Economic Diversification and Structural Challenges Thorvaldur Gylfason

What it takes The advancement from widespread poverty to widely shared affluence requires one thing, and one thing only: The advancement from widespread poverty to widely shared affluence requires one thing, and one thing only: Economic growth Economic growth Must ask: What are the main pillars of economic growth? Must ask: What are the main pillars of economic growth?

to grow What it takes to grow I.Saving and investment Physical capital II.Education, education Human capital III.Exports and imports Foreign capital IV.Democracy Social capital V.Diversification Undisputed Controversial

to diversify What it takes to diversify I.Saving and investment Physical capital (Infrastructure, tourism, etc.) II.Education, education Human capital (Ireland) III.Exports and imports Foreign capital (Botswana, Estonia, Ireland, Korea) IV.Democracy Social capital (Botswana)

Botswana and Nigeria: GDP per capita (1995 USD) Nedadi Usman, Nigeria’s economy minister: “Oil has made us lazy” Botswana 6.3% Nigeria 0.2%

Natural resources: A mixed blessing Listen to King Faisal of Saudi Arabia ( ): “In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.”

Three main sources of economic growth + + denotes a positive effect in the direction shown + + See Figures 1-6

Two further determinants of economic growth Democracy Diversification ++

Growth and political liberties, Central African Republic Brazil Democracy is good for growth: No visible sign that democracy stands in the way of economic growth r = Botswana China Niger Venezuela Korea 85 countries

Growth and political liberties, Central African Republic Brazil r = Botswana China Niger Venezuela Korea Political liberty is good for growth because oppression breeds inefficiency, and so does corruption

Growth and natural resources, Madagascar Mali Cameroon Mauritius r = See Figures 7-8 Natural resource dependence Natural resource dependence tends to hurt growth through rent seeking and by creating a false sense of security

Sir Arthur Lewis got it right Since the second world war it has become quite clear that rapid economic growth is available to those countries with adequate natural resources which make the effort to achieve it. W. Arthur Lewis (Accra, 1968)

To grow or not to grow is in large measure a matter of choice These slides – and more! – can be viewed on my website: Conclusion: It can be done The End Many of the constraints on growth are man-made, and can be removed