To grow or not to grow: Why institutions must make a difference Thorvaldur Gylfason

Why growth rates differ If technology matters for economic growth, as it must, then … General economic efficiency must also make a difference for growth Economic policy Economic policy Institutions Institutions Institutions or geography? False contrast False contrast There is room for both, side by side There is room for both, side by side

Why growth rates differ + ++ Political and economic diversification – Resource depletion drag Dutch disease Rent seeking +

Growth and political liberties, Central African Republic Brazil Democracy is good for growth: No visible sign that democracy stands in the way of economic growth r = Botswana China Niger Venezuela Korea 85 countries r = rank correlation

Central African Republic Brazil r = Botswana China Niger Venezuela Korea Political liberty is good for growth because oppression breeds inefficiency, and so does corruption Growth and political liberties,

Growth and natural capital, An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year. r = Venezuela Australia 85 countries

Recent literature Six main linkages: 1.Resource depletion drag 2.Dutch disease Hurts level, composition, or volatility of exports 3.Rent seeking Protectionism, corruption, oppression 4.False sense of security Poor quality of policies and institutions 5.Education 6. Investment But Norway is, so far at least, an exception Foreign capital Social capital Human capital Real capital Natural capital tends to crowd out

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

Empirical research strategy Study 85 industrial and developing countries from 1965 to 1998 cross-country patterns Look for cross-country patterns in data from the World Bank regression analysis Dig deeper through regression analysis Recognize interconnections among several key determinants of growth by estimating a system of simultaneous equations by Seemingly Unrelated Regression method

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Recursive system

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Investment is good for growth

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Education is good for growth

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Civil liberties are good for growth Index goes from 1 (full civil liberties) to 7 (negligible civil liberties)

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Population growth hurts growth

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Conditional convergence: 2% per year

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Abundance is good for growth

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Dependence is bad for growth

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Dependence is bad for growth

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Dependence is bad for education

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Indirect effect through education is -0.77·0.02  -0.02

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Dependence is bad for investment

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Indirect effect through investment is -0.26·0.08  -0.02

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Dependence is bad for liberty

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Indirect effect through civil liberties is 0.04·(-0.27)  -0.01

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Total effect is (-0.77)· (-0.26)· ·(-0.27)  Liberties and resources both matter for growth

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results What if abundance is not given? Total effect is [ (0.54)· (0.16)· (-0.05)·(-0.27)  0.09]·wealth per person African dummy adds nothing

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Natural capital share Natural capital per person Initial income Popu- lation growth Civil liberties index Enrol- ment rate Gross invest- ment R2R2R2R2 Economic growth -0.08(5.8)0.05(2.7)-1.89(9.2)-0.56(3.0)-0.27(2.5)0.02(2.5)0.08(3.7)0.77 Enrolment rate -0.77(4.1)0.54(2.2)13.00(5.2)-3.82(2.5)0.77 Gross investment -0.26(4.0)0.16(1.8)-1.92(2.2)-0.73(1.4)0.24 Civil liberties 0.04(4.1)-0.05(2.9)-0.95(6.5)0.65 Regression results Total effect of natural capital on growth is negative as long as wealth per head is below $150K

What is the upshot? Growth differentials across countries can be explained by several different interconnected factors Private initiatives (investment, fertility) Private initiatives (investment, fertility) Public policies (education) Public policies (education) Institutions (democracy) Institutions (democracy) Geography (natural resources) Geography (natural resources) In particular, institutions survive the presence of geography, and vice versa

Case in point: Norway 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 is, so far, a success story Government takes in 80% of oil rent and invests it mostly in foreign securities No signs of damage to growth potential, at least not yet

Why Norway has succeeded where OPEC and others failed Long tradition of democracy and market economy in Norway since before the advent of oil Large-scale rent seeking was averted as oil was defined as a common- property resource from the beginning Large-scale rent seeking was averted as oil was defined as a common- property resource from the beginning Adequate investment performance Adequate investment performance Excellent education record Excellent education record

Why Norway has succeeded where OPEC and others failed Even so, Norway faces challenges Some (weak) signs of Dutch disease Some (weak) signs of Dutch disease Stagnant exports, sluggish FDI Stagnant exports, sluggish FDI Limited interest in EU and EMU Limited interest in EU and EMU Some signs also of unwillingness to undertake difficult reforms Some signs also of unwillingness to undertake difficult reforms Health care provision Health care provision Pensions Pensions Management of oil fund transferred from Ministry of Finance to Central Bank 1999

Bottom line Fin Growth requires accumulation and efficient use of capital 1.Physical capital through strong incentives to save and invest through strong incentives to save and invest 2.Human capital via education, training, & less fertility in LDCs via education, training, & less fertility in LDCs 3.Social capital through democracy, etc. through democracy, etc. These slides can be viewed on my website: Financial and foreign capital: Same story