Recent papers
Thorvaldur Gylfason

 

For less detail, see this page.


Ten Years After: Iceland´s Unfinished Business      Forthcoming
In Robert Z. Aliber and Gylfi Zoega (eds.), The 2008 Global Financial Crisis in Retrospect, Palgrave.

This study discusses the economic, political, and judicial aftermath of Iceland´s financial collapse in 2008 as well as lessons learned, or not learned, with emphasis on some unsettled issues concerning the distribution of incomes and wealth, banking, and politics.

 

From Natural Resources to Human Rights      In print
In Emil Ems and Thorvaldur Gylfason (eds.), Prosperity and Structural Reform through Trade, Festschrift in honour of Per Magnus Wijkman, Dialogos, Stockholm.

Per Magnus Wijkman was the first foreign observer to urge Iceland in print to regulate its fisheries by price. This was in 1975, nine years before the Icelandic fishing quota system came into effect, a system judged discriminatory and unconstitutional by the Supreme Court of Iceland in 1998 (but not in 2000!) as well as by the United Nations Committee on Human Rights in 2007, principally because the advice given by Wijkman and others was not heeded. This paper discusses the human rights aspects of natural resources management in view of the International Covenant on Civil and Political Rights which stipulates the inalienable rights of nations to the rents from their natural resources.

Inequality Undermines Democracy and Growth      Forthcoming
In a conference volume
edited by Luigi Paganetto, Springer 2019. Also forthcoming as
CESifo Working Paper 2018.

This paper aims to show that income equality and interpersonal trust go along with several other facets of social capital as determinants of economic growth across countries as reflected in the purchasing power of per capita GNI. In a large sample of countries, equality in the distribution of income as measured by the World Bank and by The Standardized World Income Inequality Database is shown to go along with economic diversification, the rule of law, transparency as measured by the corruption perceptions index, trust as measured in the World Values Survey, and democracy all of which are good for growth.

Diversification, Social Capital, and Economic Growth      Forthcoming
In Ekonomicheskii zhurnal Vysshei shkoly ekonomiki (Economic Journal of the Higher School of Economics), 2019. Also forthcoming as CESifo Working Paper 2018.

This paper charts the cross-country relationship between economic and political diversification and economic growth in a large sample of countries during 1960-2012, viewing economic diversification and political diversification through increased democracy as two parallel ways of averting national risk. The paper also charts the cross-country linkages among corruption, the rule of law, economic and political diversification, and economic growth, and offers some lessons for the United States, Europe, and Russia where economic diversity shows few signs of change and where democracy and the rule of law earn rather low scores from Freedom House and World Justice Project.

Iceland´s New Constitution Is Not Solely a Local Concern      Forthcoming
In Ágúst Th. Árnason and Catherine Dupre (eds.), Icelandic Constitutional Reform: People, Processes, Politics (2010-2017), Routledge 2019.

This paper analyzes the ongoing constitutional impasse in Iceland where, after the financial collapse of 2008, Parliament convened a National Gathering of 950 citizens randomly drawn from the national register to launch a long overdue revision of the 1944 constitution. The National Gathering concluded that a new constitution was needed and ought to contain certain key provisions. To this end, a Constitutional Council of twenty-five ordinary citizens was elected by the nation to “revise the Constitution of the Republic.” Their Bill, including some changes of wording made by Parliament, was accepted by 2/3 of the voters in an advisory national referendum held by Parliament in 2012. By the end of 2017, Parliament had not yet ratified the Bill.

Dutch Disease
The New Palgrave Dictionary of Economics, 3rd ed., 2018.

This article outlines the ‘Dutch disease’, the fear of de-industrialization first seen in the Netherlands in the wake of the appreciation of the Dutch guilder following the discovery of natural gas deposits in the North Sea around 1960. It considers its symptoms, and asks whether it is indeed a ‘disease’ with negative economic implications. It also briefly reviews some cases of Dutch disease, and the case of Norway, which appears to have successfully avoided it.

Introduction     In print on the web
Introduction to The New Icelandic Constitution: How Did It Come About? Where Is It?,
JPV 2018.

Introduction (with David A. Carrillo and Jón Ólafsson)      In print
Introduction to The Icelandic Federalist Papers, Berkeley Public Policy Press 2018.

 

Political Economy, Mr. Churchill, and Natural Resources      In print
Mineral Economics, 2018.

The article recalls Winston Churchill´s advocacy of public ownership of natural resources in Africa in the early 1900s. Following a brief discussion of different countries´ methods of natural resource management, empirical evidence of the cross-country relationship between economic and political diversification and per capita national income is presented to suggest a new channel through which excessive dependence on poorly managed natural resources, including oil and other minerals, may hamper economic and social progress. Constitutional issues, democracy, and human rights are brought to bear on the story to underline the conceptual distinction between state ownership and national ownership of natural resources.

 

From Economic Diversification to Growth      In print on the web
In Rabah Arezki, Raouf Boucekkine, Jeffrey Frankel, Mohammed Laksaci, and Rick van der Ploeg (eds.), Rethinking the Macroeconomics of Resource-Rich Countries, CEPR/VOXEU, 24 April 2018.

This essay briefly describes economic diversification as one of several potential drivers of sustained economic growth, using recent measures of export diversification and product quality developed by the IMF as well as an index of economic complexity that ranks countries by the diversity and complexity of their export structure. All three measure of economic diversification are shown to vary directly with per capita incomes across countries.

Negative Interest      In print
The American Economist, October 2017.  

This paper tells the story of a doctoral dissertation in the Keynesian tradition defended at Princeton in the mid-1970s as the reaction to Keynesian economics at Chicago and elsewhere was gaining momentum. One of the controversies concerned interest rates. Were real interest rates immune to inflation as required by the neutrality of money? Irving Fisher had reported evidence that real interest rates were not immune, evidence that is worth recalling today when the reluctance of nominal interest rates to move into negative territory makes real interest rates clearly sensitive to inflation. The paper presents new evidence from Japan and Sweden.

 

From Double Diversification to Efficiency and Growth      In print
Comparative Economic Studies, June 2017.
The paper discusses economic and political diversification as two sides of the same coin, presenting them as parallel potential determinants of long-run economic growth. Three different measures of economic diversification are discussed: the Finger-Kreinin index of export diversification, the Herfindahl-Hirschman index of market concentration, and the Theil index of export diversification. Three measures of political diversification are also discussed: indices of political liberties and civil rights as well as the Polity2 index of democracy. All six measures of diversification are shown to vary directly with one another as well as with per capita incomes across a large sample of countries.

 

Iceland´s New Constitution Is Not Solely a Local Concern      In print
Challenge, 2016.

This paper analyzes the constitutional impasse in Iceland where, after the financial collapse of 2008, Parliament convened a National Assembly with 950 citizens randomly drawn from the national register to launch a long overdue revision of the 1944 constitution. The National Assembly concluded that a new constitution was needed and ought to contain certain key provisions. On this basis, a Constitutional Council of ordinary citizens was elected by the nation to draft a new constitution that was accepted by 2/3 of the voters in a national referendum held by Parliament in 2012. Parliament has yet to ratify the new constitution.


The Anatomy of Constitution Making: From Denmark in 1849 to Iceland in 2017      Forthcoming
CESifo Working Paper No. 6488, May 2017.

This paper reviews aspects of the constitution making process in Iceland after the financial collapse of 2008, emphasizing the differences between the provisional constitution of 1944 when Iceland separated unilaterally from Nazi-occupied Denmark and Denmark’s 1849 constitution which served, with notable exceptions, as the prototype for Iceland´s 1944 constitution. The comparison and contrast between the Icelandic and Danish constitutions invites a comparison also between Iceland’s 1944 constitution with the new post-crash constitution from 2011 accepted by two thirds of the voters in a national referendum in 2012 and waiting to be ratified twice by a reluctant self-dealing parliament. The paper concludes by proposing lessons to be learned from Iceland´s experience thus far.


Incomes, Hours of Work, and Equality in Europe and the United States      In print
In Luigi Paganetto (ed.), Sustainable Growth in the EU: Challenges and Solutions, Springer, 2017. Also available under a longer title, Efficiency, Fairness, and Social Cohesion in Europe and the United States: Incomes, Hours of Work, and Equality with an Afterthought on Iceland, as CESifo Working Paper No. 6025, August 2016.

The paper discusses the European Union as a union of primarily small European states whose parallel emphasis on efficiency and fairness, including deep respect for human rights, holds the key to Europe´s economic and social advances over the years. The paper shows that adjusting conventional economic indicators of living standards such as gross domestic product or gross national income per capita to reflect social factors such as hours of work and equality favors Europe in comparison with the United States. Further, adjustments for education attainment and public health, as made by the United Nations Human Development Index, similarly favor Europe vis-à-vis the US. While expansion fatigue has temporarily slowed the momentum of the widening and deepening of European integration, Europe can expect to benefit from the accession of more small states to the EU.


Chain of Legitimacy: Constitution Making in Iceland      In print
In Jon Elster, Roberto Gargarella, Vatsal Naresh, and Bjørn Erik Rasch (eds.), Constituent Assemblies. Cambridge University Press, New York, 2018. Also available as CESifo Working Paper No. 6018, July 2016.

To understand Iceland´s political situation, it is necessary to consider the historical background to the post-crash constitutional revision process launched in 2009. Also, the paper offers a brief account of some aspects of the constitution-making process during 2010-2013, including the work of the Constituent Assembly. Further, the paper describes Parliament’s ongoing attempt to undermine the substance of the constitutional bill accepted by two thirds of the voters in the 2012 referendum. A national parliament cannot, without undermining its own legitimacy, allow the results of a constitutional referendum to be changed after the fact even if the referendum was advisory.


The EU’s Open Arms and Small States      In print on the web
Nordicum-Mediterraneum: Icelandic E-Journal of Nordic and Mediterranean Studies, May 2016.

The EU has fostered lasting peace and prosperity in Europe since World War II and welcomed formerly autocratic countries back into the European fold. The paper describes the EU as a union of primarily small European states whose parallel emphasis on efficiency and fairness, including deep respect for human rights, holds the key to Europe´s economic and social advances. While expansion fatigue has temporarily slowed the momentum of the widening of European unification, the EU can expect to benefit from welcoming more small states as members, including Albania and Iceland as well as Catalonia and Scotland should they declare independence.


Digital Tools and the Derailment of Iceland´s New Constitution (with Anne Meuwese)      In print
Forthcoming in Corien Prins, Peter Lindseth, Monica Guisse, and Colette Cuijpers (eds.), Digital Democracy in a Globalized World, Edward Elgar, 2017. Also available as CESifo Working Paper No. 5997, July 2016.

This paper maps the use of digital tools in the Icelandic constitutional revision process of 2011 and discusses its aftermath in subsequent years. Although causal links between the digital elements of the process and the content and fate of the constitutional bill are impossible to establish, an analysis of the Icelandic constitution-writing efforts as ‘digital democracy’ reveals some important lessons. High-quality input into constitution-making processes through digital participation is possible, but the very threat of this to vested institutional interests also makes consensus on and enforcement of the ‘rules of the game’ of paramount importance.


Economic Diversification: Six Case Studies      Has not yet been released.
Study for the United Nations Framework Convention on Climate Change (UNFCCC).


Social Capital, Inequality, and Economic Crisis      In print
Challenge, July 2015. Also available under a slightly different title as CESifo Working Paper No. 5423, July 2015, and as Chapter 1 in Makropolitik i kris: En vänskrift till Lars Jonung med anledning av hans 70-årsdag, Lund, 2016.

Economic growth is propelled in part by the accumulation of different kinds of capital, including social capital in its several guises. This paper considers the interplay between financial crises and various aspects of social capital which, if it is allowed to depreciate, can undermine economic prosperity and growth and possibly also contribute to crises. Specifically, the paper offers some empirical comparisons between the experience of the United States in the 1920s and in the 1990s until 2008 with the experience of Sweden and Iceland. The working hypothesis is that social capital decay can be a precursor as well as consequence of slow economic growth and of financial crises. Iceland is a case in point. An increasingly unfair distribution of income and wealth is likely to exacerbate the problem. See slides.


Double Diversification with an Application to Iceland (with Per Magnus Wijkman)      In print
In Mahroum, S., and Al-Saleh, Y. (eds.), Economic Diversification Policies in Natural Resource Rich Economies (2016), Routledge. Also available as CESifo Working Paper No. 5386, June 2015.

Excessive concentration increases national risk in an uncertain world. This paper views economic and political diversification as an essential aspect of national risk management aimed at promoting efficiency, growth, and welfare. The paper first presents economic and political diversification side by side in a cross-country framework and discusses how they interact and encourage more stable long-run economic growth. Thereafter, the paper considers Iceland as a case study of the intertwined effects of insufficient economic and insufficient political diversification. Dominated for decades by the fishing industry, the Icelandic economy is more diversified than before following the financial crisis of 2008 with tourism now generating more foreign exchange than fisheries. The paper ends with some general policy conclusions. See slides.


Around the World with Irving Fisher (with Helgi Tómasson and Gylfi Zoega)      In print
North American Journal of Economics and Finance
, February 2016. Also available as CESifo Working Paper 5257, March 2015.

This paper aims to show why Irving Fisher’s own data on interest rates and inflation in New York, London, Paris, Berlin, Calcutta, and Tokyo from 1825 to 1927 suggested to him that nominal interest rates adjusted neither quickly nor fully to changes in inflation, not even in the long run. In Fisher’s data, interest rates have more persistence than inflation and change less than inflation over time. The Fisher effect is a misnomer unless it is taken to refer to what Fisher actually found and what his data show: a persistent negative effect of increased inflation on real interest rates.


Negative Interest      In print

In Birgitta Swedenborg (ed.), Swedish Economic Policy Then, Now, and in the Future (2015), a Festschrift for Professor Hans Tson Söderström. See English version here, forthcoming in The American Economist. See slides here.

 

This paper tells the story of a doctoral dissertation in the Keynesian tradition defended at Princeton in the mid-1970s as the reaction to Keynesian economics at Chicago and elsewhere was gaining momentum. One of the controversies concerned interest rates. Were real interest rates immune to inflation as required by the neutrality of money? Irving Fisher had reported evidence that real interest rates were not immune, evidence that is worth recalling today when the reluctance of nominal interest rates to move into negative territory makes real interest rates clearly sensitive to inflation. This paper presents new evidence from Japan and Sweden.


Constitution on Ice      In print
In a shorter version
in
Valur Ingimundarson, Philipe Urfalino, and Irma Erlingsdóttir (eds.), Iceland’s Financial Crisis: The Politics of Blame, Protest, and Reconstruction (2016), Routledge, London, England.

This paper reports recent events in Iceland where the political agents of oligarchs didn‘t even bother to try to influence, let alone contest, a national referendum on a new constitution because, if they didn‘t like the result, they would simply find ways to nullify the outcome ex post. The paper reviews and explains the making of Iceland’s crowd-sourced constitution bill from 2009 to 2014, and also offers an explanation as to why the bill failed to be passed by Parliament, addressing various criticisms leveled against the bill along the way. It needs to be emphasized that these criticisms, whether well founded or not (and they are not), are irrelevant because Parliament held a national referendum on 20 October 2012 in which the bill and its key individual provisions were accepted by an overwhelming majority of the voters. A democratic nation cannot under any circumstances permit the outcome of national elections, let alone a constitutional referendum, to be fixed ex post, but this is what the Icelandic Parliament is at present trying to do, flirting with a farewell to democracy. Also available as CESifo Working Paper 5056, November 2014.


Diversification, the Dutch Disease, and Economic Growth: Options for Uganda (with Jean-Pascal Nguessa Nganou)      In print
In Mahroum, S., and Al-Saleh, Y. (eds.), Economic Diversification Policies in Natural Resource Rich Economies, Routledge. Also available as CESifo Working Paper No. 5095, November 2014.

Natural resource discoveries, even when fairly modest, can have significant macroeconomic effects and implications for fiscal and monetary policy. In this respect, Uganda is no different from other oil-rich countries. The need for diversification as an efficient risk management strategy can be viewed in terms of channeling the revenues generated by resource rents into the buildup of human capital through education and training and social capital including institution building, which is conducive to good governance and transparency, aiming, inter alia, to keep rent seeking at bay. Economic diversification to contain the preponderance of the resource-intensive industry at the expense of other industries and political diversification through democracy aimed at encouraging pluralism and high-quality leadership both convey parallel principal benefits to the economy and society in terms of efficiency and fairness.


Free Trade Agreements, Institutions and Exports of Eastern Partnership Countries (with Inmaculada Martínez-Zarzoso and Per Magnus Wijkman)      In print
Journal of Common Market Studies, June 2015.

In a major setback for the EU, only two of four Eastern Partnership (EaP) countries initialed Association Agreements at the Vilnius Summit in November 2013. Following popular protests at home and the fall of the government, Ukraine reversed course and joined Georgia and Moldova in signing Association Agreements in June 2014. Using a gravity model to estimate the effects of deep and shallow free trade agreements for the EaP states with Russia and the EU, respectively, the paper shows that the EaP countries, with Ukraine by far the largest in the group, gain significantly from free trade agreements with the EU, but little if anything from free trade agreements with Russia. The quality of institutions in EaP countries has also played an important role in fostering trade.  Also available as CESifo Working Paper No. 4869, July 2014. This early version, upstaged in part by events in Ukraine, appeared as "Can and Should the EU's Eastern Partnership be Saved?" See slides.


The Dutch Disease in Reverse: Iceland’s Natural Experiment (with Gylfi Zoega)      Forthcoming
Forthcoming in Luigi Paganetto (ed.), Getting Globalization Right: Sustainability and Inclusive Growth in the post Brexit Age, Springer, 2018. Also available as OxCarre Research Paper 138, May 2014. Revised as CESifo Working Paper No. 6513, June 2017.

Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-2008 another national treasure, the sovereign’s AAA ratings, was used to attract foreign capital elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years. See slides.


Iceland: How Could This Happen?      In print
In Torben M. Andersen, Michael Bergman, and Svend E. Hougaard Jensen (eds.), Reform Capacity and Macroeconomic Performance in the Nordic Countries, Oxford University Press, 2015.

This paper reviews economic developments in Iceland following its financial collapse in 2008, focusing on causes and consequences of the crash. The review is presented in the context of the Nordic region, with broad comparisons also with developments elsewhere on the periphery of Europe, in Greece, Ireland, and Portugal. In some ways, however, Iceland resembles Italy, Japan, and Russia more than it resembles its Nordic neighbors or even Ireland. The paper also considers the uncertain prospects for reforms and restoration as well as the possible effects of the crash on social, human, and real capital and on long-run economic growth.  Also available as as CESifo Working Paper No. 4605, January 2014.


A Tale of Two debtors: Iceland, Ireland — and Their Banks      In print
Milken Insititute Review, April 2013.

This article
compares and contrasts the recent experience of Iceland and Ireland, two first-world countries with a third-world political culture characterized by deep-seated cronyism and other forms of corruption.


Constitutions: Financial Crisis Can Lead to Change      In print
Challenge, September-October 2012.

This article tells the story of the constitutional bill that emerged from Iceland’s 2008 crash. Following a brief description of the collapse and its background, the article outlines the process and method used to prepare the bill, including the role of crowdsourcing. Next, the article presents some of the substantive highlights of the bill. The article concludes by discussing some of the obstacles that must be overcome for the bill to become the law of the land and by drawing some parallels between Iceland in 2011-2012 and the United States in 1787-1788.


How Free Trade Can Help Convert the ’Arab Spring’ into Permanent Peace and Democracy (with Inmaculada Martínez-Zarzoso and Per Magnus Wijkman     In print
Defence and Peace Economics, March 2014.


Since Jean Monnet conceived the Coal and Steel Community, free trade has successfully prevented serious conflicts in Europe between democratically governed States with market economies. After six countries established the European Community, this principle has been extended successfully to its immediate neighbours, successively enlarging the European Union to its current 27 Member States. The Union’s European Neighbourhood Policy (ENP) has through the Union for the Mediterranean and the Eastern Partnership attempted to create political stability and economic development by liberalising trade between the EU and its neighbours as well as among these neighbours themselves. The ‘Arab Spring’ initially improved the prospects for establishing political democracy and human rights in key countries. In response, the EU increased theMediterranean coast of the EU. It attempts to answer the following questions. Between which groups of countries (e.g., Agadir countries, key actual/former belligerent countries in the Middle East) is this potential largest? Is it anywhere sufficiently large to provide an incentive for these countries to integrate much more closely with each other and with the EU? Can the prospect of such closer integration provide sufficient economic benefits to encourage progress in democratisation in key countries and resolution of conflicts between key participating countries? Or are additional incentives needed?  Also available as
CESifo Working Paper No. 3882, July 2012
.


From Collapse to Constitution: The Case of Iceland      In print
In Luigi Paganetto (ed.),
Public Debt, Global Governance and Economic Dynamism, Springer, 2013.

Most of the time, crises precede constitutions. Following a brief review of relevant historical background, this article aims to show why Iceland, after its financial collapse in 2008, is now at last on the road to adopting a new constitution to replace the provisional constitution from 1944. The aim is also to show how the constitutional bill of 2011 came into being with significant help from the general public. Further, the article outlines some of the key provisions of the bill as well as why and how it differs from the current constitution. The article concludes by offering a brief discussion of some potential obstacles to the adoption of the bill in parliament, the role of the public, and some lessons from, and for, other countries. — Also available as CESifo Working Paper No. 3770, March 2012.


A Decade of Editing the European Economic Review (with Zvi Eckstein, Esther Gal-Or, Jürgen von Hagen, and Gerard Pfann     In print
In M. Szenberg and L. Ramrattan (eds.),  Secrets of Economics Editors, MIT Press, 2014.

The European Economic Review (EER) was launched 1969 as the first research journal specifically aiming to contribute to the development and application of economics as a science in Europe. As a broad-based professional and international journal, the EER welcomes submissions of applied and theoretical research papers in all fields of economics. The aim of the EER is to contribute to the development of the science of economics and its applications, as well as to improve communication among academic researchers, teachers and policy makers across the European continent and beyond. The EER encourages young researchers to submit their work. — Also available as IZA Discussion Paper No. 5982 and CESifo Working Paper No. 3638, September 2011.


Which Conflicts Can the European Neighbourhood Policy Help Resolve? (with Per Magnus Wijkman     In print
In Bent Jesper Christensen and Carsten Kowalczyk (eds.), Globalization: Strategies and EffectsSpringer Verlag, 2017.

Under what conditions can the European Neighbourhood Policy achieve one of its main objectives: to resolve conflicts in the European Union’s neighbourhood? In the spirit of Montesquieu and Monnet, the basic hypothesis of the EU is that closer economic integration encourages governments to take steps to resolve conflicts and vice versa, creating a virtuous circle of prosperity and detente. The EU has a strong motive in this, since conflicts in its neighbourhood spill-over into the EU itself. The paper identifies some factors important for success, including the existence of active facilitators of compromise, strong intraregional trade, and the prospect of accession to the EU. It concludes that the EU’s Member States must give conflict resolution greater priority in the European Neighbourhood Policy and provide stronger means, larger resources and better incentives if this goal is to be realised. — Available as CESifo Working Paper No. 3861, June 2012. Presented at a conference on Globalization, Strategies and Effects at the University of Aarhus in November 2011.


Resources and Economic Growth: Is Africa (Ghana) Different?      In print
In Policy Conference: Competitiveness & Diversification: Strategic Challenges in a Petroleum-Rich Economy (UNIDO, 2012).

Natural resources have important implications for the conduct of economic policies and the role and design of institutions in resource-rich countries. A brief review of the experiences of a few resource-rich countries, including Botswana and Mauritius, highlights the successes of those that have done well as well as some of the fiscal, monetary and exchange rate policy issues that arose along the way. Special attention is given to Norway, the world’s third largest oil exporter and the role of good governance, including democracy. Several useful lessons can be drawn from Norway’s experience. First, human capital matters most, as does democracy, an important aspect of social capital. Secondly, some ways of managing natural resources seem more conducive than others to the build up of human and social capital. These are general lessons by nature and thus also apply to Ghana and the rest of Africa.


Resource Rents, Democracy and Corruption: Evidence from Sub-Saharan Africa (with Rabah Arezki)       In print
Journal of African Economies, January 2013.

We examine the effect of the interaction between resource rents and democracy on corruption for a panel of 29 Sub-Saharan countries during the period from 1985 to 2007. We find that higher resource rents lead to more corruption and that the effect is significantly stronger in less democratic countries. Surprisingly, we also find that higher resource rents lead to fewer internal conflicts and that less democratic countries face not a higher but a lower likelihood of conflicts following an increase in resource rents. We argue that these findings can be explained by the ability of political elites in less democratic countries to more effectively quell the masses through redistribution to the public. We support our argument by documenting that higher resource rents lead to more (less) government spending in less (more) democratic countries. Our findings suggest that the mechanisms through which resource rents affect corruption cannot be separated from political systems. — Also available as CESifo Working Paper No. 3575, September 2011.


Commodity Price Volatility, Democracy and Economic Growth (with Rabah Arezki)       In print
In Olivier de La Grandville (ed.), Frontiers of Economic Growth and Development, foreword by Robert Solow, Emerald, 2012.

We use a new dataset on non-resource GDP to examine the impact of commodity price volatility on economic growth in a panel of up to 158 countries during the period 1970-2007. Our main finding is that commodity price volatility leads to a significant increase in non-resource GDP growth in democracies, but to no significant increase in autocracies. To explain this result, we show that increased commodity price volatility leads to a statistically significant and quantitatively large increase in net national saving in democracies. In autocracies, on the other hand, net national saving decreased significantly. Our results hold true when using indicators capturing the quality of economic institutions in lieu of indicators of political institutions. — Also available as CESifo Working Paper No. 3619, October 2011.   See slides.


Natural Resource Endowment: A Mixed Blessing?       In print
In Rabah Arezki, Thorvaldur Gylfason, and Amadou Sy (eds.), Beyond the Curse: Policies to Harness the Power of Natural Resources, International Monetary Fund, forthcoming 2011.

This paper deals with the implications of natural resources for the conduct of economic policies and the role and design of institutions in resource-rich countries. The paper briefly reviews the experience of a few resource-rich countries, highlighting the successes of those that have done well as well as some of the fiscal, monetary, and exchange rate policy issues that arise along the way. Special attention is given to Norway, the world’s third largest oil exporter, and the role of good governance, including democracy. The paper then turns from anecdotal to econometric analysis by offering a quick glance at some of the empirical cross-country patterns that can be brought to bear on the relationship between natural resources, economic growth, and some of the main determinants of growth, including democracy.  Also available as CESifo Working Paper No. 3353, February 2011.


Growing Together: Croatia and Latvia (with Eduard Hochreiter)       In print
Comparative Economic Studies, June 2011.

We compare and contrast the economic growth performance of Croatia and Latvia since the collapse of communism 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 sheer accumulation of capital (extensive growth). On the basis of a simple growth accounting model, we infer that advances in education at all levels, good governance, and institutional reforms have played a significant role in raising economic output and efficiency in both Croatia and Latvia. The EU perspective made a more significant contribution to growth in Latvia than in Croatia, even if Latvia’s immediate post-accession boom proved unsustainable. — Also available as CESifo Working Paper No. 3202, October 2010.


Iceland: After the Fall      In print
Milken Insititute Review, First Quarter, 2010.


Development and Growth in Mineral-Rich Countries: Why Social Policy Matters      In print
In Katja Hujo (ed.), Mineral rents and the financing of social policy: Opportunities and challenges, Palgrave Macmillan, 2012.

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. — Available also as 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, September 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.  — Also available under a shorter title, Obsolescence, as CEPR Discussion Paper No. 2833, June 2001.


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. See printed version here.


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.


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.


To Grow or Not to Grow: Is Africa Different? No.     In print
MEFMI FORUM
, March 2004. 

This paper reviews some of the main determinants of economic growth around the world, and raises the question whether economic growth in the member countries of MEFMI in Eastern and Southern Africa follows a pattern that differs from that observed in the rest of the world. The short answer is No. Empirical evidence seems to suggest that economic growth in Eastern and Southern Africa varies directly with domestic and foriegn investment, education, and trade just as it does elsewhere. Too much agriculture (i.e., too little manufacturing) and too much inflation (i.e., too little liquidity) also seem to hinder growth. In sum, Africa conforms to the general world-wide pattern. — MEFMI FORUM is a semiannual publication of the Macroeconomic & Financial Management Institute of Eastern and Southern Africa In Harare, Zimbabwe.

 

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.


Lessons from the Dutch Disease: Causes, Treatment, and Cures      In print
In Paradox of Plenty: The Management of Oil Wealth, Report 12/02, ECON, Centre for Economic Analysis, Oslo, 2002. 

This paper is intended to discuss some of the economic lessons that can be drawn from the experience of natural-resource-rich countries around the world since the 1960s. The discussion begins with a few remarks on the origins and symptoms of the Dutch disease. Thereafter I describe the way economists in recent years have come to think about the relationship between natural resource abundance and economic growth. This is followed by a brief interlude on the experience of the OPEC countries. I then try to provide a glimpse of some of the results that have emerged in the last few years from empirical studies of the cross-country relationships between natural resource abundance and economic growth and various key determinants of growth across the world. The paper concludes with a brief discussion of the special case of Norway and its unusual position among the resource-rich countries. The accompanying lecture slides can be viewed here. — The paper was presented at a conference titled Paradox of Plenty organized by Statoil and ECON in Oslo in March 2001.


Natural Resources and Economic Growth: What is the Connection?      In print
In Fostering Sustainable Growth in Ukraine, eds. Stephan von Cramon-Taubadel and Iryna Akimova, Physica-Verlag (A Springer-Verlag Company), 2002.

This paper reviews the relationship between natural resources and economic growth and stresses how natural capital tends to crowd out foreign capital, social capital, human capital, and physical capital. — The paper was prepared for an international conference organized by the Institute for Economic Research and Policy Consulting/German Advisory Group on Economic Reforms with the Ukrainian Government, Kiev, Ukraine, 25-26 June, 2001. It was subsequently published in the above conference volume entitled Fostering Sustainable Growth in Ukraine, eds. Stephan von Cramon-Taubadel and Iryna Akimova, Physica-Verlag (A Springer-Verlag Company), Heidelberg and New York, 2002, in Ukrainian as well as English. The accompanying lecture slides can be viewed here. A longer version is in circulation as CESifo Working Paper No. 530, 2001. 


Mother Earth: Ally or Adversary?     In print
World Economics, January-March 2002

Economic growth requires capital. This article reviews the relationship between economic growth around the world and six different kinds of capital: (a) real capital, (b) human capital, (c) financial capital, (d) foreign capital, (e) social capital, and (f) natural capital. Economic theory and empirical evidence suggest that domestic and foreign investment, education, financial maturity, and reasonable equality in the distribution of income are all good for growth. However, recent theory and evidence also seem to suggest that natural capital – i.e., abundant natural resources – may crowd out or impair other types of capital and thus impede economic growth over long periods. — The accompanying lecture slides can be viewed here


Does Inflation Matter for Growth? (with Tryggvi Thor Herbertsson)     In print
Japan and the World Economy, December 2001. 

In this paper we present a simple model incorporating money into an optimal growth framework with constant returns to capital and then test the model on two sets of panel data, the Penn World Tables and the World Data Bank, side by side, covering 170 countries from 1960 to 1992. The inverse relationship between inflation and growth across countries is economically  and statistically significant and robust. In circulation as CEPR Discussion Paper No. 1503. —  The data used in the paper are available for inspection here


Nature, Power, and Growth     In print
Scottish Journal of Political Economy, November 2001.

This essay reviews the relationship between natural-resource abundance and economic growth around the world, and presents some new results. The principal reasons why resource-based production can inhibit economic growth over long periods are traced to the Dutch disease, neglect of education, rent seeking, and economic policy failures. Across a large number of countries in the period from 1965 to 1998, the share of the primary sector in the labour force is shown to be inversely related to exports, domestic and foreign investment, and education, and directly related to external debt, import protection, corruption, and income inequality. The cross-sectional data show, moreover, that the share of the primary sector in the labour force is inversely related to per capita growth across countries. None of this lies in the nature of things, however. What seems to matter for economic growth is not the abundance of natural resources per se, but rather the quality of their management, and of economic management and institutions in general. — The paper was commissioned by ECON, Centre for Economic Analysis, a private research and consulting firm in Norway, and was issued by ECON in January 2000 with a Norwegian summary attached. A shorter, revised version is available as CESifo Working Paper No. 413, January 2001. The paper is also available in Russian and in Swedish, in full length as well as in a shorter version that was published in Ekonomisk Debatt in 2001. 


Ownership and Growth (with Tryggvi Thor Herbertsson and Gylfi Zoega)     In print
World Bank Economic Review
, October 2001.

Here it is argued that state-owned enterprises may stand in the way of, and perhaps even stifle, static and dynamic efficiency, and consequently also economic growth. We present cross-country regressions to support our argument. — The accompanying lecture slides can be viewed here


Natural Resources and Economic Growth: A Nordic Perspective on the Dutch Disease     In print
In
Resource Abundance and Economic Development, ed. Richard M. Auty, Oxford University Press, August 2001. 

This paper offers a quick glance at the Nordic economies and then discusses some aspects of their economic growth performance and natural resource dependence since 1970. Thereafter, the paper reviews some of the main symptoms of the Dutch disease, and then considers whether these symptoms are discernible in some of the Nordic countries in view of their abundant natural resources: in particular, in Iceland with its fish, in Norway with its oil (and fish!), and in Finland with its forests. — A long version of the paper was issued in October 1999 as a Working Paper at WIDER, The World Institute for Development Economics Research, The United Nations University, Helsinki, and was published in Macroeconomic Policy: Iceland in an Era of Global Integration, ed. Mar Gudmundsson, Tryggvi Thor Herbertsson, and Gylfi Zoega, Iceland University Press, Reykjavík, 2000.


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

Does it always pay to install high-quality capital? Or could it possibly be more profitable to make investments that do not last too long? In this paper we ponder the optimal rate of depreciation of physical capital, first in the Solow model and then in a model of endogenous growth with learning-by-doing. Optimal durability and depreciation, including obsolescence, are attained when the marginal benefit of increasing durability, and thus reducing the need for future replacement investment, is equal to the marginal cost, which is the additional cost of investing due to the higher quality of capital. The optimality conditions are set out as golden rules for quality, or durability, of capital. They entail that the higher the rate of population growth or technological progress, the larger is the marginal cost of investing in durability and the lower is the optimal level of durability and, hence, the higher is the optimal rate of depreciation. We then use a customer-market model to derive the privately optimal level of durability, and find that there is nothing in the model that ensures the socially optimal level of durability and depreciation. — A slightly longer version, entitled Obsolescence, appeared as CEPR Discussion Paper No. 2833, June 2001.


Natural Resources, Education, and Economic Development      In print
European Economic Review, May 2001.

Economic growth since 1965 has varied inversely with the share of natural capital in national wealth across countries. Four main channels of transmission from abundant natural resources to stunted economic development are discussed: (a) the Dutch disease, (b) rent seeking, (c) overconfidence, and (d) neglect of education. Public expenditure on education relative to national income, expected years of schooling for girls, and gross secondary-school enrolment are all shown to be inversely related to the share of natural capital in national wealth across countries. Natural capital appears to crowd out human capital, thereby slowing down the pace of economic development. — This paper was presented in an invited papers session at the 15th Annual Congress of The European Economic Association in Bozen-Bolzano 30 August - 2 September, 2000. Also available as CEPR Discussion Paper No. 2594, October 2000. The accompanying lecture slides can be viewed here


Education, Social Equality and Economic Growth: A View of the Landscape (with Gylfi Zoega)     In print
In Education + Training => Knowledge + Innovation => Economic + Social Growth, Proceedings of the 3rd International Conference organized by the Athens Institute for Education and Research, ed. Gregory T. Papanikos, Athens, 2001.

One of the main determinants of economic growth around the world since 1965 has been education. This paper discusses three different measures of education, and considers their relationship to the distribution of income as measured by the Gini coefficient and to economic growth across countries: (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. The accompanying lecture slides can be viewed here. —  The paper appeared in a conference volume, Education + Training => Knowledge + Innovation => Economic + Social Growth, Proceedings of the 3rd International Conference organized by the Athens Institute for Education and Research, ed. Gregory T. Papanikos, Athens, 2001. We have written a companion paper emphasizing the role of natural resources in the relationship between inequality and growth; see more slides. And more.  


Nordic Integration and European Integration     In print
In Regionalism in Europe: Geometries and Strategies After 2000,  eds. Jürgen von Hagen and Mika Widgren, Kluwer Academic Publishers, 2001. 

This paper discusses trade and growth in the Nordic countries, and then goes on to examine the relationship between natural-resource management and the prospects for Norwegian and Icelandic accession to the European Union.


Resources, Agriculture, and Economic Growth in Economies in Transition     In print
Kyklos, 4/2000.

This paper reviews some reasons why natural resource abundance and extensive agriculture appear to impede economic growth around the world. The paper presents empirical, cross-sectional evidence of various aspects of this relationship in the transition economies in Central and Eastern Europe and Central Asia since 1990. The essence of the argument is that heavy dependence on natural resources and agriculture may result in rent seeking (e.g., corruption) and policy failures (e.g., inflation) and may, moreover, discourage education, external trade, and genuine saving, thereby retarding economic growth. The paper concludes with a brief discussion of the policy implications of the analysis.


Icelandic Economists: Have They Made a Difference? A Personal View     In print
Nationaløkonomisk tidsskrift, 3/2000 (in Danish). 

This paper offers a personal view of Icelandic economists and the influence they have had on economic policy making in Iceland since the 19th century. The independence hero Jón Sigurðsson (1811-1879) is identified as Iceland’s first economist in a modern sense, even if he was not an economist by training. A brief description of economic developments since home rule was attained from Denmark in 1904 is followed by an attempt to explain, by appealing to considerations of mentality, social psychology, and unbalanced education among other things, why Icelandic economists may perhaps have had less influence than they would have liked.


Fix or Flex? Alternative Exchange Rate Regimes in an Era of Global Capital Mobility      In print
North American Journal of Economics and Finance, December 2000. 

This paper discusses the pros and cons of fixed versus flexible exchange rate regimes under perfect capital mobility.


Growing Apart      In print
Journal of World Trade, August 2000.

This paper extends and updates the introductory chapter of my Principles of Economic Growth (1999). The paper discusses the economic growth record since 1964 of seven pairs or clusters of countries that started out in roughly comparable economic circumstances and had much else in common, but adopted different development strategies and grew apart. The cases considered are: (a) Burma and Thailand, (b) Tanzania, Kenya, and Uganda, (c) Nigeria, Botswana, and Ghana, (d) Morocco, Tunisia, and Egypt, (e) Uruguay, Argentina, and Spain, (f) Haiti, the Dominican Republic, and Barbados, and (g) Madagascar and Mauritius. The bottom line is that to grow or not to grow is in large measure a matter of choice.


The Path of Output from Plan to Market     In progress
This paper is intended to summarize and synthesize earlier work on the reaction of national economic output to economic reforms in transition countries and elsewhere by offering a unified account of the effects of (a) liberalization of prices and trade, (b) stabilization, (c) privatization, (d) education, and (e) natural-resource abundance on the path of output during the transition from plan to market and beyond. The main aim is to offer a general analysis of the relationship between economic reforms and the reaction of output and to show how several major ingredients of the economic transformation of post-communist countries—not only liberalization, stabilization, and privatization, but also more and better education and reduced natural-resource dependence—can be incorporated into and analyzed within a simple two-sector, general economic equilibrium framework. Research in progress. — Contents: I. Introduction. II. Liberalization. III. Stabilization. IV. Privatization. V. Education. VI. Natural Resources. VII. Unemployment. VIII. Conclusion.


A Mixed Blessing: Natural Resources and Economic Growth (with Tryggvi Thor Herbertsson and Gylfi Zoega)     In print
Macroeconomic Dynamics, June 1999.

This paper makes the point that natural resource abundance tends to reduce investment in human as well as physical capital and, therefore, to impede economic growth. We present empirical evidence in support of our thesis. 


Exports, Inflation, and Growth     In print
World Development, June 1999.

This paper is intended to show that high inflation may hurt exports and hence also economic growth across countries. The empirical analysis is based on cross-sectional data from 160 countries in the period 1985-1994. 


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A few short pieces on various topics.


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