Inequality and Economic Growth: Do Natural Resources Matter?

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Inequality and Economic Growth Do Natural
Resources Matter?
Thorvaldur Gylfason and Gylfi Zoega
2
Sources of Growth
Endogenous growth X can be almost anything!


?
Arthur Lewis X is trade, stable politics, good
weather
3
Sources of Growth
Dutch disease Rent seeking
Conditional convergence




?



Natural capital crowds out human and physical
capital
4
Natural capital tends to crowd out
Recent Literature
But Norway is, so far at least, an exception

• Five main linkages
• Dutch disease
• Adversely affects level, composition, or
  volatility of trade and investment
• Rent seeking
• Protectionism, corruption
• Education
• False sense of security
• Poor quality of policies and institutions
• 5. Investment

Foreign capital
Social capital
Human capital
Physical capital
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Natural Resource Abundance versus Dependence
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
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Inequality and Growth
X inequality











Inequality and growth are both endogenous, and
depend on natural resources
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Theory

• Two sectors
• Primary sector with unequal distribution of
  earnings
• Manufacturing sector with opportunities for
  learning and innovation
• Large primary sector means
• Greater inequality
• Slower economic growth

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Empirical Analysis

• Explore relationship between natural resource
  intensity, inequality, and economic growth across
  countries since 1965
• Hypothesis Natural resource dependence hurts
  growth through increased inequality, inter alia
• Study 87 industrial and developing countries from
  1965 to 1998

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Distribution of Income and Land
r rank correlation
Land is less equally distributed than income
r 0.57
45?
50 countries
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Inequality and Natural Capital
Increased natural resource dependence goes along
with increased inequality
Notice cluster
7 African countries where saving is 5 of GDP
and per capita growth is -1 per year
Inequality of access to education and land Same
pattern
Increase in natural capital by 3 of national
wealth goes along with an increase in Gini by 1
point.
r 0.41
75 countries
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Natural Capital and Economic Growth
What is the empirical evidence?
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 S/Y 0.32
Notice two clusters
8 African countries S/Y 0.05
r -0.64
85 countries
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Growth and Inequality, 1965-98
What do the data say?
75 countries
An increase in Gini index by 12 points goes along
with a decrease in per capita growth by almost 1
per year
Korea
No discernible sign that equality stands in the
way of economic growth
France
Brazil
South Africa
Sweden
r -0.50
Sierra Leone
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One Possible Interpretation
Inequality
Growth
Growth


Resources
Inequality
Resources
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Another Possible Interpretation
Inequality
Growth
Growth


Resources
Resources
Inequality
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Education and Inequality Another Link?
Now consider the relationship between inequality
and three different measures of education inputs,
outcomes, and participation 1. Public
expenditure on education 2. Expected years of
schooling for girls 3. Secondary-school enrolment
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Secondary Enrolment and Inequality
An increase in the secondary-school enrolment
rate by five percentage point goes along with a
decrease of almost one point on the Gini scale.
Expenditure on education and years of schooling
Same pattern
r -0.54
75 countries
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Secondary Enrolment and Growth
An 25 point increase in secondary-school
enrolment goes along with an increase in per
capita growth by 1 per year.
r 0.72
Positive but diminishing returns to education
87 countries
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One Possible Interpretation
Growth
Growth
Inequality


Education
Inequality
Education
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Another Possible Interpretation
Growth
Growth
Inequality


Inequality
Education
Education
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Investment and Natural Capital
An increase in natural capital by 5 of national
wealth goes along with a reduction in investment
by almost 1 of GDP.
Increased natural resource dependence discourages
investment and growth
r -0.38
86 countries
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Education and Natural Capital
An increase in natural capital by 10 of national
wealth goes along with a reduction in secondary
enrolment by almost 15 of cohort.
Increased natural resource dependence discourages
education and growth
r -0.63
87 countries
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Conclusion
Diversification away from natural resources may
spur economic growth 1. by increasing and
improving human capital ... 2. ... as well as
social capital, by reducing inequality ... 3. ...
and also real capital This may be one reason why
inequality and growth are inversely related
across countries an equilibrium outcome
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Conclusion
These slides can be viewed on my website
www.hi.is/gylfason
Other possible reasons 1. More and better
education reduces inequality and encourages
growth 2. Excessive inequality triggers demand
for more and better education that reduces
inequality and speeds up growth 3. Excessive
inequality reduces social cohesion, efficiency,
and growth Many possibilities!
The End