InequalityInequality and Economic Growth: Do Natural Resources Matter?

Thorvaldur Gylfasonand Gylfi Zoega

Sources of GrowthSources of Growth

In ves tm en t X E d u ca tion

G row th+ +

?

Endogenous growth: X can be almost anything!

Arthur Lewis: X is trade, stable politics, good weather

Sources of Sources of GrowthGrowth

In ves tm en t

In it ia l In com e N atu ra l C ap ita l

X E d u ca tion

G row th+

+

+–– ?

Dutch disease

Rent seeking

––

Natural capital crowds Natural capital crowds

out out humanhuman and and physicalphysical

capitalcapital

Conditional Conditional

convergenceconvergence

Recent LiteratureRecent LiteratureFive main linkages:

1. Dutch disease Adversely affects level, composition, or

volatility of trade and investment2. Rent seeking

Protectionism, corruption3. Education4. False sense of security

Poor quality of policies and institutions5. Investment

But Norway is,

so far at least,

an exceptionForeign Foreign

capitalcapital

Social Social capitalcapital

Human Human

capitalcapital

PhysicaPhysical l capitalcapital

Natural capital Natural capital tends to crowd tends to crowd outout

Natural Resource Abundance versus Dependence

Resource poor,resource dependent

(Chad, Mali)

Resource rich,resource dependent

(OPEC)

Resource rich,resource free(Canada, USA)

Resource poor,resource free

(Jordan, Panama)

Reso

urce

dep

ende

nce

Reso

urce

dep

ende

nce

Resource abundanceResource abundance

Dependence hurts growth, even if abundance may helpHypothesis:

InequalityInequality and Growth and Growth

In ves tm en t

In it ia l In com e N atu ra l C ap ita l

In eq u a lity E d u c a tion

G row th

+

+

+–––

–

–

+–

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

X = inequality

TheoryTheory Two sectors

Primary sector with unequal distribution of earnings

Manufacturing sector with opportunities for learning and innovation

Large primary sector meansGreater inequalitySlower economic growth

Explore relationship between natural resource intensity, inequality, and economic growthinequality, and economic growth across countries since 1965

Hypothesis:Hypothesis: Natural resource Natural resource dependence hurts growthdependence hurts growth through increased inequality, inter alia

Study 87 industrial and developing countries from 1965 to 1998

Empirical AnalysisEmpirical Analysis

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70

Gini index for income (various years)

Gin

i ind

ex fo

r lan

d (v

ario

us y

ears

)

Distribution of Distribution of Income and Land Income and Land

45

Land is less equally distributed than income

r = 0.57

r = rank correlation

50 countries

Inequality and Natural Capital

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60

Share of natural capital in national wealth 1994 (%)

Gin

i ind

ex o

f ine

qual

ity

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

Increased natural

resource dependence goes

along with increased

inequality

r = 0.41

75 countries

Inequality of access to education and land: Same pattern

Natural Capital and Economic Growth

85 countries85 countries

What is the empirical evidence?

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60

Share of natural capital in national wealth 1994 (%)

Per c

apita

gro

wth

196

5-98

, adj

uste

d fo

r ini

tial

inco

me

(% p

er y

ear)

An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.

r = -0.64

8 African countriesS/Y = 0.05

8 Asian countriesS/Y = 0.32

Notice two Notice two

clustersclusters

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality

Per c

apita

gro

wth

196

5-98

, adj

uste

d fo

r ini

tial

inco

me

(% p

er y

ear)

An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year

r = -0.50

Growth and Inequality, 1965-98

What do the data say?

Sweden South Africa

France

Brazil

No No discernibldiscernible sign e sign that that equality equality stands in stands in the way the way of of economic economic growthgrowth

Korea

75 countries

Sierra Leone

One Possible One Possible InterpretationInterpretation

Inequality

Resources

Growth

Inequality

Growth

+ =Resources

Another Possible Another Possible InterpretationInterpretation

Inequality

Resources

Growth

Resources

Growth

+ =Inequality

Education and Education and Inequality:Inequality: Another Another Link? Link? Now consider the relationship

between inequality and threethree different measures of education inputs, outcomes, and participation:1. Public expenditure on education2. Expected years of schooling for girls3. Secondary-school enrolment

Secondary Enrolment and Inequality

75 countries75 countries0

10

20

30

40

50

60

70

0 20 40 60 80 100 120

Secondary-school enrolment 1980-97 (%)

Gin

i ind

ex o

f inc

ome

ineq

ualit

yAn increase in the secondary-school enrolment rate by five percentage point goes along with a decrease of almost one point on the Gini scale.

r = -0.54

Expenditure on education and years of schooling: Same pattern

Secondary Enrolment and Growth

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Secondary-school enrolment 1980-97 (%)

Per c

apita

gro

wth

196

5-98

, adj

uste

d fo

r in

itial

inco

me

(% p

er y

ear)

Positive but diminishing returns to education

An 25 point increase in secondary-school enrolment goes along with an increase in per capita growth by 1% per year.

r = 0.72

87 countries

One Possible One Possible InterpretationInterpretation

Growth

Education

Growth

Inequality

Inequality

+ =Education

Another Possible Another Possible InterpretationInterpretation

Growth

Inequality

Growth

Education

InequalityInequality

Education+ =

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 1

965-

98 (%

of G

DP)

Investment and Natural Capital

Increased natural resource dependence discourages investment and growth

An increase in natural capital by 5% of national wealth goes along with a reduction in investment by almost 1% of GDP.

r = -0.38

86 countries

-40

-20

0

20

40

60

80

100

120

0 20 40 60

Share of natural capital in national wealth 1994 (%)

Seco

ndar

y-sc

hool

enr

olm

ent 1

980-

97 (%

)

Education and Natural Capital

Increased natural resource dependence discourages education and growth

An increase in natural capital by 10% of national wealth goes along with a reduction in secondary enrolment by almost 15% of cohort.

r = -0.63

87 countries

ConclusionConclusionDiversificationDiversification away from natural away from natural

resources may spur economic resources may spur economic growthgrowth1.1. by increasing and improving by increasing and improving

human capitalhuman capital ... ... 2.2. ... as well as ... as well as social capitalsocial capital, by , by

reducing inequality ...reducing inequality ...3.3. ... and also ... and also real capitalreal capital

This may be one reason why inequality This may be one reason why inequality and growth are inversely related and growth are inversely related across countries: an equilibrium across countries: an equilibrium outcomeoutcome

ConConclusionclusion

The E

nd

The E

ndOther possible reasonsOther possible reasons1.1. More and better More and better educationeducation reduces reduces

inequality and encourages growth inequality and encourages growth 2.2. Excessive inequality triggers Excessive inequality triggers

demand for more and better demand for more and better education that reduces inequality education that reduces inequality and speeds up growthand speeds up growth

3.3. Excessive inequality reduces Excessive inequality reduces social social cohesioncohesion, efficiency, and growth , efficiency, and growth

Many possibilities!Many possibilities!

These slides can be viewed on my website: www.hi.is/~gylfason