The Relative Richness of the Poor? Natural Resources, Human Capital and Economic Growth

Abstract

What is the role of natural resources in economic performance? Are there any special conditions in which natural resources can act as the engine of growth? Are natural resources a curse? In this paper we present a model where natural resources have a positive effect on level of income and a negative effect on its growth rate. However, we show that this effect can be ameliorated 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 countries high levels of human capital may more than offset 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, which shows how it is possible to grow fast based on natural resources. Overall the em pirical evidence is consistent with the main predictions of the model.