from democracy to growth thorvaldur gylfason. to grow what it takes to grow i.saving and investment...

From From Democracy Democracy to Growthto Growth

Thorvaldur GylfasonThorvaldur Gylfason

What it takes to to growgrowI.I. Saving and investmentSaving and investment

Physical capitalPhysical capitalII.II. Education, health careEducation, health care

Human capitalHuman capitalIII.III. Exports and importsExports and imports

Foreign capitalForeign capitalIV.IV. Democracy and freedomDemocracy and freedom

Social capitalSocial capitalV.V. StabilityStability

Financial capitalFinancial capitalVI.VI. Diversification away from Diversification away from

Natural capitalNatural capital

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, health careEducation, health careHuman capital Human capital (India, Ireland)(India, Ireland)

III.III. Exports and importsExports and importsForeign capital Foreign capital (Botswana, (Botswana, China, Estonia, Ireland, Korea)China, Estonia, Ireland, Korea)

IV.IV. Democracy and freedomDemocracy and freedomSocial capital Social capital (Botswana)(Botswana)

Botswana and Nigeria: GDP per capita 1965-2004 (2000 USD)

Botswana Botswana 7.1%7.1%

Nigeria Nigeria 0.6%0.6%

0

500

1000

1500

2000

2500

3000

3500

4000

1965 1970 1975 1980 1985 1990 1995 2000

Botswana

Nigeria

Nenadi Usman, Nenadi Usman,

Nigeria’s economy Nigeria’s economy

minister: minister:

““Oil has made us lazy”Oil has made us lazy”

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.”

Lee Kwan YewLee Kwan Yew,, founding father of founding father of Singapore (1959-1991)Singapore (1959-1991),, would would notnot have been surprised either: have been surprised either:

““I thought then that wealth depended mainly I thought then that wealth depended mainly on the possession of territory and on the possession of territory and natural natural resourcesresources, whether fertile land , whether fertile land ......, or , or valuable minerals, or oil and gas. It was only valuable minerals, or oil and gas. It was only after I had been in office for some years after I had been in office for some years that I recognized ... that the decisive factors that I recognized ... that the decisive factors were the were the peoplepeople, their natural abilities, , their natural abilities, educationeducation and training. and training.””

Natural resources: Natural resources: A mixed blessingA mixed blessing

Six determinantsSix determinants of of economic growtheconomic growth

Investm en t O penness Education

G row th+ ++

Democracy Diversification

+ +

denotes a positive effect in the direction shown+

Stability +

Several other

linkages among

determinants

Two hypothesesTwo hypothesesDemocracy makes it easier to replace bad Democracy makes it easier to replace bad

governments by better ones and for governments by better ones and for ideas to compete, thus fostering ideas to compete, thus fostering efficiencyefficiency and and diversificationdiversification, which is , which is good for growthgood for growth

Democracy plays into the hands of Democracy plays into the hands of pressure groupspressure groups that abuse their that abuse their power by swaying public policies and power by swaying public policies and institutions in their favor, which is institutions in their favor, which is bad bad for growthfor growth

Empirical question

Democracy 1946-Democracy 1946-20002000

DemocracyDemocracy

OligocracyOligocracy

AutocracyAutocracy

1946: 20 out of 701946: 20 out of 70

2000: 90 out of 1702000: 90 out of 170

Nu

mb

er

of

cou

ntr

ies

Nu

mb

er

of

cou

ntr

ies

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 = -0.62r = -0.62

Botswana

China

Niger

Venezuela

Korea

85 countries85 countries

r = Spearman r = Spearman

rank correlationrank correlation

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 = -0.62r = -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,as does as does corruptioncorruption

Growth and corruption, 1965-98

Cameroon

Honesty is good for growth because corruption creates inefficiency

-6

-4

-2

0

2

4

6

0 1 2 3 4 5 6 7 8 9 10

Corruption index 2000

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 = 0.40r = 0.40 Botswana

Indonesia Norway

New ZealandKenya

Income per head and Income per head and democracydemocracy

144 countries

Lipset’s Law: Lipset’s Law:

Income per Income per

capita capita increases increases

with with democracydemocracy

0

10000

20000

30000

40000

50000

-10 -5 0 5 10

Index of democracy 1960-2000

GN

P p

er

cap

ita 2

000 (

US

$, p

pp

) r = 0.62r = 0.62 LuxembourgLuxembourg

SingaporeSingapore

USAUSA

OECDOECD

KuwaitKuwaitBahrainBahrain MalaysiaMalaysia

Singapore is an Singapore is an

outlieroutlier

Democracy and Democracy and initial initial incomeincome per head per head

144 countries

Lipset in Lipset in

reverse:reverse:Democracy Democracy

increases increases

with initial with initial

income per income per

capitacapita

-10

-5

0

5

10

4 6 8 10 12

Log of GNP per capita 1960

Ind

ex o

f d

emo

crac

y 19

60-2

000

r = 0.51r = 0.51

Growth and democracy, 1960-2000

Democracy Democracy

and growth and growth

seem to go seem to go

togethertogether

-8

-6

-4

-2

0

2

4

6

8

-10 -5 0 5 10


Gro

wth

of

GD

P p

er c

apit

a 19

60-2

000,

ad

just

ed

for

init

ial i

nco

me

(% p

er y

ear)

r = 0.48r = 0.48

EquatorialGuinea

MalaysiaSingapore

Larger sample


Education and democracy, 1960-2000Equatorial

Guinea

MalaysiaSingapore


Democracy Democracy

and and education education

also go also go hand in hand in handhand0

20

40

60

80

100

-10 -5 0 5 10


Sec

on

dar

y-sc

ho

ol e

nro

lmen

t o

f g

irls

197

0-88

(%

)

r = 0.62r = 0.62

Primary production and Primary production and democracydemocracy, 1960-2000

146 countries

DemocracDemocrac

y varies y varies inversely inversely

with with primary primary productioproductio

nn-10

-8

-6

-4

-2

0

2

4

6

8

10

0 20 40 60 80 100

Primary production 1960-2000 (% of GDP)

Ind

ex o

f d

emo

crac

y 19

60-2

000

r = -0.59r = -0.59

Political liberties and natural resources

Botswana

0

1

2

3

4

5

6

7

8

9

0 20 40 60

Share of natural capital in national wealth 1994 (%)

Ind

ex o

f p

olit

ical

lib

erti

es 1

972-

90

r = 0.48r = 0.48 Back to smaller sample, same story: Natural capital tends to crowd out social capital


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 = -0.64r = -0.64 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

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

Regression results on Regression results on growth and growth and democracydemocracyModel 1Model 1

Political Political libertiesliberties

0.340.34(3.44)(3.44)

Initial Initial incomeincome

Natural Natural capitalcapital

InvestmeInvestmentnt

SecondarSecondary y educationeducation

FertilityFertility

Adj. RAdj. R22 0.110.11

Note: t-values are shown within parentheses. 85 observations. No outliers were excluded. Method of estimation is Ordinary Least Squares.

Regression results on Regression results on growth and growth and democracydemocracyModel 1Model 1 Model 2Model 2


0.340.34(3.44)(3.44)

0.770.77(6.01)(6.01)


-1.14-1.14(4.64)(4.64)




FertilityFertility

Adj. RAdj. R22 0.110.11 0.290.29


Regression results on Regression results on growth and growth and democracydemocracyModel 1Model 1 Model 2Model 2 Model 3Model 3


0.340.34(3.44)(3.44)

0.770.77(6.01)(6.01)

0.590.59(5.32)(5.32)


-1.14-1.14(4.64)(4.64)

-1.31-1.31(6.33)(6.33)


-0.10-0.10(6.17)(6.17)



FertilityFertility

Adj. RAdj. R22 0.110.11 0.290.29 0.510.51


Regression results on Regression results on growth and growth and democracydemocracyModel 1Model 1 Model 2Model 2 Model 3Model 3 Model 4Model 4


0.340.34(3.44)(3.44)

0.770.77(6.01)(6.01)

0.590.59(5.32)(5.32)

0.490.49(4.76)(4.76)


-1.14-1.14(4.64)(4.64)

-1.31-1.31(6.33)(6.33)

-1.15-1.15(6.10)(6.10)


-0.10-0.10(6.17)(6.17)

-0.07-0.07(4.93)(4.93)


0.120.12(4.62)(4.62)


FertilityFertility

Adj. RAdj. R22 0.110.11 0.290.29 0.510.51 0.610.61


Regression results on Regression results on growth and growth and democracydemocracyModel 1Model 1 Model 2Model 2 Model 3Model 3 Model 4Model 4 Model 5Model 5


0.340.34(3.44)(3.44)

0.770.77(6.01)(6.01)

0.590.59(5.32)(5.32)

0.490.49(4.76)(4.76)

0.360.36(3.90)(3.90)


-1.14-1.14(4.64)(4.64)

-1.31-1.31(6.33)(6.33)

-1.15-1.15(6.10)(6.10)

-1.85-1.85(8.65)(8.65)


-0.10-0.10(6.17)(6.17)

-0.07-0.07(4.93)(4.93)

-0.65-0.65(4.45)(4.45)


0.120.12(4.62)(4.62)

0.070.07(3.05)(3.05)


0.040.04(5.12)(5.12)

FertilityFertility

Adj. RAdj. R22 0.110.11 0.290.29 0.510.51 0.610.61 0.700.70


Regression results on Regression results on growth and growth and democracydemocracyModel 1Model 1 Model 2Model 2 Model 3Model 3 Model 4Model 4 Model 5Model 5 Model 6Model 6


0.340.34(3.44)(3.44)

0.770.77(6.01)(6.01)

0.590.59(5.32)(5.32)

0.490.49(4.76)(4.76)

0.360.36(3.90)(3.90)

0.190.19(2.40)(2.40)


-1.14-1.14(4.64)(4.64)

-1.31-1.31(6.33)(6.33)

-1.15-1.15(6.10)(6.10)

-1.85-1.85(8.65)(8.65)

-2.03-2.03(11.61)(11.61)


-0.10-0.10(6.17)(6.17)

-0.07-0.07(4.93)(4.93)

-0.65-0.65(4.45)(4.45)

-0.04-0.04(3.35)(3.35)


0.120.12(4.62)(4.62)

0.070.07(3.05)(3.05)

0.060.06(2.87)(2.87)


0.040.04(5.12)(5.12)

0.010.01(1.21)(1.21)

FertilityFertility -0.94-0.94(6.58)(6.58)

Adj. RAdj. R22 0.110.11 0.290.29 0.510.51 0.610.61 0.700.70 0.810.81


Regression results on Regression results on growth and growth and democracydemocracyModel 1Model 1 Model 2Model 2 Model 3Model 3 Model 4Model 4 Model 5Model 5 Model 6Model 6


0.340.34(3.44)(3.44)

0.770.77(6.01)(6.01)

0.590.59(5.32)(5.32)

0.490.49(4.76)(4.76)

0.360.36(3.90)(3.90)

0.190.19(2.40)(2.40)


-1.14-1.14(4.64)(4.64)

-1.31-1.31(6.33)(6.33)

-1.15-1.15(6.10)(6.10)

-1.85-1.85(8.65)(8.65)

-2.03-2.03(11.61)(11.61)


-0.10-0.10(6.17)(6.17)

-0.07-0.07(4.93)(4.93)

-0.65-0.65(4.45)(4.45)

-0.04-0.04(3.35)(3.35)


0.120.12(4.62)(4.62)

0.070.07(3.05)(3.05)

0.060.06(2.87)(2.87)


0.040.04(5.12)(5.12)

0.010.01(1.21)(1.21)

FertilityFertility -0.94-0.94(6.58)(6.58)

Adj. RAdj. R22 0.110.11 0.290.29 0.510.51 0.610.61 0.700.70 0.810.81


Repeat for

bigger sample,

switch to EViews

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)


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 resourcesnatural resources which make the which make the effort to achieve it.effort to achieve it.



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 sound with sound democratic democratic institutionsinstitutions which which make the effort to make the effort to achieve it.achieve it.


Also, political diversification – democracy! – is almost surely worthwhile in its own right

Conclusion: Conclusion: It can It can be donebe done

The effort that is required includes diversification away from agriculture and other natural-resource intensive activity into manufacturing (as in China) and services (as in India)

Economic diversification entails political diversification from dictatorship to democracy (as in Korea and Taiwan)

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

The effort that is required includes diversification away from agriculture and other natural-resource intensive activity into manufacturing (as in China) and services (as in India)

Economic diversification entails political diversification from dictatorship to democracy (as in Korea and Taiwan)

from democracy to growth thorvaldur gylfason. to grow what it takes to grow i.saving and investment...

Documents

natural resources

natural abilities

riding camels

health carehuman capital

mixed blessinglisten

positive effect

nenadi usman

nigerias economy minister