Principles of Economic Growth

1
To grow or not to grow Why institutions must
make a difference
Thorvaldur Gylfason
2
Why growth rates differ

• If technology matters for economic growth, as it
  must, then
• General economic efficiency must also make a
  difference for growth
• Economic policy
• Institutions
• Institutions or geography?
• False contrast
• There is room for both, side by side

3
Why growth rates differ
Resource depletion drag Dutch disease Rent seeking





Political and economic diversification
4
Growth and political liberties, 1965-98
r rank correlation
Democracy is good for growth No visible sign
that democracy stands in the way of economic
growth
Brazil
Botswana
China
Korea
Venezuela
Central African Republic
Niger
r -0.62
85 countries
5
Growth and political liberties, 1965-98
Brazil
Political liberty is good for growth because
oppression breeds inefficiency, and so does
corruption
Botswana
China
Korea
Venezuela
Central African Republic
Niger
r -0.62
6
Growth and natural capital, 1965-98
An increase in the natural capital share by 8
goes along with a decrease in per capita growth
by 1 per year.
Australia
Venezuela
r -0.64
85 countries
7
Natural capital tends to crowd out
Recent literature
But Norway is, so far at least, an exception

• Six main linkages
• Resource depletion drag
• Dutch disease
• Hurts level, composition, or volatility of
  exports
• Rent seeking
• Protectionism, corruption, oppression
• False sense of security
• Poor quality of policies and institutions
• Education
• 6. Investment

Foreign capital
Social capital
Human capital
Real capital
8
Natural resource abundance and economic
structure
Hypothesis
Dependence hurts growth, even if abundance may
help
Resource poor, resource dependent (Chad, Mali)
Resource rich, resource dependent (OPEC)
Resource dependence
Resource rich, resource free (Canada, USA)
Resource poor, resource free (Jordan, Panama)
Resource abundance
9
Empirical research strategy

• Study 85 industrial and developing countries from
  1965 to 1998
• Look for cross-country patterns in data from the
  World Bank
• Dig deeper through regression analysis
• Recognize interconnections among several key
  determinants of growth by estimating a system of
  simultaneous equations by Seemingly Unrelated
  Regression method

10
Regression results
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
11
Investment is good for growth
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
12
Education is good for growth
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
13
Civil liberties are good for growth
Regression results
Index goes from 1 (full civil liberties) to 7
(negligible civil liberties)
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
14
Population growth hurts growth
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
15
Conditional convergence 2 per year
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
16
Abundance is good for growth
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
17
Dependence is bad for growth
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
18
Dependence is bad for growth
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
19
Dependence is bad for education
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
20
Regression results
Indirect effect through education is -0.770.02 ?
-0.02
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
21
Dependence is bad for investment
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
22
Regression results
Indirect effect through investment is -0.260.08
? -0.02
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
23
Dependence is bad for liberty
Regression results
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
24
Regression results
Indirect effect through civil liberties is
0.04(-0.27) ? -0.01
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
25
Regression results
Total effect is -0.08 (-0.77)0.02
(-0.26)0.08 0.04(-0.27) ? -0.13
Liberties and resources both matter for growth
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
26
What if abundance is not given?
Regression results
Total effect is -0.13 0.05 (0.54)0.02
(0.16)0.08 (-0.05)(-0.27) ? 0.09wealth per
person
African dummy adds nothing
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
27
Regression results
Total effect of natural capital on growth is
negative as long as wealth per head is below 150K
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
28
What is the upshot?

• Growth differentials across countries can be
  explained by several different interconnected
  factors
• Private initiatives (investment, fertility)
• Public policies (education)
• Institutions (democracy)
• Geography (natural resources)
• In particular, institutions survive the presence
  of geography, and vice versa

29
Case in point 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
30
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
• Adequate investment performance
• Excellent education record

31
Why Norway has succeeded where OPEC and others
failed

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

32
Bottom line
These slides can be viewed on my website
www.hi.is/gylfason

• Growth requires accumulation and efficient use of
  capital
• Physical capital
• through strong incentives to save and invest
• Human capital
• via education, training, less fertility in
  LDCs
• Social capital
• through democracy, etc.

Fin
Financial and foreign capital Same story