Mother Earth: Ally or Adversary? Thorvaldur Gylfason.
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Mother Earth: Mother Earth: Ally or Ally or
Adversary?Adversary?
Thorvaldur Gylfason
What economists doWhat economists doThree stages of economic inquiry
1. Observe economic behavior2. Look for patterns 3. Build models to explain the observed
behavior patterns
Facts are not enoughNeed models to fit the facts
Can reverse the processBuild models first and then test them
Natural resources Natural resources and economic and economic growthgrowth
ObservationResource-rich countries have not grown
rapidly, contrary to expectationsCase in point: OPEC economies have
contracted since 1965Many other resource-based economies
have also grown slowly
Look at the pattern, and ask:Can economic theory explain it?
Natural Natural
capital and capital and
growthgrowth
-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
65-9
8, a
dju
sted
fo
r in
itia
l in
com
e (%
per
yea
r)
Natural
resource
dependen
ce tends
to impede
growth
Madagascar
Mali
Cameroon
Mauritius
r = -0.64Botswana
r = rank correlation
8 Asian countriesS/Y = 0.32
8 African countriesS/Y = 0.05
Notice two
clusters
Is this surprising?Is this surprising?King Faisal of Saudi Arabia (1964-
1975) would hardly have been surprised:
““In one generation we went from In one generation we went from riding camels to riding Cadillacs. riding camels to riding Cadillacs. The way we are wasting money, I The way we are wasting money, I fear the next generation will be fear the next generation will be riding camels again.”riding camels again.”
Theory: Five Theory: Five linkageslinkages
1. Dutch disease Reduces level, skews composition, or
raises volatility of trade and investment
2. Education3. Investment4. Rent seeking
Protectionism, corruption, greed, inequality
5. False sense of security Poor quality of policies and institutions
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
Different Kinds of Capital and Growth
Foreign capital
Financial capital
Human capitalSocial capital
Growth
Real capital
3
1
4
5
2
+
+
+
+
+
Different Kinds of Capital and Growth
Foreign capital
Financial capital
Human capitalSocial capital
Growth
Real capital
7
11
3
1
4
5
2
98
10
+
+
+
+
+
–
– 6
Natural capital
–
–
–
–
Foreign capital
Financial capital
Human capitalSocial capital
Real capital
7
11
3
1
4
5
2
98
10
+
+
+
+
+
–
– 6
Natural capital
–
–
–
–
Growth
Real Capital and Growth
Foreign capital
Financial capital
Human capitalSocial capital
Real capital
7
11
3
1
4
5
2
98
10
+
+
+
+
+
–
– 6
Natural capital
–
–
–
–
Human Capital and Growth
Growth
Foreign capital
Financial capital
Human capitalSocial capital
Real capital
7
11
3
1
4
5
2
98
10
+
+
+
+
+
–
– 6
Natural capital
–
–
–
–
Financial Capital and Growth
Growth
Foreign capital
Financial capital
Human capitalSocial capital
Real capital
7
11
3
1
4
5
2
98
10
+
+
+
+
+
–
– 6
Natural capital
–
–
–
–
Social Capital and Growth
Growth
Foreign capital
Financial capital
Human capitalSocial capital
Real capital
7
11
3
1
4
5
2
98
10
+
+
+
+
+
–
– 6
Natural capital
–
–
–
–
Foreign Capital and Growth
Growth
Real Real
capital capital
and and
growthgrowthNatural
capital
crowds
out real
capital
0
5
10
15
20
25
30
35
40
45
0 20 40 60
Share of natural capital in national wealth 1994 (%)
Inve
stm
ent
1965
-98
(% o
f G
DP
)
r = -0.38
Niger
Chad
Lesotho
Guinea Bissau
-8
-6
-4
-2
0
2
4
6
0 5 10 15 20 25 30 35
Investment 1965-98 (% of GDP)
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)
Real Real
capital capital
and and
growthgrowth
Botswana
China
NicaraguaNiger
Investme
nt 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
Interpretation of Interpretation of resultsresults
Growth
Investment
Growth
Resources
Investment
Resources
+ =
Human Human
capital and capital and
growthgrowth
Natural
capital
crowds
out human
capital
-40
-20
0
20
40
60
80
100
120
0 20 40 60
Share of natural capital in national wealth 1994 (%)
Sec
on
dar
y-sc
ho
ol e
nro
lmen
t 19
80-9
7 (%
) r = -0.63
Uruguay
New Zealand
Saudi Arabia
Finland
Human Human
capital and capital and
growthgrowth
-8
-6
-4
-2
0
2
4
6
0 20 40 60 80 100 120
Secondary enrolment 1980-97 (% of cohort)
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me (
% p
er
year)
Finland
Thailand
New Zealand
Jamaica
Educatio
n is good
for growth
r = 0.72
An increase in
secondary-school
enrolment by 30% of
each cohort goes along
with an increase in per
capita growth by 1%
per year.
Notice diminishing returns to education
Interpretation of Interpretation of resultsresults
Growth
Education
Growth
Resources
Education
Resources
+ =
Financial Financial
capital and capital and
growthgrowth
Natural
capital
crowds out
financial
capital
0
20
40
60
80
100
120
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Mo
ney
an
d q
uas
i-m
on
ey 1
965-
98 (
% o
f G
DP
)
r = -0.68
Japan
China
New Zealand
Switzerland
Financial Financial
capital and capital and
growthgrowth
-8
-6
-4
-2
0
2
4
6
0 20 40 60 80 100 120
Money and quasi-money 1965-98 (% of GDP)
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me (
% p
er
year)
Indonesia Japan
Switzerland
Jordan
Financial
depth is
good for
growth:
Money
greases the
wheels of
commerce
and production
r = 0.66
Financial Financial
capital and capital and
growthgrowth
-8
-6
-4
-2
0
2
4
6
0 20 40 60 80 100 120
Money and quasi-money 1965-98 (% of GDP)
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me (
% p
er
year)
Indonesia Japan
Switzerland
Jordan
This helps
explain why
inflation
hurts growth:
Inflation
reduces
financial
depth and
thereby
inhibits
growth
r = 0.66
Interpretation of Interpretation of resultsresults
Growth
Financial depth
Growth
Resources
Financial depth
Resources
+ =
Foreign Foreign
capital and capital and
growthgrowth
Natural
capital
crowds
out foreign
capital
-3
-2
-1
0
1
2
3
4
5
6
7
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Act
ual
less
pre
dic
ted
FD
I 197
5-98
(%
of
GD
P)
r = -0.32
Botswana
Sweden
Switzerland
Netherlands
Guinea Bissau
Foreign Foreign
capital and capital and
growthgrowth
-8
-6
-4
-2
0
2
4
6
-4 -2 0 2 4 6 8
Actual less predicted FDI 1975-98 (% of GDP)
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)
Foreign
direct
investme
nt is good
for growth
NetherlandsNorway
Papua New Guinea
Madagascar
r = 0.62
Foreign Foreign
trade and trade and
growthgrowth
Foreign
trade is
also
good
for growth
-8
-6
-4
-2
0
2
4
6
-40 -20 0 20 40
Actual less predicted exports 1965-98 (% of GDP)
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)
Guinea Bissau
Belgium
Korea
Malaysia
r = 0.42
Interpretation of Interpretation of resultsresults
Growth
FDI
Growth
Resources
FDI
Resources
+ =
Social Social
capital and capital and
growthgrowth
Natural
capital
crowds
out social
capital0
10
20
30
40
50
60
70
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gin
i in
dex o
f in
eq
uality
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 Notice
clustercluster
r = 0.41
Inequality of access to education and land: Same pattern
Brazil
Social Social
capital and capital and
growthgrowth
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Gini index of inequality
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me (
% p
er
year)
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
Social Social
capital and capital and
growthgrowth
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Gini index of inequality
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me (
% p
er
year)
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
Interpretation of Interpretation of resultsresults
Growth
Inequality
Growth
Resources
Inequality
Resources
+ =
Social Social
capital and capital and
growthgrowth
Natural
capital
crowds
out social
capital
0
2
4
6
8
10
12
0 10 20 30 40
Share of natural capital in national wealth 1994 (%)
Co
rru
pti
on
ind
ex 2
000
r = -0.42
Zambia
Indonesia
Finland
New Zealand
Social Social
capital and capital and
growthgrowth
Honesty
is good
for growth
because
corruptio
n creates
inefficien
cy
-6
-4
-2
0
2
4
6
0 1 2 3 4 5 6 7 8 9 10
Corruption index 2000
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me (
% p
er
year)
Botswana
Kenya
Indonesia Norway
New Zealand
r = 0.40
Interpretation of Interpretation of resultsresults
Growth
Corruption
Growth
Resources
Corruption
Resources
+ =
Bottom lineBottom lineNatural resources can hurt Natural resources can hurt
growth by crowding out growth by crowding out 1.1. Real capitalReal capital
via blunted incentives to savevia blunted incentives to save
2.2. Human capitalHuman capital through neglect of educationthrough neglect of education
3.3. Social capitalSocial capital through rent seeking, corruption, through rent seeking, corruption,
inequality, etc.inequality, etc.
4.4. Financial capitalFinancial capital5.5. Foreign capitalForeign capital
Bottom lineBottom lineNatural resources bring Natural resources bring
risksrisks
Awash in easy cash, they may find that Awash in easy cash, they may find that hard choices perhaps can be avoidedhard choices perhaps can be avoidedAwareness of these risks is perhaps the Awareness of these risks is perhaps the best insurance policy against them best insurance policy against them
A false sense of security A false sense of security tempts people to underrate tempts people to underrate or overlook the need for or overlook the need for good policies and good policies and institutions, good institutions, good education, and good education, and good investmentinvestment
These slides can be viewed on my website: www.hi.is/~gylfason
An old storyAn old story
The EndThe End
David Landes David Landes (1998) (1998) tells the story tells the story of Spain following the colonization of Spain following the colonization of South and Central America of South and Central America which made Spain rich in gold which made Spain rich in gold and other natural resources: and other natural resources:
““Easy money is bad for you.Easy money is bad for you. It It represents short-run gain that will be represents short-run gain that will be paid for in immediate distortions andpaid for in immediate distortions and
later regrets.later regrets.””
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