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

Natural Resources: A Mixed Blessing? zConsensus on foreign aid and assistance yIt is good for growth if accompanied by sound economic policies xGuiding principle in IMF and World Bank dealings with member countries zSeems also to apply to natural resource abundance yNatural resources are good for growth if accompanied by sound economic policies

Why worry? What can go wrong? zToo much emphasis on natural resources yMay be at the expense of human resources xEducation xEducation may suffer yMay draw resources available for investment away from other sectors investment xDomestic and foreign investment may suffer yMay result in Dutch disease, resulting in overvaluation of the currency, thus hurting profitability in and exports from other sectors exports x Total exports may suffer

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

Natural wealth and economic growth National economic output Time A B C D E F 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.

Empirical evidence: Education Same applies to primary and tertiary education secondary-school enrolment 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

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

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

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

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

Empirical evidence: Rent seeking II honesty index more corruption 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 So what does all this mean for growth?

Empirical evidence: Growth I per capita growth rate 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 Does this result hold for rich countries as well as poor?

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

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

Challenges for Norway and Iceland zNorway’s fish yTiny fishing industry xEmploys less than 1% of labor force xContributes less than 1% to GDP xAll the resource rent, at roughly 20-25% of the value of the catch, is allowed to dissipate yInefficient, used to be heavily subsidized yCostly also in other respects xPerhaps the single greatest obstacle to Norway’s EU membership in 1972 and 1994

Iceland’s Fish zLarger fishing industry than in Norway xEmploys 11% of labor force xAccount for 16% of GDP and 50% of exports xRent from fisheries is approx. 5% of GNP zPermits (quotas) are given away for free common property resource xState gets nothing, even if the fish is a common property resource by law xDeclared unconstitutional by Supreme Court fees xArguments for fees, based on efficiency and equity zEducation and health care in crisis

Norway’s Oil zLarge petroleum sector xSecond largest oil exporter in the world xContributes 9-10% to GNP xOil wealth is estimated at % of GNP zState takes in about 80% of the oil rent xMostly through taxes and fees common property resourceThe oil is a common property resource by law xOil 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

But Norway Needs to Be Careful zMany other oil-producing countries have serious economic problems xIran: -1% growth of per capita GDP since 1965 xVenezuela: -2% xSaudi Arabia: -3% zNorway is one of the few resource- abundant countries that has consistently performed well xIceland’s economic performance has been mixed

Conclusion: What Iceland and Norway Need to Do zSell oil drilling and fishing permits to domestic and foreign firms on a level playing field xOECD, IMF, and WTO recommend this zUse proceeds to improve the efficiency of tax collection xBy lowering distortionary taxes (income tax, VAT) xIn Iceland, also necessary to improve education and health care The End