Thorvaldur Gylfason IMF-Middle East Center for Economics and Finance (CEF) Course on Macroeconomic Management in Natural Resource-Rich Countries Kuwait City, Kuwait, 6-17 January 2013

 Stories, stories without  Success stories without natural resources with  Success stories with natural resources  Failures with and without natural resources

 Japan  Stagnant since 1990  Switzerland  Steady progress  Hong Kong  Singapore  City states  Cities are more efficient, and richer, than countries  But start with Gapminder:  Per capita GDP and life expectancy socialeconomic indicators  Importance of social as well as economic indicators See gapminder.org

Per capita GDP (2005 USD, ppp) Life expectancy (years)

Per capita GDP (2005 USD, ppp) Life expectancy (years)

 Norway, Saudi Arabia, and Algeria  Also, Norway vs. Iceland  Botswana, Congo, and Sierra Leone  Also, Botswana vs. Gabon, plus Nigeria  Azerbaijan, Kasakhstan, Russia, and Turkmenistan  Malaysia and Singapore  Mauritius, Costa Rica, and Fiji  Also, Mauritius vs. Madagascar  Chile and Zambia  Mexico and Venezuela

 African countries  Chad  Congo  Gabon  Guinea  Libya  Nigeria  Sierra Leone  Sudan  Others  Iran  Iraq  Saudi Arabia  Russia  Turkmenistan  Uzbekistan  Mexico  Venezuela

Resource poor, resource dependent (Chad, Mali) Resource poor, resource dependent (Chad, Mali) Resource rich, resource dependent (OPEC) Resource rich, resource dependent (OPEC) Resource rich, resource free (Canada, USA) Resource rich, resource free (Canada, USA) Resource poor, resource free (Jordan, Panama) Resource poor, resource free (Jordan, Panama) Resource dependence Resource abundance Dependence hurts growth, even if abundance may help Dependence hurts growth, even if abundance may help Hypothesis:

Economies blessed with abundant oil, minerals, or other natural resources should be able to invest the “rents” or proceeds at home, raising their growth potential. But the historical experience has most often been the reverse. The pitfalls are well known. Sometimes the state sells extraction rights too cheaply or taxes resource revenues too lightly. Sometimes the money it raises is stolen or squandered by rent-seeking elites and vested interests. When the money is invested, it is not always invested wisely or transparently. And by providing a ready source of foreign-exchange, natural resources can also reduce incentives for diversifying exports, a predicament known as “Dutch disease.” States will improve on this sorry historical record only if they capture an appropriate share of the resource rents; save a judicious amount overseas; and set clear, growth- oriented priorities for absorbing the remainder at home. The Growth Report: Strategies for Sustained Growth and Inclusive Development, Commission on Growth and Development, The World Bank, 2008.

for constant K/Y for u = -g N

Per capita GNI (USD at PPP)Democracy (from -10 to 10) Increase in life expectancy in years Average democracy index Generally, democracy is good for growth

Real Per Capita GDP (2000 USD)Democracy Increase in life expectancy in years Average democracy index

Education (secondary, %)  Alternative measures of education  Primary enrolment Not much variation  Secondary enrolment Boys vs. girls  Tertiary enrolment  Expenditure on education  School life expectancy Expected years of schooling  Inputs vs. output

Fertility  There is another way to provide more and better and more evenly shared education to children fewer children  Produce fewer children to increase their average “quality”  Fertility is measured by births per woman

Governance (0 to 100)  Measures delivery of public goods and services to citizens based on proxies for  Safety and Rule of Law  Participation and Human Rights  Sustainable Economic Opportunity  Human Development Ibrahim index

Corruption (0 to 10)  Corruption Perceptions Index  Corruption Perceptions Index measures perceived levels of public sector corruption in 178 countries  Based on survey interviews with business people  Each score is an average of several surveys More corruption Even so, Botswana has some distance to go

Real Per Capita GDP (2000 USD)Democracy

Real Per Capita GDP (2000 USD)Democracy

Education (secondary, %)Fertility

GovernanceCorruption (from 10 to 0) Ibrahim index More corruption Again, Botswana has some distance to go

Gini index of inequality  Botswana has a much less equal distribution of income than Gabon and Nigeria  Gini index ranges from about 25 or so in Scandinavia (most equal) to over 60 in Botswana, Brazil, and South Africa (least equal)

less equal distribution of income  Botswana has a much less equal distribution of income than Gabon and Nigeria insufficient political diversification  Same political party in power since independence in 1966, suggesting insufficient political diversification  Corruption  Corruption is not a serious problem by African standards, but would be considered problematic by OECD standards  Unemployment  Unemployment is widespread  Was 40% , 24% , is now 7.5% ( )

Per Capita GNI at PPPDemocracy

Real Per Capita GDPDemocracy

EducationFertility

EducationCorruption More corruption

Per Capita GNI at PPPDemocracy

Real Per Capita GDPDemocracy

EducationFertility

EducationCorruption More corruption

Per Capita GNI at PPPDemocracy Oil and gas

Per Capita GNI at PPPManufactures (% of exports) Oil and gas

Secondary educationFertility Oil and gas

Life expectancy (years)Corruption More corruption Oil and gas

Per Capita GNI at PPPLife expectancy (Years) Income ratio went from 3 to

Real Per Capita GDPLife expectancy (Years) Income ratio went from 2.8 to

DemocracyCorruption More corruption

EducationFertility Labor force with secondary education in Singapore up from 30% to 50% against 56% in Malaysia

Country A Country B

In % Country A Country B Labor with secondary education 5648

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio 68221

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158 Inflation3.42.7

In % Country A Country B Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158 Inflation Growth per capita

In %MalaysiaSingapore Labor with secondary education 5648 Investment ratio 2633 Export ratio Manufacturing export ratio 4158 Inflation Growth per capita = 2

Per Capita GNI at PPPDemocracy

Real Per Capita GDPDemocracy

Life expectancyFertility

EducationCorruption More corruption

 Diversification is good for growth  Economic diversification  Economic diversification away from excessive reliance on natural resources, including minerals  Political diversification  Political diversification away from narrowly based political elites toward full-fledged democracy  Social and human capital are good for growth  Social policies make a difference, including social insurance as well as education and health care  Judicious use of natural resources requires good institutions, including democracy  Conditional assistance (e.g., World Bank in Sudan)  Need to develop strategy to turn natural capital sustainably into human and social capital  European solution: Pooling coal and steel worked well  Pooling fish through CFP has worked less well Fini

Classroom discussion