Education Natural Resources, Education, and Economic Development Thorvaldur Gylfason

Overview Document the inverse relationship between natural resource abundance and economic growth across countries since 1965 Discuss four channels of transmission from abundant natural resources to slow economic growth Stress the importance of education

Background: A quick look at OPEC Nigeria has been stagnant since independence in 1966: No growth Per capita growth Iran and Venezuela: -1% per year Libya: -2% Iraq and Kuwait: -3% Qatar: -6% Why?

Background: A quick look at OPEC King Faisal of Saudi Arabia ( ) 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 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.

Is OPEC an exception? No, this seems to be a general pattern. Of 65 natural resource abundant countries , 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

Economic growth and natural capital 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 What is the empirical evidence? A new measure of natural resource abundance. Confirms results based on other measures.

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

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.

More on education 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

Expenditure on education and natural capital 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

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. 52 countries

Secondary enrolment and natural capital 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

Economic growth and education A 40 percentage point increase in the secondary enrolment rate goes along with an increase in per capita growth by one percentage point per year. 86 countries

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

Regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Constant Natural capital Enrol- ment rate Invest- ment Initial income R2R2R2R2 Economic growth 9.35(6.0)-0.06(4.3)0.04(5.9)0.07(3.1)-1.40(7.0)0.64 Enrolment rate -96.5(5.4)-0.94(4.6)20.3(9.7)0.68 Economic growth 3.87(2.5)-0.09(5.7)0.13(4.5)-0.51(3.2)0.49 Recursive system Reduced form

Regression results Dependent variable Constant Natural capital Enrol- ment rate Invest- ment Initial income R2R2R2R2 Economic growth 9.35(6.0)-0.06(4.3)0.04(5.9)0.07(3.1)-1.40(7.0)0.64 Enrolment rate -96.5(5.4)-0.94(4.6)20.3(9.7)0.68 Economic growth 3.87(2.5)-0.09(5.7)0.13(4.5)-0.51(3.2)0.49 Direct effect of natural capital on growth is Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

Regression results Dependent variable Constant Natural capital Enrol- ment rate Invest- ment Initial income R2R2R2R2 Economic growth 9.35(6.0)-0.06(4.3)0.04(5.9)0.07(3.1)-1.40(7.0)0.64 Enrolment rate -96.5(5.4)-0.94(4.6)20.3(9.7)0.68 Economic growth 3.87(2.5)-0.09(5.7)0.13(4.5)-0.51(3.2)0.49 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

Regression results Dependent variable Constant Natural capital Enrol- ment rate Invest- ment Initial income R2R2R2R2 Economic growth 9.35(6.0)-0.06(4.3)0.04(5.9)0.07(3.1)-1.40(7.0)0.64 Enrolment rate -96.5(5.4)-0.94(4.6)20.3(9.7)0.68 Economic growth 3.87(2.5)-0.09(5.7)0.13(4.5)-0.51(3.2)0.49 Indirect effect through education is -0.94·0.04  Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

Regression results Dependent variable Constant Natural capital Enrol- ment rate Invest- ment Initial income R2R2R2R2 Economic growth 9.35(6.0)-0.06(4.3)0.04(5.9)0.07(3.1)-1.40(7.0)0.64 Enrolment rate -96.5(5.4)-0.94(4.6)20.3(9.7)0.68 Economic growth 3.87(2.5)-0.09(5.7)0.13(4.5)-0.51(3.2)0.49 Total effect is (-0.94)·0.04  Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

Regression results Dependent variable Constant Natural capital Enrol- ment rate Invest- ment Initial income R2R2R2R2 Economic growth 9.35(6.0)-0.06(4.3)0.04(5.9)0.07(3.1)-1.40(7.0)0.64 Enrolment rate -96.5(5.4)-0.94(4.6)20.3(9.7)0.68 Economic growth 3.87(2.5)-0.09(5.7)0.13(4.5)-0.51(3.2)0.49 Total effect is (-0.94)·0.04  Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

Interpretation of results high-skill labor high-quality capital 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

A digression on investment 86 countries A ten percentage point increase in the natural capital share goes along with a decrease in investment by over 2% of GDP.

A further digression on openness 91 countries 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 Each ten percentage point increase in the natural capital share is associated with a decrease in per capita income by 75%. 90 countries

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)

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