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We compare the economic growth performance of Belarus and Lithuania since the collapse of the Soviet Union in 1991. Our interest in this country pair is driven by the two countries' interwoven history as well as by the fact that Belarus remains autocratic and strongly tied to Russia, while Lithuania has reinvented herself as a democratic market economy fully integrated into the EU. Our aim is to understand better the extent to which the growth differential between the two countries can be traced to increased efficiency, i.e., total factor productivity, in the use of capital and other resources

The great continent of Africa is showing signs of true economic growth and prospects for improved incomes for tens of millions. But is it a dream? Our author says there is reason for optimism.

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 Parliament. Against this comparative background, the paper proceeds to discuss political and procedural aspects of Iceland´s constitutional reform project, and concludes by proposing lessons to be learned from Iceland´s experience thus far.

Unsustainable accumulation of debt precedes financial crises. The recent Western financial crisis was no exception in this regard. The external debt of Greece, Iceland, Ireland, and Spain increased exponentially, in Iceland at a rate higher than the rate of interest on foreign debt. The Ponzi scheme that played out in Iceland begs the question why a country would set out on a path that could lead to a financial crisis. We address this question and describe the private incentives faced by bankers, financiers, politicians and others. In particular, we show how private incentives and a culture that valued financial gains above all else collided with socially desirable outcomes. The root of the problem in Iceland as well as in other crisis countries was a failure at the state level to align private incentives with what was socially prudent, a failure due, at least in Iceland, to a combination of mistakes, incompetence and what can only be called corruption. Furthermore, misplaced belief in a market economy where morals and ethics play no role paved the way to serious lapses in accounting and in the operation of the banks.

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.

The paper discusses economic and political diversification as two sides of the same coin, presenting them as parallel potential determinants of long-run economic efficiency and 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 rights and civil liberties and 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.

Thorvaldur Gylfason discusses the economic, political, and judicial aftermath of Iceland’s financial collapse in 2008. It considers lessons learnt, or not learnt, with emphasis on unsettled issues concerning the distribution of incomes and wealth, banking, and politics. The study makes three main points. First, the measurement of income flows and living standards needs to be adjusted in two respects. Second, since the crisis, Ireland has made a significantly stronger recovery than Iceland in terms of per capita income. Third, Iceland’s economic recovery from the crisis is marred by a visible deterioration of various components of the country’s social capital.

Is democracy failing in Iceland? – asks the author. The financial collapse of 2008 provoked a response from the Parliament to canvass 950 randomly selected citizens about revising the constitution, which many believed enabled the crisis. In a national referendum, two-thirds of voters accepted a newly drawn constitution. But Parliament has not yet ratified it.

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 during 1825–1927 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 evolve less rapidly than inflation and change less than inflation over time. Even so, the “Fisher effect” is commonly defined as a point-for-point effect of inflation on nominal interest rates rather than what Fisher actually found: a persistent negative effect of increased inflation on real interest rates.

For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003–2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which 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 following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic krona before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism.

Economic growth is produced in part by the accumulation of different kinds of capital, including social capital in its several forms. If such capital depreciates, including social capital, the economy can be undermined and financial and economic crises can follow. The author compares experiences in the United States to those in Sweden and Iceland to draw useful lessons.

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. This article has two main aims. First, using a gravity model of trade, it estimates the effects of deep and shallow free trade agreements for the EaP (Eastern Partnership) states with Russia and the EU respectively. Second, by relating the outcomes of the first estimation to the quality of institutions, proxied with the level of democracy and the level of corruption in the selected countries, the paper estimates the effect on exports of changes in the quality of institutions. The main results show that the EaP countries gain significantly from free trade agreements with the EU but little if anything from free trade agreements with Russia, and that improvements in the quality of institutions in EaP countries have played an important role in fostering exports.

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.

For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003-2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which 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 following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic króna before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism.

Under what conditions can the European Neighbourhood Policy (ENP) achieve one of the objectives of the European Union (EU): to resolve conflicts in its neighbourhood? In the spirit of Montesquieu and Monnet, the basic hypothesis of the EU is that closer economic integration helps resolve political conflicts and vice versa, creating a virtuous circle of prosperity and detente. The EU has a strong self-interest in resolving conflicts in its neighbourhood since their consequences spill over into the EU itself through refugee flows and trans-border criminal activities. The paper identifies factors important for the neighbourhood countries to succeed: access to active facilitators of compromise, a well-functioning market economy, strong common institutions to realise potential intra-regional free trade, the prospect of accession to the EU and the absence of third parties to the conflicts. However, characteristic of the key conflicts in the European Neighbourhood is that few of the parties are prospective members of the EU and that a third party outside the Partnership is involved in major conflicts. To succeed in conflict resolution, the EU must, therefore, provide these parties significantly stronger arbitration, more technical and financial resources and stronger institutions anchoring the partner country to the EU. This applies to conflicts involving partners in the Eastern Partnership as well as in the Mediterranean Partnership.

The paper discusses the European Union as a union of primarily small European states, a union 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 also social factors (such as hours of work and equality of income) places Europe ahead of the United States. Further, adjustments for education attainment and public health, as made by the United Nations Human Development Index, similarly favor Europe vis-a-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. This will further advance the EU’s economic and social position in the world.

We examine the effect of the interaction between resource rents and democracy on corruption and internal conflict for a panel of 29 Sub-Saharan African 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 the political elites in less democratic countries to more effectively quell the masses through redistribution of rents 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. Copyright 2013 , Oxford University Press.

Natural resource discoveries, even when fairly modest in terms of the revenues they are expected to generate, can have significant macroeconomic effects and implications for the conduct of fiscal and monetary policy. In this respect, Uganda is no different from other oil-rich countries. In five main ways, all of which suggest the need for economic diversification as an efficient risk management strategy, the Dutch disease manifests itself through (i) An appreciation of the local currency in real terms, undermining the profitability of other export industries, and of local industries competing with imports by encouraging imports. (ii) The increased volatility of the real exchange rate induced by oscillating oil prices in world markets, which reduces investment and economic growth over time. (iii) Wage increases in the resource-intensive sector that spill over to the non-resource-based sector, further hampering employment and investment in the non-resource-based sector. (iv) Socially counterproductive rent seeking (and even plundering) in the absence of effective legal and institutional mechanisms that would ensure resource rents accrue to the rightful owners with minimal leakages, and are managed for the benefit of all. (v) Crowding out, by which natural capital (if not well managed) tends to undermine other types of capital essential to economic development, including human and social capital.

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.

Many bemoan the fact that financial crisis and deep recession did not lead to constructive reform in most countries—at least not sufficient reform. But in Iceland it has led to attempts to rewrite the constitution for the better. Democratic government may well improve there.

We compare and contrast the economic growth performance of Estonia and Georgia from the collapse of the Soviet Union in 1991 until 2006 and beyond 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). On the basis of a simple growth accounting exercise, 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.

We treat the rate of depreciation as a choice variable and show that increased population growth and technological progress make optimal depreciation increase by raising the cost – in terms of consumption foregone – of providing the population with durable capital.

How well is the United States really doing? Money isn't everything, says this economist. He takes a broader look at the standard of living in the United States compared to other rich nations and finds the United States lags in several key ways, including the fact that Europeans are now taller on average than Americans. Greater tolerance of inequality in the distribution of income and wealth in the United States than in Europe may have taken its toll.

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.

Using a panel gravity model of trade for the period 1995–2010, this paper estimates the potential for increased intra-regional trade among 10 countries of the southern and eastern Mediterranean coast. It examines how closer integration through the EU’s revised neighborhood policy can encourage democratisation and conflict resolution. The main results indicate that while the gains realized to date from regional integration have been small, significant potential gains from deep integration exist. The paper proposes that the EU starts by negotiating deep and comprehensive free trade agreements with Egypt, Israel and Jordan provided these countries also negotiate them with each other. Inmaculada Martínez-Zarzoso gratefully acknowledges the financial support received from the research project (ECO2010-15863) granted by the Spanish Ministry of Science and Innovation.

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.

Empirical evidence seems to indicate that economic growth since 1965 has varied inversely with natural resource abundance across countries. This paper proposes a linkage between abundant natural resources and economic growth, through saving and investment. When the share of output that accrues to the owners of natural resources rises, the demand for capital falls leading to lower real interest rates and less rapid growth. However, institutional reforms paving the way to a more efficient allocation of capital may enhance the quantity as well as the quality of new investment and sustain growth. Empirical evidence from 85 countries from 1965 to 1998 suggests that abundant natural capital may on average crowd out physical capital thereby inhibiting economic growth. The results also suggest that abundant natural resources may hurt saving and investment indirectly by slowing down the development of the financial system. However, high growth rates in a handful of formerly resource-dependent economies seem to indicate that economic and structural reforms can overcome any adverse effect of natural resources on economic growth.

This economist analyzes the growth of China and India differently than most. He examines whether conventional sources of growth can explain the good performance of both nations, and finds that they can. Thus, growth in these countries is not an exception but the result of a variety of beneficial conditions and policies. But his conclusion is surprising: India may now be in a better position than China to grow in the long run.

Sweden has a long and distinguished tradition in economics, beginning with Knut Wicksell and continuing with Gustav Cassel, Eli Heckscher, Erik Lindahl, Gunnar Myrdal, Bertil Ohlin, and Erik Lundberg, all of whom are now gone. Yet, for several of these men, economics was not enough: Wicksell spoke out on moral issues and served time in jail, and Myrdal was for many years a high official at the United Nations and, briefly, a cabinet minister, as was Ohlin, who made his mark at home primarily as leader of the opposition in a country governed mostly by Social Democrats, serving in parliament for 32 years. For Assar Lindbeck, however, economics has been broad enough: he has devoted a long and distinguished career to economics, and to economics alone, with unfailing enthusiasm and energy over half a century. Not that he was not wanted elsewhere: over the years, he has declined challenging job offers from an international organization and a Swedish daily newspaper, to name but two examples, as well as from universities outside Sweden. Assar has managed to harness his varied and wide-ranging talents within the many mansions of economics. He is one of the most versatile economists of his generation. Indeed, he is one of the few who, for clarity, need to divide their bibliography into categories by subject: Macroeconomics and monetary economics, Public economics, Labor economics, International economics, Economic systems and economic structures, Methodology and history of economic thought, and Swedish economy. His work on these different subjects has ranged from pure theory to applied policy-oriented and empirical studies. In addition to the numerous scientific publications listed at the end of this interview, his bibliography includes nearly 200 articles for magazines and newspapers. His ivory tower has always been equipped with a high-speed elevator. But, as he points out in the conversation to follow, all his research work, as well as his journalism, is driven by an overarching interest in bettering economic policy and organization—in other words, boosting economic and social efficiency for the purpose of lifting ordinary people's standard of life. This has been, and remains, a guiding principle—a Leitmotiv, if you prefer—from which he has never swerved. Assar Lindbeck is a towering figure in Swedish economics and in Swedish national life.

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 re- gional 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 equal- ity, on the other hand, can help account for the positive correlation between the two latter variables that has been documented in the literature. (JEL 128, O15, O40)