1. Natural Resources and Economic Growth: From Dependence to Diversification Thorvaldur Gylfason

2. Outline of presentation 1.The macroeconomics of oil 2.Empirical cross-country evidence on natural resources and economic growth 3.But, Norway is different

3. Macroeconomics of oil and other resources Naturalresources Economicgrowth x 1

4. Naturalresources Economicgrowth x What is x ?

5. Five main channels of transmission 1. The Dutch disease Exchange rates, wages, volatility Hurts level or composition of exports and FDI 2. Rent seeking Protectionism, cronyism, corruption, … 3. False sense of security Poor quality of policies and institutions education 4. Neglect of education 5. investment 5. Neglect of investment Socialcapital

6. Crowding out Hence, natural capital may crowd out Foreign capital Foreign capital Social capital Social capital Human capital Human capital Real capital Real capital Financial capital Financial capital These mechanisms can be viewed as additional symptoms of the Dutch disease or as separate channels of transmission

7. 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:

8. Natural capital and growth: The evidence Review a few of the empirical findings of the new literature on natural resources and economic growth Present cross-country evidence Individual historical case studies support the results Stress linkages among natural capital and other kinds of capital as well as growth in 86 countries, rich and poor 2

16. Real capital and growth Natural capital crowds out real capital r = -0.38 Niger Chad Lesotho Guinea Bissau r = rank correlation 86 countries Japan

17. Real capital and growth Botswana China NicaraguaNiger Investment is good for growth r = 0.65 An increase in investment by 4% of GDP goes along with an increase in per capita growth by 1% per year 4% 1% Quantity and quality Jordan

18. Interpretation of results Growth Investment Growth Resources Investment Resources + =

19. Human capital and growth Natural capital crowds out human capital r = -0.63 Uruguay New Zealand Saudi Arabia Finland Ecuador

20. Human capital and growth Finland Thailand New Zealand Jamaica Education is good for growth r = 0.72 An increase in secondary-school enrolment by 25-30% of each cohort goes along with an increase in per capita growth by 1% per year diminishing returns Notice diminishing returns to education Ghana

21. Interpretation of results Growth Education Growth Resources Education Resources + =

22. Interpretation of results high-skill labor high-quality capital Natural-resource-based industries are generally less high-skill labor intensive and less high-quality capital intensive than others, and so confer few external benefits distort comparative advantage impede learning by doing, technical advance, and economic growth

23. Financial capital and growth Natural capital crowds out financial capital r = -0.68 Japan China New Zealand Switzerland India

24. Financial capital and growth Indonesia Japan Switzerland Jordan Financial depth is good for growth: Money greases the wheels of commerce and production r = 0.66 Jamaica

25. Financial capital and growth Japan Switzerland Jordan This helps explain why inflation hurts growth: Inflation reduces financial depth and thereby inhibits growth r = 0.66 Indonesia Jamaica

26. Interpretation of results Growth Financial depth Growth Resources Financial depth Resources + =

27. Brazil Nicaragua Argentina Austria Switzerland Japan Add these two correlations, and an inverse correlation between inflation and growth follows r = -0.45 Inflation and financial depth

28. Interpretation of results Growth Financial depth Growth Inflation Financial depth Inflation + =

29. Natural capital crowds out foreign capital Foreign capital and growth Botswana UK New Zealand Sierra Leone Guinea Bissau r = -0.24

30. Foreign capital and growth Foreign direct investment is good for growth Nicaragua Botswana China Korea Panama r = 0.44

31. Interpretation of results Growth FDI Growth Resources FDI Resources + =

32. Social capital and growth Natural capital crowds out social capital 7 African countries where saving is 5% of GDP and per capita growth is -1% per year Notice cluster r = 0.41 Inequality of access to education and land: Same pattern Brazil Rwanda Austria Paraguay India

33. Social capital and growth Equality is good for growth: No sign here that too much equality impedes growth Korea Norway China Sierra Leone r = -0.50 Brazil South Africa

34. Social capital and growth Equality is good for growth Korea Norway China Sierra Leone r = -0.50 An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year Brazil South Africa

35. Interpretation of results Growth Inequality Growth Resources Inequality Resources + =

36. Social capital and growth, again Again, natural capital crowds out social capital r = -0.42 Zambia Indonesia Finland New Zealand Chile Cameroon

37. Social capital and growth, again Honesty is good for growth because corruption creates inefficiency Botswana Kenya Indonesia Norway New Zealand r = 0.42 China

38. Interpretation of results Growth Corruption Growth Resources Corruption Resources + =

39. Social capital and growth, once more Once again, natural capital crowds out social capital r = 0.48 Niger Madagascar India Venezuela Benin

40. Social capital and growth, once more Political liberty is good for growth because oppression creates inefficiency r = -0.62 Botswana Korea China Indonesia Venezuela

41. Interpretation of results Growth Oppression Growth Resources Oppression Resources + = “So long as power is an easy way to wealth, the wrong sort of people will seek it” The Economist, 2 October 2004

42. In sum, natural capital tends to crowd out … 1.Real capital via blunted incentives to save and invest via blunted incentives to save and invest 2.Human capital through neglect of education through neglect of education 3.Social capital through rent seeking, corruption, inequality, civil and political oppression, etc. through rent seeking, corruption, inequality, civil and political oppression, etc. 4.Financial capital through failure to develop institutions 5.Foreign capital through protectionism

43. But, Norway is different 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 3

44. The oil fund: A fair and efficient strategy The purpose of the oil fund To share the wealth fairly across generations To shield domestic economy from overheating and possible waste Fund will clearly become huge... if Norwegians resist the temptation to use too much of the money to meet current needs

45. 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

46. 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

47. One last point Perhaps the main challenge is to make sure that the oil fund does not instill a false sense of security May need to immunize the fund from political interference – like the courts, media, universities, even central banks This may require privatization But private sector is not infallible either So, best to adopt a mixed strategy

48. Good times demand strong discipline Natural resources bring risks A false sense of security leads people to underrate or overlook the need for good policies and institutions, good education, and good investment Awash in easy cash, they may find that hard choices perhaps can be avoided Awareness of these risks is perhaps the best insurance policy against them

49. Old story: The risks are real These slides can be viewed on my website: www.hi.is/~gylfason The End David Landes (1998) tells the story of Spain following the colonization of South and Central America which made Spain rich in gold and other natural resources: “Easy money is bad for you. It represents short-run gain that will be paid for in immediate distortions and later regrets.”