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