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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 1965-1998
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 (19641975) 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 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
What is the
empirical
evidence?
Economic growth and
natural capital
A new
measure of
natural
resource
abundance.
Confirms
results based
on other
measures.
86 countries
Annual growth of GNP per capita 1965-1998 (%)
10
y = -0,0946x + 2,4894
R2 = 0,2805
8
A ten percentage point
increase in the natural
capital share goes along
with a decrease in per
capita growth by nearly
1% per year.
6
4
2
0
0
10
20
30
40
50
-2
-4
Share of natural capital in national wealth 1994 (%)
60
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
4. Neglect of education
Resource abundance
and policy failure
The problem is not the existence of
natural wealth ...
College
enrolment
has risen
from 26%
in 1970 to
62% in
1997.
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
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
Public expenditure on education 1980-1997 (% of GNP)
9
y = -0,0561x + 4,9044
R2 = 0,1247
8
An 18 percentage point
increase in the natural
capital share is associated
with a decrease in public
expenditure on education
by 1% of GNP.
7
6
5
4
3
2
1
0
0
90 countries
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
Years of schooling and
natural capital
Expected years of schooling for females 1980-1997
18
y = -0,2186x + 13,011
R2 = 0,3317
16
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.
14
12
10
8
6
4
2
0
0
52 countries
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
Secondary enrolment
and natural capital
140
Gross secondary-school enrolment 1980-1997 (%)
y = -1,8414x + 72,705
2
R = 0,3504
120
A five percentage point
increase in the natural
capital share goes
along with a decrease
in secondary-school
enrolment by almost
10 percentage points.
100
80
60
40
20
0
0
10
20
30
40
50
-20
-40
91 countries
Share of natural capital in national wealth 1994 (%)
60
Economic growth and
education
Annual growth of GNP per capita 1965-1998 (%)
10
y = 0,0238x + 0,1602
R2 = 0,1674
8
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.
6
4
2
0
0
20
40
60
80
100
120
-2
-4
86 countries
Secondary-school enrolment 1980-1997 (%)
140
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
Recursive
system
Reduced
form
Dependent
variable
Constant
Natural
capital
Enrolment
rate
Investment
Initial
income
R2
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)
-0.51
(3.2)
0.49
0.13
(4.5)
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.
Regression results
Direct effect of natural capital on growth is -0.06
Dependent
variable
Constant
Natural
capital
Enrolment
rate
Investment
Initial
income
R2
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)
-0.51
(3.2)
0.49
0.13
(4.5)
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.
Regression results
Dependent
variable
Constant
Natural
capital
Enrolment
rate
Investment
Initial
income
R2
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)
-0.51
(3.2)
0.49
0.13
(4.5)
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.
Regression results
Indirect effect through education is -0.94·0.04  -0.04
Dependent
variable
Constant
Natural
capital
Enrolment
rate
Investment
Initial
income
R2
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)
-0.51
(3.2)
0.49
0.13
(4.5)
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.
Regression results
Total effect is -0.06 + (-0.94)·0.04  -0.10
Dependent
variable
Constant
Natural
capital
Enrolment
rate
Investment
Initial
income
R2
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)
-0.51
(3.2)
0.49
0.13
(4.5)
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.
Regression results
Total effect is -0.06 + (-0.94)·0.04  -0.10
Dependent
variable
Constant
Natural
capital
Enrolment
rate
Investment
Initial
income
R2
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)
-0.51
(3.2)
0.49
0.13
(4.5)
Note: 85 observations. Method of estimation is SUR. t-statistics are shown within parentheses.
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
A digression on
investment
Gross dom estic investm ent 1965-1998 (% of GDP)
45
y = -0,2202x + 23,086
R2 = 0,1673
40
A ten percentage point
increase in the natural capital
share goes along with a
decrease in investment by over
2% of GDP.
35
30
25
20
15
10
5
0
0
86 countries
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
A further digression
on openness
Actual less prediceted exports 1965-1998 (% of GDP)
40
y = -0,4065x + 0,6941
R2 = 0,1526
30
A ten percentage point
increase in the natural
capital share goes along
with a decrease in
openness by 4% of GDP.
20
10
0
0
10
20
30
40
50
-10
-20
-30
-40
91 countries
Share of natural capital in national wealth 1994 (%)
60
Per capita income and
natural capital
10,5
y = -0,0755x + 9,1635
Logarithm of ppp-adjusted per capita GNP 1998
2
R = 0,4395
10,0
Each ten percentage point
increase in the natural
capital share is associated
with a decrease in per
capita income by 75%.
9,5
9,0
8,5
8,0
7,5
7,0
6,5
6,0
0
90 countries
10
20
30
40
50
Share of natural capital in national wealth 1994 (%)
60
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
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.