1. Natural Resources and Economic Growth: The Role of Investment Thorvaldur Gylfason and Gylfi Zoega

2. Questions Do natural resources matter for economic growth? If so, how? – i.e., through what channels Is investment one of them? Do institutions also influence growth? Do institutions also influence growth? If so, do institutions render the effects of natural resources on growth insignificant? If so, do institutions render the effects of natural resources on growth insignificant? Or is there room for both natural resources and institutions side by side? Or is there room for both natural resources and institutions side by side?

3. Determinants of growth + + + –– + denotes a positive effect in the direction shown – denotes a negative effect in the direction shown ? Resource depletion drag Dutch disease Rent seeking Framework

4. + + + –– – Role of natural resources ? Recent papers: Natural resource dependence reduces high-skill labor intensity, thus hurting growth

5. + + + –– – – Role of natural resources ? Natural resource dependence reduces investment and hence also growth This paper: Natural resource dependence reduces investment and hence also growth

6. + + + –– – – Role of natural resources ? Natural resource dependence weakens institutions (reduces civil liberties) and hence also growth This paper: Natural resource dependence weakens institutions (reduces civil liberties) and hence also growth –

7. Aims and overview natural resource intensity, saving, and investment Explore the relationship between natural resource intensity, saving, and investment in theory as well as empirically across countries since 1965 saving, investment, and economic growth Explore also the linkages among saving, investment, and economic growth across countries since 1965 Hypothesis: Resource dependence reduces growth Hypothesis: Resource dependence reduces growth via investment

8. Aims and overview civil liberties (a proxy for institutions) and economic growth and the main determinants of growth Also, explore the relationship between civil liberties (a proxy for institutions) and economic growth and the main determinants of growth Explore also the interactions among civil liberties, natural resources, and growth and its main determinants Hypothesis: Resource dependence reduces growth Hypothesis: Resource dependence reduces growth also via civil liberties

9. 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, b Resource abundance, N Dependence hurts growth, even if abundance may help Hypothesis:

10. Natural capital and economic growth 85 countries What is the empirical evidence? r = rank correlation An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year. r = -0.64 8 African countries S/Y = 0.05 8 Asian countries S/Y = 0.32 Notice two clusters A new measure of natural resource dependence A new measure of natural resource dependence Confirms results based on other measures Confirms results based on other measures Venezuela Australia

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

12. Resource depletion drag Population growth drag due to decreasing returns Resource depletion drag due to declining resources

13. Optimal saving Steady state (with g A = 0)

14. Optimal saving Solve together for k and y

15. Optimal saving Plug in solution for y

16. Optimal saving Maximizing c with respect to s gives Golden Rule

17. Implications An increase in the share of natural resources in national output reduces the marginal productivity of capital and the real interest rate, and reduces thereby also the optimal saving rate and economic growth Natural capital crowds out physical capital An increase in the natural capital share may also hamper financial development

18. Implications An increase in the share of natural resources in national output reduces the marginal productivity of capital and the real interest rate, and reduces thereby also the optimal saving rate and economic growth Natural capital crowds out physical capital

19. 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 Investment and natural resources Investment and growth Financial depth regression analysis Dig deeper through regression analysis

20. 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 Investment and natural resources Investment and growth regression analysis Dig deeper through regression analysis

21. Natural capital and investment 85 countries An increase in the natural capital share by 10% is associated with a decrease in investment by 2% of GDP. r = -0.38 Congo Sierra Leone Mali

22. Investment and economic growth 85 countries r = 0.65 An increase in investment by 4% of GDP is associated with an increase in per capita growth by 1% per year. Congo Chad Nicaragua

23. Summary of results Across countries: 1.Economic growth varies directly with investment 2.Investment is inversely related to natural capital 3.Economic growth varies inversely with natural capital through investment

24. Summary of results Growth Investment Growth Resources Investment + =

25. Financial depth Resource-abundant nations may feel they have less need for finance Smooth out consumption over time by adjusting the pace of resource extraction If so, a high natural capital share may go along with limited financial depth, low investment, and slow growth

26. Natural capital and financial depth 85 countries r = -0.68 Italy Portugal New Zealand

27. Financial depth and economic growth 85 countries r = 0.66 Jordan Switzerland JapanIndonesia Financial depth is good for growth: Money greases the wheels of commerce and production

28. 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

29. 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

30. 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

31. 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)

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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 -0.08 + (-0.77)·0.02 + (-0.26)·0.08 + 0.04·(-0.27)  -0.13

44. 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 -0.13 + [0.05 + (0.54)·0.02 + (0.16)·0.08 + (-0.05)·(-0.27)  0.09]·wealth per person African dummy adds nothing

45. 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

46. Summary of results 10 For given abundance, an increase in the natural capital share by 10 points reduces growth directly by 0.8 points0.8 points reduces enrolment by 8 points, lowering the growth rate further by 0.2 points0.2 points reduces investment by 2½% of GDP, lowering growth further by 0.2 points0.2 points reduces liberties and growth by 0.1 points0.1 points 1.3 1.3 So, the total effect on growth is -1.3 percentage points – not small at all!-1.3

47. Bottom line Fin Natural resources and institutions both matter for growth, side by side Natural resource intensity matters for economic growth even when institutions are taken into account 1.Social capital through rent seeking, civil liberties, etc. through rent seeking, civil liberties, etc. 2.Human capital through neglect of education through neglect of education 3.Physical capital through blunted incentives to save and invest as well as financial immaturity through blunted incentives to save and invest as well as financial immaturity These slides can be viewed on my website: www.hi.is/~gylfason

48. 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

49. 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  -0.02-0.77·0.02  -0.02

50. 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  -0.02-0.26·0.08  -0.02

51. 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)  -0.010.04·(-0.27)  -0.01

52. 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 -0.08 + (-0.77)·0.02 + (-0.26)·0.08 + 0.04·(-0.27)  -0.13-0.08 + (-0.77)·0.02 + (-0.26)·0.08 + 0.04·(-0.27)  -0.13