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

3. 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

4. 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?

5. 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.”

6. 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.

7. 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

8. 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 r = -0.51 r = Spearman’s rank correlation

9. Economic growth and natural capital again 85 countries 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 adjust the growth figures for initial income?

10. 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 education 4. Neglect of education 5. Too little investment

11. 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.

12. 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 1

13. 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 r = -0.32

14. 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 r = -0.57

15. 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 r = -0.66

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

17. Economic growth and education again 87 countries 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.

18. 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

19. Regression results: Growth and education 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

20. 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 -0.06 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

21. 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.

22. 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  -0.04 Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.

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

24. 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. 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

25. 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

26. 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)

27. From human to physical 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

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

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

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

31. From gross investment to genuine saving quality Gross investment does not take quality into account Genuine domestic saving 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

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

33. Economic growth and genuine saving 85 countries 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

34. 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

35. Regression results: Growth and investment Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Recursive system Reduced form Dependent variable Constant Natural capital Enrol- ment rate Invest- ment Initial income R2R2R2R2 Economic growth 10.1(6.0)-0.06(4.6)0.05(5.5)0.10(3.5)-1.54(7.3)0.67 Enrolment rate -103.7(7.5)-0.75(4.2)19.9(12.4)0.72 Investment22.5(29.3)-0.20(4.1)0.16 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35

36. 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 10.1(6.0)-0.06(4.6)0.05(5.5)0.10(3.5)-1.54(7.3)0.67 Enrolment rate -103.7(7.5)-0.75(4.2)19.9(12.4)0.72 Investment22.5(29.3)-0.20(4.1)0.16 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 Direct effect of natural capital on growth is -0.06

37. 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 10.1(6.0)-0.06(4.6)0.05(5.5)0.10(3.5)-1.54(7.3)0.67 Enrolment rate -103.7(7.5)-0.75(4.2)19.9(12.4)0.72 Investment22.5(29.3)-0.20(4.1)0.16 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 education Indirect effect through education is -0.75·0.05  -0.04

38. 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 10.1(6.0)-0.06(4.6)0.05(5.5)0.10(3.5)-1.54(7.3)0.67 Enrolment rate -103.7(7.5)-0.75(4.2)19.9(12.4)0.72 Investment22.5(29.3)-0.20(4.1)0.16 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 investment Indirect effect through investment is -0.20·0.10 = -0.02

39. 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 10.1(6.0)-0.06(4.6)0.05(5.5)0.10(3.5)-1.54(7.3)0.67 Enrolment rate -103.7(7.5)-0.75(4.2)19.9(12.4)0.72 Investment22.5(29.3)-0.20(4.1)0.16 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 Total effect is -0.06 + (-0.75)·0.05 + (-0.20)·0.10  -0.12

40. 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 10.1(6.0)-0.06(4.6)0.05(5.5)0.10(3.5)-1.54(7.3)0.67 Enrolment rate -103.7(7.5)-0.75(4.2)19.9(12.4)0.72 Investment22.5(29.3)-0.20(4.1)0.16 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 Total effect is -0.06 + (-0.75)·0.05 + (-0.20)·0.10  -0.12

41. Regression results: Growth and genuine saving Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Constant Natural capital Enrol- ment rate Genuine saving Initial income R2R2R2R2 Economic growth 12.7(10.0)-0.06(4.4)0.05(6.0)0.08(5.0)-1.69(9.1)0.71 Enrolment rate -90.4(6.3)-0.82(4.6)18.4(10.8)0.72 Genuine saving 12.0(9.7)-0.41(5.3)0.25 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35

42. Regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Constant Natural capital Enrol- ment rate Genuine saving Initial income R2R2R2R2 Economic growth 12.7(10.0)-0.06(4.4)0.05(6.0)0.08(5.0)-1.69(9.1)0.71 Enrolment rate -90.4(6.3)-0.82(4.6)18.4(10.8)0.72 Genuine saving 12.0(9.7)-0.41(5.3)0.25 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 Total effect is -0.06 + (-0.82)·0.05 + (-0.41)·0.08  -0.13

43. Regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Constant Natural capital Enrol- ment rate Genuine saving Initial income R2R2R2R2 Economic growth 12.7(10.0)-0.06(4.4)0.05(6.0)0.08(5.0)-1.69(9.1)0.71 Enrolment rate -90.4(6.3)-0.82(4.6)18.4(10.8)0.72 Genuine saving 12.0(9.7)-0.41(5.3)0.25 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 Total effect is -0.06 + (-0.82)·0.05 + (-0.41)·0.08  -0.13

44. 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

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

46. Economic growth and gross saving 85 countries 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

47. 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

48. Regression results: Growth and gross saving Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Constant Natural capital Enrol- ment rate Gross saving Initial income R2R2R2R2 Economic growth 11.3(9.1)-0.06(4.9)0.04(5.4)0.09(6.4)-1.60(9.1)0.74 Enrolment rate -89.4(6.3)-0.82(4.6)18.2(11.0)0.72 Gross saving 21.7(15.9)-0.42(4.9)0.22 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35

49. Regression results Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Constant Natural capital Enrol- ment rate Gross saving Initial income R2R2R2R2 Economic growth 11.3(9.1)-0.06(4.9)0.04(5.4)0.09(6.4)-1.60(9.1)0.74 Enrolment rate -89.4(6.3)-0.82(4.6)18.2(11.0)0.72 Gross saving 21.7(15.9)-0.42(4.9)0.22 Economic growth 7.29(4.8)-0.12(6.7)-0.58(3.2)0.35 Total effect is -0.06 + (-0.82)·0.04 + (-0.42)·0.09  -0.13

50. 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

51. Conclusion The End 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

52. A 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.

53. 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