Natural Resources and Economic Growth: From Dependence to Diversification

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

2. Outline of presentation Norway and the Dutch disease The macroeconomics of oil A quick look at OPEC Empirical cross-country evidence on natural resources and economic growth But, Norway is different

3. 1 Neither Dutch nor a disease • Discovery of oil and natural gas off-shore around 1960 • Ensuing upswing in exports of natural gas led to appreciation of Dutch guilder • Hurt manufacturing exports • Raised concerns about de-industrialization • Problem proved short-lived • But name stuck

4. The Dutch disease: Some symptoms • Overvaluation of currency • Exchange rate volatility • Excessive wage costs • Greenland • Centralized wage bargaining • Hurts level or skews composition of exports away from manufacturing • May also hurt foreign direct investment

5. Exports of goods and services 1960-2000 (% of GDP) What does experience show? Norway’s exports have hovered around 40% of GDP since 1960, with only a weak tendency to rise over time

6. Foreign direct investment 1967-2000 (gross, % of GDP) Since 1970s, Norway has attracted less gross FDI than the Netherlands

7. Manufacturing exports 1962-2001 (% of total exports) In Norway, oil exports have crowded out other exports krone for krone relative to GDP since the mid-1970s

8. Why these things may matter Exports and FDI are good for growth Openness to trade and investment stimulates imports of goods and services, technology, ideas, know-how Too much primary export dependence and too little manufacturing for export may hurt growth But, Norway has done very well

9. Unemployment 1980-2000 (% of labor force) In Norway, stabilization policy has been well managed and joblessness has been low by European standards

10. Government consumption 1960-2000 (% GDP) In Norway, general government consumption has increased, but not to extravagant levels, at least not yet

11. GNP per capita 1962-2001 (current USD, Atlas method) Since mid-1970s, Norway has grown faster than the Netherlands

12. 2 Macroeconomics of oil and other resources Natural resources Economic growth x

13. Macroeconomics of oil and other resources Natural resources Economic growth x What is x?

14. 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 4. Neglect of education 5.Neglect of investment Social capital

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

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

17. 3 A quick look at OPEC Nigeria has been stagnant since independence in 1960: No growth Per capita growth 1965-1998 • Iran and Venezuela: -1% per year • Libya: -2% • Iraq and Kuwait: -3% • Qatar: -6% Why?

18. Background: A quick look at OPEC King Faisal of Saudi Arabia (1964-1975) would hardly have been surprised: “In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.”

19. Background: A quick look at OPEC Lee Kwan Yew,founding father of Singapore (1959-1991), would not have been surprised either: “I thought then that wealth depended mainly on the possession of territory and natural resources, whether fertile land ..., or valuable minerals, or oil and gas. It was only after I had been in office for some years that I recognized ... that the decisive factors were the people, their natural abilities, education and training.”

20. Increasing awareness that oil brings risks If ... oil revenue is managed well, it can educate, heal and provide jobs for ... the people. But oil brings risks as well as benefits. Rarely have developing countries used oil money to improve the lives of the majority of citizens or bring steady economic growth. More often, oil revenues have caused crippling economic distortions and been spent on showy projects, weapons and Paris shopping trips for government officials. New York Times, 1 August 2000.

21. Is OPEC an exception? No, this seems to be a general pattern Of 65 natural resource abundant countries 1970-1998, only four had • Investment of more than 25% of GDP • Per capita GNP growth of more than 4% per year They are: Botswana, Indonesia, Malaysia, Thailand

22. But there is an exception: Norway The problem is not the existence of natural wealth as such ... but rather the failureto avert the dangers that accompany the gifts of nature Norway is, so far, a success story Government takes in 80% of oilrent and invests it mostly in foreign securities No signs of damage to growth potential, at least not yet (but some worry!)

23. 4 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

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

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

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

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

35. Human capital and growth r = 0.72 Thailand Education is good for growth Finland New Zealand Jamaica Ghana 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 Notice diminishing returns to education

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

37. Interpretation of results 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

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

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

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

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

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

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

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

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

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

47. Foreign trade and growth Malaysia r = -0.31 Netherlands Namibia Zambia Foreign trade is also good for growth Guinea Bissau

48. Foreign trade and growth r = 0.40 Botswana Foreign trade is also good for growth Greece Belgium Namibia Zambia

49. Interpretation of results Growth Growth Trade = + Resources Resources Trade

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