lessons from the dutch disease: causes, treatment, and cures thorvaldur gylfason
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Lessons from Lessons from the the Dutch Dutch DiseaseDisease: : Causes, Causes, Treatment, Treatment, and Curesand Cures
Thorvaldur Gylfason
Overview of Overview of presentationpresentation
1. Origins and symptoms of the Dutch disease
2. Thinking about natural resources and economic growth
3. Interlude on OPEC4. Empirical evidence on resources
and growth around the world5. The special case of Norway
Neither Neither DutchDutch nor a nor a diseasedisease
Discovery of off-shore oil and gas in late 1950s, early 1960s
Resulting upswing in exports of natural gas led to appreciation of Dutch guilderThis hurt other exports for a while
Threat of de-industrialization
The problem proved short-lived But the name stuck
1
The The Dutch diseaseDutch disease: : Some symptomsSome symptoms
Overvaluation of the currency Exchange rate volatility Excessive wages
Faroes, GreenlandCentralized wage bargaining
All this hurts the level or skews the composition of exportsMay also hurt FDI
Exports of goods and services 1960-1997 (% of GDP)
What does experience show?
0
10
20
30
40
50
60
70
Norway
Netherlands
Norway’s oil exports have crowded out non-oil exports krone for krone relative to GDP
Foreign direct investment 1975-1998 (% of GDP, ppp)
0
5
10
15
20
25
Norway
NetherlandsIn 1998, Norway attracted less FDI than the Netherlands, and also less than Sweden (23%) and Finland (36%)
Manufacturing exports 1980-1998 (% of total exports)
0
10
20
30
40
50
60
70
80
Norway
Netherlands
No growth in Norway’s manufacturing exports relative to total exports since 1980
Why these things Why these things may be importantmay be important
Exports and FDI are good for growthOpennessOpenness to trade and investment to trade and investment
stimulates imports of goods and stimulates imports of goods and services, technology, ideas, know-services, technology, ideas, know-howhow
Too much primary export dependence and too little manufacturing may hurt growth
So, economic growth is keygrowth is key
Thinking about Thinking about natural resources natural resources andand growth growth
NaturalNaturalresourcesresources
EconomicEconomicgrowthgrowth
xx
2
Thinking about Thinking about natural resources natural resources and growthand growth
NaturalNaturalresourcesresources
EconomicEconomicgrowthgrowth
xx
What is What is xx ??
Five channels of Five channels of transmissiontransmission1. The Dutch disease
Exchange rates, wages, volatilityHurts level or composition of exports
2. Rent seekingProtectionism, cronyism, corruption
3. OverconfidencePoor quality of policies and institutions
4. Neglect of educationeducation5. Too little investment
Socialcapital
Crowding outCrowding out
Put differently, natural capital may crowd outSocial capitalHuman capitalPhysical capital
Matter of taste whether these mechanisms are viewed as additional symptoms of the Dutch disease or as separate channels of transmission
Interlude: A quick Interlude: A quick look at OPEClook at OPEC
Nigeria has been stagnant since independence in 1960: No growth
Per capita growth 1965-1998Iran and Venezuela: -1% per yearLibya: -2%Iraq and Kuwait: -3%Qatar: -6%
Why?
3
Background: Background: A A quick look at OPECquick look at OPEC
King Faisal of Saudi Arabia (1964-1975) would hardly have been surprised:
““In one generation we went from In one generation we went from riding camels to riding Cadillacs. riding camels to riding Cadillacs. The way we are wasting money, I The way we are wasting money, I fear the next generation will be fear the next generation will be riding camels again.”riding camels again.”
Is OPEC an Is OPEC an exception?exception?
No, this seems to be a general pattern.
Of 65 natural resource abundant countries 1970-1998, only four hadInvestment of more than 25% of GDPPer capita GNP growth of more than
4% per year
They are:Botswana, Indonesia, Malaysia, Thailand
But let’s be careful:But let’s be careful: Norway stands outNorway stands out
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 storyGovernment takes in 80% of oil rent and
invests it mostly in foreign securitiesNo signs of damage to growth potential,
at least not yet (more on this later)
Natural capital and Natural capital and growth: The growth: The evidenceevidence
Review a few of the empirical findings of the new literature on natural resource abundance and growth
Present cross-country evidenceIndividual historical case studies support
the results
Stress linkages between natural capital and various determinants of growth as well as growth itself
4
Economic growth and natural capital
8855 countries countries
What is the empirical evidence?
A new measure of natural resource abundanceConfirms results based on other measures
r = rank correlation
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gro
wth
of
GN
P p
er
ca
pit
a 1
96
5-9
8, a
dju
ste
d f
or
init
ial
inc
om
e (
%)
Norway
r = -0.64 A ten percentage point increase in the natural capital share goes along with a decrease in per capita growth by 1% per year.
EducationEducation and and natural capitalnatural capital
Now consider the relationship between natural resource abundance and two different measures of national commitment to education:1. Public expenditure on education
as percentage of GNP2. Secondary-school enrolment as
percentage of each cohort
Expenditure on education and natural capital
0
1
2
3
4
5
6
7
8
9
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Pu
blic
ex
pe
nd
itu
re o
n e
du
ca
tio
n 1
98
0-9
7 (
% o
f G
NP
)
An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP.
90 countries90 countries
r = -0.32Norway
Norway is close to the top of the list of countries ranked by public expenditure on education
Expenditure on education and natural capital
0
1
2
3
4
5
6
7
8
9
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Pu
blic
ex
pe
nd
itu
re o
n e
du
ca
tio
n 1
98
0-9
7 (
% o
f G
NP
)
An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP.
90 countries90 countries
r = -0.32Norway
Natural capital
crowds o
ut
human capital
Secondary enrolment and natural capital
-40
-20
0
20
40
60
80
100
120
140
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gro
ss
se
co
nd
ary
-sc
ho
ol e
nro
lme
nt
19
80
-97
(%
)
A five percentage point increase in the natural capital share goes along with a decrease in secondary-school enrolment by almost 10 percentage points.
91 countries91 countries
r = -0.66
College enrolment has risen from 26% in 1980 to 62% in 1997
Norway
Secondary enrolment and natural capital
-40
-20
0
20
40
60
80
100
120
140
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gro
ss
se
co
nd
ary
-sc
ho
ol e
nro
lme
nt
19
80
-97
(%
)
A five percentage point increase in the natural capital share goes along with a decrease in secondary-school enrolment by almost 10 percentage points.
91 countries91 countries
r = -0.66Norway
Natural capital
crowds o
ut
human capital
Economic growth and education
8877 countries countries-6
-4
-2
0
2
4
6
0 20 40 60 80 100 120
Gross secondary-school enrolment 1980-97 (%)
An
nu
al g
row
th o
f G
NP
pe
r c
ap
ita
19
65
-98
, ad
jus
ted
fo
r in
itia
l in
co
me
(%
)
r = 0.69
Norway
A 30 point increase in the secondary enrolment rate goes along with an increase in per capita growth by 1% per year.
Education is
good for g
rowth
and vice versa
Summary of results Summary of results onon education education
Growth
Education
Growth
Resources
EducationEducation
Resources
+ =
Investment Investment and and natural capitalnatural capital
85 countries85 countries
0
5
10
15
20
25
30
35
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gro
ss
do
me
sti
c in
ve
stm
en
t 1
96
5-9
8 (
% o
f G
NP
)
r = -0.38
A ten point increase in the natural capital share goes along with a decrease in investment by 2% of GDP.
Natural capital
crowds o
ut
physical ca
pital
Norway
Economic growth Economic growth andand investment investment
85 countries85 countries
-8
-6
-4
-2
0
2
4
6
0 5 10 15 20 25 30 35
Gross domestic investment 1965-1998 (% of GNP)
Gro
wth
of
GN
P p
er
ca
pit
a 1
96
5-9
8, a
dju
ste
d f
or
init
ial
inc
om
e (
%)
r = 0.65
A five point increase in the natural capital share goes along with an increase in per capita growth by 1%.
Norway
Investment is
good for g
rowth
and vice versa
Summary of results Summary of results onon investment investment
Growth
Investment
Growth
Resources
InvestmentInvestment
Resources
+ =
The special case of The special case of NorwayNorway5 Large petroleum sectorLarge petroleum sector
Contributes 25% of GNP and almost 50% of Contributes 25% of GNP and almost 50% of exports (2000)exports (2000)
Second largest oil exporter in the worldSecond largest oil exporter in the world
Oil wealth is estimated at 50-250% of GNPOil wealth is estimated at 50-250% of GNP
State takes in about 80% of oil rentState takes in about 80% of oil rentMostly through taxes and feesMostly through taxes and feesThe oil is a The oil is a common property resourcecommon property resource by law by law
Oil revenue is deposited in oil fundOil revenue is deposited in oil fund Invested in Invested in foreign securitiesforeign securities
The oil fund: A fair The oil fund: A fair and efficient and efficient strategystrategy
The purpose of the oil fundThe purpose of the oil fundTo To shareshare the wealth fairly across the wealth fairly across
generationsgenerationsTo To shieldshield domestic economy from domestic economy from
overheating and possible wasteoverheating and possible waste Fund will become huge ...Fund will become huge ...
if Norwegians if Norwegians resist the temptationresist the temptation to use too much of the money to to use too much of the money to meet current needsmeet current needs
Why Norway has Why Norway has succeeded where OPEC succeeded where OPEC failedfailed
Long tradition of Long tradition of democracydemocracy and and market economymarket economy in Norway since in Norway since before the advent of oilbefore the advent of oilLarge-scale rent seeking was averted Large-scale rent seeking was averted Adequate investment performanceAdequate investment performanceExcellent education recordExcellent education record
Even so, Norway faces challengesEven so, Norway faces challengesSome (weak) signs of Dutch diseaseSome (weak) signs of Dutch diseaseStagnant exports, sluggish FDIStagnant exports, sluggish FDI
One last pointOne last point
Perhaps the main challenge is to Perhaps the main challenge is to make sure that the oil fund does make sure that the oil fund does not instill a not instill a false sense of securityfalse sense of security May need to immunize the fund from May need to immunize the fund from
political interference -- like the courts, political interference -- like the courts, media, even central banksmedia, even central banks
This may require privatizationThis may require privatizationBut private sector is not infallible But private sector is not infallible
eithereitherSo, So, best to best to adopt a adopt a mixed strategymixed strategy
Good times demand Good times demand strong disciplinestrong discipline
The
End
The
End Natural resources bring risksNatural resources bring risks
A A false sense of securityfalse sense of security leads leads people to underrate or overlook the people to underrate or overlook the need for good policies and need for good policies and institutions, good education, and institutions, good education, and good investmentgood investment
Awash in easy cash, they Awash in easy cash, they may find may find that hard choices perhaps can be that hard choices perhaps can be avoidedavoided
Awareness of these risks is perhaps Awareness of these risks is perhaps the best insurance policy against the best insurance policy against them them
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