1. Experiences on the EU Periphery Norway and Iceland Thorvaldur Gylfason

2. Norway, Iceland, and the EU nWith Switzerland, Norway and Iceland are the sole European nations that have no intention of joining the EU any time soon nSwitzerland is a special case –Joined UN only this year nNorway and Iceland are affluent –Norway: Ppp-adjusted GNP per capita: $30K –Iceland: $29K –Switzerland: $30K; US: $34K (2000)

3. GNP per capita, 2000 (USD, ppp-adjusted)

4. Norway and Iceland: GNP per capita, 1962-2000 Current US$, Atlas method

5. Ireland and Greece: GNP per capita, 1962-2000 Current US$, Atlas method

6. Iceland, Norway, Ireland, & Greece: GNP per capita, 1962-2000 Current US$, Atlas method

7. Background Two rich countries, but in different ways Norway has been well managed Low inflation, stable growth, low unemployment, no external debt, efficient oil-wealth management Iceland has been less well managed High inflation, uneven growth, low unemployment, high external debt, overfishing

8. Natural Resources Norway Small fisheries sector 1% of GNP and employment Huge oil sector Oil wealth: 50-250% of GNP Oil revenue: 5-25% of GNP Iceland Large fisheries sector 10% of GNP, 40% of exports

9. Exports Stagnant exports for a long time Unique among industrial countries Norway’s exports Equivalent to about 43% of GNP since before the oil discoveries Oil exports have crowded out nonoil exports Iceland’s exports Equivalent to about a third of GNP since 1945 (in fact, since 1870)

10. Iceland, Norway, Ireland, & Greece: Exports, 1960-2000 (% of GDP)

11. Iceland, Norway, Ireland, & Greece: FDI 1975-2000 (% of GDP)

12. Norway: Background Rejected membership twice 1972 and 1994 Political leadership wanted to join the EU... In 1994, all major political parties and interest organizations advocated membership... but the people said No! Strongest objections came from rural areas Fishing and farming communities along the coast, especially up north

13. Iceland: Background Never held a referendum Political leadership does not want to join... One of two main opposition parties wants to join, all other political parties, including present government, and most interest organizations are against EU membership, or at least ambivalent... but, polls indicate, the people want to join Strongest objections come from rural areas Fishing and farming communities around the coast are overrepresented in the political arena

14. Dutch Disease Symptoms Most often, overvaluation and volatility of currency Rural subsidies distort real exchange rate Sluggish exports and FDI Lack of interest in full participation in European integration Natural wealth: Mixed blessing?

15. Natural wealth and economic growth, 1965-1998 r = -0.64 85 countries An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.

16. Sources of growth + + + denotes a positive effect in the direction shown + Sir Arthur Lewis: x is mainly trade, stable politics, good weather Growth is endogenous

17. Sources of growth + + + denotes a positive effect in the direction shown - Recent research: x is natural resource abundance or intensity, inter alia - denotes a negative effect in the direction shown

18. How Natural Resource Intensity Affects Growth Four main channels of transmission from natural resources to growth 1.Dutch disease (incl. foreign capital) 2.Rent seeking (social capital) Corruption Corruption Protectionism Protectionism Lack of democracy Lack of democracy 3.Education (human capital) 4.Investment (physical capital)

19. Channels of Transmission, Again Four main linkages: 1.Dutch disease Hurts level or composition of exports 2.Rent seeking Protectionism, corruption 3.Education 4.Investment But Norway is, so far at least, an exception Foreign capital Social capital Human capital Real capital Natural capital tends to crowd out

20. Transition Economies: Economic Growth and Agriculture, 1990-1997 r = -0.57

21. Transition Economies: Natural Resource Abundance and Corruption r = -0.72

22. Transition Economies: Corruption and Economic Growth, 1990-1997 Strong connection between corruption and growth in transition countries r = 0.64

23. One Possible Interpretation Corruption Resources Growth Resources Growth + = Corruption

24. Another Possible Interpretation Corruption Resources Growth Corruption Growth + = Resources

25. Transition Economies: Openness and Agriculture, 1990-1997 r = -0.48

26. Transition Economies: Economic Growth and Openness, 1990-1997 Weak and insignificant connection between openness and growth in transition countries r = 0.05

27. One Possible Interpretation Openness Resources Growth Resources Growth + = Openness

28. Another Possible Interpretation Openness Resources Growth Openness Growth + = Resources

29. Transition Economies: Openness and Corruption, 1990-1997 Significant connection between corruption and openness in transition countries Albania Estonia Hungary Poland Romania Azerbaijan Georgia Kyrgiz Rep. Slovenia Czech Rep. Belarus Uzbekistan Lithuania Slovak Rep. Moldova Russia Kazakhstan Ukraine Bulgaria Latvia r = 0.47

30. Classroom discussion