Ebook Human Capital, Industrial Growth and Resource Curse
The negative relation between the natural resource abundance and economic growth is well documented in the literature (Sachs and Warner, 1995, 1997, 1999a,b, Sala-i-Martin, 1997, Doppelhofer et al., 2000). A number of theories were proposed to explain this negative link. The spectrum of issues raised in the literature ranges from the issues of currency appreciation in the era of high resource prices and the subsequent “Dutch disease” effects that deteriorate the development of industrial sector of the economy (Corden and Neary, 1984; Sachs and Warner, 1995) to the political economy problems associated with the numerous non-productive activities of economic agents provoked by the huge natural resource rents that undermine the institutional development of the economy and slow down economic development (Lane and Tornell, 1999; Auty, 2001)
One of the channels that the literature addresses deals with the link between human capital development and natural resource abundance (Leamer et al., 1999; Gylfason 2001). The argument is based on the idea that resource intensive sectors absorb national savings while creating only a few eminently qualified jobs which leads to lower incentive of the society to educate their citizens compare to the societies with lower abundance in natural resources. However, there is very little empirical research on this topic so far. For example, Gylfason (2001) using several proxies for human capital development such as a share of public expenditure on education in GDP, expecting years of schooling for females, gross secondary-school enrolment shows their significant negative bivariate correlation with the share of natural capital in national wealth in a cross section of 86 countries. Since the results of bivariate correlation can hardly be used as a basis for profound policy advice more rigorous empirical analysis of the human capital development explanation for the link between the natural resource richness and economic growth is called for.
Our paper addressed this question. We test the following theory proposed by Leamer (1987) and extended by Leamer et all. (1999). Leamer et all. (1999) consider physical capital accumulation in a small open economy with 3 factors of production: natural resources, labor and physical capital. The Hecksher-Ohlin features of the economy ensure the existence of cones of diversification within which for some range of factor endowments the product mix and equilibrium factor prices are uniquely determined and remain constant. Therefore the product mix within the cone corresponds to the level of factor endowments.
However the evolution of the economy from one cone to the next one requires a substantial upgrade of labor skills. Authors show that this transition could be problematic in resource rich economy as the increase in physical capital accelerates the substitution of labor in production and lowers the return to labor and human capital associated with it. This would not happen in resource poor economy as an increase in physical capital here will make labor more scarce factor of production and increase its payoff which in turn stimulates the investments in skills. Therefore one of the model results is that when we compare the resource rich economy to resource poor economy we expect the tougher deficit of the most skilled labor in the former one. Testable prediction of this result is that the industries which require sophisticated human capital inputs would be disadvantaged in resource rich countries relative to industries that technologically less dependant on the highly skilled labor. This disadvantage should disappear when we differentiate industries based on their demand for lower or average levels of human capital. These are the hypotheses that we test in our paper applying the now-standard methodology proposed by Rajan and Zingales (1998).
To test this prediction we construct the measures of industrial sectors’ human capital requirements from data on the distributions of the levels of human capital of workers within US industries. Under the assumption that labor market and the corresponding market of human capital in U.S. are mobile we can use the observed distributions of human capital in the U.S. industrial sectors as a proxy for the demand of industries for lower and high levels of human capital. Assuming further that this demand is derived from production technologies and technologies spread fast across the world we can carry over the measures of industrial human capital demands to other countries. Then we examine whether industrial sectors that are relatively more skilled labor intensive develop disproportionately slowly in countries with higher contribution of natural resource sectors in overall GDP.
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