Experiences on Experiences on the EU Peripherythe EU Periphery

Norway and Norway and

IcelandIcelandThorvaldur Gylfason

Norway, Iceland, and the Norway, Iceland, and the EUEU

With Switzerland, Norway and With Switzerland, Norway and Iceland are the sole European Iceland are the sole European nations that have no intention of nations that have no intention of joining the EU any time soonjoining the EU any time soon

Switzerland is a special caseSwitzerland is a special case– Joined UN only this yearJoined UN only this year

Norway and Iceland are affluentNorway and Iceland are affluent– Norway: Ppp-adjusted GNP per capita: Norway: Ppp-adjusted GNP per capita:

$30K$30K– Iceland: $29KIceland: $29K– Switzerland: $30K; US: $34K (2000)Switzerland: $30K; US: $34K (2000)

GNP per capita, 2000 GNP per capita, 2000 (USD, ppp-adjusted)(USD, ppp-adjusted)

0 10.000 20.000 30.000 40.000 50.000

Greece

Portugal

Ireland

Iceland

Norw ay

Sw itzerland

United States

Luxembourg

Norway and Iceland: GNP per capita, 1962-2000

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

Iceland

Norway

Current US$,Atlas method

Ireland and Greece: GNP per capita, 1962-2000

0

5000

10000

15000

20000

25000

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

Ireland

Greece

Current US$,Atlas method

Iceland, Norway, Ireland, & Greece: GNP per capita, 1962-2000

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

Iceland

NorwayIreland

Greece

Current US$,Atlas method

BackgroundBackground

Two rich countries, but in different Two rich countries, but in different waysways

NorwayNorway has been well managedhas been well managedLow inflation, stable growth, low Low inflation, stable growth, low

unemployment, no external debt, unemployment, no external debt, efficient oil-wealth managementefficient oil-wealth management

IcelandIceland has been less well has been less well managedmanagedHigh inflation, uneven growth, low High inflation, uneven growth, low

unemployment, high external debt, unemployment, high external debt, overfishingoverfishing

Natural ResourcesNatural Resources

NorwayNorwaySmall fisheries sector Small fisheries sector

1% of GNP and employment1% of GNP and employment

Huge oil sectorHuge oil sectorOil wealth: 50-250% of GNPOil wealth: 50-250% of GNPOil revenue: 5-25% of GNPOil revenue: 5-25% of GNP

IcelandIcelandLarge fisheries sectorLarge fisheries sector

10% of GNP, 40% of exports10% of GNP, 40% of exports

ExportsExports

Stagnant exports for a long timeStagnant exports for a long timeUnique among industrial countriesUnique among industrial countries

Norway’s exports Norway’s exports Equivalent to about 43% of GNPEquivalent to about 43% of GNP

since before the oil discoveriessince before the oil discoveriesOil exports have crowded out Oil exports have crowded out

nonoil exportsnonoil exports

Iceland’s exportsIceland’s exportsEquivalent to about a third of GNP Equivalent to about a third of GNP

since 1945 (in fact, since 1870)since 1945 (in fact, since 1870)

Iceland, Norway, Ireland, & Iceland, Norway, Ireland, & Greece: FDI Greece: FDI 1975-2000 1975-2000 (% of (% of GDP)GDP)

0

10

20

30

40

50

60

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Iceland

Norway

Ireland

Greece

Norway: BackgroundNorway: Background

Rejected membership twiceRejected membership twice1972 and 19941972 and 1994

Political leadership wanted to join Political leadership wanted to join the EU ...the EU ...In 1994, all major political parties and In 1994, all major political parties and

interest organizations advocated interest organizations advocated membershipmembership

... but the people said ... but the people said NoNo!!

Strongest objections came from Strongest objections came from rural areasrural areasFishing and farming communities along the Fishing and farming communities along the

coast, especially up northcoast, especially up north

Iceland: BackgroundIceland: Background

Never held a referendumNever held a referendumPolitical leadership does not want to Political leadership does not want to

join ...join ...One of two main opposition parties wants to One of two main opposition parties wants to

join, all other political parties, including join, all other political parties, including present government, and most interest present government, and most interest organizations are against EU membership, organizations are against EU membership, or at least ambivalentor at least ambivalent

... but, polls indicate, the people want ... but, polls indicate, the people want to jointo join

Strongest objections come from rural Strongest objections come from rural areasareasFishing and farming communities around Fishing and farming communities around

the coast are overrepresented in the the coast are overrepresented in the political arenapolitical arena

Dutch Disease Dutch Disease SymptomsSymptomsMost often, overvaluation and Most often, overvaluation and

volatility of currencyvolatility of currencyRural subsidies distort real exchange Rural subsidies distort real exchange

raterate

Sluggish exports and FDISluggish exports and FDI

Lack of interest in full participation Lack of interest in full participation in European integrationin European integration

Natural wealth: Mixed blessing?Natural wealth: Mixed blessing?

Natural wealth and Natural wealth and economic growtheconomic growth,, 1965- 1965-19981998

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60

Share of natural capital in national wealth 1994 (%)

Gro

wth

of G

NP

per

cap

ita 1

965-

1998

, adj

uste

d fo

r in

itial

inco

me

(%)

r = -0.64

85 countries85 countries

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

Sources Sources of growthof growth

In ves tm en t x E d u ca tion

G row th+ +

+denotes a positive effect in the direction shown

+

Sir Sir Arthur Lewis: Arthur Lewis: xx is mainly is mainly trade, stable politics, good trade, stable politics, good weatherweather

Growth is Growth is

endogenouendogenou

ss

SourcesSources of growthof growth

In ves tm en t x E d u ca tion

G row th+ +

+denotes a positive effect in the direction shown

-

Recent research: Recent research: xx is natural is natural resource abundance or intensity, resource abundance or intensity, inter aliainter alia

-denotes a negative effect in the direction shown

How Natural Resource How Natural Resource Intensity Affects GrowthIntensity Affects Growth

Four main channels of transmission Four main channels of transmission from natural resources to growthfrom natural resources to growth

1.1. Dutch disease (incl. foreign capital)Dutch disease (incl. foreign capital)

2.2. Rent seeking (social capital)Rent seeking (social capital) CorruptionCorruption ProtectionismProtectionism Lack of democracyLack of democracy

3.3. Education (human capital)Education (human capital)

4.4. Investment (physical capital)Investment (physical capital)

Channels of Transmission, Channels of Transmission, AgainAgain

Four main linkages: 1. Dutch disease

Hurts level or composition of exports

2. Rent seeking Protectionism, corruption

3. Education4. Investment

But Norway is,

so far at least,

an exceptionForeigForeig

n n capitalcapital

Social Social

capitacapita

llHumaHuma

n n capitacapita

llReal Real

capitalcapital

Natural capital Natural capital tends to crowd tends to crowd outout

-20

-15

-10

-5

0

5

10

0 10 20 30 40

Share of agriculture in labor force 1990 (in per cent)

Gro

wth

of

GN

P p

er

ca

pit

a 1

99

0-9

7 (

in p

er

ce

nt

pe

r ye

ar)

Slovenia Poland

Azerbaijan

Georgia Turkmenistan

Ukraine

Uzbekistan

RomaniaHungarySlovakRep.

Czech Rep.Bulgaria

Estonia

Belarus

KazakhstanLithuania

LatviaRussia

Moldova

Kyrgiz Rep.

Transition Economies: Economic Growth and Agriculture, 1990-1997

r = -0.57

Transition Economies: Natural Resource Abundance and Corruption

0

1

2

3

4

5

6

7

0 10 20 30 40 50 60

Share of agriculture in labor force 1990 (in per cent)

Co

rru

pti

on

pe

rce

pti

on

s in

de

x 1

99

9

Azerbaijan

Albania

BelarusBulgaria

Czech Rep.

Estonia

Georgia

Hungary

Kazakhstan Kyrgyz Rep.

Ukrainia

Lithuania

Moldova

Poland

Romania

Russia

Slovak Rep.

Slovenia

Latvia

Uzbekistan

r = -0.72

-20

-15

-10

-5

0

5

10

0 1 2 3 4 5 6 7

Corruption perceptions index 1999

Gro

wth

of

GN

P p

er

ca

pit

a 1

99

0-9

7 (

in p

er

ce

nt

pe

r ye

ar)

Albania

Azerbaijan

Belarus

Bulgaria

Czech Rep.

Estonia

Georgia

Hungary

Kazakhstan

Kyrgyz Rep.

LatviaLithuania

Moldova

Poland

Romania

Russia

Slovak Rep.

Slovenia

Ukraine

Uzbekistan

Transition Economies: Corruption and Economic Growth, 1990-1997

Strong Strong connectionconnection between between corruption corruption and growth and growth in in transition transition countriescountries

r = 0.64

One Possible One Possible InterpretationInterpretation

Corruption

Resources

Growth

Resources

Growth

+ =Corruption

Another Possible Another Possible InterpretationInterpretation

Corruption

Resources

Growth

Corruption

Growth

+ =Resources

-30

-20

-10

0

10

20

30

40

0 10 20 30 40 50 60

Share of agriculture in labor force 1990 (in per cent)

Act

ua

l e

xp

ort

s le

ss c

ou

ntr

y-si

ze-a

dju

ste

d

ex

po

rts

1990

-97

(in

pe

r ce

nt

of

GD

P)

Estonia

Czech Rep.Belarus

MoldovaUzbekistan

SloveniaSlovak Rep.

Hungary

Albania

Kyrgyz Rep.Georgia

KazakhstanUkraine

Bulgaria Russia

Lithuania

RomaniaAzerbaijanPoland

Latvia

Transition Economies: Openness and Agriculture, 1990-1997

r = -0.48

-20

-15

-10

-5

0

5

10

-10 0 10 20 30 40

Actual exports less country-size-adjusted exports 1990-1997 (in per cent of GDP)

Gro

wth

of

GN

P p

er

cap

ita

199

0-97

(in

pe

r ce

nt

pe

r ye

ar)

Poland Slovenia

Romania Czech Rep.

Slovak Rep.

Bulgaria

Azerbaijan

GeorgiaUkraina

Moldova

Kyrgyz Rep.

BelarusUzbekistan

RussiaLatvia

Lithuania

Estonia

Kazakhstan

Hungary

Transition Economies: Economic Growth and Openness, 1990-1997

Weak and Weak and insignificaninsignificantt connectionconnection between between openness openness and growth and growth in in transition transition countriescountries

r = 0.05

One Possible One Possible InterpretationInterpretation

Openness

Resources

Growth

Resources

Growth

+ =Openness

Another Possible Another Possible InterpretationInterpretation

Openness

Resources

Growth

Openness

Growth

+ =Resources

Transition Economies: Openness and Corruption, 1990-1997

Significant Significant connectionconnection between between corruption corruption and and openness openness in in transition transition countriescountries

-30

-20

-10

0

10

20

30

40

0 1 2 3 4 5 6 7

Corruption perceptions index 1999

Ac

tua

l ex

po

rts

les

s c

ou

ntr

y-s

ize

-ad

jus

ted

ex

po

rts

1

99

0-1

99

7 (

in p

er

ce

nt

of

GD

P)

Albania

Estonia

HungaryPolandRomania

Azerbaijan Georgia

Kyrgiz Rep.

Slovenia

Czech Rep.Belarus

Uzbekistan

Lithuania

Slovak Rep.

Moldova

Russia

KazakhstanUkraine Bulgaria

Latvia

r = 0.47

Classroom discussionClassroom discussion