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Natural Resource Abundance and Economic Growth
Some Lessons from Norway and Iceland
Thorvaldur Gylfason
Natural Resources: A Mixed Blessing?
Consensus on foreign aid and assistance It is good for growth if accompanied by
sound economic policiesGuiding principle in IMF and World Bank dealings
with member countries
Seems also to apply to natural resource abundance Natural resources are good for growth if
accompanied by sound economic policies
Why worry?What can go wrong?
Too much emphasis on natural resources May be at the expense of human resources
EducationEducation may suffer
May draw resources available for investment away from other sectorsDomestic and foreign investmentinvestment may suffer
May result in Dutch disease, resulting in overvaluation of the currency, thus hurting profitability in and exports from other sectors Total exportsexports may suffer
So what?
Education, investment, and exports are almost surely good for growthgood for growth
Rent seeking, often associated with natural resources, may hurt growth
So, if natural resource abundancenatural resource abundance hurts education, investment, and exports and encourages rent seeking, …
… then it may reduce economic growthmay reduce economic growth in the long run
Natural wealth and economic growth
National economic output
Time
A
B
C
D
E
F
A natural resource boom makes a country better off at least for a while, but if it reduces growth, then, after a time, the country will be worse off than it would have been without the boom, other things being equal.
Empirical evidence: Education
Figure 4. Secondary Education and Natural Capital
y = -1.5414x + 63.592
R2 = 0.3194
-40
-20
0
20
40
60
80
100
120
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Sec
on
dar
y-sc
ho
ol
enro
lmen
t ra
te 1
980-
1997
(%
)
Same applies to Same applies to primary and primary and tertiary tertiary educationeducation
A 3 percentage point increase in the share of natural capital in national wealth goes along with a 2 percentage point decrease in secondary-secondary-school school enrolmentenrolment from one country to another
Empirical evidence: Domestic investment
Figure 3. Domestic Investment and Natural Capital
y = -0.2214x + 22.82
R2 = 0.1819
0
5
10
15
20
25
30
35
40
45
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Rat
io o
f g
ross
fix
ed d
om
esti
c in
vest
men
t to
GD
P 1
960-
1997
(%
)
How about How about foreign foreign investmentinvestment??
A 5 percentage point increase in the natural capital share goes along with a decrease in the domestic domestic investment investment raterate by 1 percentage point
Empirical evidence: Foreign investment
Figure 6. Foreign Investment and Natural Capital
y = -0.0293x + 1.4978
R2 = 0.0449
-1
0
1
2
3
4
5
6
7
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gro
ss f
ore
ign
dir
ect
inve
stm
ent
1975
-19
97 (
% o
f G
DP
)
Foreign Foreign investment is investment is export of capital. export of capital. How about How about exports of goods exports of goods and services?and services?
A 30 percentage point increase in the natural capital share goes along with a decrease in the foreign foreign investment investment ratioratio by 1 percentage point
Empirical evidence: Exports
Figure 2. Exports and Natural Capital
y = -0.3098x + 28.898
R2 = 0.0531
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Rat
io o
f ex
po
rts
to G
DP
196
0-19
97 (
%)
A 3 percentage point increase in the natural capital share goes along with a 1 percentage point decrease in the export export ratioratio
Empirical evidence: Rent seeking I
Figure 5. Import Protection and Natural Capital
y = 0.2734x + 8.2041
R2 = 0.1291
0
5
10
15
20
25
30
35
40
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Imp
ort
du
tie
s 1
97
5-1
99
6 (
% o
f im
po
rts
)
A 4 percentage point increase in the natural capital share goes along with a 1 percentage point increase in the import import tariff ratetariff rate
How about How about corruptioncorruption??
Empirical evidence: Rent seeking II
Figure 8. Corruption and Natural Capital
y = -0.1514x + 6.4915
R2 = 0.1074
0
1
2
3
4
5
6
7
8
9
10
0 5 10 15 20 25
Share of natural capital in national wealth 1994 (%)
Co
rru
pti
on
in
dex
199
6
A 6 percentage point increase in the natural capital share goes along with a 1 percentage point decrease in the honesty honesty indexindex, which means more more corruptioncorruption
So what does all this mean for growth?
Empirical evidence: Growth I
Figure 10. Economic Growth and Natural Capital 1960-1997
y = -0.0792x + 2.7807
R2 = 0.2575
-4
-2
0
2
4
6
8
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
An
nu
al g
row
th o
f G
NP
per
cap
ita
1960
-19
97 (
%)
A 12 percentage point increase in the natural capital share goes along with a 1 percentage point decrease in the per capita per capita growth rategrowth rate from one country to another
Does this result hold for rich countries as well as poor?
Empirical evidence: Growth II
Figure 11. Rich Countries: Economic Growth and Natural Capital 1960-1997
y = -0.0504x + 2.9517
R2 = 0.1112
0
1
2
3
4
5
6
7
0 10 20 30 40 50
Share of natural capital in national wealth 1994 (%)
An
nu
al
gro
wth
of
GN
P p
er
ca
pit
a 1
96
0-
19
97
(%
)
Rich countries: Rich countries: Same storySame story, but slightly weaker relationship
Empirical evidence: Growth III
Figure 12. Poor Countries: Economic Growth and Natural Capital 1960-1997
y = -0.0723x + 2.4713
R2 = 0.2035
-4
-2
0
2
4
6
8
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
An
nu
al
gro
wth
of
GN
P p
er
ca
pit
a 1
96
0-
19
97
(%
)
Poor Poor countries: countries: Same storySame story, but stronger relationship
Challenges for Norway and Iceland
Norway’s fish Tiny fishing industry
Employs less than 1% of labor forceContributes less than 1% to GDPAll the resource rent, at roughly 20-25% of the
value of the catch, is allowed to dissipate
Inefficient, used to be heavily subsidized Costly also in other respects
Perhaps the single greatest obstacle to Norway’s EU membership in 1972 and 1994
Iceland’s Fish
Larger fishing industry than in NorwayEmploys 11% of labor forceAccount for 16% of GDP and 50% of exportsRent from fisheries is approx. 5% of GNP
Permits (quotas) are given away for freeState gets nothing, even if the fish is a common common
property resourceproperty resource by lawDeclared unconstitutional by Supreme CourtArguments for feesfees, based on efficiency and equity
Education and health care in crisis
Norway’s Oil
Large petroleum sectorSecond largest oil exporter in the worldContributes 9-10% to GNPOil wealth is estimated at 50-250% of GNP
State takes in about 80% of the oil rentMostly through taxes and fees
• The oil is a common property resourcecommon property resource by law
Oil revenue is deposited in oil fund• Invested in foreign securities• Will become huge in a few years if they can resist the
temptation to use the money to meet current needs
But Norway Needs to Be Careful
Many other oil-producing countries have serious economic problems
Iran: -1% growth of per capita GDP since 1965Venezuela: -2%Saudi Arabia: -3%
Norway is one of the few resource-abundant countries that has consistently performed well
Iceland’s economic performance has been mixed
Conclusion: What Iceland and Norway Need to Do
Sell oil drilling and fishing permits to domestic and foreign firms on a level playing field
OECD, IMF, and WTO recommend this
Use proceeds to improve the efficiency of tax collection
By lowering distortionary taxes (income tax, VAT)In Iceland, also necessary to improve education
and health care
The EndThe End