Human Capital, Industrial Growth and Resource Curse GDN - Valchakova

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
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 of
speculations on the origin and propagation of
the curse
• Little of empirical backup.
Literature: are natural resources a

blessing or a curse?
 Channels of negative effects transmission
− Dutch Disease
− Corden&Neary’82: theoretical model of deindustrialization
− Sachs&Warner’95, 97, 99: cross country studies revealed negative
relation between natural resource abundance and growth rates
− Spatafora&Warner’95, Hutchison’94: time series analysis does not
confirm diagnosis
− Excessive volatility of income
− Spatafora&Warner’95: terms of trade shocks have positive effect;
− Ramey&Ramey’95: volatility of government expenditures matter;
− Political Economy
− Auty’01, Paldam&Svendse’00: huge rents provoke rent-seeking,
corruption, postponement of reforms, competitive industrialization;
− Egorov, Guriev&Sonin’07: less free media in oil-rich countries;
− Human Capital Underdevelopment
− Gylfason’01, 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.
Our paper :
• Provides empirical study of a human capital
underdevelopment channel of “resource curse”
Our result:
• We find empirical support for the hypothesis that the
“human capital” transmission mechanisms is via the
distorting effect of resources on the distribution of country’s
human capital, namely under accumulation of country's
high skilled human capital.
Some facts about human capital

development and natural resources
from Gylfason’ 2001

Some facts about human capital

developments and natural resources
from Gylfason’ 2001

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&Zingales’98:
– fixed country and industry effects
– mostly exogenous explanatory variables
– model the transmission mechanism
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 two
countries: rich in natural resources vs.
poor in natural resources
Model: Leamer et al (1999)

Capital (physical, human)
Petrochemicals Machinery
H
L
Ca kes
G
pi
m
ta
ea on
a
r
la
pe
ch lati
cc
or u
la
um xpe
lab cum
bo
Capital- E Apparel
ul
re
at
es ac
intensive
io
ak l
m p i ta
n
Extraction C
ns
B D
Ca
iv
A Craft
e
Natural Primitive Extraction Peasant Farming Labor
Resources
Model results:
• The resource rich economy faces a trap of skilled
labor underdevelopment: physical capital
accumulation provokes the decline in the return to
labor and subsequently to human capital which
has depressing effect on the upper tail of human
capital distribution and prevents the development
of new more sophisticated industries as there is no
enough skilled labor
• Resource rich economy needs to overcome
coordination problem with respect to development
of marginally skilled human capital in order to
switch to next product mix
• Warning: the story is not about the lower volume
of human capital but about the deficit of marginally
skilled human capital in resource rich economies
Testable hypotheses:
• Industries with higher skilled labor
intensity grow slowly relative to industries
less skilled labor intensive in resource rich
economies compared to resource poor
economies
• low-skilled labor intensity does not
differentiate industrial growth between
resource rich and resource poor countries
of industry
of industry
Hypotheses: illustration
ind A
intensity
intensity
difference in difference in
growth rates (A-B) ~
>
laborlabor
growth rates (A-B)

H F
High-Skilled
ind B
Low-skilled
Country H Country F
resource richness of economy
Estimated equation
- average annual real growth rates of sector i in country k
- share of industry i in Value Added of manufacturing in

country k at the beginning of period
- industry i intensity with respect to low-skilled labor
- industry i intensity with respect to high-skilled labor
- resource richness of country k
Hypotheses:
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 covers
45% of U.S. labor force) that were surveyed in 1992
within Longitudinal Employer - Household Dynamics
(LEHD Program’s individual, employer, and employment
history databases).
• Then each individual human capital index was placed
into the industry where the firm she employed in belongs
to.
• This allows constructing the comparable distribution of
the level of human capital within U.S. industries.
• Why US data?
Distribution of human capital within

U.S. industries
M
et
allu
rgy
1
2 1
1.2 1
1.4 1
1.1
1
0.6 1
0.6 1
0.3
1
0 9
.2
8
.4
7
.9
8
%
0
1 2 3 4 5 6 7 8 9
Machinery(excl.electrical)
16
1
14
12 1
0.8 11
.3
1
0.1 1
0.4
9.5 9
.5
10 8
.2 8.8
7.9
%
8
6
4
2
0
1 2 3 4 5 6 7 8 9
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
Measures of high- and low-skilled

intensities
M anufactu
M anufacturing sector
P etroleum
Petroleum and coal products a
M achinery, exceptMelectrical
achinery,
M etallurgy T extiles
Transport equipment
P rinting and
Paper and products
E lectric m a
Data: other industrial

characteristics
• Average annual real growth rates of
manufacturing sector in 1980-2000
– Nominal value added data from UNIDO
(United Nation Industrial Development
Organization) 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 UNIDO
database.
Data: country level

• raw hydrocarbon production of the economy as a
share of country’s GDP, 1980-2000
1 Japan 0
2 Singapore 0
3 Korea 0
4 Spain 0
5 Turkey 0
6 Austria 0
7 France 0
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
Estimation results: 1980-1990

Dependent variable: Industr %
Variable 75
High-skilled intensity
> by 0.8%
Share of industry in total 25

manufacturing value added, 198
25% 75%
Resource richness
Low skilled intensity

Observations with positive growth
* Resourc average annual real
growth in the sample is
2.2%
Resource measure – primary

export
Dep
Varia
Share
Observations with positive growth
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%
Conclusions
• There are significant systematical losses in growth
rates of industries with higher skilled-labor
intensities relative to those with lower skilled-labor
intensities in countries rich in natural resources
compared to resource poor countries.
• Low-skilled labor intensity does not differentiate
industrial growth across poor- and rich-resource
countries.
• It is consistent with the story of under
accumulation of skilled labor in resource rich
countries: upper tails of human capital distribution
are thinner in resource rich economies
Policy application
• One of the possible charms against the
“resource curse”: investment in education
• Leamer at al: “If the model is somehow backed
up with hard evidence, the policy advice is very
clear: Governments in countries that are in a
stage of “old product mix” but close to the stage
of “new product mix” should be making major
improvements in their educational systems, in
particular eliminating the dumbbell educational
systems that were economically efficient in old
product mix but inappropriate in new one.”

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10th GDN Conference “Natural Resources And Development”

Human Capital, Industrial Growth

by Elena Suslova and Natalya Volchkova

Motivation: empirical study of the

Literature: are natural resources a

Some facts about human capital

from Gylfason’ 2001

Some facts about human capital

from Gylfason’ 2001

How to deal with the “black box”?

Model: Leamer et al (1999)

Model: Leamer et al (1999)

growth rates (A-B)

- average annual real growth rates of sector i in country k

- share of industry i in Value Added of manufacturing in

- resource richness of country k

Data: industrial sectors’ demand for

Distribution of human capital within

Constructing industry intensities

• with respect to low-skilled labor

= share of labor force in jth decile of human capital

Measures of high- and low-skilled

Data: other industrial

Data: country level

Estimation results: 1980-1990

Share of industry in total 25

Low skilled intensity

Resource measure – primary

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