The Relative Richness of the Poor?

Natural Resources, Human Capital and Economic Growth, by Claudio Bravo-Ortega, World Bank and Department of Economics, Universidad de Chile, and by Jos´e De Gregorio, Banco Central de Chile.
(Worldbank WPS3484).

Abstract: Are natural resources a blessing or a curse? In this paper we present a model in which natural resources have a positive effect on level of income and a negative effect on its growth rate. The positive and permanent effect on income implies a welfare gain. There is a growth effect stemming from a composition effect. However, we show that this effect can be offset by having a large level of human capital. We test our model using panel data for the period 1970-1990. We extend the usual specifications for economic growth regressions by incorporating an interaction term between human capital and natural resources, showing that high levels of human capital may outweigh the negative effects of the natural resource abundance on growth. We also review the historical experience of Scandinavian countries, which in contrast to Latin America, another region well endowed with natural resources, shows how it is possible to grow fast based on natural resources. JEL Classification: J24, O41, O57, Q00.

Excerpt: … Human Capital and Natural Resources: Scandinavia vs. Latin America.

A closer look at the history of Scandinavia and Latin America shows that, during the late nineteenth and early twentieth centuries, both groups of countries enjoyed similar levels of GDP per capita, and, more important from this paper’s perspective, both were mostly exporters of natural resources. In 1870 Finland, Norway, and Sweden had incomes per capita of $1107, $1303 and $1664, respectively, whereas Argentina and Chile had incomes per capita of $1311 and $1153 , respectively. However, the long-run evolution of the two groups of countries was quite different: the Scandinavian countries developed, but the Latin American countries did not. By 1990 the divergence in income levels was striking. Whereas Finland, Norway, and Sweden by that year had incomes per capita of $16604, $16897 and $17695, respectively, Argentina and Chile had fallen far behind, with incomes per capita of $6581 and $6380 dollars, respectively (table 1) …
… indluded two tables …
… Many have argued that the reason for the success of the Scandinavian transformation lies in how open these economies were. O’Rourke and Williamson (1995) establish that most of Sweden’s catch-up was due to mass migration, international capital flows, and trade, and that this experience seems to apply to the rest of Scandinavia as well. This explanation assigns only modest importance to the relatively high level of educational attainment in the Scandinavian countries.

Nevertheless, what has not been widely recognized in the literature is that the Scandinavian countries were not the only resource-rich countries to experience high rates of economic growth during the late nineteenth century—the so-called Scandinavian catch-up. Some Latin American countries did so as well. Argentina and Chile experienced rapid growth, which by the late 1920s had raised their incomes per capita to levels above those in Finland, Italy, Norway, Portugal, and Spain. In these two Latin American countries, as in Scandinavia, international trade played a fundamental role. The openness of their economies and their comparative advantages—in beef and wheat for Argentina, and in nitrates for Chile—contributed to that growth. However, it is difficult to explain the greater persistence of growth in Scandinavia than in Latin America without remarking on the educational gap that emerged between the two groups of countries over the period 1870-1910, and which remained large throughout the twentieth century (table 2).

Bravo-Ortega (1999) argues that, despite some common characteristics, both groups of countries differed sharply in terms of income inequality, access to education, trade policies, and geographical location. By the beginning of the nineteenth century, the Scandinavian countries had implemented land redistributions and educational reforms. No similar transformations occurred in Latin America during that time. With regard to trade policies, whereas the Scandinavian countries, until 1900, tended consistently toward free trade, most Latin American governments (except Argentina and Chile) relied on trade tariffs as their principal source of income. Thus, by the late nineteenth century, both groups of countries had quite different structural conditions for accommodating the consequences of international trade.

This comparison of regional experiences confirms that education mattered in the nineteenth century. It was important in the development of new industrial activities in Scandinavia and in the economic and political accommodation of external shocks. A well-educated labor force facilitated the movement of workers across economic activities and assisted in sectoral restructuring as new industrial activities developed as part of the process of natural resource exploitation. Some examples of the benefits of this educational advantage are evident in studies of the changes in the industrial structure of the Scandinavian countries during the late nineteenth century.

Examples include Denmark’s shift from the export of grains to the export of livestock in the 1870’s, the shift in Sweden and Norway from lumbering to pulp production, and Sweden’s adoption and improvement of British metallurgical techniques, which allowed the Swedes to develop their iron and steel industries.6 An adjustment that in Latin America would have provoked a serious social crisis, as did the collapse of nitrates production in Chile, which led to a mass migration to the cities, proved instead for Scandinavia to be an episode of Schumpeterian creative destruction.

An alternative interpretation, based on an analysis of inequality and growth, is that access to primary education is simply a good proxy for reduced income inequality in Scandinavia. Increased equality would have contributed to a growing domestic
market and would have furthered the development of new sectors.

Of course, there are many possible reasons why two regions that, more than a century ago, were similar in terms of income per capita and abundance of natural resources subsequently diverged, with very different patterns of development and economic growth. Clearly a salient difference, however, as the empirical analysis of this paper will show, was the level of human capital …

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