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The Long Term Consequences of Resource Based Specialization

by Guy Michaels. Reading for Tuesday, 19 February 2008.

Economists have long debated whether an abundance of natural resources adversely affects long term economic performance. Focusing on three economic channels discussed in the literature, I investigate whether resource abundance slows down industrialization or the accumulation of education, or whether it raises inequality. I examine these channels using geological variation in oil abundance in the Southern United States. In 1890 oil abundant counties were mostly agricultural and similar to other nearby counties, but after oil was discovered they began to specialize in its production. From 1940 1990 oil abundant counties developed a manufacturing sector that was smaller in terms of its share of employment, but not in terms of its absolute size. At the same time, these counties enjoyed a better educated workforce and higher per capita income, and attracted population at a faster rate. By 1990 these advantages had diminished, but oil abundant counties still had slightly higher per capita income without suffering from worse inequality. Taken together, my results suggest that while resource based specialization involves some long term costs, it can serve as an important lever for development.

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Center for Comparative and Global Research