Thorvaldur Gylfason IMF INSTITUTE Course on Natural Resources, Finance, and Development Stellenbosch, South Africa November 15-26, 2010

 Stories, stories without  Success stories without natural resources with  Success stories with natural resources  Failures with and without natural resources

 Japan  Stagnant since 1990  Switzerland  Steady progress  Hong Kong  Singapore  City states  Cities are more efficient, and richer, than countries  But start with Gapminder:  Per capita GDP and life expectancy socialeconomic indicators  Importance of social as well as economic indicators See gapminder.org

Per capita GDP (2005 USD, ppp) Life expectancy (years)

Per capita GDP (2005 USD, ppp) Life expectancy (years)

 Norway, Saudi Arabia, and Algeria  Also, Norway vs. Iceland  Botswana, Congo, and Sierra Leone  Also, Botswana vs. Gabon, plus Nigeria  Further, Nigeria vs. Ghana  Malaysia and Singapore  Mauritius, Costa Rica, and Fiji  Also, Mauritius vs. Madagascar  Chile and Zambia  Mexico and Venezuela

 African countries  Chad  Congo  Gabon  Guinea  Libya  Nigeria  Sierra Leone  Sudan  Others  Iran  Iraq  Saudi Arabia  Russia  Turkmenistan  Uzbekistan  Mexico  Venezuela

Resource poor, resource dependent (Chad, Mali) Resource poor, resource dependent (Chad, Mali) Resource rich, resource dependent (OPEC) Resource rich, resource dependent (OPEC) Resource rich, resource free (Canada, USA) Resource rich, resource free (Canada, USA) Resource poor, resource free (Jordan, Panama) Resource poor, resource free (Jordan, Panama) Resource dependence Resource abundance Dependence hurts growth, even if abundance may help Dependence hurts growth, even if abundance may help Hypothesis:

Economies blessed with abundant oil, minerals, or other natural resources should be able to invest the “rents” or proceeds at home, raising their growth potential. But the historical experience has most often been the reverse. The pitfalls are well known. Sometimes the state sells extraction rights too cheaply or taxes resource revenues too lightly. Sometimes the money it raises is stolen or squandered by rent-seeking elites and vested interests. When the money is invested, it is not always invested wisely or transparently. And by providing a ready source of foreign-exchange, natural resources can also reduce incentives for diversifying exports, a predicament known as “Dutch disease.” States will improve on this sorry historical record only if they capture an appropriate share of the resource rents; save a judicious amount overseas; and set clear, growth- oriented priorities for absorbing the remainder at home. The Growth Report: Strategies for Sustained Growth and Inclusive Development, Commission on Growth and Development, The World Bank, 2008.

for constant K/Y for u = -g N

Per capita GNI (USD at PPP)Democracy (from -10 to 10) Increase in life expectancy in years Average democracy index Generally, democracy is good for growth

Real Per Capita GDP (2000 USD)Democracy Increase in life expectancy in years Average democracy index

Education (secondary, %)  Alternative measures of education  Primary enrolment Not much variation  Secondary enrolment Boys vs. girls  Tertiary enrolment  Expenditure on education  School life expectancy Expected years of schooling  Inputs vs. output

Fertility  There is another way to provide more and better and more evenly shared education to children fewer children  Produce fewer children to increase their average “quality”  Fertility is measured by births per woman

Governance (0 to 100)  Measures delivery of public goods and services to citizens based on proxies for  Safety and Rule of Law  Participation and Human Rights  Sustainable Economic Opportunity  Human Development Ibrahim index

Corruption (0 to 10)  Corruption Perceptions Index  Corruption Perceptions Index measures perceived levels of public sector corruption in 178 countries  Based on survey interviews with business people  Each score is an average of several surveys More corruption Even so, Botswana has some distance to go

Real Per Capita GDP (2000 USD)Democracy

Real Per Capita GDP (2000 USD)Democracy

Education (secondary, %)Fertility

GovernanceCorruption (from 10 to 0) Ibrahim index More corruption Again, Botswana has some distance to go

Gini index of inequality  Botswana has a much less equal distribution of income than Gabon and Nigeria  Gini index ranges from about 25 or so in Scandinavia (most equal) to over 60 in Botswana, Brazil, and South Africa (least equal)

less equal distribution of income  Botswana has a much less equal distribution of income than Gabon and Nigeria insufficient political diversification  Same political party in power since independence in 1966, suggesting insufficient political diversification  Corruption  Corruption is not a serious problem by African standards, but would be considered problematic by OECD standards  Unemployment  Unemployment is widespread  Was 40% , 24% , is now 7,5% ( )

Real Per Capita GDP (2000 USD)Democracy -2

Per capita GNI (USD at PPP)Gini index of inequality

Education (secondary, %)Fertility (Children per woman)

GovernanceCorruption (from 10 to 0) Ibrahim index More corruption

Per Capita GNI at PPPDemocracy

Real Per Capita GDPDemocracy

EducationFertility

EducationCorruption More corruption

Per Capita GNI at PPPDemocracy

Real Per Capita GDPDemocracy

EducationFertility

EducationCorruption More corruption

Real Per Capita GDPLife expectancy (Years) From 2.8 to 5.4

Per Capita GNI at PPPLife expectancy From 3 to 3.5

DemocracyCorruption More corruption

EducationFertility Labor force with secondary education in Singapore up from 30% to 50% against 56% in Malaysia

Country A Country B

In % Country A Country B Labor with secondary education 5648

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio 68221

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158 Inflation3.42.7

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158 Inflation Growth per capita

In %MalaysiaSingapore Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158 Inflation Growth per capita

Country A Country B

In % Country A Country B Girls at primary school 10072

In % Country A Country B Girls at primary school Investment ratio 2511

In % Country A Country B Girls at primary school Investment ratio 2511 Export ratio 5823

In % Country A Country B Girls at primary school Investment ratio 2511 Export ratio 5823 Primary export ratio 3380

In % Country A Country B Girls at primary school Investment ratio 2511 Export ratio 5823 Primary export ratio 3380 Inflation1018

In % Country A Country B Girls at primary school Investment ratio 2511 Export ratio 5823 Primary export ratio 3380 Inflation1018 Growth per capita

And the countries are: Country A Country B Girls at primary school Investment ratio 2511 Export ratio 5823 Primary export ratio 3380 Inflation1018 Growth per capita

And the countries are: MauritiusMadagascar Girls at primary school Investment ratio 2511 Export ratio 5823 Primary export ratio 3380 Inflation1018 Growth per capita = = 5

Mauritius Madagascar

Per Capita GNI at PPPDemocracy

Real Per Capita GDPDemocracy

Life expectancyFertility

EducationCorruption More corruption

Per Capita GNI at PPPDemocracy

Real Per Capita GDPDemocracy

Education (secondary, %)Fertility Labor force with secondary education

CorruptionFertility

Per Capita GNI at PPPSecondary education

Real Per Capita GDPLife expectancy Cost of inflation

Tertiary educationFertility

Nordics, including Norway, cluster around 25 to 27 Increased inequality as a sign of pending crisis

 The problem is not the existence of natural wealth as such...  … but rather the failure to avert the dangers that accompany the gifts of nature  Norway, so far, is a success story 80% of oil rent  Government invests 80% of oil rent entirely in foreign securities  60% in equities  40% in fixed-income securities

 Norway always had its natural resources educated labor  It was only with the advent of educated labor that it became possible for the Norwegians to harness those resources on a significant scale  Human capital  Human capital accumulation was the primary force behind the economic transformation of Norway  Natural capital was secondary

 The purpose of the oil fund  SharePension fund  Share the wealth fairly: Pension fund  Shield  Shield domestic economy from overheating and possible waste USD 450 billion  Fund has grown huge: USD 450 billion  That makes almost USD 100K per person resisted temptation  Norwegians have resisted temptation to use too much of the money to meet current needs

democracy market economy  Long tradition of democracy and market economy in Norway since before the advent of oil  Large-scale rent seeking was averted as oil was, by law, defined as a common- property resource from the beginning  Adequate investment performance  Excellent education record  Female college enrolment doubled from 46% of each cohort in 1991 to 94% in 2006

Dutch disease  Some (weak) signs of Dutch disease  Stagnant exports, until recently  Sluggish FDI  Limited interest in joining EU and EMU  Some signs also of unwillingness to undertake difficult reforms  Health care provision Central Bank  Management of oil fund delegated by Ministry of Finance to Central Bank 1997  To immunize oil fund from politics

 With Switzerland, Norway and Iceland were, until recently, the sole European nations with no intention of joining the EU Iceland applied for membership in 2009 Norway remains opposed to joining  Switzerland is a special case Joined UN only a few years ago  Norway and Iceland have grown apart Norway’s ppp-adjusted per capita GNI is $59K compared with Iceland’s $25K Switzerland has $39K while US has $47K Figures refer to 2008

GNI per person (USD, PPP)

 Both are rich, but in different ways  Norway has 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, flawed fisheries management, banking crash in 2008 requiring IMF emergency assistance

 Norway  Small fisheries sector 1% of GNP and employment Huge oil sector Oil wealth: % of GNP Oil revenue:  25% of GNP and investment  33% of budget revenue  50% of export earnings  Iceland  Large fisheries sector 7% of GNP, 40% of exports

Long stagnant exports  Unique among industrial countries  Norway’s oil exports crowded out nonoil exports Iceland’s exports  Equivalent to about a third of GNP from, yes, 1870  Picked up after crash of 2008

 Rejected EU membership twice 1972 and 1994  Political leadership wanted to join EU In 1994, all major political parties and interest organizations advocated membership  But the people said No!  Strong objections from rural areas Fishing and farming communities along the coast, especially up north

 No referendum was held  Until 2008 crash, political leadership did not want to join Even if polls indicated public support for membership  Yet, strong objections from rural areas Fishing and farming communities around the coast are overrepresented in political arena  Since 2008 crash, political leadership wants to join Rerendum is planned, but now public opinion has turned against membership

 Persistent overvaluation and volatility of currency Rural subsidies distort real exchange rate High inflation leads to real appreciation  Sluggish exports and FDI  Lack of interest in full participation in European integration  Natural wealth: Fishy blessing? Free catch quotas gave lots of money plus political power to boat owners

 Diversification is good for growth  Economic diversification  Economic diversification away from excessive reliance on natural resources, including minerals  Political diversification  Political diversification away from narrowly based political elites toward full-fledged democracy  Social and human capital are good for growth  Social policies make a difference, including social insurance as well as education and health care  Judicious use of natural resources requires good institutions, including democracy  Conditional assistance (e.g., World Bank in Sudan)  Need to develop strategy to turn natural capital sustainably into human and social capital  European solution: Pooling coal and steel worked well  Pooling fish through CFP has worked less well Fini

Classroom discussion