education, investment, natural resources, education, investment, and economic growth thorvaldur...

Natural Resources, Education, Education, Investment,Investment, and Economic GrowthThorvaldur Gylfason

OverviewOverview

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

Background: A Background: A quick look at OPECquick look at OPEC

Nigeria has been stagnant since independence in 1960: No growth

Per capita growth 1965-1998Iran and Venezuela: -1% per yearLibya: -2%Iraq and Kuwait: -3%Qatar: -6%

Why?

Background: Background: A A quick look at OPECquick 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.”

Increasing Increasing awareness thatawareness that oil oil brings risksbrings 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.

Is OPEC an Is OPEC an exception?exception?

No, this seems to be a general pattern.

Of 65 natural resource abundant countries 1970-1998, only four hadInvestment of more than 25% of GDPPer capita GNP growth of more than

4% per year

They are:Botswana, Indonesia, Malaysia, Thailand

Economic growth and natural capital

y = -0,0946x + 2,4894

R2 = 0,2805

-4

-2

0

2

4

6

8

10

0 10 20 30 40 50 60

Share of natural capital in national wealth 1994 (%)

An

nu

al g

row

th o

f G

NP

pe

r c

ap

ita

19

65

-19

98

(%

)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 countries86 countries

What is the empirical evidence?

A new measure of natural resource abundanceConfirms results based on other measures

r = -0.51

r = Spearman’s rank correlation

Economic growth and natural capital again


y = -0,114x + 0,0713

R2 = 0,3902

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60


Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

An 8-9 percentage point increase in the natural capital share goes along with a decrease in per capita growth by 1% per year.

r = -0.61

What if we What if we adjust the adjust the growth growth figures for figures for initial initial income?income?

Five channels of Five channels of transmissiontransmission1. The Dutch disease

Exchange rates, wages, volatilityHurts level or composition of exports

2. Rent seekingProtectionism, cronyism, corruption

3. OverconfidencePoor quality of policies and institutions

4. Neglect of educationeducation5. Too little investment

Resource Resource abundance and abundance and policy failurepolicy 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.

Education and Education and natural capitalnatural capital

Now consider the relationship between natural resource abundance and three different measures of education inputs, outcomes, and participation:1. Public expenditure on education2. Expected years of schooling for

girls3. Secondary-school enrolment

1

Expenditure on education and natural capital y = -0,0561x + 4,9044

R2 = 0,1247

0

1

2

3

4

5

6

7

8

9

0 10 20 30 40 50 60


Pu

blic

ex

pe

nd

itu

re o

n e

du

ca

tio

n 1

98

0-1

99

7 (

% o

f G

NP

)

An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP.


r = -0.32

Years of schooling and natural capital

y = -0,2186x + 13,011

R2 = 0,3317

0

2

4

6

8

10

12

14

16

18

0 10 20 30 40 50 60


Ex

pe

cte

d y

ea

rs o

f s

ch

oo

ling

fo

r fe

ma

les

19

80

-19

97

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

Secondary enrolment and natural capital

y = -1,8414x + 72,705

R2 = 0,3504

-40

-20

0

20

40

60

80

100

120

140

0 10 20 30 40 50 60


Gro

ss

se

co

nd

ary

-sc

ho

ol e

nro

lme

nt

19

80

-19

97

(%

)

A five percentage point increase in the natural capital share goes along with a decrease in secondary-school enrolment by almost 10 percentage points.


r = -0.66

Economic growth and education

y = 0,0238x + 0,1602

R2 = 0,1674

-4

-2

0

2

4

6

8

10

0 20 40 60 80 100 120 140

Secondary-school enrolment 1980-1997 (%)

An

nu

al g

row

th o

f G

NP

pe

r c

ap

ita

19

65

-19

98

(%

)

A 40 point increase in the secondary enrolment rate goes along with an increase in per capita growth by 1% per year.


r = 0.53

Economic growth and education again


r = 0.53 y = 0,0377x - 2,9036

R2 = 0,3424

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Gross secondary-school enrolment 1980-1998 (%)

Gro

wth

of

GN

P p

er

ca

pit

a, a

dju

ste

d f

or

init

ial i

nc

om

e

19

65

-19

98

(%

)

A 30 point increase in the secondary enrolment rate goes along with an increase in per capita growth by 1% per year.

Summary of Summary of results onresults on educationeducation

We have seen that, across countries:1. Economic growth varies directly with

education2. 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

Regression results: Regression results: Growth and Growth and educationeducation

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

DependenDependent variablet variable

ConstanConstantt

Natural Natural capitalcapital

Enrol-Enrol-ment ment raterate

Invest-Invest-mentment

Initial Initial incomeincome

RR22

Economic Economic growthgrowth

9.359.35

(6.0)(6.0)-0.06-0.06

(4.3)(4.3)0.040.04

(5.9)(5.9)0.070.07

(3.1)(3.1)-1.40-1.40

(7.0)(7.0)0.60.644

Enrolment Enrolment raterate

-96.5-96.5

(5.4)(5.4)-0.94-0.94

(4.6)(4.6)20.320.3

(9.7)(9.7)0.60.688


3.873.87

(2.5)(2.5)-0.09-0.09

(5.7)(5.7)0.130.13

(4.5)(4.5)-0.51-0.51

(3.2)(3.2)0.40.499

RecursivRecursive e systemsystem

Reduced Reduced formform

Regression resultsRegression results


ConstanConstantt





RR22


9.359.35

(6.0)(6.0)-0.06-0.06

(4.3)(4.3)0.040.04

(5.9)(5.9)0.070.07

(3.1)(3.1)-1.40-1.40

(7.0)(7.0)0.60.644


-96.5-96.5

(5.4)(5.4)-0.94-0.94

(4.6)(4.6)20.320.3

(9.7)(9.7)0.60.688


3.873.87

(2.5)(2.5)-0.09-0.09

(5.7)(5.7)0.130.13

(4.5)(4.5)-0.51-0.51

(3.2)(3.2)0.40.499

Direct effect of natural capital on growth is -0.06




ConstanConstantt





RR22


9.359.35

(6.0)(6.0)-0.06-0.06

(4.3)(4.3)0.040.04

(5.9)(5.9)0.070.07

(3.1)(3.1)-1.40-1.40

(7.0)(7.0)0.60.644


-96.5-96.5

(5.4)(5.4)-0.94-0.94

(4.6)(4.6)20.320.3

(9.7)(9.7)0.60.688


3.873.87

(2.5)(2.5)-0.09-0.09

(5.7)(5.7)0.130.13

(4.5)(4.5)-0.51-0.51

(3.2)(3.2)0.40.499




ConstanConstantt





RR22


9.359.35

(6.0)(6.0)-0.06-0.06

(4.3)(4.3)0.040.04

(5.9)(5.9)0.070.07

(3.1)(3.1)-1.40-1.40

(7.0)(7.0)0.60.644


-96.5-96.5

(5.4)(5.4)-0.94-0.94

(4.6)(4.6)20.320.3

(9.7)(9.7)0.60.688


3.873.87

(2.5)(2.5)-0.09-0.09

(5.7)(5.7)0.130.13

(4.5)(4.5)-0.51-0.51

(3.2)(3.2)0.40.499

Indirect effect through education is -0.94·0.04 -0.04




ConstanConstantt





RR22


9.359.35

(6.0)(6.0)-0.06-0.06

(4.3)(4.3)0.040.04

(5.9)(5.9)0.070.07

(3.1)(3.1)-1.40-1.40

(7.0)(7.0)0.60.644


-96.5-96.5

(5.4)(5.4)-0.94-0.94

(4.6)(4.6)20.320.3

(9.7)(9.7)0.60.688


3.873.87

(2.5)(2.5)-0.09-0.09

(5.7)(5.7)0.130.13

(4.5)(4.5)-0.51-0.51

(3.2)(3.2)0.40.499

Total effect is -0.06 + (-0.94)·0.04 -0.10


Regression Regression resultsresultsTotal effect is -0.06 + (-0.94)·0.04 -0.10



ConstanConstantt





RR22


9.359.35

(6.0)(6.0)-0.06-0.06

(4.3)(4.3)0.040.04

(5.9)(5.9)0.070.07

(3.1)(3.1)-1.40-1.40

(7.0)(7.0)0.60.644


-96.5-96.5

(5.4)(5.4)-0.94-0.94

(4.6)(4.6)20.320.3

(9.7)(9.7)0.60.688


3.873.87

(2.5)(2.5)-0.09-0.09

(5.7)(5.7)0.130.13

(4.5)(4.5)-0.51-0.51

(3.2)(3.2)0.40.499

Interpretation of Interpretation of resultsresults

Natural-resource-based industries are generally less high-skill laborhigh-skill labor intensive and less high-quality high-quality capitalcapital intensive than others, and soconfer few external benefits distort comparative advantageimpede learning by doing, technical

advance, and economic growth

MarshallMarshall was right was right

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

ALFRED ALFRED MARSHALLMARSHALL

(1920)(1920)

From human to From human to physical capitalphysical capital

Natural capital seems to crowd out human capital

Does natural capital also crowd out physical capital? What is the evidence?

How about social capital? Consider the relationship between

natural capital and corruption

2 Joint work with Gylfi Zoega

Natural Capital and Corruption

0

1

2

3

4

5

6

7

8

9

10

0 5 10 15 20 25

Share of natural capital in national wealth (%)

Cor

rupt

ion

inde

x

New Zealand

Abundant Abundant natural natural resources resources appear to appear to go along go along withwith corruptiocorruptionn

Investment Investment and and natural capitalnatural capital

8855 countries countries

y = -0,2135x + 22,925

R2 = 0,1598

0

5

10

15

20

25

30

35

40

45

0 10 20 30 40 50 60


Gro

ss

do

me

sti

c in

ves

tme

nt

19

65

-19

98

(%

of

GN

P)

r = -0.37

A ten point increase in the natural capital share goes along with a decrease in investment by 2% of GDP.

Economic growth Economic growth andand investment investment


y = 0,2071x - 5,4956

R2 = 0,3676

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50

Gross domestic investment 1965-1998 (% of GNP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

A five point increase in the natural capital share goes along with an increase in per capita growth by 1%.

r = 0.63

From gross From gross investment to investment to genuine savinggenuine saving

Gross investment does not take qualityquality into account

Genuine domestic savingGenuine domestic saving is adjusted for quality, and is defined asGross domestic saving minusDepreciation of physical capital plusExpenditure on education minusDepreciation of natural capital

Energy, minerals, forests, carbon dioxide

Genuine saving Genuine saving and natural capitaland natural capital


y = -0,4123x + 12,05

R2 = 0,2476

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

0 10 20 30 40 50 60


Ge

nu

ine

do

me

sti

c s

avi

ng

19

70

-19

98

(%

of

GD

P)

A ten point increase in the natural capital share goes along with a fall in genuine saving by 4% of GDP.

r = -0.54

Economic growth Economic growth andand genuine saving genuine saving


y = 0,151x - 2,3624

R2 = 0,4687

-8

-6

-4

-2

0

2

4

6

-30 -20 -10 0 10 20 30

Genuine domestic saving 1970-1998 (% of GDP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

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

Summary of Summary of results onresults on investmentinvestment

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

Regression results: Regression results: Growth and Growth and investmentinvestment


RecursivRecursive e systemsystem

Reduced Reduced formform


ConstanConstantt




Initial Initial incomincomee

RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)-1.54-1.54

(7.3)(7.3)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722

InvestmeInvestmentnt

22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355




ConstanConstantt





RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)-1.54-1.54

(7.3)(7.3)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722


22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355

Direct effect of natural capital on growth is -0.06




ConstanConstantt





RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)-1.54-1.54

(7.3)(7.3)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722


22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355

Indirect effect through educationeducation is -0.75·0.05 -0.04




ConstanConstantt





RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)-1.54-1.54

(7.3)(7.3)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722


22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355

Indirect effect through investmentinvestment is -0.20·0.10 = -0.02




ConstanConstantt





RR22


10.110.1

(6.0)(6.0)-0.06-0.06

(4.6)(4.6)0.050.05

(5.5)(5.5)0.100.10

(3.5)(3.5)-1.54-1.54

(7.3)(7.3)0.60.677


-103.7-103.7

(7.5)(7.5)-0.75-0.75

(4.2)(4.2)19.919.9

(12.4)(12.4)0.70.722


22.522.5

(29.3)(29.3)-0.20-0.20

(4.1)(4.1)0.10.166


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355

Total effect is -0.06 + (-0.75)·0.05 + (-0.20)·0.10 -0.12

Regression results: Regression results: Growth and Growth and genuine genuine savingsaving



ConstanConstantt



GenuinGenuine e savingsaving


RR22


12.712.7

(10.0)(10.0)-0.06-0.06

(4.4)(4.4)0.050.05

(6.0)(6.0)0.080.08

(5.0)(5.0)-1.69-1.69

(9.1)(9.1)0.70.711


-90.4-90.4

(6.3)(6.3)-0.82-0.82

(4.6)(4.6)18.418.4

(10.8)(10.8)0.70.722

Genuine Genuine savingsaving

12.012.0

(9.7)(9.7)-0.41-0.41

(5.3)(5.3)0.20.255


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355




ConstanConstantt



GenuinGenuine e savingsaving


RR22


12.712.7

(10.0)(10.0)-0.06-0.06

(4.4)(4.4)0.050.05

(6.0)(6.0)0.080.08

(5.0)(5.0)-1.69-1.69

(9.1)(9.1)0.70.711


-90.4-90.4

(6.3)(6.3)-0.82-0.82

(4.6)(4.6)18.418.4

(10.8)(10.8)0.70.722

Genuine Genuine savingsaving

12.012.0

(9.7)(9.7)-0.41-0.41

(5.3)(5.3)0.20.255


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355

Total effect is -0.06 + (-0.82)·0.05 + (-0.41)·0.08 -0.13

Gross savingGross saving vs. vs. genuine savinggenuine saving

What part of the difference between gross investment and genuine saving matters most for growth?

The current account! The current account! Gross domestic saving (i.e., gross

domestic investment minus the current account) is closely related to economic growth

Gross saving Gross saving and and natural capitalnatural capital


y = -0.4174x + 21.7

R2 = 0.2187

-15

-10

-5

0

5

10

15

20

25

30

35

40

0 10 20 30 40 50 60


Gro

ss

do

me

sti

c s

av

ing

19

70

-19

98

(%

of

GD

P)

A ten point increase in the natural capital share goes along with a decrease in gross saving by 4% of GDP.

r = -0.47

Economic growth Economic growth andand gross saving gross saving


y = 0,1504x - 3,7951

R2 = 0,54

-6

-4

-2

0

2

4

6

-20 -10 0 10 20 30 40

Gross domestic saving 1970-1998 (% of GDP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

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

Summary of Summary of results onresults on gross gross savingsaving

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 growthWhen investment and current account

deficits enter separately, the coefficients are almost equal but with opposite signs

Regression results: Regression results: Growth and Growth and gross savinggross saving



ConstanConstantt



Gross Gross savingsaving


RR22


11.311.3

(9.1)(9.1)-0.06-0.06

(4.9)(4.9)0.040.04

(5.4)(5.4)0.090.09

(6.4)(6.4)-1.60-1.60

(9.1)(9.1)0.70.744


-89.4-89.4

(6.3)(6.3)-0.82-0.82

(4.6)(4.6)18.218.2

(11.0)(11.0)0.70.722


21.721.7

(15.9)(15.9)-0.42-0.42

(4.9)(4.9)0.20.222


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355




ConstanConstantt





RR22


11.311.3

(9.1)(9.1)-0.06-0.06

(4.9)(4.9)0.040.04

(5.4)(5.4)0.090.09

(6.4)(6.4)-1.60-1.60

(9.1)(9.1)0.70.744


-89.4-89.4

(6.3)(6.3)-0.82-0.82

(4.6)(4.6)18.218.2

(11.0)(11.0)0.70.722


21.721.7

(15.9)(15.9)-0.42-0.42

(4.9)(4.9)0.20.222


7.297.29

(4.8)(4.8)-0.12-0.12

(6.7)(6.7)-0.58-0.58

(3.2)(3.2)0.30.355

Total effect is -0.06 + (-0.82)·0.04 + (-0.42)·0.09 -0.13

ConclusionConclusion

Natural resources bring risksNatural resources bring risksToo many people tend to become Too many people tend to become

stuck in low-skill, low-tech intensive stuck in low-skill, low-tech intensive industries industries

A A false sense of securityfalse sense of security leads leads people to underrate or overlook the people to underrate or overlook the need for good policies, education, need for good policies, education, and investmentand investment

Awash in easy cash, they Awash in easy cash, they may find may find that education does not paythat education does not pay

Resource-poor countries are less Resource-poor countries are less likely to make this mistake likely to make this mistake

ConclusionConclusion

The

End

The

EndNatural capitalNatural capital appears to crowd appears to crowd

out out physicalphysical as well as as well as human human capitalcapital

Empirical evidence from 85 Empirical evidence from 85 countries in 1965-1998 suggests countries in 1965-1998 suggests that about a half of the total that about a half of the total effect of natural capital on effect of natural capital on growth can be ascribed to less growth can be ascribed to less education and less investmenteducation and less investment

Reinforces the case for Reinforces the case for educationeducation and and investmentinvestment as as engines of engines of growthgrowth

A digression on A digression on opennessopenness


y = -0,4065x + 0,6941

R2 = 0,1526

-40

-30

-20

-10

0

10

20

30

40

0 10 20 30 40 50 60


Ac

tua

l le

ss

pre

dic

ete

d e

xp

ort

s 1

96

5-1

99

8 (

% o

f G

DP

)A ten percentage point increase in the natural capital share goes along with a decrease in openness by 4% of GDP.

Per capita income and natural capital

y = -0,0755x + 9,1635

R2 = 0,4395

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

10,0

10,5

0 10 20 30 40 50 60


Lo

ga

rith

m o

f p

pp

-ad

jus

ted

pe

r c

ap

ita

GN

P 1

99

8

Each ten percentage point increase in the natural capital share is associated with a decrease in per capita income by 75%.


education, investment, natural resources, education, investment, and economic growth thorvaldur...

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