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

2. 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
Institutions
Institutions or geography?
False contrast
There is room for both, side by side

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

4. Growth and political liberties, 1965-98
r = rank correlation
Brazil
Democracy is good for growth:
No visible sign that democracy stands in the way of economic growth
Botswana
China
Korea
Venezuela
Central African Republic
Niger
r = -0.62
85 countries

5. Growth and political liberties, 1965-98
Brazil
Political liberty is good for growth
because oppression breeds inefficiency,
and so does corruption
Botswana
China
Korea
Venezuela
Central African Republic
Niger
r = -0.62

6. Growth and natural capital, 1965-98
An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.
Australia
Venezuela
r = -0.64
85 countries

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

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

9. Empirical research strategy
Study 85 industrial and developing countries from 1965 to 1998
Look for cross-country patterns in data from the World Bank
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

10. Regression results Recursive system -0.08 (5.8) 0.05 (2.7) -1.89 (9.2)
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Recursive system
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

11. Regression results Investment is good for growth -0.08 (5.8) 0.05
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

12. Regression results Education is good for growth -0.08 (5.8) 0.05 (2.7)
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

13. Regression results Civil liberties are good for growth -0.08 (5.8)
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
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.

14. Regression results Population growth hurts growth -0.08 (5.8) 0.05
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

15. Regression results Conditional convergence: 2% per year -0.08 (5.8)
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

16. Regression results Abundance is good for growth -0.08 (5.8) 0.05 (2.7)
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

17. Regression results Dependence is bad for growth -0.08 (5.8) 0.05 (2.7)
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

18. Regression results Dependence is bad for growth -0.08 (5.8) 0.05 (2.7)
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

19. Regression results Dependence is bad for education -0.08 (5.8) 0.05
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

20. Regression results
Indirect effect through education is -0.77·0.02  -0.02
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

21. Regression results Dependence is bad for investment -0.08 (5.8) 0.05
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

22. Regression results
Indirect effect through investment is -0.26·0.08  -0.02
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

23. Regression results Dependence is bad for liberty -0.08 (5.8) 0.05
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

24. Regression results
Indirect effect through civil liberties is 0.04·(-0.27)  -0.01
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

25. Regression results Liberties and resources both matter for growth
Total effect is (-0.77)· (-0.26)· ·(-0.27)  -0.13
Dependent variable
Natural capital share
Natural capital per person
Initial income
Popu-lation growth
Civil liberties index
Enrol-ment rate
Gross invest-ment R2
Economic growth
-0.08
(5.8)
0.05
(2.7)
-1.89
(9.2)
-0.56
(3.0)
-0.27
(2.5)
0.02
0.08
(3.7)
0.77
Enrolment rate
-0.77
(4.1)
0.54
(2.2)
13.00
(5.2)
-3.82
Gross investment
-0.26
(4.0)
0.16
(1.8)
-1.92
-0.73
(1.4)
0.24
Civil liberties
0.04
-0.05
(2.9)
-0.95
(6.5)
0.65
Liberties and resources both matter for growth
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

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

27. 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

28. 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
Adequate investment performance
Excellent education record

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

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