risks as well as benefits. Rarely have developing countries used oil money to improve the lives of the majority of citizens or bring steady economic growth. More often, oil revenues have caused crippling economic distortions and been spent on showy projects, weapons and Paris shopping trips for government officials. New York Times, 1 August 2000.
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
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!)
4 Natural capital and growth: The evidence Review a few of the empirical findings of the new literature on natural resources and economic growth Present cross-country evidence Individual historical case studies support the results Stress linkages among natural capital and other kinds of capital as well as growth
Real capital and growth r = -0.38 Lesotho Natural capital crowds out real capital Guinea Bissau Niger Chad
Real capital and growth r = 0.65 Botswana China Quantity and quality Investment is good for growth 1% 4% An increase in investment by 4% of GDP goes along with an increase in per capita growth by 1% per year Niger Nicaragua
Interpretation of results Growth Growth Investment = + Resources Resources Investment
Human capital and growth r = -0.63 Finland New Zealand Uruguay Natural capital crowds out human capital Saudi Arabia
Human capital and growth r = 0.72 Thailand Education is good for growth Finland New Zealand Jamaica An increase in secondary-school enrolment by 25-30% of each cohort goes along with an increase in per capita growth by 1% per year Notice diminishing returns to education
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
Financial capital and growth r = -0.68 Switzerland Japan Natural capital crowds out financial capital China New Zealand
Financial capital and growth r = 0.66 Financial depth is good for growth: Money greases the wheels of commerce and production Japan Indonesia Switzerland Jordan
Financial capital and growth r = 0.66 This helps explain why inflation hurts growth: Inflation reduces financial depth and thereby inhibits growth Japan Indonesia Switzerland Jordan
Interpretation of results Growth Growth Financial depth = + Resources Resources Financial depth
Foreign capital and growth r = -0.32 Netherlands Switzerland Botswana Sweden Natural capital crowds out foreign capital Guinea Bissau
Foreign capital and growth r = 0.62 Norway Foreign direct investment is good for growth Netherlands Papua New Guinea Madagascar
Foreign trade and growth r = 0.42 Korea Malaysia Foreign trade is also good for growth Belgium Guinea Bissau
Interpretation of results Growth Growth FDI = + Resources Resources FDI
Social capital and growth 7 African countries where saving is 5% of GDP and per capita growth is -1% per year Brazil Natural capital crowds out social capital Inequality of access to education and land: Same pattern Increase in natural capital by 3% of national wealth goes along with an increase in Gini by 1 point. r = 0.41 Notice cluster
Social capital and growth r = -0.50 Korea China Equality is good for growth: No sign here that too much equality hurts growth Norway Brazil South Africa Sierra Leone
Social capital and growth r = -0.50 Korea China Equality is good for growth Norway Brazil South Africa An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year Sierra Leone
Interpretation of results Growth Growth Inequality = + Resources Resources Inequality
Social capital and growth r = -0.42 Finland New Zealand Again, natural capital crowds out social capital Zambia Indonesia
Social capital and growth r = 0.40 Botswana Honesty is good for growth because corruption creates inefficiency Norway Indonesia New Zealand Kenya
Interpretation of results Growth Growth Corruption = + Resources Resources Corruption
Social capital and growth Once more, natural capital crowds out social capital r = 0.48
Social capital and growth r = -0.62 Political liberty is good for growth because oppression creates inefficiency