1. Structural Adjustment, Export Specialization, and Growth in Diversified Resource Based Economies: The Case of Norway Thorvaldur Gylfason

2. Outline of presentation 1.Norway and the Dutch disease 2.The macroeconomics of oil 3.A brief digression on OPEC 4.Empirical cross-country evidence on natural resources and growth 5.But, Norway is different

3. Neither Dutch nor a disease Discovery of oil and natural gas off- shore round 1960 Ensuing upswing in exports of natural gas led to appreciation of Dutch guilder Hurt manufacturing exports Raised concerns about de-industrialization Problem proved short-lived But name stuck 1

4. The Dutch disease: Some symptoms Overvaluation of currency Exchange rate volatility Excessive wages Greenland Centralized wage bargaining Hurts level or skews composition of exports away from manufacturing May also hurt foreign direct investment

5. Exports of goods and services 1960-2000 (% of GDP) What does experience show? Norway’s exports have hovered around 40% of GDP since 1960, with only a weak tendency to rise over time

6. Foreign direct investment 1967-2000 (gross, % of GDP) Since 1970s, Norway has attracted less gross FDI than the Netherlands

7. Manufacturing exports 1962- 2001 (% of total exports) In Norway, oil exports have crowded out other exports krone for krone relative to GDP since the mid-1970s

8. Why these things may matter Exports and FDI are good for growth Openness to trade and investment stimulates imports of goods and services, technology, ideas, know-how Too much primary export dependence and too little manufacturing for export may hurt growth But Norway has done very well

9. Unemployment 1980-2000 (% of labor force) In Norway, stabilization policy has been well managed and joblessness has been low by European standards

10. Government consumption 1960-2000 (% GDP) In Norway, general government consumption has increased, but not to extravagant levels, at least not yet

11. GNP per capita 1962-2001 (current USD, Atlas method Since mid- 1970s, Norway has grown faster than the Netherlands

12. Macroeconomics of oil and other resources Naturalresources Economicgrowth x 2

13. Naturalresources Economicgrowth x What is x ?

14. Five main channels of transmission 1. The Dutch disease Exchange rates, wages, volatility Hurts level or composition of exports and FDI 2. Rent seeking Protectionism, cronyism, corruption 3. False sense of security Poor quality of policies and institutions education 4. Neglect of education 5. Not enough investment Socialcapital

15. Crowding out Hence, natural capital may crowd out Foreign capital Social capital Human capital Real capital Matter of taste whether these mechanisms are viewed as additional symptoms of the Dutch disease or as separate channels of transmission

16. 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) Resource dependence, b Resource abundance, N Dependence hurts growth, even if abundance may help Hypothesis:

17. A quick look at OPEC Nigeria has been stagnant since independence in 1960: No growth Per capita growth 1965-1998 Iran and Venezuela: -1% per year Libya: -2% Iraq and Kuwait: -3% Qatar: -6% Why? 3

18. Background: A quick look at OPEC King Faisal of Saudi Arabia (1964- 1975) would hardly have been surprised: “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.”

19. Background: A quick look at OPEC Lee Kwan Yew, founding father of Singapore (1959-1991), would not have been surprised either: “I thought then that wealth depended mainly on the possession of territory and natural resources, whether fertile land..., or valuable minerals, or oil and gas. It was only after I had been in office for some years that I recognized... that the decisive factors were the people, their natural abilities, education and training.”

20. Increasing awareness that oil brings risks If... oil revenue is managed well, it can educate, heal and provide jobs for... the people. But oil brings risks as well as benefits. Rarely have developing countries used oil money to improve the lives of the majority of citizens or bring steady economic growth. More often, oil revenues have caused crippling economic distortions and been spent on showy projects, weapons and Paris shopping trips for government officials. New York Times, 1 August 2000.

21. Is OPEC an exception? No, this seems to be a general pattern. Of 65 natural resource abundant countries 1970-1998, only four had Investment of more than 25% of GDP Per capita GNP growth of more than 4% per year They are: Botswana, Indonesia, Malaysia, Thailand

22. But there is an exception: Norway The 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 story Government takes in 80% of oil rent and invests it mostly in foreign securities No signs of damage to growth potential, at least not yet (but some worry!)

23. Natural capital and growth: The evidence Review a few of the empirical findings of the new literature on natural resources and economic growth Present cross-country evidence Individual historical case studies support the results Stress linkages among natural capital and other kinds of capital as well as growth 4

31. Real capital and growth Natural capital crowds out real capital r = -0.38 Niger Chad Lesotho Guinea Bissau r = rank correlation

32. Real capital and growth Botswana China NicaraguaNiger Investment is good for growth r = 0.65 An increase in investment by 4% of GDP goes along with an increase in per capita growth by 1% per year 4% 1% Quantity and quality

33. Interpretation of results Growth Investment Growth Resources Investment Resources + =

34. Human capital and growth Natural capital crowds out human capital r = -0.63 Uruguay New Zealand Saudi Arabia Finland

35. Human capital and growth Finland Thailand New Zealand Jamaica Education is good for growth r = 0.72 An increase in secondary-school enrolment by 25-30% of each cohort goes along with an increase in per capita growth by 1% per year Notice diminishing returns to education

36. Interpretation of results Growth Education Growth Resources Education Resources + =

37. Interpretation of results high-skill labor high-quality capital Natural-resource-based industries are generally less high-skill labor intensive and less high-quality capital intensive than others, and so confer few external benefits distort comparative advantage impede learning by doing, technical advance, and economic growth

38. Financial capital and growth Natural capital crowds out financial capital r = -0.68 Japan China New Zealand Switzerland

39. Financial capital and growth Indonesia Japan Switzerland Jordan Financial depth is good for growth: Money greases the wheels of commerce and production r = 0.66

40. Financial capital and growth Indonesia Japan Switzerland Jordan This helps explain why inflation hurts growth: Inflation reduces financial depth and thereby inhibits growth r = 0.66

41. Interpretation of results Growth Financial depth Growth Resources Financial depth Resources + =

42. Foreign capital and growth Natural capital crowds out foreign capital r = -0.32 Botswana Sweden Switzerland Netherlands Guinea Bissau

43. Foreign capital and growth Foreign direct investment is good for growth Netherlands Norway Papua New Guinea Madagascar r = 0.62

44. Foreign trade and growth Foreign trade is also good for growth Guinea Bissau Belgium Korea Malaysia r = 0.42

45. Interpretation of results Growth FDI Growth Resources FDI Resources + =

46. Social capital and growth Natural capital crowds out social capital Increase in natural capital by 3% of national wealth goes along with an increase in Gini by 1 point. 7 African countries where saving is 5% of GDP and per capita growth is -1% per year Notice cluster r = 0.41 Inequality of access to education and land: Same pattern Brazil

47. Social capital and growth Equality is good for growth: No sign here that too much equality hurts growth Korea Norway China Sierra Leone r = -0.50 Brazil South Africa

48. Social capital and growth Equality is good for growth Korea Norway China Sierra Leone r = -0.50 An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year Brazil South Africa

49. Interpretation of results Growth Inequality Growth Resources Inequality Resources + =

50. Social capital and growth, again Again, natural capital crowds out social capital r = -0.42 Zambia Indonesia Finland New Zealand

51. Social capital and growth, again Honesty is good for growth because corruption creates inefficiency Botswana Kenya Indonesia Norway New Zealand r = 0.40

52. Interpretation of results Growth Corruption Growth Resources Corruption Resources + =

53. Social capital and growth, once more Once more, natural capital crowds out social capital r = 0.48

54. Social capital and growth, once more Political liberty is good for growth because oppression creates inefficiency r = -0.62

55. Interpretation of results Growth Oppression Growth Resources Oppression Resources + =

56. Summary Natural capital tends to crowd out 1.Real capital via blunted incentives to save via blunted incentives to save 2.Human capital through neglect of education through neglect of education 3.Social capital through rent seeking, corruption, inequality, civil and political oppression, etc. through rent seeking, corruption, inequality, civil and political oppression, etc. 4.Financial capital 5.Foreign capital

57. But, to repeat: Norway is different The 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 story Government takes in 80% of oil rent and invests it mostly in foreign securities No signs of damage to growth potential, at least not yet 5

58. The oil fund: A fair and efficient strategy The purpose of the oil fund To share the wealth fairly across generations To shield domestic economy from overheating and possible waste Fund will clearly become huge... if Norwegians resist the temptation to use too much of the money to meet current needs

59. Why Norway has succeeded where OPEC and others failed Long tradition of democracy and market economy in Norway since before the advent of oil Large-scale rent seeking was averted as oil was defined as a common- property resource from the beginning Large-scale rent seeking was averted as oil was defined as a common- property resource from the beginning Adequate investment performance Adequate investment performance Excellent education record Excellent education record

60. Why Norway has succeeded where OPEC and others failed Even so, Norway faces challenges Some (weak) signs of Dutch disease Some (weak) signs of Dutch disease Stagnant exports, sluggish FDI Stagnant exports, sluggish FDI Limited interest in EU and EMU Limited interest in EU and EMU Some signs also of unwillingness to undertake difficult reforms Some signs also of unwillingness to undertake difficult reforms Health care provision Health care provision Pensions Pensions Management of oil fund transferred from Ministry of Finance to Central Bank 1999

61. One last point Perhaps the main challenge is to make sure that the oil fund does not instill a false sense of security May need to immunize the fund from political interference – like the courts, media, even central banks This may require privatization But private sector is not infallible either So, best to adopt a mixed strategy

62. Good times demand strong discipline Natural resources bring risks A false sense of security leads people to underrate or overlook the need for good policies and institutions, good education, and good investment Awash in easy cash, they may find that hard choices perhaps can be avoided Awareness of these risks is perhaps the best insurance policy against them

63. Old story: The risks are real These slides can be viewed on my website: www.hi.is/~gylfason The End David Landes (1998) tells the story of Spain following the colonization of South and Central America which made Spain rich in gold and other natural resources: “Easy money is bad for you. It represents short-run gain that will be paid for in immediate distortions and later regrets.”