Development and Growth in Mineral-Rich Countries      New
This paper describes some of the ways in which mineral rents and their management influence economic growth and other determinants of growth as well as some of the reasons why many mineral-rich countries have not managed very well to divert their resource rents to furthering economic and social development – that is, why natural capital tends to crowd out human, social, financial and real capital. The empirical evidence of these linkages is presented in two rounds. First, we allow World Bank data covering 164 countries in 1960-2000 to speak for themselves through a sequence of bilateral correlations that suggest an inverse relationship between natural resource dependence and growth via human capital. We then repeat the exercise for two aspects of social capital, corruption and democracy, suggesting an additional adverse effect of natural resource dependence via social capital on growth. In the second round, we test for the robustness of natural resource dependence as a determinant of long-run growth by estimating a series of growth regressions for the same 164 countries.
CEPR Discussion Paper 7031, October 2008.

Dutch Disease      In print on the web
The New Palgrave Dictionary of Economics Online.

Growing Apart? A Tale of Two Republics: Estonia and Georgia (with Eduard Hochreiter)     In print
European Journal of Political Economy, July 2009.

We compare and contrast the economic growth performance of Estonia and Georgia since the collapse of the Soviet Union in 1991 in an attempt to understand better the extent to which the growth differential between the two countries can be traced to increased efficiency in the use of capital and other resources (intensive growth) as opposed to brute accumulation of capital (extensive growth). We infer that advances in education at all levels, good governance, and institutional reforms have played a more significant role in raising economic output and efficiency in Estonia than in Georgia which remains marred by various problems related to weak governance in the public and private spheres. — IMF Working Paper No. 08/235, September 2008. An earlier version is available as CESifo Working Paper No. 2155, December 2007.  

A Golden Rule of Depreciation (with Gylfi Zoega)      In print
Economics Letters, September 2007.

We derive a Golden Rule for the obsolescence of physical capital. Optimal durability is shown to vary inversely with population growth as well as technological progress. Increased population growth and technological progress accelerate depreciation because providing a rapidly growing and increasingly productive population with high-quality capital is costly in terms of consumption forgone. In the long run, the adverse effect of population growth on the level of output per head is reinforced.  

The International Economics of Natural Resources and Growth      In print
Minerals and Energy, June 2007.

This article is in three parts. First, it briefly describes the contribution of natural resources to economic growth around the world, pondering the question whether an abundance of natural resources is a blessing or a curse. Second, an attempt is made to provide a glimpse of recent empirical evidence that can be brought to bear on this question. Third, the article discusses the experience of Norway, the world’s third largest oil exporter. To date, Norway has appeared to be mostly free of the worrisome symptoms, such as the Dutch disease, that have afflicted many other countries with abundant natural resources. — Available also as CESifo Working Paper No. 1994, May 2007. Appeared also in Russian translation in the Economic Journal of the Higher School of Economics, September 2008.

Privatization, Efficiency, and Economic Growth      In print
In The Socio-Economic Transformation: Getting Closer to What?, eds. Zbigniew Nahorski, Jan W. Owsinski, and Tomasz Szapiro, Palgrave (MacMillan), London, 2007. 

This paper is intended to show how the reallocation and reorganization effects of privatization can lead to substantial macroeconomic efficiency gains and thereby also increased economic growth. — Also available as CEPR Discussion Paper No. 1844. 

Why Europe Works Less and Grows Taller      In print
Challenge, January-February 2007.

Even if national economic output per capita remains higher in the United States than in most of Europe, several European countries’ output per hour worked now exceeds that of the United States because many Europeans prefer and can afford to work less by, for example, retiring earlier than Americans. Measures of the biological standard of living based on variations in human stature across countries convey a similar pattern, suggesting that in recent decades adult Europeans who used to be shorter than Americans have grown significantly taller while working less. Greater tolerance of inequality in the distribution of income and wealth in the United States than in Europe may have taken its toll.  

Natural Resources and Economic Growth: The Role of Investment (with Gylfi Zoega)     In print
World Economy, August 2006.

Is it possible that excessive reliance on natural resources affects saving and investment in a way that retards economic growth? – and thus, in the long run, the level of output per capita. This paper reviews the literature, explores the data and compares and contrasts the explanatory power and interplay of natural resources and civil liberties, our proxy for institutional variables currently under scrutiny in the literature. We propose that natural resource dependence may be viewed as an exogenous factor that impedes economic growth and investment as well as institutions, even if we stress that natural resource abundance may be good for growth. A longer version is available as CEPR Discussion Paper No. 2743, March 2001. — The paper was presented at the 16th Annual Congress of the European Economic Association in Lausanne August 29 to September 1, 2001. It was also presented at a Central Bank of Chile-World Bank conference on Natural Resources and Economic Growth in Santiago, Chile, 18 January 2002, as well as at the CESifo Area Conference on Macro, Money & International Finance in Munich 8-9 February 2002. The accompanying lecture slides can be viewed here. 

Institutions, Human Capital, and Diversification of Rentier Economies      In print
In Dead Ends of Transition — Rentier Economies and Protectorates, Michael Dauerstädt and Arne Schildberg (eds.), Campus, 2006.

This paper describes economic diversification away from natural-resource-based activity into manufacturing, trade, and services and political diversification away from power concentration in the hands of authoritarian elites as an investment in social capital. From this vantage point, it is perhaps not surprising to read from the cross-country evidence presented here a fairly clear and consistent tendency for both kinds of diversification to encourage economic growth. —  Prepared for Workshop on Transforming Authoritarian Rentier Economies at the Friedrich Ebert Foundation in Bonn 21-24 September 2005.

Interview with Assar Lindbeck     In print
Macroeconomic Dynamics, February 2006.

Macroeconomic Dynamics commissioned this interview with Assar Lindbeck for a series of such conversations with economists, starting with Duncan Foley’s interview with Wassily Leontief in 1998. Other interviews in the series include Ben McCallum’s interview with Robert Lucas (1999), Olivier Blanchard’s interview with Janos Kornai (1999), Daniel Trefler’s interview with Elhanan Helpman (1999), William Barnett and Robert Solow’s interview with Franco Modigliani (2000), John Taylor’s interview with Milton Friedman (2001), James Poterba’s interview with Martin Feldstein (2003), Brian Snowdon’s interview with Axel Leijonhufvud (2004), William Barnett’s interview with Paul Samuelson (2004), and John Campbell’s interview with Robert Shiller (2004). Forthcoming interviews include Olivier Blanchard’s interview with Stanley Fischer (2005), Omar Licandro and Pierre Dehez’s interview with Jacques Drèze (2005), and George Evans and Seppo Honkapohja’s interview with Tom Sargent (2005). — The interview with Lindbeck is scheduled to appear also in a book of interviews published by Cambridge University Press. Also available as CESifo Working Paper No. 1408, February 2005. Appeared also in Swedish in Ekonomisk Debatt, November 2005.

How do India and China Grow?     In print
Challenge, January-February 2006.

India and China have both grown rapidly in recent years, especially China. Even so, India has failed to bring population growth down to a desirable level whereas China has failed to introduce democracy. With fewer children, India’s future prospects look bright because family planning is relatively easy. Democratization, on the other hand, is a difficult and time-consuming process because it requires the defeat of firmly ingrained political opposition against increased democracy. For this reason, China’s long-term prospects appear less certain than those of India. China needs democracy at least as much as India needs slower population growth. — Based on presentation at the MEFMI Combined Forum of Ministers of Finance and Planning, Treasury Secretaries and Permanent Secretaries for Finance and Planning, and Central Bank Governors, 17 September 2005, Bridgetown, Barbados. 

Mixed Blessings: Does Africa Differ from the Rest of the World?     New

This paper reviews economic growth performance in sub-Saharan Africa since 1965 within the context of the new empirical growth literature. Several of the key determinants of economic growth – initial conditions, investment, and natural resources – that have been identified in cross-country growth regressions applied to world-wide samples are shown to have been at work in Africa as well. Other factors, including education, trade, democracy, ethnic fragmentation, and foreign aid, are also considered. The empirical results suggest that the African experience differs less from that of the world as a whole than is commonly assumed. In particular, dependence on natural resources and dependence on foreign aid tend to go together, and have been associated with low investment and slow growth in the past. Policy reform is required to turn generous foreign aid and abundant natural resources into sources of growth. —  Forthcoming as CEPR Discussion Paper. 

The Road from Agriculture (with Gylfi Zoega)     In print
In Institutions, Development, and Economic Growth, eds. Theo Eicher and Cecilia García-Peñalosa, MIT Press, May 2006. 

This paper aims to shed new light on the farm problem from the perspective of growth economics. We show that economic growth is directly related to the devolution of agriculture around the world – that is, to the ongoing transfer of resources from agriculture to industry or, equivalently, to the rate of labor migration form rural to urban areas. We present a dynamic model to show how productivity gains in agriculture free up labor that can be used in the modern sector in urban areas. We run multiple regressions that include, in addition to our measures of structural change from agriculture to industry and migration from farm to city, several of the standard growth determinants such as initial income, natural resources, investment and education. We find that structural change and migration make a significant contribution to growth in a cross section of countries.  

Natural Resources and Economic Growth: From Dependence to Diversification     In print
In Economic Liberalization and Integration Policy: Options for Eastern Europe and Russia, eds. Harry G. Broadman, Tiiu Paas, and Paul J. J. Welfens, Springer, 2006.

This paper reviews the relationship between natural resource dependence and economic growth, and stresses how natural capital intensity tends to crowd out foreign capital, social capital, human capital, physical capital, and financial capital, thereby impeding economic growth across countries. Specifically, the paper presents empirical cross-country evidence to the effect that nations that depend heavily on their natural resources tend to have (a) less trade and foreign investment, (b) more corruption, (c) less equality, (d) less political liberty, (e) less education, (f) less domestic investment, and (g) less financial depth than other nations that are less well endowed with, or less dependent on, natural resources. This matters for long-run growth because empirical evidence also suggests that trade, honesty, equality, liberty, education, investment, and financial maturity are all positively and significantly related to economic growth across countries. Before concluding, the paper briefly compares and contrasts the experience of the OPEC countries with that of Norway, a singularly successful oil producer. — Available as CEPR Discussion Paper No. 4804, December 2004.

To Grow or Not to Grow: Why Institutions Must Make a Difference     In print
CESifo DICE Report 2, Summer 2004.

Some of the key determinants of economic growth that have been identified in recent studies depend in important ways on institutions as well as on economic policy undertakings from year to year. It takes an efficient financial system and probably also an independent central bank to channel national saving into ample high-quality investment. It takes an outward-looking, liberal exchange and trade regime to foster rapidly expanding foreign trade. It takes a good, subsidized, incentive-compatible education system to offer a good education to all. It takes an honest and independent judiciary to keep corruption under control. It takes liberal laws and constitutions to secure political and civil liberties. Likewise, it may take institutional reforms – such as, for example, in Norway where the management of the Petroleum Fund was transferred from the Ministry of Finance to the more independent Central Bank in 1999 – in order to avert the adverse consequences that otherwise may follow from heavy dependence on nature’s bounty. In short, institutions make a difference: they must.

Monetary and Fiscal Management, Finance, and Growth     In print
Empirica, June-September 2004.

This lecture addresses three related aspects of monetary and fiscal management in Europe and elsewhere. First, I discuss the implications of economic integration for monetary and fiscal policy, especially the narrow focus on low inflation as the main objective of monetary policy. I argue that because inflation springs from several sources, monetary authorities held responsible by law for maintaining low inflation need to exercise their newfound independence by reserving the right to address all sources of inflation. In this context, I also ponder the question whether increased independence of fiscal policy from short-term political interference would be desirable. Second, I present new empirical evidence of the relationship between inflation, finance, and economic growth across countries, arguing that long-run growth considerations provide an important additional justification for why price stability ought to remain a priority of independent policy makers. Third, I review some further aspects of the relationship between fiscal policy and economic growth, emphasizing the traditional three-pronged role of fiscal management: stabilization, allocation, and distribution, all of which can be conducive to growth. The argument leads to the conclusion that only the stabilization function of fiscal policy and perhaps also some aspects of the allocation function could be usefully delegated in an attempt to immunize them from shortsighted and socially counter-productive political interference, but not the distribution function. — Available also as CES Working Paper No. 1118.

Education, Social Equality and Economic Growth: A View of the Landscape (with Gylfi Zoega)     In print
CES Economic Studies, December 2003.

Education has been one of the key determinants of economic growth around the world since 1965. In this paper, we discuss three different measures of education, and consider their relationship to the distribution of income as measured by the Gini coefficient as well as to economic growth across countries. The three measures are: (a) gross secondary-school enrolment, (b) public expenditure on education relative to national income and (c) expected years of schooling for girls. We show that all three measures of education are directly related to income equality across countries. In a sample of 87 countries at all income levels, we also find that more and better education appears to encourage economic growth directly as well as indirectly through increased social equality and cohesion. Our regression results survive the introduction of regional dummy variables for Africa, Asia and Central and South America. We argue that the empirical relationship between education, on the one hand, and growth and equality, on the other hand, can help account for the positive correlation between the two latter variables that has been documented in the literature. — Available as CES Working Paper No. 876.

Icelandic Fisheries Management: Fees vs. Quotas (with Martin Weitzman)     New
CEPR Discussion Paper No. 3849, March 2003.

We discuss the quota system by which Iceland’s fisheries have been managed since 1984, and explain why, in our view, the system is neither fair nor fully efficient. We argue that the shortcomings of the Icelandic quota system are inherent in any type of quota system applied to high-seas fishing. Further, we find that regulating access to a limited, stochastic common-property natural resource such as Iceland’s fish by fee rather than by quota – i.e., by relying on price incentives rather than quantitative restrictions – would constitute a more equitable and more efficient solution to the fisheries management problem. Our argument applies to the management of all open-seas fisheries, including the Common Fisheries Policy of the European Union. — This preliminary version of the paper was presented at a conference on Iceland and the World Economy: Small Island Economies in the Era of Globalization at Harvard University 20 May 2002.

Inequality and Economic Growth: Do Natural Resources Matter? (with Gylfi Zoega)     In print
In Inequality and Growth: Theory and Policy Implications, eds. Theo Eicher and Stephen Turnovsky, MIT Press, 2003. 

This paper is intended to demonstrate, in theory as well as empirically, how increased dependence on natural resources tends to go along with less rapid economic growth and greater inequality in the distribution of income across countries. On the other hand, public policy in support of education can simultaneously enhance equality and growth by raising the return to working in higher technology (that is, nonprimary) industries and thus counter some of the potentially adverse effects of excessive natural resource dependence. Together, these two variables – natural resources and education – can help account for the inverse relationship between inequality and growth observed in cross-country data. Moreover, the analysis highlights the role of public revenue policy. Taxes and fees can be used to reduce the attractiveness of primary-sector employment, lift the marginal productivity of capital in higher technology industries and thus increase the rate of interest and economic growth, while reducing the inequality of income and wealth. — The paper was presented at a CESifo conference on Growth and Inequality in Bavaria 18-19 January 2002. The paper was also presented at the 5th Conference on Global Economic Analysis in Taipei, 5-7 June 2002. It is also available as CES Working Paper No. 712. The accompanying lecture slides can be viewed here. 

The Real Exchange Rate Always Floats     In print
Australian Economic Papers, December 2002.

This paper makes two main points. First, irrespective of nominal exchange rate arrangements, the real exchange rate always floats – if not through nominal exchange rate adjustment, then through price change. Further, because prices and wages tend to be sticky, the adjustment of real exchange rates towards long-run equilibrium takes time, as witnessed by long-lasting currency misalignments around the world. In second place, real exchange rates are rather likely to fluctuate on their way towards long-run equilibrium because of the dynamic interaction between real exchange rates and the current account or, put differently, because the structure of lags with which exchange rates impact the volume of exports and imports may give rise to oscillatory behavior. — Available also as CEPR Discussion Paper No. 3376, May 2002. Appeared in a special issue of the Australian Economic Papers. The accompanying lecture slides can be viewed here.