lessons from the dutch disease: causes, treatment, and cures thorvaldur gylfason

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


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


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.


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


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.


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


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.


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


0

5

10

15

20

25

30

35

0 10 20 30 40 50 60


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


-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

lessons from the dutch disease: causes, treatment, and cures thorvaldur gylfason

Documents

growth growth

fdi slide

gdp slide

key slide

norways oil exports

total exports

exports of goods

composition of exports