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8/8/2019 Human Capital, Industrial Growth and Resource Curse GDN_Valchakova
1/25
10th GDN Conference Natural Resources And Development
Human Capital, Industrial Growth
and Resource Curse
by Elena Suslova and Natalya Volchkova
New Economic School
February 3, 2009
Kuwait
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10th GDN Conference Natural Resources And Development
Motivation: empirical study of the
black box of resource curse
Resource curse well documented slower
growth of resource rich economies
Literature provide us with a number ofspeculations on the origin and propagation of
the curse
Little of empirical backup.
8/8/2019 Human Capital, Industrial Growth and Resource Curse GDN_Valchakova
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10th GDN Conference Natural Resources And Development
Literature: are natural resources a
blessing or a curse? Channels of negative effects transmission
Dutch Disease Corden&Neary82: theoretical model of deindustrialization Sachs&Warner95, 97, 99: cross country studies revealed negative
relation between natural resource abundance and growth rates
Spatafora&Warner95, Hutchison94: time series analysis does notconfirm diagnosis
Excessive volatility of income Spatafora&Warner95: terms of trade shocks have positive effect; Ramey&Ramey95: volatility of government expenditures matter;
Political Economy
Auty01, Paldam&Svendse00: huge rents provoke rent-seeking,corruption, postponement of reforms, competitive industrialization;
Egorov, Guriev&Sonin07: less free media in oil-rich countries;
Human Capital Underdevelopment Gylfason01, Leamer et al.99: resource intense sectors absorb
national savings while creating only a few eminently qualified jobs,
thus preventing the development of innovative industries.
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10th GDN Conference Natural Resources And Development
Our paper :
Provides empirical study of a human capitalunderdevelopment channel of resource curse
Our result:
We find empirical support for the hypothesis that the
human capital transmission mechanisms is via thedistorting effect of resources on the distribution of countrys
human capital, namely under accumulation of country's
high skilled human capital.
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10th GDN Conference Natural Resources And Development
Some facts about human capital
development and natural resources
from Gylfason 2001
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10th GDN Conference Natural Resources And Development
Some facts about human capital
developments and natural resources
from Gylfason 2001
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10th GDN Conference Natural Resources And Development
How to deal with the black box?
Cross-country growth studies: omitted variables problem
endogeneity issues
failure to distinguish among possible mechanisms of
transmission Difference in differences - cross-country and cross-
industry growth - study a la Rajan&Zingales98:
fixed country and industry effects
mostly exogenous explanatory variables model the transmission mechanism
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10th GDN Conference Natural Resources And Development
Model: Leamer et al (1999)
Assumptions Open economy: production pattern is
determined by comparative advantage a la
Hecksher-Ohlin model Growth mechanism: capital accumulation
both physical and human
Compare the implied dynamics of human
capital accumulation between twocountries: rich in natural resources vs.poor in natural resources
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10th GDN Conference Natural Resources And Development
Model: Leamer et al (1999)
Capital (physical, human)
Natural
Resources
Labor
Capitalaccumula
tion
A BC
D
E
F
G
H L
M
Primitive Extraction
Capital-
intensiveExtraction
Petrochemicals
Craft
Apparel
Machinery
Capita
laccum
ula
tion
PeasantFarming
makeslabor
expensivem
akes
lab
orch
eaper
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10th GDN Conference Natural Resources And Development
Model results: The resource rich economy faces a trap of skilled
labor underdevelopment: physical capitalaccumulation provokes the decline in the return tolabor and subsequently to human capital whichhas depressing effect on the upper tail of humancapital distribution and prevents the developmentof new more sophisticated industries as there is noenough skilled labor
Resource rich economy needs to overcomecoordination problem with respect to development
of marginally skilled human capital in order toswitch to next product mix Warning: the story is not about the lower volume
of human capital but about the deficit of marginallyskilled human capital in resource rich economies
8/8/2019 Human Capital, Industrial Growth and Resource Curse GDN_Valchakova
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10th GDN Conference Natural Resources And Development
Testable hypotheses:
Industries with higher skilled labor
intensity grow slowly relative to industries
less skilled labor intensive in resource rich
economies compared to resource pooreconomies
low-skilled labor intensity does not
differentiate industrial growth betweenresource rich and resource poor countries
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10th GDN Conference Natural Resources And Development
Hypotheses: illustration
resource richness of economy
High-Ski
lledlaborinten
sity
ofind
ustry
indA
indB
CountryH Country F
>
Low-sk
illedl
aborin
tensityofind
ustry
~difference in
growth rates (A-B)H
difference in
growth rates (A-B)F
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10th GDN Conference Natural Resources And Development
Estimated equation
- average annual real growth rates of sectoriin country k
- share of industry iin Value Added of manufacturing incountry kat the beginning of period
- industry iintensity with respect to low-skilled labor
- industry iintensity with respect to high-skilled labor
- resource richness of country k
Hypotheses:
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10th GDN Conference Natural Resources And Development
Data: industrial sectors demand for
human capital Abowd et al. ( 2003) estimate the human capital index
for each of 68 millions of U.S. workers (which covers45% of U.S. labor force) that were surveyed in 1992within Longitudinal Employer - Household Dynamics
(LEHD Programs individual, employer, and employmenthistory databases).
Then each individual human capital index was placedinto the industry where the firm she employed in belongsto.
This allows constructing the comparable distribution ofthe level of human capital within U.S. industries.
Why US data?
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10th GDN Conference Natural Resources And Development
Distribution of human capital within
U.S. industriesMetallurgy
10.6 10.611.2 11.4 11.1
10.39.2
8.47.9
0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9
Machinery (excl. electrical)
9.5
7.9 8.28.8
9.510.1 10.4
10.8 11.3
0
2
4
6
8
10
12
14
16
1 2 3 4 5 6 7 8 9
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Constructing industry intensities
with respect to high skilled labor
with respect to low-skilled labor
= share of labor force in jth decile of human capital
distribution in industry i
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10th GDN Conference Natural Resources And Development
Measures of high- and low-skilled
intensities
M anufacturing sector
Petroleum and coal productsMachinery, except electrical
MetallurgyTransport equipment
Pa er and roducts
Manufact
PetroleumMachinery,
TextilesPrinting an
E lectric m a 10th GDN Conference Natural Resources And Development
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Data: other industrial
characteristics
Average annual real growth rates ofmanufacturing sector in 1980-2000 Nominal value added data from UNIDO
(United Nation Industrial DevelopmentOrganization) database for 3-digit ISIC codes(Rev.2)
GDP deflator obtained from WDI (World
Development Indicators) database. Share of sector in total manufacturing
value added in 1980-2000 from UNIDOdatabase.
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10th GDN Conference Natural Resources And Development
Data: country level raw hydrocarbon production of the economy as a
share of countrys GDP, 1980-2000
1 Japan 0
2 Singapore 03 Korea 0
4 Spain 0
5 Turkey 0
6 Austria 0
7 France 0 10th GDN Conference Natural Resources And Development
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Example
In 1980-1990
Norway: Machinery grew at a 4 percent
lower annual real rate than Metallurgy
Belgium: Machinery grew at 2 percent
higher rate than Metallurgy
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10th GDN Conference Natural Resources And Development
Estimation results: 1980-1990
Dependent variable: IndustVariable
Share of industry in totalmanufacturing value added, 19
Low skilled intensity * ResourResource richness
High-skilledint
en
sity
25% 75%
75
25
%
> by 0.8%
average annual real
growth in the sample is
2.2%Observations with positive growth
10th GDN Conference Natural Resources And Development
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10th GDN Conference Natural Resources And Development
Resource measure primary
export
De
Vari
SharObservations with positive growth
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Robustness check
Other measures of resource abundance-
oil, gas at the beginning of the period,
average over the period results hold
Period 1990-2000, oil, gas production
results hold and becomes stronger:
75%-25% growth losses =4.7% and average
annual growth =5.4%
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10 GDN Conference Natural Resources And Development
Conclusions
There are significant systematical losses in growthrates of industries with higher skilled-laborintensities relative to those with lower skilled-laborintensities in countries rich in natural resources
compared to resource poor countries. Low-skilled labor intensity does not differentiate
industrial growth across poor- and rich-resourcecountries.
It is consistent with the story of underaccumulation of skilled labor in resource richcountries: upper tails of human capital distributionare thinner in resource rich economies
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Policy application
One of the possible charms against theresource curse: investment in education
Leamer at al: If the model is somehow backed
up with hard evidence, the policy advice is veryclear: Governments in countries that are in astage of old product mix but close to the stageof new product mix should be making majorimprovements in their educational systems, inparticular eliminating the dumbbell educationalsystems that were economically efficient in oldproduct mix but inappropriate in new one.
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