mother earth: ally or adversary? thorvaldur gylfason

Mother Earth: Mother Earth: Ally or Ally or

Adversary?Adversary?

Thorvaldur Gylfason

What economists doWhat economists doThree stages of economic inquiry

1. Observe economic behavior2. Look for patterns 3. Build models to explain the observed

behavior patterns

Facts are not enoughNeed models to fit the facts

Can reverse the processBuild models first and then test them

Natural resources Natural resources and economic and economic growthgrowth

ObservationResource-rich countries have not grown

rapidly, contrary to expectationsCase in point: OPEC economies have

contracted since 1965Many other resource-based economies

have also grown slowly

Look at the pattern, and ask:Can economic theory explain it?

Natural Natural

capital and capital and

growthgrowth

-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)

Natural

resource

dependen

ce tends

to impede

growth

Madagascar

Mali

Cameroon

Mauritius

r = -0.64Botswana

r = rank correlation

8 Asian countriesS/Y = 0.32

8 African countriesS/Y = 0.05

Notice two

clusters

Is this surprising?Is this surprising?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.”

Theory: Five Theory: Five linkageslinkages

1. Dutch disease Reduces level, skews composition, or

raises volatility of trade and investment

2. Education3. Investment4. Rent seeking

Protectionism, corruption, greed, inequality

5. False sense of security Poor quality of policies and institutions

But Norway is,

so far at least,

an exception

Foreign Foreign

capitalcapital

Social Social

capitalcapital

Human Human

capitalcapital

Real Real

capitalcapital

Natural capital Natural capital tends to crowd tends to crowd outout

Different Kinds of Capital and Growth

Foreign capital

Financial capital

Human capitalSocial capital

Growth

Real capital

3

1

4

5

2

+

+

+

+

+

Different Kinds of Capital and Growth

Foreign capital

Financial capital


Growth

Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Growth

Real Capital and Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Human Capital and Growth

Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Financial Capital and Growth

Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Social Capital and Growth

Growth

Foreign capital

Financial capital


Real capital

7

11

3

1

4

5

2

98

10

+

+

+

+

+

–

– 6

Natural capital

–

–

–

–

Foreign Capital and Growth

Growth

Real Real

capital capital

and and

growthgrowthNatural

capital

crowds

out real

capital

0

5

10

15

20

25

30

35

40

45

0 20 40 60


Inve

stm

ent

1965

-98

(% o

f G

DP

)

r = -0.38

Niger

Chad

Lesotho

Guinea Bissau

-8

-6

-4

-2

0

2

4

6

0 5 10 15 20 25 30 35

Investment 1965-98 (% of GDP)

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)

Real Real

capital capital

and and

growthgrowth

Botswana

China

NicaraguaNiger

Investme

nt is good

for growth

r = 0.65

An increase in

investment by 4% of

GDP goes along with an

increase in per capita

growth by 1% per year.

4%

1%

Quantity

and quality

Interpretation of Interpretation of resultsresults

Growth

Investment

Growth

Resources

Investment

Resources

+ =

Human Human


growthgrowth

Natural

capital

crowds

out human

capital

-40

-20

0

20

40

60

80

100

120

0 20 40 60


Sec

on

dar

y-sc

ho

ol e

nro

lmen

t 19

80-9

7 (%

) r = -0.63

Uruguay

New Zealand

Saudi Arabia

Finland

Human Human


growthgrowth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Secondary enrolment 1980-97 (% of cohort)

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Finland

Thailand

New Zealand

Jamaica

Educatio

n is good

for growth

r = 0.72

An increase in

secondary-school

enrolment by 30% of

each cohort goes along

with an increase in per

capita growth by 1%

per year.

Notice diminishing returns to education


Growth

Education

Growth

Resources

Education

Resources

+ =

Financial Financial


growthgrowth

Natural

capital

crowds out

financial

capital

0

20

40

60

80

100

120

0 10 20 30 40 50 60


Mo

ney

an

d q

uas

i-m

on

ey 1

965-

98 (

% o

f G

DP

)

r = -0.68

Japan

China

New Zealand

Switzerland

Financial Financial


growthgrowth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Money and quasi-money 1965-98 (% of GDP)

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Indonesia Japan

Switzerland

Jordan

Financial

depth is

good for

growth:

Money

greases the

wheels of

commerce

and production

r = 0.66

Financial Financial


growthgrowth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Money and quasi-money 1965-98 (% of GDP)

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Indonesia Japan

Switzerland

Jordan

This helps

explain why

inflation

hurts growth:

Inflation

reduces

financial

depth and

thereby

inhibits

growth

r = 0.66


Growth

Financial depth

Growth

Resources

Financial depth

Resources

+ =

Foreign Foreign


growthgrowth

Natural

capital

crowds

out foreign

capital

-3

-2

-1

0

1

2

3

4

5

6

7

0 10 20 30 40 50 60


Act

ual

less

pre

dic

ted

FD

I 197

5-98

(%

of

GD

P)

r = -0.32

Botswana

Sweden

Switzerland

Netherlands

Guinea Bissau

Foreign Foreign


growthgrowth

-8

-6

-4

-2

0

2

4

6

-4 -2 0 2 4 6 8

Actual less predicted FDI 1975-98 (% of GDP)

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)

Foreign

direct

investme

nt is good

for growth

NetherlandsNorway

Papua New Guinea

Madagascar

r = 0.62

Foreign Foreign

trade and trade and

growthgrowth

Foreign

trade is

also

good

for growth

-8

-6

-4

-2

0

2

4

6

-40 -20 0 20 40

Actual less predicted exports 1965-98 (% of GDP)

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)

Guinea Bissau

Belgium

Korea

Malaysia

r = 0.42


Growth

FDI

Growth

Resources

FDI

Resources

+ =

Social Social


growthgrowth

Natural

capital

crowds

out social

capital0

10

20

30

40

50

60

70

0 10 20 30 40 50 60


Gin

i in

dex o

f in

eq

uality

Increase in natural capital by 3% of national wealth goes along with an increase in Gini by 1 point.

7 African countries where saving is 5% of GDP

and per capita growth is -1% per year

Notice Notice

clustercluster

r = 0.41

Inequality of access to education and land: Same pattern

Brazil

Social Social


growthgrowth

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Equality

is good

for growth:

No sign

here that

too much

equality

hurts

growth

Korea

Norway

China

Sierra Leone

r = -0.50

Brazil

South Africa

Social Social


growthgrowth

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Equality

is good

for growth

Korea

Norway

China

Sierra Leone

r = -0.50

An increase in Gini

index by 12 points goes

along with a decrease

in per capita growth by

almost 1% per year.

Brazil

South Africa


Growth

Inequality

Growth

Resources

Inequality

Resources

+ =

Social Social


growthgrowth

Natural

capital

crowds

out social

capital

0

2

4

6

8

10

12

0 10 20 30 40


Co

rru

pti

on

ind

ex 2

000

r = -0.42

Zambia

Indonesia

Finland

New Zealand

Social Social


growthgrowth

Honesty

is good

for growth

because

corruptio

n creates

inefficien

cy

-6

-4

-2

0

2

4

6

0 1 2 3 4 5 6 7 8 9 10

Corruption index 2000

Gro

wth

of

GN

P p

er

cap

ita 1

965-9

8, ad

juste

d

for

init

ial in

co

me (

% p

er

year)

Botswana

Kenya

Indonesia Norway

New Zealand

r = 0.40


Growth

Corruption

Growth

Resources

Corruption

Resources

+ =

Bottom lineBottom lineNatural resources can hurt Natural resources can hurt

growth by crowding out growth by crowding out 1.1. Real capitalReal capital

via blunted incentives to savevia blunted incentives to save

2.2. Human capitalHuman capital through neglect of educationthrough neglect of education

3.3. Social capitalSocial capital through rent seeking, corruption, through rent seeking, corruption,

inequality, etc.inequality, etc.

4.4. Financial capitalFinancial capital5.5. Foreign capitalForeign capital

Bottom lineBottom lineNatural resources bring Natural resources bring

risksrisks

Awash in easy cash, they may find that Awash in easy cash, they may find that hard choices perhaps can be avoidedhard choices perhaps can be avoidedAwareness of these risks is perhaps the Awareness of these risks is perhaps the best insurance policy against them best insurance policy against them

A false sense of security A false sense of security tempts people to underrate tempts people to underrate or overlook the need for or overlook the need for good policies and good policies and institutions, good institutions, good education, and good education, and good investmentinvestment

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

An old storyAn old story

The EndThe End

David Landes David Landes (1998) (1998) tells the story tells the story of Spain following the colonization of Spain following the colonization of South and Central America of South and Central America which made Spain rich in gold which made Spain rich in gold and other natural resources: and other natural resources:

““Easy money is bad for you.Easy money is bad for you. It It represents short-run gain that will be represents short-run gain that will be paid for in immediate distortions andpaid for in immediate distortions and

later regrets.later regrets.””

mother earth: ally or adversary? thorvaldur gylfason

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