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Principles of Economic Growth

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Title: Principles of Economic Growth Author: Dagfinnur Sveinbj rnsson Last modified by: orvaldur Gylfason Created Date: 4/4/1999 11:30:47 AM Document presentation ... – PowerPoint PPT presentation

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Title: Principles of Economic Growth


1
Natural Resources and Economic Growth The Role
of Investment
Thorvaldur Gylfason and Gylfi Zoega
2
Sources of growth Investment and education


denotes a positive effect in the direction shown

3
Sources of growth Investment and education
Adam Smith knew this, and more, as did Arthur
Lewis
Solow raised doubts on long-run linkages
Nelson and Phelps on education


denotes a positive effect in the direction shown

4
More sources of growth
Arthur Lewis x is trade, stable politics, good
weather
But Solow carried the day long-run growth is
exogenous



denotes a positive effect in the direction shown

5
Enter natural resources
Endogenous growth x can be almost anything!
Dutch disease and rent seeking




?

denotes a positive effect in the direction shown

denotes a negative effect in the direction shown

6
Enter natural resources




?


Recent papers Natural resource abundance reduces
high-skill labor intensity, thus hurting growth
7
Enter natural resources




?



This paper Natural resource abundance reduces
investment and hence also growth
8
Aims and overview
  • Explore the relationship between natural resource
    intensity, saving, and investment in theory as
    well as empirically across countries since 1965
  • Explore also the linkages among saving,
    investment, and economic growth across countries
    since 1965
  • Hypothesis Resource abundance reduces growth via
    investment

9
Outline
  1. Introduction
  2. Preview
  3. Literature
  4. Norway
  5. Theory
  6. Correlations
  7. Regressions
  8. Conclusion

10
Natural resource abundance and economic
structure
Resource poor, resource dependent (Chad, Mali)
Resource rich, resource dependent (OPEC)
Resource dependence, b
Resource rich, resource free (Canada, USA)
Resource poor, resource free (Jordan, Panama)
Resource abundance, N
11
Natural capital and economic growth
What is the empirical evidence?
r rank correlation
An increase in the natural capital share by 8
goes along with a decrease in per capita growth
by 1 per year.
8 Asian countries I/Y 0.32
Notice two clusters
8 African countries I/Y 0.05
r -0.64
85 countries
12
Recent literature
But Norway is, so far at least, an exception
  • Four main linkages
  • Dutch disease
  • Hurts level or composition of exports
  • Rent seeking
  • Protectionism, corruption
  • Education
  • False sense of security
  • Poor quality of policies and institutions
  • 5. Investment

13
Golden Rule
Theory Optimal saving
Ramsey
14
Implications for optimal saving
An increase in the share of natural resources in
national output reduces the marginal productivity
of capital and the real interest rate, and
reduces thereby also the optimal saving rate and
economic growth Natural capital crowds out
physical capital An increase in the natural
capital share may also hamper financial
development
15
More theory Endogenous growth
Ramsey rule
16
More theory Endogenous growth
Privately optimal
Socially optimal
Discrepancy between privately and socially
optimal growth varies directly with the share of
natural resources in national income
Extent of market failure varies directly with the
share of natural resources in national income
17
Empirical research strategy
  • Study 85 industrial and developing countries from
    1965 to 1998
  • Look for cross-country patterns in data from the
    World Bank
  • Investment and natural resources
  • Investment, genuine saving, gross saving
  • Investment and growth
  • Financial depth
  • Dig deeper through regression analysis

18
Natural capital and investment
An increase in the natural capital share by 10
is associated with a decrease in investment by 2
of GDP.
r -0.38
85 countries
19
Investment and economic growth
An increase in investment by 4 of GDP is
associated with an increase in per capita growth
by 1 per year.
r 0.65
85 countries
20
From gross investment to genuine saving
Gross investment does not take quality into
account Genuine domestic saving is adjusted for
quality, and is defined as Gross domestic saving
minus Depreciation of physical capital
plus Expenditure on education minus Depreciation
of natural capital Energy, minerals, forests,
carbon dioxide
21
Natural capital and genuine saving
An increase in the natural capital share by 10
is associated with a decrease in genuine saving
by 4 of GDP.
r -0.53
85 countries
22
Genuine saving and economic growth
An increase in genuine saving by 6 of GDP goes
along with an increase in per capita growth by 1
per year.
r 0.72
85 countries
23
Natural capital and gross saving
An increase in the natural capital share by 10
is associated with a decrease in gross saving by
4 of GDP.
r -0.40
85 countries
24
Gross saving and economic growth
An increase in gross saving by 6-7 of GDP goes
along with an increase in per capita growth by 1
per year.
r 0.73
85 countries
25
Summary of results
  • We have seen that, across countries
  • Economic growth varies directly with three
    different measures of saving and investment
  • The three measures of saving and investment are
    all inversely related to natural capital
  • Economic growth varies inversely with natural
    capital

26
Summary of results
Growth
Growth
Investment


Investment
Resources
Resources
27
Financial depth
Resource-abundant nations may feel they have less
need for finance Smooth out consumption over time
by adjusting the pace of resource extraction If
so, a high natural capital share may go along
with limited financial depth, low investment, and
slow growth
28
Natural capital and financial depth
r -0.68
85 countries
29
Financial depth and economic growth
r 0.66
85 countries
30
Regression results
Dependent variable Constant Natural capital Initial income Enrol-ment rate Invest-ment rate R2
Economic growth 10.1 (6.0) -0.06 (4.6) -1.54 (7.3) 0.05 (5.5) 0.10 (3.5) 0.67
Enrolment rate -103.7 (7.5) -0.75 (4.2) 19.9 (12.4) 0.72
Investment rate 22.5 (29.3) -0.20 (4.1) 0.16
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
31
Regression results
Direct effect of natural capital on growth is
-0.06
Dependent variable Constant Natural capital Initial income Enrol-ment rate Invest-ment rate R2
Economic growth 10.1 (6.0) -0.06 (4.6) -1.54 (7.3) 0.05 (5.5) 0.10 (3.5) 0.67
Enrolment rate -103.7 (7.5) -0.75 (4.2) 19.9 (12.4) 0.72
Investment rate 22.5 (29.3) -0.20 (4.1) 0.16
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
32
Regression results
Dependent variable Constant Natural capital Initial income Enrol-ment rate Invest-ment rate R2
Economic growth 10.1 (6.0) -0.06 (4.6) -1.54 (7.3) 0.05 (5.5) 0.10 (3.5) 0.67
Enrolment rate -103.7 (7.5) -0.75 (4.2) 19.9 (12.4) 0.72
Investment rate 22.5 (29.3) -0.20 (4.1) 0.16
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
33
Regression results
Indirect effect through education is -0.750.05 ?
-0.04
Dependent variable Constant Natural capital Initial income Enrol-ment rate Invest-ment rate R2
Economic growth 10.1 (6.0) -0.06 (4.6) -1.54 (7.3) 0.05 (5.5) 0.10 (3.5) 0.67
Enrolment rate -103.7 (7.5) -0.75 (4.2) 19.9 (12.4) 0.72
Investment rate 22.5 (29.3) -0.20 (4.1) 0.16
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
34
Regression results
Dependent variable Constant Natural capital Initial income Enrol-ment rate Invest-ment rate R2
Economic growth 10.1 (6.0) -0.06 (4.6) -1.54 (7.3) 0.05 (5.5) 0.10 (3.5) 0.67
Enrolment rate -103.7 (7.5) -0.75 (4.2) 19.9 (12.4) 0.72
Investment rate 22.5 (29.3) -0.20 (4.1) 0.16
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
35
Regression results
Indirect effect through investment is -0.200.10
-0.02
Dependent variable Constant Natural capital Initial income Enrol-ment rate Invest-ment rate R2
Economic growth 10.1 (6.0) -0.06 (4.6) -1.54 (7.3) 0.05 (5.5) 0.10 (3.5) 0.67
Enrolment rate -103.7 (7.5) -0.75 (4.2) 19.9 (12.4) 0.72
Investment rate 22.5 (29.3) -0.20 (4.1) 0.16
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
36
Regression results
Total effect is -0.06 (-0.75)0.05
(-0.20)0.10 ? -0.12
Dependent variable Constant Natural capital Initial income Enrol-ment rate Invest-ment rate R2
Economic growth 10.1 (6.0) -0.06 (4.6) -1.54 (7.3) 0.05 (5.5) 0.10 (3.5) 0.67
Enrolment rate -103.7 (7.5) -0.75 (4.2) 19.9 (12.4) 0.72
Investment rate 22.5 (29.3) -0.20 (4.1) 0.16
Recursive system
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
37
Summary of results
  • An increase in the natural capital share by 10
    percentage points
  • reduces growth directly by 0.6 points
  • reduces enrolment by 8 points, lowering the
    growth rate further by 0.4 points
  • reduces investment by 2 of GDP, lowering growth
    further by 0.2 points
  • So, the total effect on growth is -1.2 percentage
    points not small at all!

38
More regression results
Dependent variable Natural capital Initial income Enrol-ment rate Gross saving rate Financial depth R2
Economic growth -0.06 (5.2) -1.64 (9.2) 0.04 (5.4) 0.09 (6.4) 0.74
Enrolment rate -0.90 (5.2) 16.0 (10.1) 0.70
Gross saving rate -0.26 (2.5) 4.95 (3.0) 0.28
Financial depth -0.03 (7.4) 0.39
Suppress constants
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
39
More regression results
Dependent variable Natural capital Initial income Enrol-ment rate Gross saving rate Financial depth R2
Economic growth -0.06 (5.2) -1.64 (9.2) 0.04 (5.4) 0.09 (6.4) 0.74
Enrolment rate -0.90 (5.2) 16.0 (10.1) 0.70
Gross saving rate -0.26 (2.5) 4.95 (3.0) 0.28
Financial depth -0.03 (7.4) 0.39
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
40
More regression results
Dependent variable Natural capital Initial income Enrol-ment rate Gross saving rate Financial depth R2
Economic growth -0.06 (5.2) -1.64 (9.2) 0.04 (5.4) 0.09 (6.4) 0.74
Enrolment rate -0.90 (5.2) 16.0 (10.1) 0.70
Gross saving rate -0.26 (2.5) 4.95 (3.0) 0.28
Financial depth -0.03 (7.4) 0.39
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
41
More regression results
Total effect is -0.06 (-0.90)0.04
(-0.26)0.09 (-0.03)4.950.09 ? -0.13
Dependent variable Natural capital Initial income Enrol-ment rate Gross saving rate Financial depth R2
Economic growth -0.06 (5.2) -1.64 (9.2) 0.04 (5.4) 0.09 (6.4) 0.74
Enrolment rate -0.90 (5.2) 16.0 (10.1) 0.70
Gross saving rate -0.26 (2.5) 4.95 (3.0) 0.28
Financial depth -0.03 (7.4) 0.39
Note 85 observations. Method of estimation is
SUR. t-statistics are shown within parentheses.
42
Bottom line
These slides can be viewed on my website
www.hi.is/gylfason
  • Natural resource intensity impedes economic
    growth by reducing or corroding
  • social capital
  • through rent seeking, etc.
  • human capital
  • through neglect of education
  • physical capital
  • through blunted incentives to save and invest
    as well as financial immaturity

The End
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