to grow or not to grow: why institutions must make a difference

To grow or To grow or

not to grow: not to grow:

Why Why institutions institutions

must make a must make a

differencedifference Thorvaldur Gylfason

Why growth rates Why growth rates differdiffer If technology matters for economic

growth, as it must, then … General economic efficiency must

also make a difference for growthEconomic policyEconomic policyInstitutionsInstitutions

Institutions or geography? False contrastFalse contrastThere is room for both, side by sideThere is room for both, side by side

Why Why growth ratesgrowth rates differdiffer

Investm en t

Dem ocracy D ivers if ication

Fertility Education

G row th+

+ +

Political and economic diversification

–

Resource depletion dragDutch diseaseRent seeking

+

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

r = rank correlation

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 political liberties, 1965-98

Growth and natural capital, 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

65-1

998,

ad

just

ed

for

init

ial i

nco

me

(%)

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

Venezuela

Australia

85 countries85 countries

Recent literatureRecent literatureSix main linkages:

1. Resource depletion drag2. Dutch disease

Hurts level, composition, or volatility of exports

3. Rent seeking Protectionism, corruption, oppression

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

5. Education6. Investment

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

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

den

ceR

eso

urc

e d

ep

end

ence

Resource abundanceResource abundance

Dependence hurts growth, even if abundance may help

Hypothesis:

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 Bank

Dig deeper through regression analysisregression analysisRecognize interconnections among

several key determinants of growth by estimating a system of simultaneous equations by Seemingly Unrelated Regression method

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

DependenDependent variablet variable

NaturaNatural l capital capital shareshare

Natural Natural capital capital per per personperson

Initial Initial incomeincome

Popu-Popu-lation lation growthgrowth

Civil Civil libertieliberties indexs index

Enrol-Enrol-ment ment raterate

Gross Gross investinvest-ment-ment

RR22

Economic Economic growthgrowth

-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777

Enrolment Enrolment raterate

-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777

Gross Gross investmeninvestmentt

-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244

Civil Civil libertiesliberties

0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression results

RecursivRecursive e systemsystem










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsInvestment is good for growth










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsEducation is good for

growth










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsCivil liberties are

good for growth

Index goes from 1 (full civil

liberties) to 7 (negligible civil

liberties)










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsPopulation

growth hurts

growth










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsConditional

convergenc

e: 2% per year










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsAbundance

is good for

growth










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsDependence is bad for growth










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsDependence is bad for education










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsIndirect effect through education is -0.77·0.02 -0.02










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsDependence is bad for investment










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsIndirect effect through investment is -0.26·0.08 -0.02










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsDependence is bad for liberty










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsIndirect effect through civil liberties is 0.04·(-0.27) -0.01










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsTotal effect is -0.08 + (-0.77)·0.02 + (-0.26)·0.08 + 0.04·(-0.27) -0.13

Liberties and Liberties and

resources both resources both

matter for growthmatter for growth










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsWhat if abundance

is not given?

Total effect is -0.13 + [0.05 + (0.54)·0.02 + (0.16)·0.08 + (-0.05)·(-0.27) 0.09]·wealth per person

African dummy African dummy

adds nothingadds nothing










RR22


-0.08-0.08

(5.8)(5.8)0.050.05

(2.7)(2.7)-1.89-1.89

(9.2)(9.2)-0.56-0.56

(3.0)(3.0)-0.27-0.27

(2.5)(2.5)0.020.02

(2.5)(2.5)0.080.08

(3.7)(3.7)0.70.777


-0.77-0.77

(4.1)(4.1)0.540.54

(2.2)(2.2)13.0013.00

(5.2)(5.2)-3.82-3.82

(2.5)(2.5)0.70.777


-0.26-0.26

(4.0)(4.0)0.160.16

(1.8)(1.8)-1.92-1.92

(2.2)(2.2)-0.73-0.73

(1.4)(1.4)0.20.244


0.040.04

(4.1)(4.1)-0.05-0.05

(2.9)(2.9)-0.95-0.95

(6.5)(6.5)0.60.655

Regression resultsRegression resultsTotal effect of natural capital on growth is Total effect of natural capital on growth is negative as long as wealth per head is below negative as long as wealth per head is below $150K$150K

What is the What is the upshot?upshot? Growth differentials across countries

can be explained by several different interconnected factorsPrivate initiatives Private initiatives (investment, fertility)(investment, fertility)Public policies Public policies (education)(education) Institutions Institutions (democracy)(democracy)Geography Geography (natural resources)(natural resources)

In particular, institutions survive the presence of geography, and vice versa

Case in point: Case in point: NorwayNorwayThe 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

Why Norway has Why Norway has succeeded where OPEC succeeded where OPEC and others failedand others failed

Long tradition of Long tradition of democracydemocracy and and market economymarket economy in Norway in Norway since before the advent of oilsince before the advent of oilLarge-scale rent seeking was Large-scale rent seeking was

averted as oil was defined as a averted as oil was defined as a common- property resource from common- property resource from the beginning the beginning

Adequate investment performanceAdequate investment performanceExcellent education recordExcellent education record

Why Why NorwayNorway has has succeeded where OPEC succeeded where OPEC and others failedand others failed

Even so, Norway faces challengesEven so, Norway faces challenges Some (weak) signs of Dutch diseaseSome (weak) signs of Dutch disease

Stagnant exports, sluggish FDIStagnant exports, sluggish FDILimited interest in EU and EMULimited interest in EU and EMU

Some signs also of unwillingness to Some signs also of unwillingness to undertake difficult reformsundertake difficult reformsHealth care provisionHealth care provisionPensionsPensions

Management of oil fund transferred from Management of oil fund transferred from Ministry of Finance to Central Bank Ministry of Finance to Central Bank 19991999

Bottom lineBottom line

FinFinGrowth requires accumulation and Growth requires accumulation and

efficient use of capitalefficient use of capital1.1. Physical capitalPhysical capital

through strong incentives to save and through strong incentives to save and investinvest

2.2. Human capitalHuman capital via education, training, & less fertility in via education, training, & less fertility in

LDCsLDCs

3.3. Social capitalSocial capital through democracy, etc.through democracy, etc.

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

Financial and

foreign capital: Same

story

to grow or not to grow: why institutions must make a difference

Documents

growth of gnp

sidewhy growth rates

netschool enrollment

political liberties

yeargender4school enrollment

way of economic growthr

general economic efficiency

burkina faso2