Economic Economic DiversificatioDiversification and n and Structural Structural ChallengesChallenges

Thorvaldur GylfasonThorvaldur Gylfason

What it takes The advancement from The advancement from

widespread poverty to widespread poverty to widely shared affluence widely shared affluence requires one thing, and one requires one thing, and one thing only:thing only:

Economic growthEconomic growth Must ask: What are the Must ask: What are the

main pillars of economic main pillars of economic growth?growth?

What it takes to to growgrowI.I. Saving and investmentSaving and investment

Physical capitalPhysical capitalII.II. Education, educationEducation, education

Human capitalHuman capitalIII.III. Exports and importsExports and imports

Foreign capitalForeign capitalIV.IV. DemocracyDemocracy

Social capitalSocial capitalV.V. DiversificationDiversification

Undisputed

Controversial

What it takes to to diversifydiversifyI.I. Saving and investmentSaving and investment

Physical capital Physical capital (Infrastructure, (Infrastructure, tourism, etc.)tourism, etc.)

II.II. Education, educationEducation, educationHuman capital Human capital (Ireland)(Ireland)

III.III. Exports and importsExports and importsForeign capital Foreign capital (Botswana, (Botswana, Estonia, Ireland, Korea)Estonia, Ireland, Korea)

IV.IV. DemocracyDemocracySocial capital Social capital (Botswana)(Botswana)

Botswana and Nigeria: GDP per capita 1960-2002 (1995 USD)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

19601964196819721976198019841988199219962000

Botswana

Nigeria

Nedadi Usman, Nedadi Usman,

Nigeria’s economy Nigeria’s economy

minister: minister:

““Oil has made us lazy”Oil has made us lazy”

Botswana Botswana

6.3%6.3%

Nigeria Nigeria 0.2%0.2%

Natural resources: Natural resources: A mixed blessingA mixed blessing

Listen to King Faisal of Saudi Arabia (1964-1975):

““In one generation we went In one generation we went from riding camels to riding from riding camels to riding Cadillacs. The way we are Cadillacs. The way we are wasting money, I fear the wasting money, I fear the next generation will be riding next generation will be riding camels again.”camels again.”

Three main sources of Three main sources of economic growtheconomic growth

Investm en t O penness Education

G row th+ +

denotes a positive effect in the direction shown

+

+

See Figures 1-6

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

School enrollment, secondary, female (% net) Lin

0.09 1065020 30 40 60 70 80 90

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Secondary Education 2001 (Girls)Income Per Head and Secondary Education 2001 (Girls)

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

School enrollment, secondary, male (% net) Lin

0.09 1055020 30 40 60 70 80 90

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Secondary Education 2001 (Boys)Income Per Head and Secondary Education 2001 (Boys)

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

Gross capital formation (% of GDP) Log

-20 1200 5 10 5030208432

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Domestic Investment 2001Income Per Head and Domestic Investment 2001

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

Gross foreign direct investment (% of GDP) Log

0.00092 1 3605 10 50 10020

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Foreign Investment 2001Income Per Head and Foreign Investment 2001

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

Exports of goods and services (% of GDP) Lin

0.0000128 18510050 150

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Exports 2001Income Per Head and Exports 2001

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

Import duties (% of tax revenue) Lin

0.01 825020 30 40 60 70

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Import Duties 2001Income Per Head and Import Duties 2001

Two further Two further determinantsdeterminants of of economic growtheconomic growth

Investm en t O penness Education

G row th+ ++

Democracy Diversification

+ +

Growth and political liberties, 1965-98

Central African Republic

Brazil Democracy Democracy is good for is good for growth:growth: No visible No visible sign that sign that democracy democracy stands in stands in the way of the way of economic economic growthgrowth-8

-6

-4

-2

0

2

4

6

0 2 4 6 8

Index of political liberties 1972-90

Gro

wth

of

GN

P p

er c

apit

a 19

65-9

8, a

dju

sted

fo

r in

itia

l in

com

e (%

per

yea

r)

r = -0.62

Botswana

China

Niger

Venezuela

Korea

85 countries85 countries

Growth and political liberties, 1965-98

Central African Republic

Brazil

-8

-6

-4

-2

0

2

4

6

0 2 4 6 8

Index of political liberties 1972-90

Gro

wth

of

GN

P p

er c

apit

a 19

65-9

8, a

dju

sted

fo

r in

itia

l in

com

e (%

per

yea

r)

r = -0.62

Botswana

China

Niger

Venezuela

Korea

Political Political liberty is liberty is good for good for growthgrowthbecause because oppression oppression breeds breeds inefficiencinefficiency,y,and so and so does does corruptioncorruption

Growth and natural resources, 1965-98

-8

-6

-4

-2

0

2

4

6

0 20 40 60

Share of natural capital in national wealth 1994 (%)

Gro

wth

of

GN

P p

er c

apit

a 19

65-9

8, a

dju

sted

fo

r in

itia

l in

com

e (%

per

yea

r)

Madagascar

Mali

Cameroon

Mauritius

r = -0.64

See Figures 7-8

Natural Natural resource resource dependence dependence tends to hurt growththrough rent seeking and by creating a false sense of security

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

Manufactures exports (% of merchandise exports) Lin

0.000001 1055020 30 40 60 70 80 90

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Economic Diversification 2001Income Per Head and Economic Diversification 2001

GD

P p

er c

apita

, PP

P (cu

rren

t int

erna

tiona

l $)

Log

210

61 500

Agriculture, value added (% of GDP) Lin

0.07 95.55020 30 40 60 70 80

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Agriculture 2001Income Per Head and Agriculture 2001

Sir Arthur Lewis got it Sir Arthur Lewis got it rightright

Since the second Since the second world war it has world war it has become quite clear become quite clear that rapid economic that rapid economic growth is available growth is available to those countries to those countries with adequate with adequate natural resources natural resources which which make the make the effort to achieve iteffort to achieve it..

W. Arthur LewisW. Arthur Lewis(Accra, 1968)(Accra, 1968)

To grow or not to grow is in large measure a matter of choice

To grow or not to grow is in large measure a matter of choice

These slides – and more! – can be viewed on my website: www.hi.is/~gylfason

Conclusion: Conclusion: It can It can be donebe done

The EndThe End

Many of the Many of the

constraints on constraints on

growth are growth are

man-mademan-made, ,

and can be and can be

removedremoved