natural resources and economic growth: the role of investment thorvaldur gylfason and gylfi zoega

Natural Natural Resources Resources and and EconomicEconomic GrowthGrowth: The : The Role of Role of InvestmentInvestment

Thorvaldur Gylfasonand Gylfi Zoega

Sources Sources of of growth: growth: Investment and Investment and educationeducation

In ves tm en t E d u ca tion

G row th

+ +

+denotes a positive effect in the direction shown

In ves tm en t E d u ca tion

G row th

+ +


Adam Smith knew this, and more, as did Arthur Lewis

Sources of Sources of growth: growth: Investment and Investment and educationeducation

Solow raised Solow raised

doubts on doubts on

long-run long-run

linkageslinkages

Nelson Nelson

and and

Phelps on Phelps on

educationeducation

More More sources sources of growthof growth

In ves tm en t x E d u ca tion

G row th+ +


+

Arthur Lewis: x is trade, stable politics, good weather

But Solow carried the day: long-run growth is exogenous

Enter initial incomeEnter initial income

In ves tm en t

In it ia l In com e N atu ra l C ap ita l

x E d u ca tion

G row th+

+

+–


– denotes a negative effect in the direction shown

?

Conditional Conditional convergenceconvergence

Asolute convergence?

Do poor

countrie

s catch

up?

-4

-2

0

2

4

6

8

10

0 2 4 6 8 10 12

Log of initial GDP per capita (1965)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8 (

%)

r = -0.09Botswana

China Korea

Nicaragua

ThailandIndonesia

No sign that poor countries grow faster than rich

8855 countries countries

r = rank correlation

Enter Enter natural resourcesnatural resources

In ves tm en t


x E d u ca tion

G row th+

+

+––


– denotes a negative effect in the direction shown

?

Endogenous growth: x can be almost anything!Dutch disease and rent seeking

In ves tm en t


x E d u ca tion

G row th+

+

+––

–

More onMore on natural natural resourcesresources

?

Recent papers: Natural resource abundance Recent papers: Natural resource abundance reduces reduces high-skill labor intensityhigh-skill labor intensity, thus hurting , thus hurting growth growth

In ves tm en t


x E d u ca tion

G row th+

+

+––

––

More onMore on natural natural resourcesresources

?

This paper: Natural resource abundance reducesNatural resource abundance reduces investment investment and hence also growthand hence also growth

Aims Aims and and overviewoverview Explore the relationship between

natural resource intensity, saving, natural resource intensity, saving, andand investment investment in theory as well as empirically across countries since 1965

Explore also the linkages among saving, investment, and economic saving, investment, and economic growthgrowth across countries since 1965

Hypothesis:Hypothesis: Resource abundance Resource abundance reduces growthreduces growth via investment

OutlineOutline

1. Introduction2. Preview3. Literature4. Norway5. Theory6. Correlations7. Regressions8. Conclusion

Natural resource abundance and economic structure

Resource poor,resource dependent

(Chad, Mali)

Resource rich,resource dependent

(OPEC)

Resource rich,resource free(Canada, USA)

Resource poor,resource free

(Jordan, Panama)

Reso

urc

e d

ep

en

dence

, b

Reso

urc

e d

ep

end

en

ce,

b

Resource abundance, NResource abundance, N

Natural capital and economic growth

85 countries85 countries

What is the empirical evidence?

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

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.

r = -0.64

8 African countriesI/Y = 0.05

8 Asian countriesI/Y = 0.32

Notice Notice

two two

clustercluster

ss

A A newnew measure of measure of natural natural resource resource abundanceabundanceConfirms Confirms results based results based on other on other measuresmeasures

Venezuela

Australia

Recent literatureRecent literature

Four main linkages: 1. Dutch disease

Hurts level or composition of exports

2. Rent seeking Protectionism, corruption

3. Education4. False sense of security

Poor quality of policies and institutions

5. Investment

But Norway is,

so far at least,

an exception

ForeigForeig

n n capitalcapital

Social Social

capitacapita

llHumaHuma

n n capitacapita

llReal Real

capitalcapital

Natural capital Natural capital tends to crowd tends to crowd outout

Theory: Theory: Optimal savingOptimal saving

baba KNALY 1

ysc 1

k

ys

K

KsY

K

K

k

k

s

y

k

ba

baba

ba

ba

b

ba snAsc

1

11 1

1

bas 1

bas 1babkAny 1

RamseyRamsey

Golden RuleGolden Rule

Implications for Implications for optimal savingoptimal saving

An increase in the share of natural resources in national output reduces the marginal productivity of capital and the real interest rate, and reduces thereby also the optimal saving rate and economic growth

Natural capital crowds out physical capitalAn increase in the natural capital share

may also hamper financial development

More theory: More theory: Endogenous growthEndogenous growth

aibi

baii KLKNqKY 1

baba KqA 1 baba KNALY 1

rKLKNKqbadK

dY ai

bi

bai

ba

i

i 11

rgRamsey ruleRamsey rule

More theory: More theory: Endogenous growthEndogenous growth

abba LNqbag 11

abba LNqg 1

Discrepancy between privately and socially optimal growth varies directly with the share of natural resources in national income

PrivatelyPrivately

optimaloptimal

Socially

optimal

Extent of market failure varies directly with the share of natural resources in national income

Empirical research Empirical research strategystrategy

Study 85 industrial and developing countries from 1965 to 1998

Look for cross-country patternscross-country patterns in data from the World BankInvestment and natural resources

Investment, genuine savinggenuine saving, gross saving

Investment and growthFinancial depth

Dig deeper through regression analysisregression analysis

Natural capital and investment


0

5

10

15

20

25

30

35

0 10 20 30 40 50 60


Gro

ss

do

me

sti

c in

ves

tme

nt

19

65

-19

98

(%

of

GD

P) An increase in the

natural capital share by 10% is associated with a decrease in investment by 2% of GDP.

r = -0.38

Congo

Sierra Leone

Mali

Investment and economic growth


-8

-6

-4

-2

0

2

4

6

0 5 10 15 20 25 30 35

Gross domestic investment 1965-1998 (% of GDP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

r = 0.65

An increase in investment by 4% of GDP is associated with an increase in per capita growth by 1% per year.

CongoChad

Nicaragua

From gross From gross investment to investment to genuine savinggenuine saving

Gross investment does not take qualityquality into account

Genuine domestic savingGenuine domestic saving is adjusted for quality, and is defined asGross domestic saving minusDepreciation of physical capital plusExpenditure on education minusDepreciation of natural capital

Energy, minerals, forests, carbon dioxide

Natural capital and genuine saving


-25

-20

-15

-10

-5

0

5

10

15

20

25

30

0 10 20 30 40 50 60


Ge

nu

ine

do

me

sti

c s

avin

g 1

970-

1998

(%

of

GD

P)

An increase in the natural capital share by 10% is associated with a decrease in genuine saving by 4% of GDP.

r = -0.53

Japan

Botswana

Mauritania

Genuine saving and economic growth


-8

-6

-4

-2

0

2

4

6

-30 -20 -10 0 10 20 30

Genuine domestic saving 1970-1998 (% of GDP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

An increase in genuine saving by 6% of GDP goes along with an increase in per capita growth by 1% per year.

r = 0.72

Mauritania

MozambiqueCote d’Ivoire

China

Natural capital and gross saving

85 countries85 countries-15

-10

-5

0

5

10

15

20

25

30

35

40

0 10 20 30 40 50 60


Gro

ss

do

me

sti

c s

avi

ng

19

70

-19

98

(%

of

GD

P)

An increase in the natural capital share by 10% is associated with a decrease in gross saving by 4% of GDP.

r = -0.40

BotswanaChina

Zambia

Niger

Gross saving and economic growth


-8

-6

-4

-2

0

2

4

6

-20 -10 0 10 20 30 40

Gross domestic saving 1970-1998 (% of GDP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

r = 0.73

An increase in gross saving by 6-7% of GDP goes along with an increase in per capita growth by 1% per year.

Mozambique

Venezuela

Thailand

Zambia

Summary of resultsSummary of results

We have seen that, across countries:

1. Economic growth varies directly with three different measures of saving and investment

2. The three measures of saving and investment are all inversely related to natural capital

3. Economic growth varies inversely with natural capital


Growth

Investment

Growth

Resources

InvestmentInvestment

Resources

+ =

Financial depthFinancial depth

Resource-abundant nations may feel they have less need for finance

Smooth out consumption over time by adjusting the pace of resource extraction

If so, a high natural capital share may go along with limited financial depth, low investment, and slow growth

Natural capital and financial depth


0

20

40

60

80

100

120

0 10 20 30 40 50 60


Mo

ne

y a

nd

qu

as

i-m

on

ey

19

65

-19

98

(%

of

GD

P)

r = -0.68

Italy

Portugal

New Zealand

Financial depth and economic growth


-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Money and quasi-money 1965-1998 (% of GDP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

r = 0.66

Jordan

Switzerland

JapanIndonesia

Regression resultsRegression results

Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

DependenDependent variablet variable

ConstanConstantt

Natural Natural capitalcapital

Initial Initial incomeincome

Enrol-Enrol-ment ment raterate

Invest-Invest-ment ment raterate

RR22

Economic Economic growthgrowth

1010..11

(6.0)(6.0)-0.06-0.06

(4.(4.66))-1-1..5544

((77..33))0.00.055

((55..55))0.100.10

((33..55))0.60.677

Enrolment Enrolment raterate

-103.7-103.7

((77..55))-0.-0.7575

(4.(4.22))1919..99

((1212..44))0.0.7722

InvestmeInvestment ratent rate

2222..55

(2(299..33))-0.-0.2020

((44..11))0.0.1166

Recursiv

Recursiv

e e syste

msyste

m




ConstanConstantt





RR22


1010..11

(6.0)(6.0)-0.06-0.06

(4.(4.66))-1-1..5544

((77..33))0.00.055

((55..55))0.100.10

((33..55))0.60.677


-103.7-103.7

((77..55))-0.-0.7575

(4.(4.22))1919..99

((1212..44))0.0.7722


2222..55

(2(299..33))-0.-0.2020

((44..11))0.0.1166

Recursiv

Recursiv

e e syste

msyste

m

Direct effect of natural capital on growth is -0.06




ConstanConstantt





RR22


1010..11

(6.0)(6.0)-0.06-0.06

(4.(4.66))-1-1..5544

((77..33))0.00.055

((55..55))0.100.10

((33..55))0.60.677


-103.7-103.7

((77..55))-0.-0.7575

(4.(4.22))1919..99

((1212..44))0.0.7722


2222..55

(2(299..33))-0.-0.2020

((44..11))0.0.1166

Recursiv

Recursiv

e e syste

msyste

m




ConstanConstantt





RR22


1010..11

(6.0)(6.0)-0.06-0.06

(4.(4.66))-1-1..5544

((77..33))0.00.055

((55..55))0.100.10

((33..55))0.60.677


-103.7-103.7

((77..55))-0.-0.7575

(4.(4.22))1919..99

((1212..44))0.0.7722


2222..55

(2(299..33))-0.-0.2020

((44..11))0.0.1166

Recursiv

Recursiv

e e syste

msyste

m

Indirect effect through education is -0.75·0.05 -0.04




ConstanConstantt





RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)-1.54-1.54

(7.3)(7.3)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722


22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166

Recursiv

Recursiv

e e syste

msyste

m




ConstanConstantt





RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)-1.54-1.54

(7.3)(7.3)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722


22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166

Recursiv

Recursiv

e e syste

msyste

m

Indirect effect through investment is -0.20·0.10 = -0.02




ConstanConstantt





RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)-1.54-1.54

(7.3)(7.3)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722


22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166

Recursiv

Recursiv

e e syste

msyste

m

Total effect is -0.06 + (-0.75)·0.05 + (-0.20)·0.10 -0.12


An increase in the natural capital share by 1010 percentage points reduces growth directly by 0.6 pointsreduces enrolment by 8 points,

lowering the growth rate further by 0.4 points

reduces investment by 2% of GDP, lowering growth further by 0.2 points

So, the total effect on growth is -1.21.2 percentage points – not small at all!

More regression More regression resultsresults

Dependent Dependent variablevariable




Gross Gross savinsaving rateg rate

FinanciaFinancial depthl depth

RR22


-0.06-0.06

(5.2)(5.2)-1.64-1.64

(9.2)(9.2) 0.040.04

(5.4)(5.4) 0.090.09

(6.4)(6.4) 0.70.744


-0.90-0.90

(5.2)(5.2)16.016.0

(10.1)(10.1) 0.70.700

Gross Gross saving ratesaving rate

-0.26-0.26

(2.5)(2.5) 4.954.95

(3.0)(3.0) 0.20.288

Financial Financial depthdepth

-0.03-0.03

(7.4)(7.4) 0.30.399


Suppress

constants








RR22


-0.06-0.06

(5.2)(5.2)-1.64-1.64

(9.2)(9.2) 0.040.04

(5.4)(5.4) 0.090.09

(6.4)(6.4) 0.70.744


-0.90-0.90

(5.2)(5.2)16.016.0

(10.1)(10.1) 0.70.700


-0.26-0.26

(2.5)(2.5) 4.954.95

(3.0)(3.0) 0.20.288


-0.03-0.03

(7.4)(7.4) 0.30.399









RR22


-0.06-0.06

(5.2)(5.2)-1.64-1.64

(9.2)(9.2) 0.040.04

(5.4)(5.4) 0.090.09

(6.4)(6.4) 0.70.744


-0.90-0.90

(5.2)(5.2)16.016.0

(10.1)(10.1) 0.70.700


-0.26-0.26

(2.5)(2.5) 4.954.95

(3.0)(3.0) 0.20.288


-0.03-0.03

(7.4)(7.4) 0.30.399


Total effect is -0.06 + (-0.90)·0.04 + (-0.26)·0.09 + (-0.03)·4.95·0.09 -0.13

Bottom lineBottom line

The

End

The

EndNatural resource intensity Natural resource intensity

impedes economic growth by impedes economic growth by reducing or corroding reducing or corroding

1.1. social capitalsocial capital through rent seeking, etc.through rent seeking, etc.

2.2. human capitalhuman capital through neglect of educationthrough neglect of education

3.3. physical capitalphysical capital through blunted incentives to save and through blunted incentives to save and

invest as well as financial immaturityinvest as well as financial immaturity

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

natural resources and economic growth: the role of investment thorvaldur gylfason and gylfi zoega

Documents

growth slide

investment slide

b resource abundance

economic growth

education slide

natural resources

usa resource poor

growth hypothesis