Download Abundant Natural Resources in the Growth Process

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Abundant Natural Resources in the Growth Process; an
Advantage or Disadvantage for a Region?
Nils-Gustav Lundgren
Department of Business Administration
and Social Sciences
Luleå University of Technology
S-971 87 Luleå, Sweden
Phone +46 920 491954
e-mail: [email protected]
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National policies and resources in the Barents region – a brief sketch
From the middle ages until the 17th century the area today known as the Barents region was
relatively important in the foreign policy considerations of the Russian, Danish, Norwegian
and Swedish rulers, as well as for the influential merchant town Novgorod. Different ruling
elites were claiming rights to collect taxes, control trade and put other demands on land and
population in the region1. In the following, i.e. from the 18th century, the regions importance
in such a context was significantly reduced. However it increased again as a result of the
industrialization process initiated in the 19th century and continuing throughout the 20th
century. The reason was that the natural resources in the region became an important part of
the industrial and economic development processes in Russia as well as in Finland, Norway
and Sweden. During the last 120-130 years the region's natural resources have been
industrially exploited on a scale and with an intensity never seen before. The northern parts of
Norway, Sweden, Finland and Northwest Russia has, according to these forces, undergone
fundamental and to some extent dramatic economic, social as well as political changes since
the end of the 19th century.
Societal development in the Barents region was heavily influenced by two strong, partly
different, but always closely interconnected forces; the influence of western market economy
and capitalism, and its more or less universal urbanisation and modernisation processes, and
the international rivalry and nationalistic policies implemented by the states of Sweden,
Russia and Denmark and later on the independent states of Norway and Finland.
The early regional and international trade routes which had been formed, developed, and
sometimes broken up, from the days of the Vikings to the late 1800's, underwent significant
changes in the wake of industrialisation in the 19th century. The demand for raw materials on
the international markets increased dramatically whilst, at the same time scarcity and
inevitably increasing prices, and even exhaustion of resources, affected some of the early
industrialised core-areas in western, central and southern Europe.
The 19th century industrialisation, forests, minerals and the transport network
The forests of the Barents region was the first resource to attract commercial interest,
followed by the mineral resources and finally the possibility to obtain electricity from hydroelectric power stations built in the region’s large rivers. Throughout the period fishing and
other maritime activities remained a significant part of the economy, especially in northern
Norway, the areas around the White Sea and in the Finnish and Swedish parts of the Gulf of
Bothnia.
Large scale commercial exploitation of the forests of the Barents region began in the 18th
century with the extraction of wood tar and production of masts and beams for ship
construction and maintenance, as well as wood-products for house building and rail-road
construction. In the 19th century sawn timber, and from the early 20th century large factories
producing pulp and paper, were in the focus of the economic growth process.
These commercial developments were closely tied to improvements of the transport and
communication networks. Transport and communication costs were significantly reduced
with the introduction of steam boats and railways, the telegraph and telephone networks,
internal combustion engines and the spread of good quality road networks.
1
For an overview of the research as well as a deep going analysis see Wallerström 1995. See also Lundkvist
1985, 1990 and 1994.
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Figure 1 illustrates the dramatic, i.e. the almost 70 percent, decline in maritime transport
costs in the late 19th century. The improvements in transport and communication acted as a
catalyst for the commercialisation and exploitation processes of forests and mineral deposits
for export from peripheral regions to the international market.
Development of nations, industry and political rivalry
The direction, scale and pace of commercialisation of the region’s resources was also
heavily ”intertwined” with the formation of the national states and driven by development
trends at a national level, but also by the latent and sometimes open political and military
conflicts between Norway, Sweden, Finland and Russia/Soviet Union. The north-south
orientation in the economic, cultural and political contacts, as well as social networks in
general, became tangible during this period. For a long time the north-south orientation of
contacts became almost totally dominant.
It is obvious that there are many similarities in the historic development of the different
parts of the Barents region. A self evident reason is of course the common geographical and
ecological conditions. At the same time there are many differences in the way in which
industrialisation and urbanisation has taken place, especially with regard to the differences in
the general institutional setting ”supplied” to the regions by each of the nation states, as well
as the differences in growth rates between them.
From the 18th to the late 19th century the economic growth rates was almost similar, but
slightly lower in Norway, Sweden, Finland and Russia compared to the general West
European development. GDP per capita slightly doubled in all four nations from 1700 to
1870, while the differences significantly increased in the following period. From 1870 to 1970
GDP per capita in Finland increased almost 10 times, in Sweden and Norway about 8 times
and in Russia slightly above 6 times, i.e. slightly exceeding the West-European average, see
figure 2 below.
From the mid-late 19th until the beginning of the 20th century the character of
industrialisation throughout the Barents region was to a large extent similar. The region’s
forests were made accessible in response to the increasing European demand for sawn wood
products through the influx of capital from earlier industrialised and economically developed
regions. Important was also the influx of entrepreneurs, sometimes foreign, who bought
cutting rights, forest land and made huge investments in industrial plants and in the
communication network, for example harbours and creating float-ways out of the rivers. This
was the case in Sweden, Norway as well as in Finland and North-West of Russia2. The
process is described by the Swedish economic historian Jörgen Björklund as a "timber
frontier", moving from Norway to the south western parts of Sweden, northwards along the
eastern and western coasts of the Gulf of Bothnia finally reaching the forests along the river
Petjora in the Komi republic3.
The paths to modernisation divide - and join again ?
The in large similar process of industrialisation of the Barents region driven by western
capitalism and market forces, was interrupted and basically changed with the emergence of
communism and the Soviet empire in the 1920’s and 1930´s. Already obvious differences
was, as a result, accentuated in the agricultural and industrial development of the region. In
northern Sweden and Finland, a decentralised rural society developed, characterised by
2
3
Glete J 1987 kap 3, Ahvenainen 1972, Hänninen
Björklund 1984
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colonisation which was closely coupled to forestry activities. Subsistence farms, primarily
producing for their own needs, could expand their activities in concert with the expanding
industrialised forestry related activities emerging in the region4.
In the North West of Russia, on the other hand, forestry and farming seems to have
developed almost completely independently of each other. Even the character of farming in
North West Russia showed significant differences with those in Sweden and Finland where
small villages and single farms, becoming more and more widely spread towards the north
and away from the coast was the norm. In contrast, Russian farms and the centres of
population that developed were much larger. This structure was also reflected in later
industrialisation where the north of Russia saw the creation of few, but significant industrial
centres in a relatively inhospitable environment. In Norway, Sweden and Finland, with the
exception of the mining towns in Gällivare and Kiruna and the Norwegian coal mines on
Spitsberg, more widespread but smaller industrial centres developed5.
Another fundamental difference in regional development during the first half of the 20th
century is the fact that the industrialisation process in Russia was significantly dependant on
forced labour. It was the case in forestry in the Archangels and Murmansk regions which was
an established part of the Gulag system6. The mining towns, such as Kirovsk, were also
established with significant use of slave labour. In contrast, forestry and mining, as well as the
major hydro-electric projects, in Norway, Sweden and Finland depended on a workforce that
was attracted to the region as relatively well paid labour.
The Barents region is today, like all parts of the world, facing the challenges created by
global markets and economies. The Norwegian, Swedish and Finnish parts of the Barents
region operate now days within a “late” or a “post industrial” market economy with its strong
emphasis on service industries under both public and private management. Healthcare and
education, from pre-school to post graduate, as well as military activities, are sectors which
form a major part of the economy today. However, natural resources remain important from
both an industrial perspective, but also increasingly from the perspective of the emerging
tourist and leisure industries.
Similar generalisations can also apply to the Russian part of the Barents region. However,
the political, social and economic change from an authoritarian planned economy to one
increasingly driven by global market forces has, probably to use somewhat of an
understatement, not been without it's problems. In the Archangels region, the forestry industry
is obviously struggling with huge problems with drastic decreases in production and
employment during the 1990s, whilst at least some forest companies in the Murmansk region
appear to have met these challenges and opportunities slightly better, as can be seen in figure
3. It illustrates the changes in production and employment from 1989 to 1999 in a number of
forestry companies located in Archangels, Karelia, Murmansk and Norrbotten and highlights
the downturn in both production and employment levels experienced especially by the
companies in Archangels7.
4
For a description and analysis see for example Lundgren N-G 1984 and Bäcklund D 1988
Kauppala 1998 p.11
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Kuppala 1998
7
An extended analysis in Carlsson, Lundgren, Olsson 2001 and 1999 and Ivanova & Nygaard 1999
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Abundant Natural Resources in the Growth Process; an Advantage or Disadvantage
for a Region?
We have above emphasised the important role of natural resources and raw materials
extraction in the industrialisation and development processes in the Barents region. Natural
resources are also an important source of national and regional wealth all around the world.
But, to what extent then, are abundant natural resources and an industrialisation and growth
process heavily dependant on natural resources, an advantage or disadvantage for the overall
societal development in a long term perspective? Recent empirical research suggests that an
abundance of natural resources actually can hurt economic growth indirectly by unleashing
forces that hamper the development of the economy8.
By using a dataset including 135 countries covering the period 1965 to 1998 the Icelandic
economist Thorvaldur Gylfason concludes that economic growth really seems to be hampered
by the existence of a large natural resources sector in the economy, measured for example as
export share or share of total employment. The reasons can be summarised as follow;
The first reason is the consequences of the so called Dutch disease, meaning that the
exchange rate of the currency tends to rise, to be more volatile while, at the same time, labour
costs tends to increase significantly in the resource abundant economy. Other industries will
therefore grow at a lower pace due to the competition with the often very profitable rawmaterials industries.
The second reason pointed out by Gylfason is the neglect of educational investments, as
illustrated in figure 4 below. His findings indicates that if the share of the labour forces
employed in natural resource exploitation increases by 1 percent, the enrolment share in highschool education decreases by more than 1 percent. This is due to the fact that raw-materials
industries often demand a large share of low-educated workers that often at same time
receives relatively high wages. In a long term perspective a large raw-material based sector
therefore will result in a limited supply of a well educated labour force possible to be used by
other branches and industries9.
The third reason for a slower economic development record, due to abundant natural
resources, is a strong and general tendency to rent seeking. According to Gylfason, there
exists a general tendency for a protectionist economic policy in countries with a large share of
natural resource based industries. Exploiting natural resources often is connected to
monopolist activities and/or need for political permissions, privileges etc. Probably therefore
corruption seems to be slightly more widespread in natural resource dependant economies. A
general finding is that if the natural resource share increases by 1 percent import tariffs
increases by 5-6 percent, with an inevitable lower economic growth rate as a consequence10.
The forth reason is a general tendency for countries abundantly equipped with natural
resources to overestimate there economic strength. Economic problems and recessions will
often not be taken seriously and structural change will therefore often not occur. Instead we
find a tendency to go on as before, for example “solving” acute problems with increased loans
and indeptedness. Gylfasons finding indicates that a 3 percent larger share of natural resource
8
Recent research is Gylfasson 2001a, 2001b, Paldam 1997 and Auty 2001
Gylfason 2001 p 504
10
Gylfason 2001 p505
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industries increases international indeptednes by almost 10 percent11.
A general conclusion concerning the correlation between economic growth in a long term
perspective and the share of natural resources is, according to Gylfason, that if the raw
materials sectors share of the economy increases by about 10 percent the overall economic
growth per capita (given the initial level of income) decreases by 1 percent per year, see
figure 512.
Conclusions and reflections
To what extend then are the empirical findings of Gylfason of relevance for understanding
the economic and industrial development of the Barents region as well as for understanding
the regions present ability to face the forces of the global economy? To what extent has the
industrial development, with its deep roots in natural resource exploitation, negatively
influenced the regions “capacity to transform” to use professor Charles Kindlebergers
expression?
I will argue that Gylfason´s empirical findings, based on a national level, is of high
relevance also at the regional level. At least for the Swedish part of the region relatively high
wages in mining, steel, pulp and paper industries was accompanied by for example low
participation rates in higher education in the long run influencing the regional development
prerequisites in a growth hampering way.
Another observation in line with Gylfason is what happened during the structural crisis in
the forest, steel and mining in northern Sweden, triggered by the OPEC I in 1973/74 and
OPEC II in 1979/80 that increased energy prices about four times. During the 1970s and
1980s political opinions commonly expressed in the region heavily overestimated the values
of the natural resources as a potential for future wealth creation for a large share of the labour
force in the region.
In the late 1970s political suggestions with a protectionist, anti-market and anti-capitalistic
bias was put forward as a way to reduce high employment rates often caused by the crisis in
the raw materials industries. Arguments and explanations inspired by the dependency school
(the theories developed by the Economic Commission for Latin America, ECLA and made
world wide spread by authors like A.G. Frank, S. Amin and others) became an important part
of the public debate and public opinion in the 1970s and early 1980s in Sweden as well as in
Finland and Norway13.
Looked upon in retrospect it is obvious that the proposed policies in the 1970s aimed at
conserving and reinforcing the existing structure of incentives and organisations. It was also a
way to explain the poor performance of the regional economy on the basis of the international
terms of trade and other conditions external to the region. In that way the public discussions
was biased and moved away from the fundamental problems of the regional economy. In my
view important and fundamental problems within the region was to a large extent neglected as
for example the informal and formal institutions, i.e. norm and value systems and a national
11
Gylfason 2001 p507
Gylfason 2001 p510
13
Industrialization of Latin America. For an application of ECLAS perspectives applied to Northern Sweden
and Norrbotten see Öström 1978 and 1980, for a critical discussion Lundgren N-G 1979. See also Seers 1979
and 1983 for an application of a Dependency, Core-Periphery, perspective on the regional development of
Finland, Sweden and other European regions.
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tax system that in fact was an obstacle to private entrepreneurship and the creation of new
small and medium sized firms. Included here also is the cultural obstacles to increase the low
participations rates in higher education despite two universities located in the far north of
Sweden14.
In a very critical discussion of the dependency theories Douglas C. North has pointed out
that incomplete and in fact often misleading explanations of the sort not only rationalises the
structure of the regional economy, but also contains policy implications that would reinforce
the existing growth hampering institutional framework15. Despite the radical political
tendencies in the policy suggestions put forward in the late 1970s, a conservative bias was
obvious, in its avoidance of understanding the need for fundamental changes in the
institutional setting and context of the region and thus also in the distribution of political
power, influence and hegemony.
In writing the modern industrial and economic history of the Barents region it is important
to try to link the description and analysis of the empirical development of production, wage
and income formation, technological and productivity changes and entrepreneurial efforts to
the mental models actually formulated and articulated by different actors i.e. interest groups.
Interesting might bee to try to identify what kind of knowledge, descriptions and mental
models of society that different groups and organised interests actually demanded, as a result
of, and for sure heavily biased by, the institutional framework of society thus leading to
imperfect knowledge and understanding that always make up the subjective models of the
actors16.
14
Anderstig/Lundgren 1994 and Lundgren 1992.
North 1990 p100
16
For an interesting discussion on this topic see North 1990 chapter 9 and Denzau and North 1994.
15
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Figure 1 Maritime Dry Bulk Transport Costs 1870-2000
110
100
90
Dollar/ton (1990 US$)
80
70
60
50
40
30
20
10
0
1870th 1910th 1930th 1950th 1970th 1990th
Source; Lundgren N-G, Bulk Trade and Maritime Transport costs.
The Evolution of Global Markets. Resources Policy 1/2, 1996
Figure 2 Growth in GDP per capita
Year 1700-1870, 1870-1970
Finland
Norway
Russia
Sweden
GDP/C 1870/1700
West Eur
GDP/C 1970/1870
0
2
4
6
8
10
Source: Maddison A, The World Economy. A millenial Perspective (2001)
Table B-21, page 265
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Figure 3 Production and Employment Change in Forest Companies
Production and Employment (1999 divided by 1989)
7
Production 1999/Production 1989
6
5
4
3
Murmansk
2
Karelia
1
Norrbotten
0
0,0
Archangels
,5
1,0
1,5
2,0
Employment 1999/Employment 1989
Cource; The IIASA forestry database. More information in Carlson, Lundgren, Olsson 2001
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Figure 4 Natural resources and education
Share in High-Schooleducation 1965-98
120
Finland
Belgium
Sweden
100
NewZealand
Greece
80
Italy
60
40
Venezuela
20
0
-10
Rsq = 0 4078
0
10
20
30
40
50
Natural Capital Share
Source; Gylfason/Zoega (2001). Statistical Appendix page 41f
Figure 5 Economic growth and Natural Capital
Growth per capita 1965-1998 (adj. for initial GDP)
6
4
Korea
2
Japan
0
Denmark
Sweden
SouthAfrica
-2
-4
Niger
-6
Rsq = 0 4339
-10
0
10
20
30
Share of natural capital
Source see figure 4
40
50
60