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Economic Economic DiversificatioDiversification and n and Structural Structural ChallengesChallenges
Thorvaldur GylfasonThorvaldur Gylfason
What it takes The advancement from The advancement from
widespread poverty to widespread poverty to widely shared affluence widely shared affluence requires one thing, and one requires one thing, and one thing only:thing only:
Economic growthEconomic growth Must ask: What are the Must ask: What are the
main pillars of economic main pillars of economic growth?growth?
What it takes to to growgrowI.I. Saving and investmentSaving and investment
Physical capitalPhysical capitalII.II. Education, educationEducation, education
Human capitalHuman capitalIII.III. Exports and importsExports and imports
Foreign capitalForeign capitalIV.IV. DemocracyDemocracy
Social capitalSocial capitalV.V. DiversificationDiversification
Undisputed
Controversial
What it takes to to diversifydiversifyI.I. Saving and investmentSaving and investment
Physical capital Physical capital (Infrastructure, (Infrastructure, tourism, etc.)tourism, etc.)
II.II. Education, educationEducation, educationHuman capital Human capital (Ireland)(Ireland)
III.III. Exports and importsExports and importsForeign capital Foreign capital (Botswana, (Botswana, Estonia, Ireland, Korea)Estonia, Ireland, Korea)
IV.IV. DemocracyDemocracySocial capital Social capital (Botswana)(Botswana)
Botswana and Nigeria: GDP per capita 1960-2002 (1995 USD)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
19601964196819721976198019841988199219962000
Botswana
Nigeria
Nedadi Usman, Nedadi Usman,
Nigeria’s economy Nigeria’s economy
minister: minister:
““Oil has made us lazy”Oil has made us lazy”
Botswana Botswana
6.3%6.3%
Nigeria Nigeria 0.2%0.2%
Natural resources: Natural resources: A mixed blessingA mixed blessing
Listen to King Faisal of Saudi Arabia (1964-1975):
““In one generation we went In one generation we went from riding camels to riding from riding camels to riding Cadillacs. The way we are Cadillacs. The way we are wasting money, I fear the wasting money, I fear the next generation will be riding next generation will be riding camels again.”camels again.”
Three main sources of Three main sources of economic growtheconomic growth
Investm en t O penness Education
G row th+ +
denotes a positive effect in the direction shown
+
+
See Figures 1-6
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
School enrollment, secondary, female (% net) Lin
0.09 1065020 30 40 60 70 80 90
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Secondary Education 2001 (Girls)Income Per Head and Secondary Education 2001 (Girls)
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
School enrollment, secondary, male (% net) Lin
0.09 1055020 30 40 60 70 80 90
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Secondary Education 2001 (Boys)Income Per Head and Secondary Education 2001 (Boys)
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
Gross capital formation (% of GDP) Log
-20 1200 5 10 5030208432
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Domestic Investment 2001Income Per Head and Domestic Investment 2001
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
Gross foreign direct investment (% of GDP) Log
0.00092 1 3605 10 50 10020
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Foreign Investment 2001Income Per Head and Foreign Investment 2001
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
Exports of goods and services (% of GDP) Lin
0.0000128 18510050 150
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Exports 2001Income Per Head and Exports 2001
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
Import duties (% of tax revenue) Lin
0.01 825020 30 40 60 70
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Import Duties 2001Income Per Head and Import Duties 2001
Two further Two further determinantsdeterminants of of economic growtheconomic growth
Investm en t O penness Education
G row th+ ++
Democracy Diversification
+ +
Growth and political liberties, 1965-98
Central African Republic
Brazil Democracy Democracy is good for is good for growth:growth: No visible No visible sign that sign that democracy democracy stands in stands in the way of the way of economic economic growthgrowth-8
-6
-4
-2
0
2
4
6
0 2 4 6 8
Index of political liberties 1972-90
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)
r = -0.62
Botswana
China
Niger
Venezuela
Korea
85 countries85 countries
Growth and political liberties, 1965-98
Central African Republic
Brazil
-8
-6
-4
-2
0
2
4
6
0 2 4 6 8
Index of political liberties 1972-90
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)
r = -0.62
Botswana
China
Niger
Venezuela
Korea
Political Political liberty is liberty is good for good for growthgrowthbecause because oppression oppression breeds breeds inefficiencinefficiency,y,and so and so does does corruptioncorruption
Growth and natural resources, 1965-98
-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)
Madagascar
Mali
Cameroon
Mauritius
r = -0.64
See Figures 7-8
Natural Natural resource resource dependence dependence tends to hurt growththrough rent seeking and by creating a false sense of security
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
Manufactures exports (% of merchandise exports) Lin
0.000001 1055020 30 40 60 70 80 90
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Economic Diversification 2001Income Per Head and Economic Diversification 2001
GD
P p
er c
apita
, PP
P (cu
rren
t int
erna
tiona
l $)
Log
210
61 500
Agriculture, value added (% of GDP) Lin
0.07 95.55020 30 40 60 70 80
500
1 000
5 000
10 000
40 000
20 000
7 000
3 000
2 000
Africa
Americas
Arab countries
Asia
Europa
Income Per Head and Agriculture 2001Income Per Head and Agriculture 2001
Sir Arthur Lewis got it Sir Arthur Lewis got it rightright
Since the second Since the second world war it has world war it has become quite clear become quite clear that rapid economic that rapid economic growth is available growth is available to those countries to those countries with adequate with adequate natural resources natural resources which which make the make the effort to achieve iteffort to achieve it..
W. Arthur LewisW. Arthur Lewis(Accra, 1968)(Accra, 1968)
To grow or not to grow is in large measure a matter of choice
To grow or not to grow is in large measure a matter of choice
These slides – and more! – can be viewed on my website: www.hi.is/~gylfason
Conclusion: Conclusion: It can It can be donebe done
The EndThe End
Many of the Many of the
constraints on constraints on
growth are growth are
man-mademan-made, ,
and can be and can be
removedremoved