Development and growth in mineral-rich countries [chapter]

Thorvaldur Gylfason
Sustainable Growth and Resource Productivity: Economic and Global Policy Issues  
Social development is an integral part of economic growth. Social capital, therefore, needs to be included among the several different kinds of capital the accumulation and efficiency of which drive long-run economic growth. This paper begins by noting the rather limited space that political and social forces have been granted thus far in empirical research of economic growth and development. Take fertility. One of the keys to increased prosperity around the world is the persistent trend from
more » ... istent trend from short lives in large families to long lives in small families as birth rates have declined sharply. Lower birth rates and reduced population growth enable parents to provide better more and better education to each of their children and thereby to increase their average "quality." Reduced fertility can thus, from this perspective, be viewed as a form of investment in human capital, intended to increase the quality and efficiency of the labour force as well as individual happiness. Such investments in human capital require prior, or contemporaneous, investments in social capital through social insurance and the like to reduce the need for large families. Social capital and human capital go hand in hand. A quick look at twenty-two nonindustrial mineral-rich countries shows that, on average, they offer their citizens less education with larger families, less health care and less democracy than other countries with similar incomes and fewer natural resources. The rest of the paper describes some of the several ways in which mineral rents and their management influence economic growth and other determinants of growth as well as some of the reasons why many mineralrich countries have not managed very well to divert their resource rents to furthering economic and social development -that is, why natural capital tends to crowd out human, social, financial and real capital. The empirical evidence of these linkages is presented in two rounds. First, we allow World Bank data covering 164 countries in 1960-2000 to speak for themselves through a sequence of bilateral correlations, beginning with (a) education and natural resource dependence and (b) growth and education. The correlations suggest an inverse relationship between natural resource dependence and growth via human capital. We then repeat the exercise for two aspects of social capital, corruption and democracy, suggesting an additional adverse effect of natural resource dependence via social capital on growth. In the second round, we test for the robustness of natural resource dependence as a determinant of long-run growth by estimating a series of growth regressions for the same 164 countries. This is done by regressing the rate of growth of per capita GDP from 1960 to 2000 on the share of natural capital in national wealth, and then by adding to the regression other potential determinants of growth representing aspects of other types of capital in order to assess the robustness of the initial result. We allow for the possibility that natural resource abundance may be good for growth even if natural resource dependence hurts growth. The empirical results show that the natural capital share survives the introduction of additional explanatory variables that are commonly used in empirical growth research. Specifically, the results suggest that if the following five determinants of growth -the natural capital share representing natural resource dependence, democracy, investment, school life expectancy and fertility -move in a growth-friendly direction by one standard deviation each, while initial income and natural capital per person representing natural resource abundance remain unchanged, then per capita growth will increase by one percentage point. For comparison, the median per capita growth rate in our sample is 1.5 percent per year. The human capital variables -education and fertility -account for more than a half of the increase in growth, while investment in real capital accounts for only ten percent. Natural resource dependence and democracy account for the remaining third, in roughly equal proportions. We can conclude that the natural capital share makes an economically as well as statistically significant contribution to economic growth. In sum, our results suggest that diversification of risk encourages growth through several different channels. Economic diversification is good for growth because it directs economic activity away from excessive reliance on primary production, thus facilitating the transfer of labour from low-paying jobs in low-skill-intensive farming or mining to more lucrative jobs in more high-skillintensive occupations in manufacturing and services. Political diversification encourages growth in a similar manner by redistributing political power from narrowly based ruling elites to the people, thus in many cases replacing an extended monopoly of often ill-gotten power by democracy and pluralism. The essence of the argument is the same in both cases: diversity is good for growth. JEL: O11.
doi:10.9774/gleaf.978-1-907643-06-4_5 fatcat:42e2fe72c5bvfjbnwml2efytgi