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What will you have: oil or brains?

Submitted by on March 19, 2012 – 4:58 pm 10 Comments |  
[in collaboration with Martin W. Lewis]

In a recent New York Times article, Thomas L. Friedman discusses a correlation between natural resource exploitation and human resources development. The correlation is negative: the more oil a country pumps or the more diamonds it digs, the lower its high school students score in standardized testing of math, science and reading comprehension skills. While many have been talking about the “resource curse”, the new study by a team from the Organization for Economic Cooperation and Development, or OECD, shows its validity, based on data for 65 countries. Countries that exhibit the strongest correlation include Singapore, Finland, South Korea, Hong Kong, and Japan, all with few natural resources and high scores on the PISA (Program for International Student Assessment) exam. On the other end of the spectrum are countries like Qatar and Kazakhstan, which stand out as having the highest oil rents and the lowest PISA scores.

The correlation makes some sense: “in countries with little in the way of natural resources … education has strong outcomes and a high status, at least in part because the public at large has understood that the country must live by its knowledge and skills”. However, not all countries fit neatly into this oil-or-brains dichotomy. Canada, Australia, and Norway rely heavily on natural resources, but still score well on PISA, in large part because “all three countries have established deliberate policies of saving and investing these resource rents, and not just consuming them”. As one commentator on the original OECD study points out, “natural resource and other primary exports have been the route to economic development and prosperity for many countries from the 19th century onwards, including Sweden, Finland, Denmark, Iceland, New Zealand… Commodity exports are not necessarily a curse, even in less developed countries today, as the case of Botswana shows.”

Another example of a country which relies heavily on its natural resources – even more so than Norway, Australia, or Canada, according to the OECD study – but still scores above the average 450 points on the PISA exam is the Russian Federation. Recent Russian press and blogosphere are full of discussions of whether Russia, like a drug addict, is dependent on “the oil needle”, and numerous pundits are trying to prove that it is not. However, commonly cited figures often contradict each other, and much of this discussion follows a pro-Putin agenda. According to the OECD study, Russian natural resources rents are at just over 20%, matching pretty closely those of the United Arab Emirates, and trailing only those of Kazakhstan, Qatar, Azerbaijan, and Trinidad and Tobago. Much public discussion in Russia focuses on the fact that few oil dollars are invested into infrastructure maintenance and development, healthcare, science, culture, or education. And yet education levels in the Russian Federation appear to be quite high, despite the low financial investment (see cartogram). Not only does Russia fare well on the PISA exam, but its levels of tertiary and post-graduate education are fairly high and growing. According to the official 2002 census data, between 1989 and 2002, the proportion of people with higher and postgraduate degrees grew from 113 to 160 per 1,000 persons. Many individual regions, including Kemerovo region, Orenburg region, and Chuvashi republic, experienced a nearly two-fold increase in the higher education levels in this period.

Regardless of the validity of Friedman’s overarching thesis, it must be said that the specific examples that he uses reveals an unfortunate degree of geographical ignorance. Friedman begins with a discussion of Taiwan, which he cites as his favorite country (other than his own). Here is his description of the country:

“Taiwan is a barren rock in a typhoon-laden sea with no natural resources to live off of — it even has to import sand and gravel from China for construction — yet it has the fourth-largest financial reserves in the world. Because rather than digging in the ground and mining whatever comes up, Taiwan has mined its 23 million people, their talent, energy and intelligence — men and women. I always tell my friends in Taiwan: “You’re the luckiest people in the world. How did you get so lucky? You have no oil, no iron ore, no forests, no diamonds, no gold, just a few small deposits of coal and natural gas…”

Taiwan is a barren rock without forests? In actuality, Taiwan is a lush, heavily forested, and sizable island with a highly productive agriculture sector. Over half of its territory is covered with forests, one of the highest figures in the industrialized world, although not as high as these of either Finland or Japan. Taiwan’s post-WWII “economic miracle,” moreover, relied heavily on farming in the early years, as the country’s explicit development strategy was based on “developing industry through agriculture, and developing agriculture through industry.” Such a policy would not have been suitable for a “barren rock.”

 

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  • http://www.facebook.com/people/Peter-Rosa/1593565364 Peter Rosa

    Oil is a difficult case because its production doesn’t create much employment.

    • http://www.pereltsvaig.com Asya Pereltsvaig

      And?

      • http://www.facebook.com/people/Peter-Rosa/1593565364 Peter Rosa

         An oil-rich country isn’t going to see a major increase in jobs and incomes unless it wisely invests the oil revenues.

        • http://www.pereltsvaig.com Asya Pereltsvaig

          Ah yes, I see your point now. A very good point too! But oil can provide immediate, and often significant funds, even if they are not invested (wisely or otherwise) or distributed to the people fairly. In my mind, the biggest problem with the Friedman article (and the underlying correlation) is that it focuses on the availability of natural resources rather than the social and political factors that determine what is done with those resource rents. Examples like Norway show that it is possible to have both oil *and* brains, and Kyrgyzstan — that it is also possible to have neither…

          • Phil_Daniels

            Prior to the discovery of oil in its territorial waters Norway had a developed mixed economy with substantial agriculture, forestry, hydro power, fishing,shipping and  metallurgy sectors.  It also had stable and robust political and legal frameworks based on a constitution that dates back to the early 19th century. 

            Its not the resources that create the problems in countries such as Kyrgyzstan, its the lack of the political, legal and social structures to ‘manage’ them and the wealth that they bring. 

            Norway has all those things in spades, as do Canada and Australia.

          • http://www.pereltsvaig.com Asya Pereltsvaig

            Thanks, Phil, very well put!

  • Phil_Daniels

    Friedman is a FIFO journo who rarely checks his facts, I suspect he may have conflated Singapore with Taiwan. 

    If Taiwan didn’t have a functioning agricultural sector it wouldn’t have protection measures similar to those of the US, EU, Japan and South Korea.  And if those countries actually had highly productive agriculture sectors then they wouldn’t need protecting.  http://www.dfat.gov.au/geo/taiwan/taiwan_brief.html – snippet

    “Taiwan agriculture receives government assistance including import protection
    and domestic support. Import protection involves high tariff rates,
    tariff-rate quotas and special safeguard measures. Taiwan’s average
    tariff on agricultural products is 17.4 per cent (WTO definition).”

    PD

    Aside : Lee Kwan Yew, Chang Kia Shek, Deng Xioaping and Sun Yat Sen were all from the same ethic group (Hakka), which in number is quite small, 80 million world wide.

    • http://www.pereltsvaig.com Asya Pereltsvaig

      Good point about protection measures, Phil!

  • Nick Baldo

    I would also add that it doesn’t really mean anything to just note a correlation between resource reliance and education (or whatever else). More likely some other factor is jointly determining both outcomes. My guess would be that if you have a country that’s been poor for millennia with low educational attainment and scarce capital, it’s going to be much easier to extract resources than to do anything else provided there isn’t an extreme level of dysfunction a la Somalia or Afghanistan.

    • http://www.pereltsvaig.com Asya Pereltsvaig

      Thank you for your insightful comment, Nick! I agree with you that exploiting nature is easier than nurturing the human capital. Still, for a country with scarce natural resources there may not be another choice but to develop education and science… So there is definitely something to this generalization, but it’s far too shallow to explain much. And Friedman could have done a better job by showing its shortcomings than by trying to fit the facts to the theory.

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