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Natural Resources, Education, Investment, and Economic Growth

Natural Resources, Education, Investment, and Economic Growth. Thorvaldur Gylfason. Overview. Document the inverse relationship between natural resource abundance and economic growth across countries since 1965

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Natural Resources, Education, Investment, and Economic Growth

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  1. Natural Resources, Education, Investment, and Economic Growth Thorvaldur Gylfason

  2. Overview • Document the inverse relationship between natural resource abundance and economic growth across countries since 1965 • Discuss five channels of transmission from abundant natural resources to slow economic growth • Stress education and investment

  3. Background: A quick look at OPEC Nigeria has been stagnant since independence in 1960: No growth Per capita growth 1965-1998 Iran and Venezuela: -1% per year Libya: -2% Iraq and Kuwait: -3% Qatar: -6% Why?

  4. Background: A quick look at OPEC King Faisal of Saudi Arabia (1964-1975) would hardly have been surprised: “In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.”

  5. Increasing awareness that oil brings risks If ... oil revenue is managed well, it can educate, heal and provide jobs for ... the people. But oil brings risks as well as benefits. Rarely have developing countries used oil money to improve the lives of the majority of citizens or bring steady economic growth. More often, oil revenues have caused crippling economic distortions and been spent on showy projects, weapons and Paris shopping trips for government officials. New York Times, 1 August 2000.

  6. Is OPEC an exception? No, this seems to be a general pattern. Of 65 natural resource abundant countries 1970-1998, only four had • Investment of more than 25% of GDP • Per capita GNP growth of more than 4% per year They are: Botswana, Indonesia, Malaysia, Thailand

  7. Economic growth and natural capital What is the empirical evidence? r = Spearman’s rank correlation r = -0.51 • A new measure of natural resource abundance • Confirms results based on other measures A ten percentage point increase in the natural capital share goes along with a decrease in per capita growth by nearly 1% per year. 86 countries

  8. Economic growth and natural capital again r = -0.61 An 8-9 percentage point increase in the natural capital share goes along with a decrease in per capita growth by 1% per year. What if we adjust the growth figures for initial income? 85 countries

  9. Five channels of transmission 1. The Dutch disease Exchange rates, wages, volatility Hurts level or composition of exports 2. Rent seeking Protectionism, cronyism, corruption 3. Overconfidence Poor quality of policies and institutions 4. Neglect of education 5.Too little investment

  10. Resource abundance and policy failure The problem is not the existence of natural wealth ... but rather the failure to avert the dangers that follow the gifts of nature. Norway is a success story. Government takes in 80% of oil rent and invests it mostly in foreign securities. No signs of rent seeking, overconfidence, or neglect of education College enrolment has risen from 26% in 1970 to 62% in 1997.

  11. 1 Education and natural capital Now consider the relationship between natural resource abundance and three different measures of education inputs, outcomes, and participation: 1. Public expenditure on education 2. Expected years of schooling for girls 3. Secondary-school enrolment

  12. Expenditure on education and natural capital r = -0.32 An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP. 90 countries

  13. Years of schooling and natural capital A five percentage point increase in the natural capital share is associated with a decrease by one year in the schooling that girls can expect. r = -0.57 52 countries

  14. Secondary enrolment and natural capital r = -0.66 A five percentage point increase in the natural capital share goes along with a decrease in secondary-school enrolment by almost 10 percentage points. 91 countries

  15. Economic growth and education r = 0.53 A 40 point increase in the secondary enrolment rate goes along with an increase in per capita growth by 1% per year. 86 countries

  16. Economic growth and education again r = 0.53 A 30 point increase in the secondary enrolment rate goes along with an increase in per capita growth by 1% per year. 87 countries

  17. Summary of results on education We have seen that, across countries: 1. Economic growth varies directly with education 2. Three different measures of education inputs, outcomes, and participation are all inversely related to natural resource abundance 3. Economic growth varies inversely with natural resource abundance

  18. Regression results: Growth and education Recursive system Reduced form Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  19. Regression results Direct effect of natural capital on growth is -0.06 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  20. Regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  21. Regression results Indirect effect through education is -0.94·0.04  -0.04 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  22. Regression results Total effect is -0.06 + (-0.94)·0.04  -0.10 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  23. Regression results Total effect is -0.06 + (-0.94)·0.04 -0.10 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  24. Interpretation of results Natural-resource-based industries are generally less high-skill labor intensive and less high-quality capital intensive than others, and so • confer few external benefits • distort comparative advantage • impede learning by doing, technical advance, and economic growth

  25. Marshall was right There is no extravagance more prejudicial to growth of national wealth than that wasteful negligence which allows genius that happens to be born of lowly parentage to expend itself in lowly work. No change would conduce so much to a rapid increase of material wealth as an improvement in our schools, and especially those of the middle grades, provided it be combined with an extensive system of scholarships, which will enable the clever son of a working man to rise gradually from school to school till he has the best theoretical and practical education which the age can give. ALFRED MARSHALL (1920)

  26. 2 From human to physical capital Joint work with Gylfi Zoega Natural capital seems to crowd out humancapital Does natural capital also crowd out physical capital? What is the evidence? How about social capital? Consider the relationship between natural capital and corruption

  27. Natural Capital and Corruption Abundant natural resources appear to go along with corruption

  28. Investment and natural capital A ten point increase in the natural capital share goes along with a decrease in investment by 2% of GDP. r = -0.37 85 countries

  29. Economic growth and investment r = 0.63 A five point increase in the natural capital share goes along with an increase in per capita growth by 1%. 85 countries

  30. From gross investment to genuine saving Gross investment does not take quality into account Genuine domestic saving is adjusted for quality, and is defined as Gross domestic saving minus Depreciation of physical capital plus Expenditure on education minus Depreciation of natural capital Energy, minerals, forests, carbon dioxide

  31. Genuine saving and natural capital r = -0.54 A ten point increase in the natural capital share goes along with a fall in genuine saving by 4% of GDP. 85 countries

  32. Economic growth and genuine saving A 6-7 point increase in the genuine saving rate goes along with an increase in per capita growth by 1% of GDP. r = 0.69 85 countries

  33. Summary of results on investment We have seen that, across countries: 1. Economic growth varies directly with gross investment and genuine saving 2. Gross investment and genuine saving are both inversely related to natural resource abundance 3. Economic growth varies inversely with natural resource abundance

  34. Regression results: Growth and investment Recursive system Reduced form Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  35. Regression results Direct effect of natural capital on growth is -0.06 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  36. Regression results Indirect effect through education is -0.75·0.05 -0.04 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  37. Regression results Indirect effect through investment is -0.20·0.10 = -0.02 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  38. Regression results Total effect is -0.06 + (-0.75)·0.05 + (-0.20)·0.10 -0.12 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  39. Regression results Total effect is -0.06 + (-0.75)·0.05 + (-0.20)·0.10-0.12 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  40. Regression results: Growth and genuine saving Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  41. Regression results Total effect is -0.06 + (-0.82)·0.05 + (-0.41)·0.08  -0.13 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  42. Regression results Total effect is -0.06 + (-0.82)·0.05 + (-0.41)·0.08 -0.13 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  43. Gross saving vs. genuine saving What part of the difference between gross investment and genuine saving matters most for growth? The current account! Gross domestic saving (i.e., gross domestic investment minus the current account) is closely related to economic growth

  44. Gross saving and natural capital A ten point increase in the natural capital share goes along with a decrease in gross saving by 4% of GDP. r = -0.47 85 countries

  45. Economic growth and gross saving A 6-7 point increase in the gross saving rate goes along with an increase in per capita growth by 1% of GDP. r = 0.73 85 countries

  46. Summary of results on gross saving Gross saving has slightly more explanatory power in the growth equation than either gross investment or genuine saving This means that current account deficits are not good for growth When investment and current account deficits enter separately, the coefficients are almost equal but with opposite signs

  47. Regression results: Growth and gross saving Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  48. Regression results Total effect is -0.06 + (-0.82)·0.04 + (-0.42)·0.09 -0.13 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

  49. Conclusion Natural resources bring risks Too many people tend to become stuck in low-skill, low-tech intensive industries A false sense of security leads people to underrate or overlook the need for good policies, education, and investment Awash in easy cash, they may find that education does not pay Resource-poor countries are less likely to make this mistake

  50. Conclusion Natural capital appears to crowd out physical as well as human capital Empirical evidence from 85 countries in 1965-1998 suggests that about a half of the total effect of natural capital on growth can be ascribed to less education and less investment Reinforces the case for education and investment as engines of growth The End

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