1. Inequality and Economic Growth: Do Natural Resources Matter?
Thorvaldur Gylfason
and Gylfi Zoega

2. Sources of Growth Endogenous growth: X can be almost anything! + + ?
Arthur Lewis: X is trade, stable politics, good weather

3. Sources of Growth Dutch disease Rent seeking Conditional convergence +– ? – – + –
Natural capital crowds out human and physical capital

4. Recent Literature Five main linkages:
Natural capital tends to crowd out
Recent Literature
But Norway is, so far at least, an exception
Five main linkages:
Dutch disease
Adversely affects level, composition, or volatility of trade and investment
Rent seeking
Protectionism, corruption
Education
False sense of security
Poor quality of policies and institutions
5. Investment
Foreign capital
Social capital
Human capital
Physical capital

5. Natural Resource Abundance versus Dependence
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

6. Inequality and Growth X = inequality – + + – – – – + + –
Inequality and growth are both endogenous, and depend on natural resources

7. Theory Two sectors Large primary sector means
Primary sector with unequal distribution of earnings
Manufacturing sector with opportunities for learning and innovation
Large primary sector means
Greater inequality
Slower economic growth

8. Empirical Analysis
Explore relationship between natural resource intensity, inequality, and economic growth across countries since 1965
Hypothesis: Natural resource dependence hurts growth through increased inequality, inter alia
Study 87 industrial and developing countries from 1965 to 1998

9. Distribution of Income and Land
r = rank correlation
Land is less equally distributed than income
r = 0.57
45
50 countries

10. Inequality and Natural Capital
Increased natural resource dependence goes along with increased inequality
Notice cluster
7 African countries
where saving is 5% of GDP
and per capita growth
is -1% per year
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
75 countries

11. Natural Capital and Economic Growth
What is the empirical evidence?
An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.
8 Asian countries
S/Y = 0.32
Notice two clusters
8 African countries
S/Y = 0.05
r = -0.64
85 countries

12. Growth and Inequality, 1965-98
What do the data say?
Growth and Inequality,
75 countries
An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year
Korea
No discernible sign that equality stands in the way of economic growth
France
Brazil
Sweden
South Africa
r = -0.50
Sierra Leone

13. + = One Possible Interpretation Inequality Growth Growth Resources

14. + = Another Possible Interpretation Inequality Growth Growth Resources

15. Education and Inequality: Another Link?
Now consider the relationship between inequality and three different measures of education inputs, outcomes, and participation:
1. Public expenditure on education
2. Expected years of schooling for girls
3. Secondary-school enrolment

16. Secondary Enrolment and Inequality
An increase in the secondary-school enrolment rate by five percentage point goes along with a decrease of almost one point on the Gini scale.
Expenditure on education and years of schooling: Same pattern
r = -0.54
75 countries

17. Secondary Enrolment and Growth
An 25 point increase in secondary-school enrolment goes along with an increase in per capita growth by 1% per year.
r = 0.72
Positive but diminishing returns to education
87 countries

18. + = One Possible Interpretation Inequality Growth Growth Education

19. + = Another Possible Interpretation Inequality Growth Growth Education

20. Investment and Natural Capital
An increase in natural capital by 5% of national wealth goes along with a reduction in investment by almost 1% of GDP.
Increased natural resource dependence discourages investment and growth
r = -0.38
86 countries

21. Education and Natural Capital
An increase in natural capital by 10% of national wealth goes along with a reduction in secondary enrolment by almost 15% of cohort.
Increased natural resource dependence discourages education and growth
r = -0.63
87 countries

22. Conclusion
Diversification away from natural resources may spur economic growth
1. by increasing and improving human capital ...
as well as social capital, by reducing inequality ...
and also real capital
This may be one reason why inequality and growth are inversely related across countries: an equilibrium outcome

23. The End Conclusion Other possible reasons
These slides can be viewed on my website:
Conclusion
Other possible reasons
1. More and better education reduces inequality and encourages growth
2. Excessive inequality triggers demand for more and better education that reduces inequality and speeds up growth
3. Excessive inequality reduces social cohesion, efficiency, and growth
Many possibilities!
The End